Option Investor

Daily Newsletter, Sunday, 2/3/2019

Table of Contents

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

Market Wrap

Six Weeks and Counting

by Jim Brown

Click here to email Jim Brown

The Dow has gained nearly 3,500 points in six consecutive weeks of gains.

Weekly Statistics

Friday Statistics

The Dow managed to stay positive most of the day with a +184-point rally on the morning economic reports. A little post earnings depression and some light weekend event risk pushed it slightly negative, but buyers were waiting, and the index closed above 25,000.

The Nasdaq never had a chance with Amazon losing 92 points. I am surprised the index made it into positive territory in the morning given the Amazon drag. Amazon was responsible for 37 Nasdaq points and Microsoft was second on the anchor list at 10 Nasdaq points.

There were quite a few economic reports for a Friday because several had been postponed during the shutdown. The calendar for next week is a moving target with Moody's showing one set of dates and Econoday and Bloomberg showing different dates. Hopefully after we get past next week all the reports will reset to their normal schedules.

The first major report for Friday was the Nonfarm Payrolls. The economy created 304,000 jobs and well over the latest estimate for 160,000. However, the blowout 312,000 number from December was revised down to 222,000 and the November gain of 176,000 was revised up to 196,000 for a net drop of 70,000 jobs due to revisions.

Goods producing jobs rose 72,000 and service jobs rose 232,000. The unemployment rate rose to 4.0% because more people entered the workforce thanks to available jobs and higher wages. Government workers were classified as unemployed even though they were still employed and just on furlough. Average hourly earnings rose 0.1% and the workweek was flat at 34.5 hours.

Construction jobs rose 52,000, healthcare jobs rose 42,000, leisure and hospitality added 74,000 jobs, transportation and warehousing added 27,000 and retail rose by 21,000. Personal and businesses services rose 30,000 and manufacturing added 13,000.

The headline numbers and percentages were impacted by the annual full-year revisions. Each January the government looks back at the yearly releases and the adjustments in the following months and produces a "final revision" for the year. The impact this year was negligible.

January was the 100th consecutive month of job gains and the pace seems to be growing stronger. The 3-month moving average after the revisions is now 241,000.

Because of the impact of the government shutdown we could see a dramatic shift in the February report, assuming another shutdown does not occur on February 16th.

The ISM Manufacturing Index for January rebounded from 54.1 to 56.6. Analysts were expecting a repeat of the 54.1. This is very good news for all those analysts worried about a 2019 economic decline. The new order component rose from 51.3 to 58.2 but order backlogs barely changed at 50.0 to 50.3. Production rose from 54.1 to 60.5.

The two best components were prices paid, which declined from 54.9 to 49.6 and customer inventories rising only slightly from 41.7 to 42.8. Prices paid fell into contraction territory and indicates no inflation on the horizon and no fear of a Fed rate hike. Prices paid hit 76 back in June so this is a significant decline and very good for manufacturers. The customer inventories remain very low and suggest continued strength in manufacturing as companies replenish their stocks.

Consumer sentiment was little changed from the initial January reading. The headline number rose from 90.7 to 91.2 in the revision but that was still a 7-point decline from the 98.3 in December. That was the largest monthly decline since December 2012.

With the longest partial government shutdown in history, worries over Chinese tariffs and the December market crash, I am surprised it was not worse. February should show a significant improvement assuming there is not a second shutdown.

Construction spending for November posted a stronger than expected rise of 0.8%. Analysts were expecting +0.3% after a previously reported decline of -0.1% in October. That was revised higher to +0.1%. Private residential construction rose 3.5% and was responsible for the headline gain. Public construction declined -0.9%. Overall construction spending is up 3.4% YoY and public construction is up 7.0%.

Wholesale inventories rose 0.3% in November, compared to estimates for 0.5% and a 0.8% gain in October. The inventory levels are being impacted by the tariffs on Chinese goods and the expectations they could be boosted to 25% on March 1st.

Vehicle sales slumped in January to an annualized pace of 16.7 million. With the government shutdown in place for most of the month and brutal cold weather it should not be a shock that sales suffered. Light truck sales were the hardest hit falling from 12.2 million to 11.3 million annualized.

The frequency of economic reports declines sharply next week as the backlog of missed reports dwindles. The ISM Nonmanufacturing and Factory orders are the most important reports.

Fed Chair Powell will speak on Wednesday and that will always be important for the market. If he is smart, he will try to avoid any market moving comments and not disrupt the current rally.

The State of the Union is Tuesday evening and that is sure to touch on a lot of topics and further increase political divisiveness. Ironically, the topic of the speech is supposedly "Unity." This will be the full use of the bully pulpit in a last-ditch effort to get funding for border security before being forced to declare a national emergency. Republicans will be cheering, and democrats will be putting their lawyers phone numbers on speed dial in case it actually happens. The speech should not have any material impact on the market.

Some 234 S&P companies have reported earnings with the current blended forecast for Q4 at 15.5% and 6.2% revenue growth. Unfortunately, the forecast for Q1 is dropping rapidly. Last month the forecast was for 8% growth and that has declined to only 0.7% growth. Net income estimates have turned negative at -1.6% and dropping sharply. This is going to get the market's attention very soon and it may not be pretty. If earnings are declining, the "E" in PE, then prices "P" will also decline.

Next week will see 97 S&P companies report. As you can see by the graphic below the number of high-profile companies has shrunk significantly. The earnings peak was last week, and it is downhill from here. There are still a lot of big cap companies to report but they are not names you hear every day. We are moving into mid-cap week and next week we will see the small cap sector begin to report.

We are nearing the point in the cycle where post earnings depression will begin to appear. We are already seeing it in the Dow, and we could see it in the Nasdaq next week. However, it is normally expiration week when the weakness really begins to appear.

Friday is not normally a big earnings day, but this cycle was heavier than most. Honeywell (HON) got off to a good start at the open but ran out of steam in the rapidly fading market. The company reported earnings of $1.91 that beat estimates for $1.89. Revenue declined 10% to $9.73 billion due to the spinoff of its transportation systems but still beat estimates for $9.70 billion. They guided for 2019 for earnings of $7.80-$8.10 on revenue of $36.0-$36.9 billion. Analysts were expecting $7.86 and $37.07 billion. Honeywell said strength in aerospace, defense and warehouse automation led to the strong earnings. Shares were up $6 at the open but faded to a $1 gain.

Chevron (CVX) reported earnings of $1.95 that beat estimates for $1.87 despite the falling oil prices in Q4. Revenue rose from $37.6 billion to $42.4 billion but narrowly missed estimates for $42.5 billion. Net production rose 7% to 2.93 million Boepd. They guided for 2019 production to rise 4-7%. They added 1.46 billion barrels of reserves in 2018. They repurchased $1 billion in shares in Q4 and increased the dividend by 7 cents to $1.19.

They produced an average of 338,000 Boepd from the Permian and expect to increase that to 600,000 bpd by the end of 2022. Bloomberg reported that Chevron had approved a $25 billion stock buyback program, but I could not find that in Chevron filings. Chevron said earlier in the week it was buying a Pasadena Texas refinery for $350 million from Brazil based Petrobras. Chevron is looking for a home for all that Permian oil they are shipping to the Gulf. Running it through their own refinery will increase their profits.

Exxon Mobil (XOM) reported earnings of $1.41 that easily beat estimates for $1.08. Revenue rose from $66.52 billion to $71.9 billion but missed estimates for $72.53 billion. Production rose to 4.01 million Boepd and beat estimates for 4.0 million. Exxon said its capital budget for 2019 is $30 billion, a 16% increase over 2018. Most of the spending will be on deep water and LNG projects.

Merck reported earnings of $1.04 that beat estimates by a penny. Revenue rose 5% to $10.99 billion and beat estimates for $10.95 billion. Sales of Keytruda rose 66% to $2.15 billion. They guided for 2019 earnings of $4.57-$4.72 on revenue of $43.2-$44.7 billion. Analysts were expecting $4.69 and $44.2 billion. Shares rallied $2 back to resistance at $76.50.

Currency issues lowered revenue by 3%. Keytruda was not the only drug winner. Gardasil, an HPV vaccine, saw sales rise 32% to $835 million. Bridon, Pneumovax and ProQuad all saw strong double-digit sales gains.

Discussing earnings would not be complete without talking about Amazon. The company reported earnings of $6.04 that beat estimates for $5.65. Revenue of $72.4 billion beat estimates for $71.88 billion. Investors were not impressed. The company guided for Q1 revenue of $56-$60 billion and analysts expected $60.83 billion. Even with the lowered revenue forecast it would still be an increase of 10-18% in a normally slow quarter. The company also said spending will increase at a significantly faster rate as they accelerate the process on HQ2 and other endeavors. Shares fell $92.

Investors should remember that Amazon went for years with no profits under the "build it and they will come" theory. Consumers arrived in record numbers. Annual profits in 2017 were $3 billion and that jumped to more than $10 billion in 2018. How many companies are increasing profits that quickly?

In retrospect 2018 was the result of all that capital investment in 2016-2017. This was the beginning of the payoff. Now Amazon is planning on spending another $10-$20 billion on their next round of investments. Amazon is still digesting the Whole Foods purchase. Revenue from its physical stores, which total about 500, declined 3% to $4.4 billion. This is growing pains as they try out multiple formats of retail locations in addition to Whole Foods. Actually, when adjusting the reporting calendar for Whole Foods to match Amazon's, sales were up 6%.

Amazon Web Services revenue rose 45% to $7.43 billion and operating income rose 61% to $2.18 billion. Revenue growth in its advertising business rose 95% to $3.39 billion. For the full year advertising revenue more than doubled from $4.65 billion to $10 billion.

Amazon is suffering from the law of large numbers. When revenue was $7 billion a quarter, raising it to $10 billion (+43%) was not that big of a jump given the total addressable market. The market was fertile and Prime subscriptions were small. Now that revenue is $72 billion and nearly every online shopper in America is a Prime subscriber, it is harder to move the needle. A 43% jump in Q4 revenue would mean a $31 billion increase. That is larger than the market cap of most S&P companies. The jump in package volume would almost need another UPS to deliver them.

In order to continue growing, Amazon is reaching out into other areas besides online shopping and to areas where online shopping has not taken hold. They mentioned a big spend in India where they are trying to establish a beachhead. There are 1.4 billion people in India compared to 330 million in the USA. If they are successful in dominating online market share in India, they could easily double existing revenue in 3-5 years. Of course, they are fighting the Alibaba companies on what could be considered home turf.

I would not be a buyer of Amazon today because we could see a drop back to $1,500 on post earnings depression. However, I would buy it for a long-term hold. This is a dynamic company with plenty of ideas that will keep them on top with new businesses for the next decade. There are analysts who believe shares will double or triple by 2025. Buy the dip to $1,500 or even $1,400 and then forget you own it. If you watch the big swings in the future, you will be tempted to sell and hate yourself later.

With the Fed out of the picture short-term, the dollar has declined back to support at 95 on the Dollar Index. With expectations for only one rate hike in late 2019, the dollar is losing ground. While that is good for earnings at American companies doing business overseas, it is a pressure in other areas. Our buying power is shrinking. Support at the $94 level is likely to hold as long as the economic numbers continue to improve. Additional employment reports like we saw on Friday will have the Fed coming back to the table with hikes, sooner rather than later.

The falling dollar means a rise in the price of gold. The yellow metal is heading back to resistance at $1,360 and that should equate to about $94 on the Dollar Index. The weak global economy is also prompting gold buying as a store of value.

The prior week the Bank of England refused to give Venezuelan president Maduro $1.2 billion in gold on deposit there. Last week the US stopped a shipment of $850 million in gold (20 tons) from leaving Venezuela headed for the UAE. The threat of sanctions against any person, company, airline or charter jet, caused the deal to blow up before the gold could be loaded. The Russian plane left empty.

In theory, the gold was supposed to be purchased by a company in the UAE for euros in order to provide some liquidity to Venezuela. In reality, many thought Maduro was trying to move his retirement funds out of the country before he leaves the country for good.

The constant headlines about Venezuelan gold helped to support gold prices.

Crude prices rallied back above $55 on news the US had sanctioned oil from Venezuela. US imports fell more than one million barrels per day because it is now illegal to make payments to Venezuela. The sanctions prevent American companies from doing business with PDVSA, the Venezuelan oil company. We normally import about 500,000 bpd from PDVSA.

Venezuela has another problem in selling that oil. The heavy oil must be blended with a lighter oil before it can be refined. Normally that happens in the US but that option is no longer available to PDVSA. If they try to sell the oil to other countries, there are very few refineries that have the capability of processing this heavy crude. That means PDVSA will have to sell it at a steep discount and then wait a month to get paid while the oil is in transport.

Venezuela only exports in volume to three large countries, Russia, China and the USA. The US is the only country that pays for the oil and therefore their only source of hard currency, dollars. China and Russia loaned the country money over the last several years and they are taking oil in place of payments. That means Venezuela, desperately in need of hard cash, cannot send oil to Russia or China because they get nothing in return. The US has crippled the Maduro regime, and this will force a further slowdown in production because there is no place to put the oil and no cash to pay the workers.

Bloomberg reported this weekend there are tankers holding about six million barrels of Venezuelan oil parked in the Gulf of Mexico with no place to go. Eight ships are either parked or heading to a holding pattern.

Kpler tanker tracking

Four days ago, news broadcasts were telling people to turn off all non-essential natural gas appliances and heaters because of low pressure in the lines and insufficient supplies. The Polar Vortex was killing people with sub-zero cold. Three days ago, forecasters predicted a significant thaw for this coming week and natural gas prices crashed to a seven month low.

This drop came with the country still in the grip of winter and gas supplies well below the 5-year average. Gas supplies will probably decline by 10% when reported next Thursday. If we had 2-3 more weeks of significant cold, we could see significant supply shortages. With only 2,197 Bcf in storage and the potential for a -250 Bcf decline next week we are reaching critical levels and prices are crashing. If you want logic you won't find it in the commodity market.


I don't want to be the writer that cried wolf or the equivalent of Chicken Little, but the Dow and Nasdaq have been up for six consecutive weeks. The Dow has rebounded 3,500 points at the intraday high on Friday. Long lasting "V" bottoms are very rare. Q1 earnings forecasts are about to turn negative. Post earnings depression is coming. By any measure the current rebound is overbought.

The only thing keeping this market positive is the extreme oversold conditions in December and the potential for a China Trade deal. The oversold conditions from December have nearly equalized. We are overdue for a meaningful dip. I am not predicting a 1,000-point decline but simply a decline that last more than a day or two and allows some traders to take profits while portfolio managers get an opportunity to enter positions they missed on the initial rebound.

If I had told you on December 26th to buy everything in sight because the market was going to rebound straight up for the next six weeks you would have thought I was crazy. This kind of V bottom rarely happens.

The trade war with China knocked a lot of points off the market in 2018. It has been a nearly daily pain in the neck with headlines and tweets that increased volatility. October was especially painful. Everyone has bought the dip on the hope of a resolution. The meeting last week was positive, and it appears Trump and Xi will meet at the end of February to sign a major trade agreement. This is the perfect sell the news event. An agreement is already priced into the market. The actual results of the agreement will take months if not years to be felt in the economy. The only immediate part will be a headline about the removal of the tariffs.

The market will likely spike on the announcement and then roll over for lack of other news. March is typically a slow month with investors liquidating positions to raise money to pay their taxes. If an agreement is reached in the last week of February, there may be no headlines left to hold the market up in March.

I really hope that I am wrong on this prediction. We may not make it until the end of February. There is a market adage that says, "As January goes, so goes the year." Since 1957 January has been up 37 times. Of those 37 times the market has been up for the year 32 times. That is a remarkable record with an 86% success rate. However, of those 37 times, February has only been up 55% of the time or 20 years. Basically, a coin toss.

You may remember February 2018. Markets do not have a memory, but humans do, and events tend to repeat. The Nasdaq hit a high on January 29th and nine trading days later it had lost -875 points. The S&P lost -341 points and the Dow -3256. I am not predicting this, but I do think we should pay attention. The Chinese trade deal could keep investors interested in the market but once it has been announced, there may not be another carrot to chase. Add in the potential for Q1 earnings forecasts to turn negative and that is an added incentive to be cautious.

The S&P finally made it through the resistance at 2,650 and closed just over resistance at 2,700. The 100-day average at 2,710 is current resistance but the 2,700 level is still in play. The next 100 points could be tough, but the 2800-2815 level is the clear target and that will be the next goal.

The Dow closed positive solely on the strength of the earnings winners from Friday. Chevron, Exxon and Merck added 57 points and Wednesday's winner Visa added 34 points. Note that prior winners from several days ago, CAT, MCD, MSFT and MMM were at the bottom of the list with post earnings depression.

The Dow gain of 64 points was just enough to close the index over 25,000 and the 100-day and 200-day at 24,986. If the Dow can hold these gains over those levels, it would be very bullish. Should it drop back below 25,000 the round number resistance would gain strength. I believe Disney is the only Dow component to report next week.

Amazon was the big drag on the Nasdaq with the $92 decline erasing 37 points from the Nasdaq index. It was the only stock to trade with a double-digit gain or loss. The index has round number resistance at 7,300 and the high for the day was 7299.94. You cannot get much closer than that.

The 10% correction level is 7,298 and the 100-day at 7,281. Alphabet (GOOGL) is the big dog reporting on Monday and they are expected to beat estimates. Whether the stock will rally is of course unknown. Since there are two $1,100 Google stocks, their earnings impact is doubled. Every $1 move in the stock is worth about a quarter of a Nasdaq point. A $12 move in each stock ($24) would be the equivalent of 6 points on the Nasdaq. A $10 move in Amazon is worth 4 Nasdaq points.

The Russell 2000 finally pushed through resistance at 1,493 and even closed over 1,500. However, there is a real blockade at 1,520 where multiple resistance levels converge. With small cap earnings still a week away there may be enough interest to keep the index moving higher to that 1,520 level.

I probably do not need to write a summary paragraph today because I made my feelings known. However, those are just my concerns and they have nothing to do with the market. I could be entirely off the mark. I would simply like everyone to understand what could happen and be aware. If it does not happen, I am sure everyone will be thrilled with another week or two of gains.

Unfortunately, we are still undergoing some challenges after our server failure last week. We are working diligently to get them corrected. Please be patient if there is an interruption in your email delivery. You can always go to the website to access the newsletter content.

Enter passively and exit aggressively!

Jim Brown

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"A democracy will continue to exist up until that time the voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship."

Alexis de Tocqueville 1835.

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Index Wrap

Pressing Our Luck

by Jim Brown

Click here to email Jim Brown
After six weeks of gains I feel like a bettor at the craps table. In the game of craps, when you win certain bets, you can press your bet. That means if you had $25 bet and you won $50 you can keep $25 and add $25 to the original bet. You now have $50 in play and $25 in your pocket. If you win again you could press your bet again by keeping $75 of your $100 in winnings and adding another $25 to your bet. Note that I am using simple dollar amounts for the example so non-bettors can understand.

Since they don't build those billion-dollar hotels in Vegas on tips from winners, there is a flaw in this process. In craps, once a number is rolled the object of the game is to roll that number again before you roll a seven. The seven is the killer number and there are 6 ways to roll a seven making it more likely to appear than any other number. The odds are always against the shooter. Gamblers who constantly press their bets are eventually stopped out when a seven appears and all number bets lose. This is why smart gamblers stop pressing their bets and take their money off the table after a series of successful rolls. Regardless of how lucky you are, at some point the seven will always appear and the dealers will scrape all your hard-earned money off the table. It may take 5 rolls or 50 rolls but a seven always appears eventually. The longest recorded streak was set by Patricia Demauro at the Borgata in Atlantic City where she held the dice for four hours and 18 minutes without a seven out. She rolled the dice 154 times. It was only her second time playing craps and she started with $100. The Borgata would not say how much she won but they escorted her to her car with her winnings after providing a champagne toast for everyone at the table. The previous record was three hours and 6 minutes in a Vegas casino.

The Dow and Nasdaq have been up for six consecutive weeks. Rarely do the indexes post long consecutive winning streaks. They do happen and I will be the first to admit I have lost a lot of money betting against them. They are so rare that once they appear, supposedly "knowledgeable" analysts begin calling for profit taking after the first 5-6 weeks. To continue the gaming analogy, if you are playing roulette and a red number comes up 6 times in a row, most gamblers would start betting on black under the assumption that the next number will be black. In roulette there are 18 reds, 18 blacks and 2 greens. That means there is less than a 50% chance the next number will be red again. I have seen gamblers throw thousands of dollars on the table after a long string of red or black numbers because they are sure the string will be broken. However, the roulette wheel has no memory and it does not know the last 10 spins ended resulted in a red number. In Mesquite Nevada several years ago, I saw a run of 21 consecutive spins with a black number. Tens of thousands of dollars were wagered and lost on the idea a red number would appear on the next spin. The odds of a single color appearing for 20 consecutive spins are 1,813,778 to 1. The longest recorded streak in American casino history was in 1943 when red hit 32 consecutive times.

Fortunately, the market itself may not have a memory but millions of investors have vivid memories of prior resistance levels and support points. These investors have a much better chance of making money betting on reversals at these levels than they would on craps or roulette.

This reduces the likelihood of a continued streak of market gains. It can happen but investors entering new positions today are "pressing" their luck.

The market is driven by headlines and expectations that impact investor sentiment. Today that sentiment is being powered by expectations for a trade deal with China. Like everyone betting on a red number in the example above, investors have done the political math and expect a deal by the end of February.

These expectations could keep the markets positive for the next couple weeks but could set us up for a big letdown if everything in the agreement is not perfect or for some reason an agreement is not reached.

Investors should not be pressing their bets at this point in the market cycle. This is time to be reducing those bets or maintaining trailing stops to capture profits should something unexpected happen.

You only need to look at the change in the A/D line on the S&P since Christmas to understand the current overbought conditions. Six weeks after the Christmas lows and the A/D is at a new high. Obviously, it can go higher but we are rapidly approaching a point where post earnings depression is going to impact sentiment.

Post earnings depression appears when traders buy/own a stock ahead of earnings. They are looking for a big earnings beat and a post earnings spike. Regardless of what the company reports there is rarely a continued move higher 2-3 days after earnings. This may occur in 2-3 out of 100 earnings reporters. We see it all the time. Company ABC beats on earnings and revenue and issues positive guidance. Shares rise and traders take profits. Shares decline in the weeks following the earnings. This is the depression period where traders are moving their money to another stock to capitalize on their earnings run. This is the perfect scenario.

In the majority of reports the company may beat on one or two of the metrics but they miss on the other. The stock falls at the open and trader flight is instant. However, in this scenario, investors rather than traders, begin to decide they want to move their money because of which ever combination of metrics that produced the disappointment. If they company disappointed on guidance, then why continue to hold the stock? The investor flight is not instant but will occur over the next several weeks because of changing investor sentiment.

February is a bad month for post earnings depression. The fourth quarter is normally the biggest earnings quarter of the year. Those earnings color guidance for the next year. If companies disappoint after the best quarter of the year, then investor sentiment sours quickly.

Since 1950 February has posted 39 gains and 30 losses. The loss years posted larger percentage moves then the up years. The average gain or loss over the last ten years is 4.1%. Only one year was flat at 0.24% and the biggest move was a -10.7% loss. This suggests we should expect a 4% move in February only we do not know which direction. The expectations for a China trade deal could keep the market positive unless the Q1 earnings forecasts continue to plunge deep into negative territory.

On the positive side, the semiconductor stocks are surging. That is positive for the Nasdaq and assuming GOOGL earnings on Monday do not tank the tech sector, the Nasdaq should continue higher.

Also positive is the correlation between the small caps and the Dow. The small caps normally lead the market, especially in January. They have recovered nicely but they are not yet leading. We need them to take their leadership position and that would be very positive for market sentiment. Small cap earnings begin this week but will increase in intensity the following week.

The Russell 3000 never fell back below that initial support at 1,550 and has continued higher to stop exactly on resistance of the 100-day average at 1,599 on Friday. This IS the market in one chart. The index faces downtrend resistance just over 1,600 and then the 200-day at 1,623. As long as the R3K continues to move higher the smaller indexes, Dow, S&P, etc, will eventually follow. The smaller indexes will be more volatile because of individual issues but as long as investors continue buying the broader market, we will be ok.

I am not recommending anybody sell anything. I am only supplying a cautionary view that market streaks do not last forever and that is especially true in the current economic and political environment. Add some trailing stop losses, fasten your seatbelt and be prepared for some turbulence in the weeks after the China trade meeting at the end of February.

Enter passively and exit aggressively!

Jim Brown

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New Option Plays

Beat and Raise

by Jim Brown

Click here to email Jim Brown

Editors Note:

With so many companies posting lowered guidance you have to love one that beats and raises guidance. Business is good for PayChex.


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


PAYX - Paychex Inc - Company Profile

Paychex, Inc. provides payroll, human resource (HR), retirement, and insurance services for small to medium-sized businesses in the United States and Europe. The company offers payroll processing services; payroll tax administration services; employee payment services; and regulatory compliance services, such as new-hire reporting and garnishment processing. It also provides HR outsourcing services, including Paychex HR solutions comprising payroll, employer compliance, HR and employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained HR representative; and retirement services administration, including plan implementation, ongoing compliance with government regulations, employee and employer reporting, participant and employer online access, electronic funds transfer, and other administrative services. In addition, the company offers insurance services for property and casualty coverage, such as workers' compensation, business-owner policies, and commercial auto, as well as health and benefits coverage, including health, dental, vision, and life; cloud-based HR administration software products for employee benefits management and administration, time and attendance, recruiting, and onboarding solutions; and other HR services and products, such as employee handbooks, management manuals, and personnel and required regulatory forms. Further, it provides various accounting and financial services to small to medium-sized businesses comprising payroll funding and outsourcing services, which include payroll processing, invoicing, and tax preparation; and various services, such as payment processing services, financial fitness programs, and a small-business loan resource center. The company markets its products and services through direct sales force. Paychex, Inc. was founded in 1979 and is headquartered in Rochester, New York. Company description from FinViz.com.

The company reported earnings of 65 cents that rose 20.4% and beat estimates for 63 cents. Revenue of $858.9 million rose 7% and beat estimates for $855 million. Free cash flow from operations was $223.5 million. They paid $201.3 million in dividends in the quarter. The annual dividend is $2.24 or a 3.12% yield.

For 2019 the company guided for 18% to 20% revenue growth in PEO and insurance services and 4% growth in management solutions. Interest on funds held for clients is expected to rise by 20-25%. Earnings are expected to rise 11-12%.

During the quarter they announced a deal to acquire Florida based Oasis Outsourcing for $1.2 billion in cash. That is expected to bolster the company's PEO strategy an expand PEO sales and the client base. PEO stands for professional employer organization. This is where they provide all types of HR solutions to small businesses.

Earnings March 20th.

Shares have moved up steadily from the December low and broke above December 3rd resistance high on Friday. The next target is $75 and the October high. With strong earnings, guidance and dividend, shares should continue to be in favor.

The March options cycle expires 5 days before earnings, so we have to reach out to June to prevent premium erosion ahead of earnings.

Buy June $75 call, currently $1.90, stop loss $68.65.


No New Bearish Plays

In Play Updates and Reviews

Resistance Held

by Jim Brown

Click here to email Jim Brown

Editors Note:

The critical resistance on the Nasdaq held thanks to a $92 decline in Amazon. The 100-day average at 7,281 held with the Nasdaq declining only 17 points. Amazon was the only Nasdaq big cap stocks that traded in double digit gains or losses at the close. As the largest weighting in the index it kept the Nasdaq negative most of the day.

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


No specific news. Shares continue to surge and are now well over prior resistance at $150 with the prior high at $160.50 the next target.

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


Dell partnered with Secureworks and CrowdStrike to increase their endpoint security offerings. Shares exploded to a new high.

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


No specific news. Shares rallied over secondary resistance at $182.50. It looks like the gloom and doom has passed.

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


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


Merck reported earnings of $1.04 that beat estimates by a penny. Revenue rose 5% to $10.99 billion and beat estimates for $10.95 billion. Sales of Keytruda rose 66% to $2.15 billion. They guided for 2019 earnings of $4.57-$4.72 on revenue of $43.2-$44.7 billion. Analysts were expecting $4.69 and $44.2 billion. Shares spiked $2 but it was not enough to reflate the option. I am not dropping it because as positive market could do wonders with two weeks to go. We are only $3.50 OTM.

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


No gain thanks to Amazon's $92 decline.

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


New 6-week high close right at 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


No specific news. The rebound is continuing.

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.

Update 1/30: 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.

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

TGT - Target - Company Profile


A researcher found that Target's mobile shopping app charged more for products if you were near a store than if you were far away. Researchers found that a 55-inch TV was $499 if you were some distance from a store but when you pulled into the parking lot it rose to $599. They found this on multiple products. Shares fell $2 on the news.

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

No Current Puts