Option Investor

Daily Newsletter, Saturday, 1/12/2019

Table of Contents

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

Market Wrap

Another Perfect Day

by Jim Brown

Click here to email Jim Brown

The last two days have been almost perfect in terms of textbook bullish consolidation.

Weekly Statistics

Friday Statistics

The indexes fell hard at the open and then rallied back to neutral by lunch time. The Dow fell -176 on Thursday and -203 on Friday before recovering in a calm and orderly fashion. These were not short covering bounces but thoughtful dip buying sessions where investors were picking their entry points on individual stocks rather than wholesale buying of indexes. The early morning declines gave investors excellent entry points but were not enough of a drop to scare investors away.

The most encouraging part of the move was the return to resistance each day. For the last three days the S&P has been testing resistance at 2,600 in the afternoon and almost closed at a new 4-week high on Friday just below that level. It appears the S&P is poised to breakout over that resistance on Monday assuming the weekend headlines cooperate.

Investors were obviously not worried about weekend event risk with almost the high close for the week. The big cap indexes did not post a gain, but the declines were minimal.

The economic reports were market friendly on Friday. The Consumer Price Index (CPI) came in with a -0.1% headline decline for December. Energy prices were the big drag with gasoline prices falling -7.5% and crude oil down -11.4% producing a -3.5% decline in the energy component. The core CPI rose 0.2% and the third consecutive month at that level.

On a year ago basis the headline CPI was up 1.9% and the core up 2.2%. Those are very tame numbers considering the strong economy. This report did not give the Fed any reason to be concerned about raising rates. With headline inflation declining they can afford to be "patient and flexible."

With wage growth barely rising and employment very strong, the Fed should be on hold for several more months. Rising wage inflation is a critical issue for the Fed and it is almost nonexistent.

The California Manufacturing Index for Q1 slipped from 65.0 and the recent post-recession peak to 61.2. Anything over 50 still represents expansion but only at a slower pace. New orders declined slightly from 64.9 to 64.1 and employment fell from 62.9 to 57.6. Production slipped from 72.8 to 65.0. The tariff issues and trade war with China was credited with the decline in the index. The Los Angeles and Long Beach ports are critical for Chinese imports and a slowing of commerce would be negative for the area.

The calendar for next week has a couple of important events. The next vote on the Brexit plan will be on Tuesday and many analysts do not believe it will pass. With the hard exit date in March, they need to get a plan approved ASAP so everyone can begin preparations. A failure of the vote could put May back in hot water and eventually there could be a new election to decide her fate.

The Fed Beige Book on Wednesday outlines the economic conditions in each of the Fed regions. With several recent economic reports showing weakness this could tell us where that weakness is appearing. It is not normally a market mover unless there is an unexpected change in the outlook.

The Producer Price Index will give us the inflation rate at the producer level and it is also expected to be benign.

Retail sales on Wednesday could be a surprise after multiple retailers lowered guidance after the Q4 holiday season. Since the weekly Redbook sales from Chain stores has been averaging about 9% growth, I would not expect the monthly overall report to be a disaster. We could see weakness, but sales should be rising.

The Housing Market Index could be a surprise after a persistent decline in the other home sales indicators.

The Philly Fed Manufacturing Survey will be on Thursday. In the last report the headline number declined from 11.9 to 9.1 and the lowest level since 2016. This weakness seems to be a trend in the various regional reports.

The coming week is the start of the Q4 earnings cycle and nearly every major bank is reporting along with several Dow components. JPM, Goldman and American Express should be the most watched financials but Citigroup, Bank America, Wells Fargo, US Bank, Blackrock and Morgan Stanley also report.

The biggest market mover will be Netflix on Thursday after the close. The stock is up $106 since the December 26th low at $231.

With 20 S&P 500 companies already reported the blended earnings growth is 14.5% and revenue growth of 5.6%. This is significantly under the forecast for 22% and represents several disappointing reports. However, 20 companies are just a small fraction of the total to report so that earnings number is going to change significantly as the weeks progress.

Even at 14.5% it is more than double the expected 6.8% growth for Q1. The S&P 500 is currently trading at a PE of 15.1 and the Russell 2000 at 19.5.

Total S&P earnings for 2018 are expected to be around $161.68. For 2019 that rises to a record $172.04 and 2020 is expected to hit $191.32.

There was very little stock news on Friday because everyone is in their quiet period ahead of earnings. Netflix (NFLX) garnered two upgrades and rallied again. UBS upgraded them from neutral to buy with a price target of $410. Raymond James upgraded from outperform to strong buy with a price target of $450. Morgan Stanley reiterated a buy rating.

The Raymond James analyst said the company is approaching a "profit inflection" given their solid content slate. We believe there is an upward bias to their 2020 earnings and revenue. The UBS analyst said after six months of the outlook being debated in the investment community, the bad news is already discounted by investors and reflected in the stock price. "We see the competitive moat widening around Netflix's global positioning."

Morgan Stanley said the Netflix opportunity is coming from the $500 billion annual global TV market where over the top subscription services have less than 5% of their revenues. "The shift towards a vertically integrated streaming business is accelerating." "This should translate into 1) a deeper moat, 2) greater operating leverage, and 3) meaningful free cash flow long term."

Jeff Bezos may be getting a divorce, but the stock did not react to the news. Activision said it was getting a divorce from Bungie after an 8-year marriage and shares imploded with a 10% decline. For those that do not know, Bungie developed the Destiny game and Destiny 2 was the third best selling game title in 2017. The NPD has not yet released the 2018 rankings. Bungie and Activision made the joint announcement and Bungie said they would begin self-publishing future games including the Destiny franchise.

Piper Jaffray expects the split to cost Activision $400 million in revenue and 15 cents in earnings this year. RW Baird also saw a 15-cent drop but only $300 million in lost revenue. The Baird analyst said he was not surprised with the split because Activision had said it was going to "pull the plug on underperforming games" and Destiny may have run its course. BMO capital had the same outlook that Destiny revenue was likely fading.

Not everybody was cutting estimates. The Benchmark Company reiterated a buy rating and $87 price target. Stephens initiated coverage with a buy rating and $65 target. Piper Jaffray only cut their price target by $2 to $55. The biggest hit came from Keybanc with a target price cut from $80 to $64.

Shares fell 9% but remain over support at $45.

PVH Corp (PVH) rallied 7% after raising Q4 and full year guidance. For Q4 they now expect revenue of $2.4 billion and full year revenue of $9.6 billion. They guided for Q4 earnings of $1.75 and 15 cents above the high end of their prior guidance. Full year earnings are now expected to be $9.50. The company said it was relaunching the Calvin Klein brand under a new name. Shares gained $7 in a weak market.

GM shares rose 7% after the company raised guidance for 2018 and 2019. For 2019 the company said it expects earnings of $6.50-$7.00 and analysts were only expecting $5.92. The company said it expects free cash flow of $4.5-$6.0 billion. They guided for full year 2018 earnings to beat expectations and FactSet was looking for $6.24. The CEO said they were making ambitious changes to Cadillac in order to challenge Tesla in the EV market. She said Cadillac would be the tip of the corporate spear on electrification.

She said the plan to sell the Lordstown Ohio, small car factory to Tesla fell through because Tesla was not interested in the GM workforce represented by the UAW.

Shares of Caesars Entertainment (CZR) spiked 9% after a rumor broke that Carl Icahn may have taken an activist stake. A year ago, Tilman Fertitta offered to buy Caesars for $13 a share. When the deal did not go through shares fell to $6. Credit Suisse said Caesars was in an ideal position in the Las Vegas gaming market after renovating "long-neglected" assets and focused on creating new convention space. There was no confirmation of Icahn's position, but the stock has been on fire since December 24th.

Starbucks (SBUX) dipped at the open after Goldman said they would be the next company to warn on earnings because of business declines in China. The analyst cut the stock from buy to neutral with a $68 price target. Starbucks has 3,600 stores in China and Goldman said a falling GDP driven by a decline in consumer spending was going to slow retail sales. Shares fell about $3 at the open but recovered to end with only a fractional loss.

Goldman also cut Yum Brands (YUM) to a sell citing valuation and concerns about US sales at Pizza Hut and Taco Bell. The analyst cut the price target from $83 to $76.

The Wall Street Journal reported on Friday that Apple will release three new versions of the iPhone in 2019. There will be a successor to the troubled XR and have an LCD screen. The highest priced model will be above the current XS and have a triple rear camera while the lower end models will have a double rear camera.

Also on Friday multiple headlines reported significant discounts from Apple to retailers and partners in China by as much as 20%. Reportedly lower priced phones with more features from companies like Huawei and LG are taking market share at Apple's expense.

In the current Qualcomm trial with the FTC we learned on Friday that Apple demanded a $1 billion payment from Qualcomm to be considered as a modem chip supplier in 2011. Apple did not give any assurance whether it would buy the chips after the payment or how many chips it would buy. Apple then complained in the trial that had they chosen to use a chip from another manufacturer, Qualcomm would halt their rebate program and that would force the cost higher on the alternate chips.

OK, lets see if I can make this understandable. Apple demanded $1 billion a year just to allow Qualcomm the potential to sell their chips. If Apple bought a $100 chip from Qualcomm the company would give them a $25 rebate. (sample numbers only). If they decided to buy an equivalent chip from another company for $100, Qualcomm would not give them the rebate. So, Apple sued Qualcomm for noncompetitive practices that raised the cost of the phone if they bought chips from somebody else. It looks to me that Apple was the culprit here, but I am sure we do not have all the details. We do know that Apple went to the FTC and donated thousands of pages of documents in an effort to get the FTC to sue Qualcomm and cost them billions in legal fees at the same time Apple was suing Qualcomm. That is just wrong.

Warren Buffett had a bad Q4 because he lost $23 billion on his apple shares since early October. Buffett owns 252.5 million shares as of the end of Q3. If Buffett followed his own advice to buy when others are fearful, he probably bought more on the way down. That loss was from the high on October 3rd. Obviously Buffett did not buy all his shares at the high. He has been buying them for several quarters, so his basis is probably a lot less than the $233 high for the stock on October 3rd. Regardless of when he bought the shares it is likely he has lost billions. Some 130.2 million shares were bought between Jan 1st, 2016 and March 31st 2017 so those are still profitable. Another 110 million were bought between April 1st, 2017 and March 31st 2018. Those are probably underwater. It will be interesting to see his next SEC filing to see if he liquidated any on the way down or bought more thinking he was getting a bargain.

Tesla's Elon Musk tweeted a picture of the new SpaceX "super heavy" rocket which he plans to use to send 100 people to Mars in the early 2020s. The rocket looks like something from a Buck Rogers movie in the 1950s. It is huge and supposed to be reusable. This particular rocket is for initial suborbital testing. The actual rocket used for orbital flights and beyond will be longer and have better curves according to Musk. The first test flights are expected to be in March or April.

I mentioned earlier that Jeff Bezos and his wife MacKenzie are divorcing after 25 years. They were married one year before he started Amazon, so community property rules apply. She did work in the business in the early days, so she definitely has community rights. There is reportedly no prenup since he had no money and worked out of his garage in the beginning. They have been separated for some time and are just now making it official with a joint statement. The National Enquirer was preparing a story where they tracked Bezos dating a former Fox TV anchor, Lauren Sanchez, 49, who is married to Hollywood talent agent Patrick Whitesell. Jeff and Lauren have been dating since April 2018. The rumor is that Lauren is also divorcing. They were friends of the Bezos for years. MacKenzie reportedly knew they were dating.

The real point if this commentary is that the couple will split in some form, Jeff's 80 million shares of Amazon which are worth $131 billion. Including Jeff's other companies, he is thought to be worth $137 billion and the richest man alive. If they do split the estate evenly, he would drop to fourth richest. Because Amazon's value is linked to Jeff remaining in total control, it is unlikely the ownership shares would be split. MacKenzie and Jeff contribute billions to charities and have multiple nonprofits together. If shares were split it is more likely that Jeff would retain voting rights to protect the value of Amazon and of the shares.

Supposedly it is going to be a friendly parting and the joint statement said they would remain partners and friends. I doubt it is about the total amount of the split. After all, once you have $10-$15 billion does it really make any difference. This will go down as the most expensive divorce regardless of the split percentage. Currently the record is held by Steve and Elaine Wynn with a $1 billion settlement. Harold Hamm wrote a check for $974.8 million in 2012 to end his divorce battle. MacKenzie will likely become the richest woman in the world.

Amazon shares did not react because investors believe the parting will not have any material impact on Jeff's control.

Crude prices rebounded to $52 for a gain of $10 from the $42 low on Christmas Eve. This is due in part to repeated comments from Saudi Arabia that they are going to accelerate production cuts and restrict the amount of oil sent to the USA. Getting over the $53 level could be a challenge if inventory levels in the US do not decline. We saw a sharp rise in refining activity over the last week of December and first week of January but inventory levels barely dipped. Inventories of refined products moved sharply higher, so we may still see a decline in crude numbers that were missed in the holiday reporting.


The markets have now risen for three consecutive weeks. The Dow has gained 1,449 points over that period and is only about 200 points away from recovering the 1,655 points it lost in the week before Christmas.

It has been a good three weeks with only one day with a material loss thanks to Apple. The S&P has closed just under 2,600 for three consecutive days and the intraday dips on each day were quickly bought and the index returned to that resistance.

On Friday the big cap averages failed to close with a gain but they were only minimally lower. I attribute that to normal weekend event risk and the political battle underway in Washington. While that does not directly impact the stock market it probably weighed on investor sentiment and they saw no reason to continue buying the highs until resistance has been broken.

Assuming there are no disaster headlines over the weekend I would expect to see a resistance breakout attempt on Monday. Should the S&P move over 2,600 the next material resistance is 2,632 and that could prove tougher to break.

With a sudden flurry of earnings warnings, we could see investors slack off on their buying until we get some of the actual earnings behind us. If the trend in warnings continues and earnings growth remains in the 14% range, we had last week, that could trigger some more caution. We need some big reports with big earnings and even stronger guidance to move the markets through that 2632-2800 congestive resistance range on the S&P. There are multiple resistance levels in that range at 2,700 and 2,740.

To say the Dow components were lackluster on Friday would be an understatement. Advancers and decliners were dead even and only three stocks moved over $1. UnitedHealth added 19 Dow points and Apple and 3M subtracted 19 Dow points leaving the index flat.

The Dow is struggling with round number resistance at 24,000 and stalled there on each of the last three days. The next major resistance should be around 24,300 then 24,750. Once into the congestion range of 24300-26000 we could see several weeks of choppy trading unless sentiment changes significantly.

The Nasdaq has the worst resistance path of the big cap indexes. Round number resistance begins at 7,000 and again at 7,300, 7,400 and 7,500. Congestive resistance starts at 7,000 to 7,500. This is where the Nasdaq was extremely volatile from late October until early December. Many investors that took positions in this volatility have been underwater for the last month. They will be happy to exit for a breakeven.

The Russell 2000 has had a great rebound. It has posted gains on 12 of the last 13 sessions. The amount of the gains has slowed, and the index was barely positive on Friday. The declining risk of Fed rate hikes is the reason for the rally. However, the index is headed into some serious congestive resistance and until it closes over 1,600 again, there is going to be a daily fight for higher ground.

I believe the market will be positive next week. The earnings excitement has been blunted by the earnings warnings, but it still exists. Fund managers still have excess cash and buybacks are still in progress. There were $1.1 trillion in announced buybacks in 2018 and we should see another wave with the Q4 earnings because stock prices are cheap. I would try to buy your favorite stocks on dips. Once we move a little higher in to the Oct/Nov congestion ranges we should see a little more volatility in individual stocks.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


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Index Wrap

Stretching Our Luck

by Jim Brown

Click here to email Jim Brown
After three weeks of gains are we headed for a pause? Over the very long term a string of gains for three weeks typically leads to a bout of profit taking. Even in the most bullish markets, stocks can become overbought and investors decide to take profits. This should not be a surprise.

However, the urge to take profits in January 2019 is more than likely going to come from disappointing earnings rather than simple overbought conditions. The flurry of earnings warnings just before earnings is not unusual. It is just that investors are already concerned about slowing earnings growth and any unexpected dips in that growth could escalate the problem.

On the positive side, Tom Lee of Fundstrat Advisors, pointed out last week that the odds are very good for the market to rise double digits in 2019 with 15-17% his target. He based this on historical patterns. The high yield market was down in 2018. The high yield market has never been down two consecutive years and has only been down a total of five years since it has been tracked. The average market gain the year after a high yield decline has been 21%.

On the equity side the S&P saw a waterfall decline of 18% over 60 days twice in 2018. Whenever that has occurred in the past the average return over the next year is 21%.

Lee said the market has the best chance of a double-digit gain since 2009. Equities are facing a lot of risks, but the waterfall decline in Q4 has discounted all those risks. The equity market now has a discounted wall of worry to climb and plenty of cash available because of the selling.

The High Yield ETF (HYG) typically leads the equity market. In 2018 it was the equity market dragging corporate yields lower late in the year. While the Fed is being "patient and flexible" in 2019, investors are going to favor the higher yielding corporates and that should lead to the HYG having a good year and leading equities higher.

The S&P gained 2.5% last week and you can tell by the A/D chart the advancers were winning by a wide margin. The bulls are back.

We can also see the bullishness in the market from the percentage of S&P stocks that are trading over their 50-day average. At one point less than 5% of the S&P was trading over their 50-day. That has surged to 38.6% as of Friday. Those over their 200-day have rebounded from 10.8% to 30.6%. Most of these long-term averages are still well above the stock prices. All of the major indexes are well below their 50/100 and 200 day averages.

One of the most bullish changes in the market was the surge in buy signals for S&P stocks. Three weeks ago, only 11.8% of S&P stocks had buy signals on a point and figure chart. This is a long-term indicator and one that is followed by portfolio managers on a stock by stock basis. Today more than 40% of the S&P stocks have current buy signals.

The AAII Sentiment Survey saw bullish sentiment rising to a nine-week high. Bearish sentiment declined to 29.4% and the lowest level since October 3rd, and the historic high in the market. The sharp drop in bearish sentiment ended a 13-week streak of above average bearishness.

The Russell 3000 Index is the broadest market index of tradable stocks. Stocks not in this index are very small and considered microcaps or they are not US stocks. This is the market for all practical purposes.

The R3K declined 358 points or -20.6% in the market crash. The index has already rebounded 151 points or 10.9% since December 26th. That is a monster amount of capital flowing into the market and it is not likely over.

The R3K has strong resistance at 1,550 and again at 1,660. However, the R3K is not normally reactive to specific support and resistance levels because the index is so broad. There are not enough portfolio managers following the technicals and then spending enough money to move the index. However, they do follow the S&P, Nasdaq and Dow and all of their components are in the R3K.

I see this index as the most accurate indicator of market direction because the normal intraday peaks and valleys and the stock noise of earnings and acquisitions are not enough to cause even a tiny blip in the R3K.

However, Apple's earnings warning caused enough knew jerk reactions in the tech sector to cause a similar dip in the R3K. This is one of the very few instances where a single stock caused a material move in the index.

The Nasdaq continues to move in lock step with the chip sector and showing no signs of the linkage breaking. The Apple warning has depressed the chip sector even for those companies that are not suppliers to Apple.

The one new trend over the last two weeks is that the FANG trade is breaking up. Netflix has soared well away from the others and the gains in the other three faded last week. Google and Facebook appear to be rolling over as the privacy issue refuses to go away.

Finally, the index chart that will control the markets next week is the Russell 2000. The small caps are the fund manager sentiment indicator for the market. If small caps are rising, fund managers are bullish. They are currently up 12 of the last 13 days and the index is facing major resistance at the 50 day at 1,455 and at the Oct/Nov resistance at 1,463. We need these levels to be broken quickly so they do not become self-reinforcing.

I am positive on the market for next week with my only concern being weak earnings that could sour sentiment. This is bank earnings week and they have not been earnings leaders. Even when they report good news, they tend to retrace their gains. If we are depending on the financials to lift the markets, if may be a battle.

I would continue to buy the dips until proven wrong. I believe it would take a lot of disappointing earnings to push the market significantly lower but that is always possible. We have had positive guidance and negative guidance for Q4 and negative tends to produce the moist headlines.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Strong Retailer, Tech Reload

by Jim Brown

Click here to email Jim Brown

Editors Note:

Time to add this strong retail stock and reload our existing tech position. Target has already affirmed Q4 and full year earnings so the risk has been removed.

Our existing QQQ position is likely to expire next Friday so I am recommending we reload with the March options.


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


TGT - Target - Company Profile

Target Corporation operates as a general merchandise retailer in the United States. The company offers beauty and household essentials, including beauty products, personal and baby care products, cleaning products, paper products, and pet supplies; food and beverage products, such as dry grocery, dairy, frozen food, beverage, candy, snacks, deli, bakery, meat, and produce products; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. It also provides home furnishings and decor comprising furniture, lighting, kitchenware, small appliances, home decor, bed and bath products, home improvement products, and automotive products, as well as seasonal merchandise comprising patio furniture and holiday decor; and music, movies, books, computer software, sporting goods, and toys, as well as electronics that include video game hardware and software. In addition, the company offers in-store amenities, which comprise Target Cafe, Target Optical, Starbucks, and other food service offerings. It sells its products through its stores; and digital channels, including Target.com. As of March 8, 2018, the company operated 1,826 stores. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

Target shares were beaten severely when they missed estimates by 2 cents on their Q3 earnings in November. The company reported earnings of $1.09 that missed estimates for $1.11. Revenue rose to $17.59 billion but that missed estimates of $17.81 billion. Same store sales rose 5.1%, a 3.2% improvement but missed the 5.5% consensus. Digital sales rose a whopping 49% and now contribute 2% to overall revenue.

They guided for the full year for earnings of $5.30-$5.50 and analysts were expecting $5.42. They guided for 5.0% same store sales.

This was actually a great quarter. The digital sales have lower margins because of the cost of shipping. That impacted earnings. However, they are still sales and evidence they are competing well with Walmart and Amazon.

On Thursday Jan 10th, Target said same store sales for the November-December period rose 5.7% thanks to higher store traffic and a minor increase in ticket size. This compares to 3.4% in the same period in 2017. The company affirmed its Q4 guidance for same store sales of 5.0% and full year earnings of $5.30-$5.50. This came on the same day that Macy's warned on earnings and shares fell sharply all across the retail sector. Shares rebounded sharply by almost 2% in a weak market on Friday.

Earnings February 19th.

Since Target has already affirmed guidance, the odds are good they will beat it. The risk has been removed from the stock and their positive comments suggest the Q4 earnings and 2019 guidance will be good. I am recommending a March option to retain the call premium, but we will exit before the earnings.

Buy March $72.50 call, currently $2.33, stop loss $64.65.

QQQ - Nasdaq 100 ETF - ETF Profile


The QQQ has stalled at $160 for three days and that killed the premium on our existing position ahead of next Friday's expiration. I am recommending we add a new position on the QQQs.

Original Trade Description: Dec 7th

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

Buy March $170 Call, currently $2.22, stop loss $149.35.


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

Two days of minor consolidation without any major loss. Friday was almost a carbon copy of Thursday with a -203-point drop at the open and rebound almost back to positive territory. This is a textbook example of a bullish consolidation.

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

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. Shares holding just over resistance while we wait on China trade talks. Moody's upgraded Caterpillar's credit outlook to positive.

Original Trade Description: Dec 22nd

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for construction, resource, and energy and transportation industries. 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 Deerfield, Illinois. Company description from FinViz.com.

CAT has failed to decline with the market until the last couple of days. Earnings were good and forecasts were good. CAT has been hobbled by the trade war with China. Investors are worried that tariffs could disrupt its rapidly growing business. CAT said it has raised prices three times to cover the majority of the increased costs and the net impact has only been around $150 million. When a trade deal is reached, you can bet those price increases will not be completely erased. They will make up their losses.

Earnings are January 22nd.

Position 12/24:
Long Feb $135 call @ $2.43, see portfolio graphic for stop loss.

CRM - SalesForce.com - Company Profile


No specific news. Holding just below resistance.

Original Trade Description: Dec 22nd

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, which helps to 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 solutions for financial services, healthcare, and government. Additionally, the company offers 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 consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com

When the market is weak, go with strength. CRM shares rallied on the strong earnings then pulled back only slightly during the latest Nasdaq crash. The Nasdaq was the strongest index on Monday and hopefully we are nearing an actual bottom. With CRM shares showing relative strength, this may be a safe port in a volatility storm.

SalesForce.com reported earnings of 61 cents that beat estimates for 50 cents and the year ago quarter of 39 cents. Revenue rose 26% to $3.39 billion and beat estimates for $3.37 billion. The company guided for revenue as much as $3.56 billion in Q4 and analysts were expecting $3.53 billion. They said they were on path for $16 billion in revenue in 2020 and $22 billion by 2022.

Billings, metric of future performance, rose 27% to $2.89 billion and beat estimates for $2.68 billion. Revenues rose 25% in the Americas, 26% in APAC and 31% in EMEA using constant currency. Sales cloud revenues rose 11%, service cloud rose 24% and marketing and commerce cloud rose 37%. Platform and "other" cloud revenues rose 51% or 30% if you exclude the acquisition of Mulesoft. The number of deals for more than $1 million rose 46%.

Adjusted gross profit of $2.6 billion came from gross margin of 76.9%. They ended the quarter with $3.45 billion in cash.

This company can seemingly do no wrong. When the tech sector eventually recovers SalesForce will be a leader.

Earnings February 26th.

Salesforce will be a fast mover if the market turns positive. This is a crowd favorite and has only declined because of the market.

Position 12/24:
Long Feb $135 Call @ $4.04, see portfolio graphic for stop loss.

HD - Home Depot - Company Profile


Lowe's was downgraded by Barclay's but it did not impact HD shares.

Original Trade Description: Jan 9th

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.

Home Depot shares declined after six consecutive months of declining home sales. The rising mortgage rates were also taking a toll. Analysts are worried the remodel boom will stall. This is simply not the case. When homeowners want to move they do buy materials from HD to fix up the house before they sell. However, when they decide they can no longer afford to sell because home prices and interest rates are too high to justify a move they still fix up their homes because they are going to stay there for a while.

Analysts should not be worried about Home Depot earnings. The entire Southeast was hit by multiple hurricanes and that means many months of repairs that will continue into this summer that are far more costly than what homeowners would be spending just to fix up homes prior to selling. There is massive destruction and damage across multiple states and will require millions of pieces of sheetrock, shingles, siding, home appliances, 2x4s, tools, etc. Hurricane Sandy added between $300-$500 million to Home Depot revenue in the short term and we have two different hurricanes in the same area today. This will add to earnings for quarters to come.

Earnings February 12th.

The company reported Q3 earnings of $2.51 compared to estimates for $2.27. Revenue rose 5.1% to $26.30 billion and narrowly beat estimates for $26.242 billion. Same store sales rose 4.8% and beat estimates slightly. They guided for full year revenue to rise about 7.2% with 5.5% same store sales. They guided for earnings of $9.75.

Morgan Stanley reiterated an overweight position with a $200 price target. Several analysts have written that the Sears bankruptcy will benefit Home Depot and Lowe's because of the overlap in store footprints. Since Home Depot sells tools, appliances, household items, lawn and garden, etc, they will pickup any Sears customers looking for a new outlet.

HD will rally with the Dow for the rest of January as long as the Q4 earnings guidance from other companies does not turn negative.

The market is poised to open lower on Thursday so we should be able to buy a dip at the open. With the February option expiring on the 15th and earnings on the 12th, the premium should have decent support.

Position 1/10/19:
Long Feb $185 call @ $2.66, see portfolio graphic for stop loss.

MRK - Merck - Company Profile


No specific news. Shares waiting for the next drug sector surge.

Original Trade Description: Jan 5th

Merck & Co., Inc. provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The company offers therapeutic agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal and intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors, and melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment for dogs and cats; anthelmintic products; fluralaner products to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with Aduro Biotech, Inc.; Premier Inc.; Cancer Research Technology; Corning; Pfizer Inc.; AstraZeneca PLC.; and SELLAS Life Sciences Group Ltd. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey. Company description from FinViz.com

Keytruda is expanding its base and is now approved for eight different cancer types. The drug has been approved in China, which has a serious melanoma problem. Sales of Keytruda are expected to reach $22 billion a year by 2022.

The FDA granted MRK a priority review on using Keytruda on a rare form of skin cancer. In a study with 14 patients 64% responded well to the treatment and all 14 saw tumor shrinkage.

Hardly a week goes by that Merck does not receive a new approval on some drugs. They have a very strong pipeline.

Merck shares declined in October after the company reported earnings of $1.19 that beat estimates for $1.14. Revenue of $10.79 billion rose 4.5% but missed estimates for $10.88 billion. They raised guidance for the full year from $4.22-$4.30 to $4.30-$4.36. Revenue guidance was narrowed but stayed in the same range. Shares fell $4 on the earnings but recovered almost immediately to set new highs in early December.

The company raised full year earnings guidance from $4.16-$4.28 to $4.22-$4.30. Revenue is expected to range between $42.0-$42.8 billion, up slightly from the prior $41.8-$43.0 billion guidance.

The company raised its dividend 15% to 55 cents. They also announced another $10 billion share buyback.

The company successfully avoided the October/November market decline but rolled over in early December after they announced the $2.3 billion acquisition of Antelliq, which will join their animal health division.

Shares have started to recover and market willing should be making new highs in the near future.

Merck has earnings on January 24th. I am recommending we buy a cheap February call and hold over the earnings report.

Position 1/7/19:
Long Feb $80 call @ 85 cents, see portfolio graphic for stop loss.

QCOM - Qualcomm - Company Profile


The trial with the FTC is continuing but news has been minimal. Shares were up on Friday after the CEO testified.

Original Trade Description: Dec 31st

QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, and/or long term evolution standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California. Company description from FinViz.com.

The last 12 months have been turbulent for Qualcomm. First they tried to acquire NXP Semiconductor (NXPI). They received approvals from 7 of the 8 countries that needed to approve the transaction. While they were waiting on China's approval, Broadcom (AVGO) made a hostile offer to acquire Qualcomm for $121 billion. Qualcomm would be forced to drop the bid for NXPI if they accepted the Broadcom bid. Qualcomm fought Broadcom and finally got the government to veto the deal under a national security rationale.

Broadcom quickly made a big show of becoming a U.S. company by changing its domicile to the U.S. That was not enough to convince CFIUS they were not a threat. Eventually Broadcom dropped its bid.

Qualcomm tried to continue its acquisition of NXPI but China refused to approve the acquisition and Qualcomm was forced to abandon the acquisition attempt and pay a $2 billion breakup fee.

While Qualcomm and NXPI would have been stronger together, Qualcomm is not sitting still. They are rapidly moving forward on 5G communications, automotive chips, internet connectivity, Internet of Things, network processing, etc.

The company just announced a $30 billion stock buyback. That is one-third of the company using the funds they had set aside for the NXPI acquisition.

The next challenge for Qualcomm is settling the patent dispute with Apple. The phone company has protested the way Qualcomm collects royalties on its products. Instead of only charging a royalty on the specific parts in the phone, Qualcomm has always charged a royalty on the entire cost of the phone. In the beginning, companies did not balk because without Qualcomm's parts the phone would not have been possible. After paying royalties to Qualcomm for years, Apple decided they were paying too much money to Qualcomm and sued them to change the patent. Since Apple and every other phone manufacturer had been paying Qualcomm under this structure for years, Apple does not have a very good chance of winning. They do have a lot of money and the best lawyers in the world but the law is the law and signed agreements are tough to fight.

This suit is expected to be settled soon. Qualcomm has been successful in getting some models of iPhones blocked from sale and with each court action they are making it more likely there will be a settlement soon. The CEO said he thought it would be in Q4 but it has not happened yet.

With a 4% dividend and buying back 33% of the stock, there is no reason for Qualcomm shares not to rise in the coming months. The stock should also be somewhat immune to market movement over the coming weeks thanks to the monster buyback.

Qualcomm reported earnings of 90 cents that beat estimates for 83 cents. Revenue of $5.80 billion also beat estimates for $5.52 billion. However, the company guided for Q4 revenue of $4.5-$5.3 billion and earnings of $1.05-$1.15. Analysts were expecting $5.57 billion and 95 cents. The decline was due to a lack of Apple sales. Apple normally buys 35-50 million chips in Q4 but they have dropped Qualcomm as a supplier until the royalty fight is concluded in court. Shares lost $7 post earnings.

Cowen recently reiterated a buy rating and $73 target. Canaccord Genuity reiterated a buy and $75 target. Bank of America reiterates a neutral and $67 target.

Earnings Feb 6th.

Apple is trying to push out a software update to force phones to remove patent liabilities in China. Qualcomm is pressing the court to force an immediate halt to sales. Apple said late in the day that the China sales ban would force them to settle the patent suit with Qualcomm. Obviously that is exactly what Qualcomm has been trying to accomplish. Apple said being forced to settle with Qualcomm would force all other manufacturers to pay higher royalties as well. Everyone has been hoping Apple would be victorious and they would benefit from the same lower royalties if Apple won. Apple is trying to claim that Qualcomm's royalty agreements, which they signed and paid royalties on for years, is no longer valid because the price of the phone has risen so high. The agreement calls for a set percentage of the sales price as the royalty amount. When phones sold for $400 it was a smaller amount but now with $1,000-$1,500 phones that same percentage is a lot bigger number.

Apple is also playing politics in their court filings warning that China will lose millions of dollars in taxes and revenue if the ban is enforced. Of course, they could just pay Qualcomm what they owe and there would be no ban.

Qualcomm also won an injunction in Germany to force Apple to halt sales of iPhones.

Starting on January 4th, Qualcomm will participate in a 10-day non-jury trial against the FTC. This trial is the key to the settlement of Apple's suits around the world. Qualcomm will argue for its current patent and licensing model and fee schedules. The outcome of the trial will either boost Qualcomm's $5.2 billion a year royalty stream or crash it to a fraction of that amount. LINK

Nobody disagrees that Qualcomm's engineering and designs are the best in the business. They are simply whining that Qualcomm charges too much to license those technologies.

The outcome of this trial could move the stock $10 or more in either direction. I am proposing we buy a call and a put and hang on for the ride. One of them could been deep in the money and the other will expire worthless.

Update 1/5: Qualcomm acted to enforce the ban on iPhones in Germany and Apple was forced to pull the specific models from stores. Germany's biggest retailer, Gravis, said it still had all Apple products on sale but that is likely to end quickly. Qualcomm posted a bond of 1.34 billion euros in order to put the enforcement into effect. According to the court order, Apple has to stop the sale, offer for sale and importation for sale of all infringing iPhones in Germany. The court also ordered Apple to recall the affected iPhones from third-party resellers in Germany.

The 10-day non-jury trial with the FTC over patent procedures began on Friday. Position 12/31/18:
Long Mar $60 Call @ $2.06, see portfolio graphic for stop loss.
Long Feb $52.50 put @ $1.39, see portfolio graphic for stop loss.

We should know from the trial watchers if Qualcomm proved their case by the middle of January. I only recommended the Feb put because any downside move should be nearly immediate while any upside move could be lasting.

QQQ - Nasdaq 100 ETF - ETF Profile


The QQQ has stalled at $160 for three days and that killed the premium ahead of next Friday's expiration. I put a 30-cent exit trigger on it to get us out for a breakeven. I plan on reinstating the position with a longer term option.

Original Trade Description: Dec 7th

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

The Nasdaq looks like it wants to decline further. I am profiling a dip buy at $158.15 on the hope that the Nasdaq/ETF will not decline below 6,800/155.00.

Position 12/17 with a QQQ trade at $156.85:
Long Jan $168 Call @ $1.12, see portfolio graphic for stop loss.

Position 12/24:
Long five Jan $168 Calls @ .12 each.
Adjusted cost for 6 = $.29 each.

SPY - S&P-500 SPDR ETF - ETF Profile


The S&P has stalled at round number resistance at 2,600. Hopefully we will get a break through next week.

Original Trade Description: Dec 22nd

The SPY is the SPDR ETF for the S&P-500. It was the first exchange traded fund listed in the USA starting in 1993.

If the market is going to rebound the SPY would be our vehicle of choice. This avoids single stock risk and capitalizes on the most oversold big cap index.

This is a bet on an end to tax loss selling and a post-Christmas market rebound. There is no guarantee there will be a rebound and there is the risk of some early January volatility.

There are hundreds of billions in cash on the sidelines waiting for the selling to end. Investors want to establish positions for 2019 and at the current lows there are plenty of bargains.

Position 12/24:
Long Feb $255 Call @ $3.25, see portfolio graphic for stop loss.

BEARISH Play Updates

No Current Puts