Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/30/2019

Table of Contents

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

Market Wrap

The Bull Is Back

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The FOMC says it will take its foot off the so-called economic brakes and the market cheers; better than expected earnings helped too. Market action was positive all morning but really kicked into high gear following the FOMC policy release. The release is everything the market could have asked for and helps brighten the outlook for this year.


Notable changes in the statement include the removal of verbiage indicating further rate hikes this year. They took out the words 'further gradual increases' and replaced it with 'will be patient' about the timing and pace of future hikes. The Fed also made clear in a separate note that it would continue to operate with an ample balance sheet, a message to the effect the end of the balance sheet run-off is near. The new message, now official, is the committee is not on auto-pilot and will adjust as needed.

Market Statistics

Earnings were another big boost to today's markets. Yesterday's report from Apple shows that the worst of global economic slowdown is behind the company, an outlook taken as a proxy for the global economy. Apple's forecast for the coming year is below estimates made last year but it's far better than what the market was expecting and has sparked some optimism for the coming year.

This morning a report from Boeing helped fan the flames of optimism. The aerospace giant reported record revenue and EPS, strong global demand, and a solid backlog of orders that guarantee a few more quarters of strong revenue and EPS at least. The backlog now sits at 5900 which equates to about six years of production at the current pace of delivery. The guidance for 2019 is above analysts expectations and helped send the stock up more than 6% in early pre-market trading.

Economic Calendar

The Economy

The ADP Employment Report came in much stronger than expected and points to continued labor market health in 2019. The headline213,000 is more than 30K above consensus estimates. It is offset by a downward revision to the previous month that leaves it as-expected but that is still a fair 180,000. The 12-month average is still above 200,000 as well. Job gains were fairly even across business size but skewed as always to the services side of things. On the goods-producing side of things construction and manufacturing both produced solid increases in hiring. If the NFP on Friday is anything like this I think we could see the equities market continue to recover.


The GDP figures for the fourth quarter were delayed due to the government shutdown. The shutdown is over but its effects are still being felt. A lot of tomorrow's data including the Personal Income, Spending, and Consumer Inflation figures are likely to be delayed as well.

Pending Home Sales fell -2.2% in the last month and are now at an 8 year low. The number of sales was affected by high rates and interest rate fears in late fall (when contracts are signed) so likely to rebound in the coming months. On a YOY basis, the number of Pending Sales fell -9.8% making this the twelfth straight month of YOY decline. Today's news from the FOMC is likely to help change this situation but home prices remain high so I don't expect a mad rush of buyers to materialize.

The Dollar Index

The Dollar Index edged slightly higher in the early portion of the session but that was just the calm before the storm. The index moved sharply lower following the FOMC policy release and broke below the $95.50 support target. The Fed's new stance, the change of policy statement, and the new outlook for the balance sheet have drastically altered policy expectation and put the dollar on a new path. The index is now headed lower and may hit $95 in the next few days. A move below $95 would be bearish and could take the index down to $94 or lower in the near to short-term.


The Gold Index

Gold prices extended their rally on the FOMC's dovish policy statement. The metal moved up another 0.90% in what looks like a strong move higher. Today's candle sets a new 8-month high and is supported by the indicators. Both indicators are bullish and on the rise, so higher prices are expected. Now that gold has surpassed the $1,320 level a move up to $1,340 and $1,360 looks much more likely.


The Gold Miners are responding to favorably to rising gold prices. The Gold Miners ETF GDX rose 1.70% in today's action. The ETF created a long green candle extending a move up from support to touch my resistance target at $22.50. This target is consistent with support levels from last year and may be strong. The indicators are bullish so I expect to see at least a test of resistance if not a break to new highs. The risk is gold prices if they fall the GDX will fall with them.


The Oil Index

The price of WTI jumped on today's inventory data but the gains did not hold. The EIA says crude stockpiles rose less than 1 million barrels when the market was expecting close to 3 million. On top of that storage of gasoline and distillates fell more than expected which raised concerns of tightening supply. Later in the day the reality US storage is at record highs helped trim gains. WTI settled near $54 after setting a multi-month high intraday. Today's gains were capped by resistance just above the $54 level which keeps oil trading within its congestion band.


The Oil Index rose about 1.0% in today's session but it too remains range bound. The index is consolidating above the short-term moving average and the 1,230 support line but remains beneath resistance near 1,275. The indicators are mixed but suggest a weakening market and the possibility the index will retreat in the coming days. A move below 1,230 would be bearish and could take the index down to 1,100 in the near to short-term.


In The News, Story Stocks and Earnings

Industrial products maker Ingersol-Rand reported before the bell and sent shares soaring. The company was able to beat analysts estimates with its 29% increase in YOY adjusted EPS and give positive guidance. The company says growth will slow in 2019 but only a little to 5-6% from 2018's 8%. The company says bookings for new orders was robust with bookings up 17%, another indication 2019 activity (in the global economy) will not be as bad as people have been thinking.


Facebook reported after the closing bell and delivered results comparable to Apple, far better than what recent events have led the market to believe was possible. The company says revenue grew more than 30% over the same quarter last year and beat consensus estimates for EPS by $0.20. Zuckerberg says the community and business continues to grow, we'll see about that. Shares of the stock jumped more than 6.5% on the news. Looks like FAANG is back.



Microsoft grew revenue 12.4% over the same quarter last year but missed estimates by a narrow margin. The company says adjusted EPS is $1.10 which beat the consensus by a penny, GAAP EPS missed by a penny. Satya Nadella says strong growth in commercial cloud business is driving the business and getting stronger as the company works to deliver value to its customers. The commercial cloud business grew 48% over the last year and accounts for nearly a third of revenue so that is good news. Shares of the stock fell in after-hours trading though because growth just wasn't as strong as the market had hoped for.


Tesla reported revenue growth topping 110% over the last year but it was not enough to drive the electric car market higher. Despite the growth, EPS fell far short of analysts expectations on the GAAP and non-GAAP comparison as efforts to control costs, ramp up production, and improve profitability fail to bear fruit. Shares of the stock were down about -2.5% on the news.


Payment processor VISA reported solid 13.2% YOY revenue growth that beat analysts consensus. The company also beat expectations for EPS and sent shares moving higher in the after-hours session. Considering the strength in labor markets, consumer banking, and holiday spending I would expect to see Visa continue to post solid results this year.


Shares of Wynn were volatile in after-hours trading after delivering a mixed report. The company says revenue grew by 4.3% over last year and beat consensus estimates but EPS fell short of expectations. Shares first shot higher by 2.0% but then quickly gave up those gains and more as concerns for global growth sapped outlook.


The Indices

The indices moved higher today and look like they want to keep going higher. If the after-hours reports are any indication I think they will. Today's leader was the NASDAQ Composite with a gain greater than 2.0%. The tech-heavy index created a medium sized candle that moved up to set a new high and extend the reversal that has been forming. The indicators are still mixed but rolling into bullish crossovers that are consistent with rising prices. A move up may find resistance at the long-term moving average, a move above that would be bullish.


The Dow Jones Industrial Average posted the second largest gain with an advance near 1.75%. The blue-chip index created a medium-sized green candle that shows some signs of resistance but is also poised to move higher. The indicators are still mixed but rolling into bullish trend-following signals that will confirm long-term uptrends. A move higher is expected but there is resistance at 25,250 that may hold prices from advancing further. A break above that level would be bullish.


The S&P 500 advanced about 1.60% in a move that touched the long-term 150-day EMA. The EMA has provided some resistance but it isn't strong at this time, that may change. Until then the indicators are consistent with at least a test of resistance that may turn into a break of resistance should earnings continue to satisfy the market. A move above 2,700 would be bullish and could take the index up to 2,800 in the near to short-term.


The Dow Jones Transportation Average moved up about 1.0% in today's session and looks like it could go higher. The index is moving up off of support and is confirmed by rising momentum so a move to the long-term moving average is likely. A move above the long-term EMA would be bullish and would likely result in a retest of 11,000 and 11,500 in the near to short-term.


The Fed did it again, they sounded the all-clear for equities, at least so far as they are concerned. Now that the Fed worry can be moved to the back burner the market can focus on earnings and trade. The earnings are OK, not as bad as feared, and the impact of the trade war has so far been limited so yet another headwind may be mitigated. If trade relations deliver some positive news we may just see this market really begin to rally. I am firmly bullish for the long-term and still oh so very cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes

PS, the baby is home alive and well. Joseph Edmund Hughes, named for his two grandfathers.


New Option Plays

Hold Them or Fold Them?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Not only do investors need to know when to hold and when to fold but when to stand pat. The Dow gained 434 points and the Nasdaq 154. Anything that was worth buying was bought today. The S&P futures are up +9 and the Nasdaq futures +42. Option premiums were already overly inflated at the close and should the futures gains hold overnight they will be inflated even more at Thursday's open. This will not be a morning to enter new positions.

 

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


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Good Day to be Long

by Jim Brown

Click here to email Jim Brown

Editors Note:

Positive earnings and positive Fed comments produced a huge gain. The recent earnings trend of lowered guidance was tempered somewhat on Wednesday and sentiment quickly improved. The Fed promised to be patient in its rate hikes and agreed to reduce its balance sheet program if necessary. The market celebrated and stocks surged. Advancers were 3:1 over decliners.



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

CRM - SalesForce.com - Company Profile

Comments:

No specific news. Shares posted a strong $4 gain to close just barely over resistance at $150.

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.



DELL - Dell Technologies - ETF Profile

Comments:

Raymond James initiated coverage with a buy rating and $57 price target.

Original Trade Description: Jan 26th

Dell Technologies Inc. designs, develops, manufactures, markets, sells, and supports information technology (IT) products and services worldwide. It operates through three segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. The ISG segment provides traditional and next-generation storage solutions; and rack, blade, tower, and hyperscale servers. It also offers networking products and services that help its business customers to transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes; and attached software, and peripherals, as well as support and deployment, configuration, and extended warranty services. The CSG segment offers desktops, notebooks, and workstations; displays and projectors; third-party software and peripherals; and support and deployment, configuration, and extended warranty services. The VMware segment offers compute, management, cloud, and networking, as well as security storage, mobility, and other end-user computing infrastructure software to businesses that provides a flexible digital foundation for the applications that empower businesses to serve their customers globally. The company also offers cloud-native platform that makes software development and IT operations a strategic advantage for customers; information security and cybersecurity solutions; cloud software and infrastructure-as-a-service solutions that enable customers to migrate, run, and manage mission-critical applications in cloud-based IT environments; cloud-based integration services; and financial services. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.

Dell was taken private several years ago and disappeared from the market. When they acquired VMWare they had a tracking stock representing their 80% interest in the company under the symbol DVMT. In December they bought back that tracking stock in a complex transaction and then changed the ticker to DELL. Today, this represents all of Dell.

Over the last month Citigroup and Goldman initiated coverage with a buy rating and average target price of $60. Now that Dell is back as an operating company with strong management, we should be seeing a lot of funds and institutional investors moving back into the stock.

Dell has 145,000 employees. It is not a small company and it is a leader in the PC/Server sector and of course VMWare is a major component of the cloud.

Since the new Dell shares have only been around a month, they are definitely not over-owned.

Earnings March 14th.

Position 1/28/19P:
Long April $47.50 call @ $2.60, see portfolio graphic for stop loss.


HD - Home Depot - Company Profile

Comments:

No specific news. Shares rallied with the Dow to close over short-term resistance at $180.

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.


IBB - iShares Nasdaq Biotech ETF - ETF Profile

Comments:

No specific news. Short term support held, and we could try a breakout next week. The index is up strongly from December and it has held its gains.

Original Trade Description: Jan 19th

The investment seeks to track the investment results of the NASDAQ Biotechnology Index, which contains securities of companies listed on NASDAQ that are classified according to the Industry Classification Benchmark as either biotechnology or pharmaceuticals and that also meet other eligibility criteria determined by Nasdaq, Inc. The fund generally invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents. It is non-diversified. Company description from FinViz.com.

The IBB has 226 stocks and follows the Nasdaq Biotech Index ($NBI). The IBB rebounded strongly from the Christmas bottom and then stalled for over a week in the $108 range as it consolidated its gains. Friday's minor gain set it up to test resistance at $111.50 and a breakout there would target the prior highs at $122.

The first quarter is normally strong for biotechs because of the multiple conferences and calendar of FDA drug approvals. I am recommending we enter a position to benefit from a break over resistance.

Position 1/22/19:
Long March $115 Call @ $1.79, see portfolio graphic for stop loss.


MRK - Merck - Company Profile

Comments:

No specific news. No reason to close the position for 5 cents. The original play description was to buy "an inexpensive February call and hold over earnings." Those will be out on Feb 1st. The call cost 85 cents.

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 February 1st. 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.


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

Excellent rebound with a $4 gain.

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 1/14/19:
Long March $170 Call @ $1.77, see portfolio graphic for stop loss.

Previously closed:
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.
Expired 1/18: Adjusted cost for 6 = $.29 each. Expired, -.29 loss.


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

Comments:

New 6-week high close. The next hurdle is 2,700.

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.


SWK - Stanley Black & Decker - ETF Profile

Comments:

OpenGate Capital has agreed to buy lock maker Sargent and Greenleaf from SWK. The lock maker was founded in 1857 and sells products in more than 100 countries. No terms were disclosed and the transaction will be completed in March.

Original Trade Description: Jan 23rd

Stanley Black & Decker, Inc. provides tools and storage, engineered fastening and infrastructure, and security solutions worldwide. The company's Tools & Storage segment offers professional products, including corded and cordless electric power tools and equipment, drills, impact wrenches and drivers, grinders, saws, routers, and sanders, as well as pneumatic tools and fasteners, including nail guns, nails, staplers and staples, and concrete and masonry anchors; and consumer products, such as lawn and garden products comprising hedge and string trimmers, lawn mowers, and edgers and related accessories, as well as home products, such as hand-held vacuums, paint tools, and cleaning appliances. It also offers hand tools, including planes, hammers, demolition tools, clamps, vises, knives, chisels, and industrial and automotive tools, as well as measuring, leveling, and layout tools; power tool accessories; and storage products. The company's Industrial segment sells engineered fastening products and systems, which include blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners; sells and rents custom pipe handling, joint welding, and coating equipment; provides pipeline inspection services; and sells hydraulic tools and accessories. Its Security segment provides alarm and fire alarm monitoring, video surveillance, systems integration, and system maintenance solutions; sells healthcare solutions, which include asset tracking, wander and fall management, and emergency call products, as well as infant, pediatric, and patient protection products; and sells automatic doors. The company was formerly known as The Stanley Works and changed its name to Stanley Black & Decker, Inc. in March 2010. The company was founded in 1843 and is headquartered in New Britain, Connecticut. Company description from FinViz.com.

Earnings were not kind to Stanley Black & Decker (SWK). On Tuesday the company reported earnings of $2.11 that edged out estimates by a penny. Revenue of $3.63 billion barely edged out estimates for $3.62 billion. The problem came in the guidance. The company predicted earnings for fiscal 2019 of $8.45-$8.65 and analysts were expecting $8.79. The company is in the middle of a large $250 million restructuring program that is impacting costs in the short term.

Analysts were quick to moan about the falling housing market and how it was impacting this sector. However, about 90% of home improvement sales come from consumers not selling their homes. Investors were quick to dump Home Depot thinking weakness at SWK meant weakness at Home Depot since they are their biggest customer.

Investors need to focus. Revenue hit the target, restructuring costs are impacting earnings, Home Depot has not reported any sales declines. Unfortunately, SWK shares fell $21 on the news.

Now is the time to buy the dip on SWK.

Position 1/24/19:
Long Mar $125 Call @ $2.40, see portfolio graphic for stop loss.


TGT - Target - Company Profile

Comments:

No specific news. Holding right at a 2-month high.

Original Trade Description: Jan 9th

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. 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.

Position 1/14/19:
Long March $72.50 call @ $2.08, see portfolio graphic for stop loss.


BEARISH Play Updates

QCOM - Qualcomm - Company Profile

Comments:

QCOM reported earnings after the close and should their afterhours gains hold, we will be stopped out at the open on Thursday. The company reported earnings of $1.20 that beat estimates for $1.09. Revenue of $4.84 billion missed estimates for $4.90 billion because of Apple's continued refusal to pay their royalties and license fees. They guided for Q1 earnings of 65-75 cents and revenue of $4.4-$5.2 billion. Analysts were expecting 69 cents and $4.83 billion. Shares rose to $51.40 in afterhours.

They did not mention the current FTC case in their earnings release. They did mention the billions owed by Apple and Huawei that will be paid if the various court cases end in Qualcomm's favor.

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 had 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.

Update 1/23/19: Noted short seller Sahm Adrangi and his Kerrisdale Capital hedge fund took aim at Qualcomm saying a loss to the FTC in the current trial would cut the stock price in half. If the company loses they would be forced to "license core patents to competitors and to renegotiate all of its existing licenses on fair terms." Kerrisdale argued that Judge Lucy Koh, currently presiding over the case, has already ruled against the company on several maters and may be inclined to rule in favor of the FTC.

Position 12/31/18:
Long Feb $52.50 put @ $1.39, see portfolio graphic for stop loss.

Previously closed: 1/22: Long Mar $60 Call @ $2.06, exit .60, -1.46 loss.




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