Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/13/2019

Table of Contents

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

Market Wrap

Mixed Signals

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market is moving higher on growing trade optimism despite mixed signals from Washington. Last week, Larry Kudlow and other White House officials let it be known there were still wide differences regarding trade and that a meeting between Trump and Xi would not happen before March. Now, Trump says he may postpone the implementation of the March 2 tariffs provided the US and China could reach an acceptable agreement before the deadline. That message and word from China President Xi would meet with Mnuchin and Lighthizer on Friday implies a deal, at least in principle, is not that far away.


Another government shutdown may be avoided but the jury is still out on that one. The Congress has passed a bill on the President's desk for his signature but the signing has not yet happened. Trump says he wants to peruse the document for potential landmines he wants to avoid. The deal doesn't include money for the wall but it does include funding for a physical barrier along some parts of the border which is a big step for the Democrats to have made. If he vetoes the bill Trump says he will still get his funding even if he has to shift funds from other spending projects.

Market Statistics

The Presidential political cycle is already getting underway, oh joy. Today's news includes a report that Joe Biden, former Obama VP, is entertaining the idea of running for President. So far all he's done is flirt with potential donors as he mulls his decision. As of now, he is the front-runner for the Democratic nomination.

The fight against share buybacks is slowly heating up. Senator Marco Rubio recently joined the fray and said today a bill addressing the issue would be presented soon. According to him, we don't have free markets and buybacks are the reason why. His plan is to alter the tax code to disincentivize the practice in hopes businesses will pass on more of their profits to employees or in the form of dividends. He wants to treat buybacks and dividends the same way, good in theory, but if he's successful the market will lose billions of dollars of support that has been a major driver of the bull market.

Today's market set the most new highs since before the November/December stock market correction.

Economic Calendar

The Economy

Only one economic release today and it was a fairly important one; the Consumer Price Index for January. The reports show that consumer-level inflation held steady over the last month as declines in energy offset increases in food, shelter, and most other items Americans use daily. The gasoline index declined the most, about 5.5%, while food increased by 0.2%. At the core-level CPI rose 0.2% over the last month and up 2.2% YOY. This data is solid, solid enough to indicate continued US expansion, and is enough to substantially increase the chances of a rate hike this year, slim as they are.



The Dollar Index

The Dollar started today on shaky footing as trade optimism fueled an early rally in global currencies. Later in the day, however, weak EU data and solid US data helped stiffen the dollar. In the EU industrial production fell -0.9% and more than expected in a sign of continuing slowdown within their economy. In the UK CPI came in below expectations and at a 2-year low. The DXY opened with a loss equal to yesterday's gains but then moved up steadily to regain all the losses before the close. The index looks like it may be consolidating for another push higher, a push that may take it up to the $99 level in the near-term.


The Gold Index

Gold prices tried to rally on today's weak dollar but weren't able to hold the gains. The dollar's midday reversal is the cause and sent spot prices back to break even before the close of the session. The metal is still in consolidation and still above support so there is a bullish bias, the problem is that the dollar looks like it could move higher on stable US economic activity and that would put pressure on gold. Support is near $1,315, a move up may find resistance near $1,330 while a move lower may find support near $1,300.


The Gold Miners ETF GDX moved up in the early portion of the session only to fall back by the close. The ETF closed with a small loss and set a new near-term low in the process. The candle is indecisive but price action over the past two weeks shows a market that is under pressure. For now, the ETF is still above support at the $22 level so there some bullish bias, the risk is that a break of $22 could trigger a deeper decline, possibly to retest support at the short-term moving average. A move up may find resistance at $22.50.


The Oil Index

Oil prices were able to move higher despite a larger than expected build in US stockpiles. The driver of the move is word from OPEC and Saudi Arabia indicating production caps have lowered total output to under 31 million barrels per day. WTI gained nearly 2.0% on the news but the gains were capped by the US inventory data. Stockpiles of WTI and distillates increased substantially over the last week despite an expectation for tightening markets.

The OPEC production cut seems to be doing what it was intended, oil prices are creeping higher, although there is still a long way to go before they regain the losses we saw at the end of last year. Based on price action alone, it looks like WTI will test new near-term highs before it will seek out new near-term lows.


The Oil Index tried to move higher on today's oil news but the gains weren't held. The index continues to consolidate within its near-term range and does not show much sign of breaking out in either direction. The indicators are both near the middle of their ranges which indicates a quiet market, one waiting for a sign of direction. A move up will be bullish when it break 1,300, a move lower will be bearish when it breaks 1,225.


In The News, Story Stocks and Earnings

Hilton Worldwide reported better than expected revenue and earnings despite the effects of slowing global economic growth. The hotel operator says global RevPar grew 2.0%, US RevPar grew 1.1%, management fees increased by 13.9%, margins improved, adjusted EPS grew 12.9%, and occupancy held steady. The company went on to raise guidance above the consensus and sent shares moving up. The analyst at Nomura tracking the sector says they are comfortable with the guidance after seeing the Q4 results but held his price target steady. Shares moved up more than 5%.


Dish Network fell more than -7.0% in today's action after reporting better than expected revenue. The problem is a miss on EPS and a massive decline in paid subscribers. The number of paid subscribers fell 339,000 in the last quarter, 10 times the number of net-subscriber adds posted in the previous quarter. Dish has been experiencing massive customer loss for some time now and does not appear to be winning the TV/media wars.


Shares of Deere And Company were downgraded today by Bank of America Merril Lynch. The analysts say ongoing trade concerns and slowing global expansion will weigh on sales of farm equipment. Based on that outlook, Deere is expected to not raise guidance this year and not maintain a premium over rival Caterpillar. The downgrade is from buy to neutral and comes with a decreased price target, $11.25, and sent shares down more than 2.0%.


Google made headlines today announcing it would invest $13 billion in US real estate this year. The company is planning on expanding its data centers into Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina, and Virginia and add 10's of thousands of jobs in the process. Shares of the stock gained about 0.35% on the news, the bigger story is, of course, the boost to US jobs, jobs that are fueling wage gains and consumer spending.


The Indices

The indices moved higher today but the gains were capped by profit-takers, not surprising given this week's run up and the fact OPEX is at hand. The day's leader is the Dow Jones Transportation Average with an advance of 0.49%.

The transports have extended their break above the long-term moving average and look like they could continue to rise in the near-term at least. The indicators are bullish so upward pressure is present, the problem is that momentum and stochastic are both diverging from the new high. A move higher is still expected although gains may be limited, my next target for resistance is 10,750 assuming we get a close above 10,500.


The Dow Jones Industrial Average posted the second largest gain with an advance of 0.46%. The blue-chip index moved higher in the pre-opening session to break above resistance at a long-term uptrend line and set a new near-term high. The move is bullish and may lead to higher prices still but there are some red flags that may halt gains in the coming days. Both indicators are divergent from the new high and there is a potentially strong resistance target just above today's close. A move up is expected but I wouldn't count on it going to far until price moves above 25,750.


The broad market S&P 500 moved up 0.30% to set a new near-term high. The move is bullish but the candle is weak and there is some visible upper shadow so the risk of reversal is present. The indicators are mixed, MACD is bullish and divergent while stochastic moves lower, which indicates a slowing market and the presence of resistance, a recipe for reversal if I ever heard one. If prices are able to move higher resistance may be present just above today's close near 2,780, a break above that would be bullish. If the price falls from today's closing level support may be found at 2,700 and the long-term moving average.


The NASDAQ Composite posted the smallest gain at only 0.07%. The tech-heavy index created the most bearish looking candle of all, small and red with visible upper shadow, that raises the odds tomorrow's action will see index prices fall from today's close. A move lower may find support at Tuesday's close, a move below that will probably continue down to the long-term moving average near 7,260.


The market is moving higher and that is a great thing, the sentiment is improving but we are not out of the woods yet. The trade talks are the biggest obstacle the market faces at this time, the biggest obstacle it has faced in quite some time, and there is no guarantee we'll see substantive progress regardless the cause for hope. If the talks break down, if the next round of tariffs gets implemented and the outlook for global economic activity takes another hit I fear we may see a sharp and possibly prolonged downdraft in stock prices. Until then I am bullish for the long term and incredibly cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Careful with the Kool-Aid

by Jim Brown

Click here to email Jim Brown

Editors Note:

Bullish sentiment is rising ahead of a normally weak period in the market. While I would love to see the S&P retest 2,800 and continue its recent gains, the odds are shrinking that it will happen. I would love to just back up the truck and load up a bunch of momentum stocks but the last two weeks of February are the weakest part of the month. The cloud of post earnings depression settles over the market and investors are deciding what positions to sell to raise money to pay their taxes. With the weak performance on the S&P and Nasdaq today, the market could be setting up for the post expiration turmoil. There is no reason to add new plays today.

 

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

Technically Over Resistance

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P may have closed over current resistance but only barely. The close at 2,753 is ten points above the 200-day but only 3 points over 2,750 and the year-end analyst consensus. This is a major resistance level. The index tried to extend its gains at the open to 2,761 but was immediately sold. There was another try at the close to 2,760 and it was also sold. I am not confident we are going higher, but I will celebrate if we do. The last two weeks of February are normally the weakest.



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

DELL - Dell Technologies - Company Profile

Comments:

No specific news.

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.

Update 2/9: Dell said it was exploring the sale of SecureWorks (SCWX) with 4,300 clients in more than 50 countries. Dell bought the company in 2011 for $612 million then spun it off in 2016. Dell still owns 85% if the stock. The company only has a market cap of $254 million but Dell thinks it could be worth $2 billion. Dell has more than $50 billion in debt.

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


MRK - Merck - Company Profile

Comments:

Merck said Keytruda received a priority review from the FDA for head/neck cancer.

Shares are just $1 OTM but there is only two days left on the option. If we had one more up day in the market Merck could hit $80 and we could get something for out option. I would recommend putting a 50-cent limit order on the position. If we did get a market spike, it could be brief. Since i wrote this position off mentally a couple weeks ago, anything we get is an unexpected recovery.

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.

Update 2/2: 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.

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


PAYX - Paychex Inc - Company Profile

Comments:

No specific news. Shares closed exactly at the prior high from September.

Original Trade Description: Feb 3rd

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.

Position 2/4/19:
Long June $75 call @ $1.90, see portfolio graphic for stop loss.


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

No material gain in tech sector.

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.


STZ - Constellation Brands - Company Profile

Comments:

Wells Fargo reiterated an outperform rating and $235 price target. The analyst said Canopy Growth and Constellation made the right moves early and will control a significant amount of market share in the plants, byproducts and drinks.

Original Trade Description: Feb 6th

Constellation Brands, Inc., together with its subsidiaries, produces, imports, and markets beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. The company sells wine across various categories, including table wine, sparkling wine, and dessert wine. It provides beer primarily under the Corona Extra, Corona Light, Modelo Especial, Modelo Negra, Modelo Chelada, Pacifico, and Victoria brands, as well as Funky Buddha, Obregon Brewery, and Ballast Point brands. The company offers wine under the 7 Moons, Black Box, Clos du Bois, Estancia, Mount Veeder, The Dreaming Tree, Franciscan Estate, Nobilo, The Prisoner, Kim Crawford, Ravage, The Velvet Devil, Kung Fu Girl, Mark West, Meiomi, Robert Mondavi, Ruffino, and Simi brands, as well as Schrader Cellars and Charles Smith brands; and spirits under the Casa Noble, High West, SVEDKA Vodka, Black Velvet Canadian Whisky, Casa Noble Tequila, and High West Whiskey brands. It provides its products to wholesale distributors, retailers, on-premise locations, and state alcohol beverage control agencies. The company was founded in 1945 and is headquartered in Victor, New York. Company description from FinViz.com.

Constellation took a $4.1 billion stake in marijuana company Canopy Growth. Their plan is to market THC infused drinks, snacks, etc, wherever marijuana is legal. That includes all of Canada, multiple US states and more than likely the entire US by the end of this decade. There are multiple countries other than Canada where the plant is legal.

This has significant implications where medical marijuana is legal. Patients who would rather not smoke a joint can drink a beer or other THC infused beverage with the same results. Constellation took a major hit on the announcement because many funds cannot invest in "sin" stocks. Shares fell to a low of $160 in late December with the market crash but are starting to rebound now.

Constellation is a buy just on its regular beverages at this level and the THC drinks are going to add to that valuation in the next couple years.

The company reported earnings of $2.37 that beat estimates for $2.06. Sales rose 9% to $1.97 billion and beat estimates for $1.91 billion. Beer sales rose 16% to $1.21 billion to beat estimates for $1.16 billion. Wine and spirit sales rose 0.4% to $762.8 million and beat estimates for $747.8 million.

For 2019 the company cut guidance from $9.60-$9.75 to $9.20-$9.30. Analysts were expecting $9.43. They said beer sales would still rise 9% to 11% but wine and spirit sales were expected to decline in the low single digit range compared to prior guidance for 2% to 4% growth.

Sales of wine were down but the company said they were going to reduce their low margin products and products under $11 and concentrate on higher dollar wines with higher margins. Once they begin marketing cannabis infused products, the sales are going to explode. Getting those products through research and development is going to take months but investors should be able to anticipate the profits.

The CEO said Canopy was expected to produce $1 billion in revenue over the next 18 months and that was 56% more than analysts expected. As Canopy begins to report these numbers, Constellation will benefit.

Earnings April 10th.

Options are somewhat expensive, and I am recommending April so the earnings expectations will keep the premiums inflated.

If you want to offset some of the premium you can sell a corresponding put. I am recommending a 180/160 combination. If you do not want to sell the put then use the $185 call option.

Position 2/11/19:
Long Apr $180 call @ $6.00, see portfolio graphic for stop loss.
Optional: Short Apr $160 put @ $2.65, see portfolio graphic for stop loss.
Net debit $3.35.


BEARISH Play Updates

No Current Puts