Option Investor

Daily Newsletter, Saturday, 2/16/2019

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

The Dow, Nasdaq and Russell stretched their winning streak to eight weeks.

Weekly Statistics

Friday Statistics

Any winning streak that lasts eight weeks has got to generate some consternation on the part of investors. However, after a couple weeks of choppy trading the market just keeps moving higher. At the current level investors are starting to see those big round number targets and without a headline disaster we could see them hit.

When the indexes get close enough to a high-profile level it acts like a tractor beam that pulls them higher and higher until it is reached. Unfortunately, sometimes when those targets are reached, investors don't know what to do next. "Ok, now what?"

In the case of the Dow the 25,800 level was the round number target dating back to the October 16th close. Twice before it had been broken only to be sold hard in the days that followed. Obviously, closing over that level is only one part of the process. Now we need to hold over that level.

We are still catching up with all the reports delayed by the government shutdown so there were a bunch on Friday. The consumer sentiment for February rebounded sharply to 95.5 from the low 91.2 reading for January. Now that the shutdown was over, sentiment began to accelerate back to the upside. The present conditions component only rose a point from 109.9 to 110.0 but the expectations component rose from 79.9 to 86.2 for a 6.3 point gain.

Business conditions spiked 9 points from 34% of respondents to 52% reporting better conditions. That is still 7 points below the December level before the shutdown began. Overall economic optimism rose 8 points but remains 5 points below December.

Now that the government funding is behind us and the Chinese trade negotiations are heating up, we should see sentiment continue higher.

The NY Empire Manufacturing Survey for February rebounded 5 points from 3.9 to 8.8 but that is still well below the 21.4 level in November. There was a 10 point drop in December as the budget battle was beginning and fell to the lowest level since May of 2017.

New orders rose from 3.5 to 7.5 and backorders recovered from -7.6 to -0.7 but still in contraction. Employment declined from 7.4 to 4.1. However, the price components made big moves in the right direction. Prices paid declined from 35.9 to 27.1 and prices received rose from 13.1 to 22.9. Those planning on increasing their capital expenditure plans jumped from 17.9 to 29.3. This suggests the price pressures are fading and owners are feeling more confident about the future.

Industrial production for January declined -0.6% and the first decline in nine months. Manufacturing output declined 0.9%. Motor vehicles and parts fell -8.8% and the second loss in four months. The tariffs on Chinese materials was cited as the main problem. Manufacturers are holding off on resupply in hopes a deal can be concluded and tariffs dropped. Those not able to postpone buying are decreasing the size of their orders.

Surprisingly import prices declined -0.5% in January. This was the third consecutive decline with December down -1.0% and November down -1.7%. The majority of the prior month declines were related to oil prices. Excluding oil, import prices would have declined only 0.4% total for the three-month period. Export prices declined -0.6% driven by the strong dollar.

There are no signs of inflation at the import, production or consumer levels. Thursday's producer price index saw prices fall -0.1% for January and the consumer price index on Tuesday showed prices were flat for the third consecutive month.

Unfortunately, the impact from the shutdown and the weakness in Europe and Asia has been substantial. The Atlanta Fed real time GDPNow forecast for Q4 GDP has fallen from 2.7% growth to only 1.5% growth. The large decline in retail sales and inventories slashed the personal consumption expenditures (PCE) growth from 3.7% to 2.6%. This rippled throughout the forecast to cause an economic earthquake.

On the positive side, the 12-month outlook for the Fed is for no hike and a 19% chance of a rate cut. This chart is for the January 2020 meeting.

We have a light calendar for next week with the FOMC minutes the highlight. The Philly Fed Manufacturing Survey and the Existing Home Sales are the next most important.

Chinese trade negotiators will travel again to Washington this week in hopes of getting closer to a final deal before the March 1st trade deadline. The meeting days have not been published.

The Q4 earnings cycle is 80% over with 394 S&P companies having already reported. Q4 earnings growth is now projected at 16.4% with 6.0% revenue growth. Some 69.5% of companies have beaten estimates and 61.7% beat on revenue. For Q1 there have been 56 guidance warnings and 23 guidance upgrades. The are 51 S&P companies reporting this week. The forward PE has risen to 16.3%. The Q1 earnings forecast has declined to -0.5%. Energy is the biggest drag with a projected decline of -13.6% and healthcare is the strongest sector with a +6.2% forecast.

The earnings calendar is shrinking. Dow component Walmart will report on Tuesday. Agilent, CVS, Dominoes Pizza and Hewlett Packard Enterprise should be the most watched for the rest of the week.

Mattel (MAT) reported an earnings surprise on February 7th and shares shot up from $12.30 to $17.25 on the news. They reported earnings of 4 cents and analysts were expecting a 16-cent loss. For five days the stock rose and analysts bragged on how they had beaten the Toys-R-Us curse that tanked Hasbro the prior week.

On Friday at 2:PM the company warned that 2019 revenue would be flat with 2018 and analysts had been expecting 3.5% growth. They said Q1 revenue would be down due to currency issues and weakness in China. The company said weakness in Thomas & Friends and American Girl brands were responsible. They did not give earnings guidance, but analyst said based on their revenue and commentary the expected 5 cent earnings would likely turn into a loss. Shares collapsed with an 18% drop and the worst single day percentage decline since 1999. There are bound to be lawsuits on this given the way they delayed the announcement. Anybody that bought Mattel after the earnings, thinking the company was in good shape, would have a case against them for losses on the negative guidance. This selective data release is not the right way to do it.

Newell Brands (NWL), formerly known as Newell Rubbermaid, reported earnings of 71 cents that beat estimates for 67 cents. Revenue declined 6% to $2.3 billion and missed estimates for $2.43 billion. Food and appliance sales of $824 million missed estimates for $844 million. Outdoor living sales declined -7.2% to $809 million and missed estimates for $855 million. Learning and development sales fell -3.2% to $707 million and missed estimates for $735 million.

They guided for earnings of $1.50-$1.65 and analysts were expecting $1.91. Revenue guidance of $8.2 billion also missed estimates for $8.79 billion. Shares fell -21% on the news.

PepsiCo (PEP) reported earnings of $1.49 that matched estimates. Revenue of $19.524 billion narrowly beat estimates for $19.51 billion. Frito Lay revenue rose 4% to $5.0 billion and topped estimated for $4.94 billion. Beverage revenue rose 2% to $6.01 billion. Pepsi said 2019 earnings were expected to decline about 1% but analysts were expecting 3.4% growth. They raised their annual dividend by 3% to $3.82. Shares spiked over $3.

XPO Logistics (XPO) reported disastrous earnings of 62 cents, down from $1.42 in the year ago quarter and well below analyst estimates for 84 cents. Revenue of $4.39 billion missed estimates for $4.56 billion. They authorized a $1.5 billion buyback and projected revenue growth in 2019 of 3% to 5%.

However, the company said their "largest customer" (assumed to be Amazon) was "substantially downsizing its business with XPO starting in Q1." Projected volume is expected to drop by 66%. Amazon paid XPO nearly $1 billion for shipping services in 2019. XPO is being forced to close three facilities where Amazon was the largest customer. Two of the facilities each occupied more than 500,000 square feet so this is not a minor event. Amazon recently announced a one million square foot facility to handle heavy/bulky items, similar to what XPO handled for Amazon.

Amazon has boosted its Prime Air fleet to 50 Boeing 767 freighters and currently operates nearly 7,500 semi-trucks/trailers. They are implementing a "last mile" delivery service where they are funding small business startups in major cities with up to 20 delivery vehicles each. Amazon has a commitment from Mercedes for 20,000 Sprinter vans for these startup companies. The concept is to have a bunch of independent delivery companies serving specific areas in and around big cities. When coupled with their planes, trucks and 185 distribution centers, they will be cutting out FedEx, UPS and the USPS on many of their deliveries.

They are renting/buying/building airport facilities all around the country and are expected to ramp up to 100 planes over the next couple of years. Currently, analysts believe they have reduced revenue by 2% at Fedex and UPS and that will rise to 10% by 2021. XPO is feeling this impact already because of their less than truckload shipments related to the spoke/hub delivery system.

In Amazon's most recent SEC filings, they listed for the first time "logistics and transportation companies" as competitors. That is a clue they are rapidly expanding into that area.

On Friday Amazon announced a $700 million investment into electric truck startup Rivian Automotive. Amazon was the lead participant on the investment. Amazon is hoping the electric trucks will bolster its logistics network. GM was also mentioned as a possible contributor. The company would have a $3 billion valuation. Bezos personally reached out to the company to see if Amazon could provide funding.

While on the topic of Amazon, the company pulled the plug on its proposed $5 billion investment and 50,000 jobs in NYC. A few misinformed and uneducated protestors and politicians caused enough of a stink that Amazon bailed on the HQ2 project in NYC.

New York City is in one of the top five highest tax states, highest cost of living, most congested, etc. NYC is expected to run a $3 billion budget deficit in 2019 and will pay $7 billion in interest on their debt. They needed the $5 billion in investment and the 50,000 high paying jobs that would produce billions in taxes over the coming years. Amazon was planning to hire 25,000 and analysts believe the support services around the HQ would have created another 25,000. Restaurants, shopping, entertainment facilities, etc, would have been built and staffed. Over the next 25 years there would have been tens of billions in taxes paid by those businesses and workers. Personally, I could not believe Amazon wanted to go there and pay those high wages, taxes and the higher cost of living. There are so many places in the country that would have welcomed them at 25-40% of the cost.

Apple (AAPL) shares were under pressure on Friday after multiple SEC filings showed that big investors were trimming their positions. Berkshire Hathaway sold roughly 3 million shares, but they still had 249.5 million as of December 31st. However, since this notice covered Q4 investors did not know if they continued selling in January. Given Berkshire's paper loss of $22 billion from the October high to the January 3rd low, or 40% of their investment, they could have continued their sales of Apple shares in January.

However, Berkshire assistant Debbie Bosanek, said Warren did not sell the Apple shares. The shares that were sold were managed by one of Buffett's two portfolio managers. She also clarified that none of the Apple shares purchased by Buffett himself have ever been sold. You know Berkshire had to put out that note in order to avoid a costly run on Apple shares if individual investors thought Buffett had lost confidence in the company. With 249 million shares, every $1 of decline is a $249 million loss.

Tiger Capital announced the sale of one million shares. David Tepper and George Soros both announced they had closed their positions. Shares were only down fractionally on Friday.

Apple announced it would resume selling iPhones in Germany that include Qualcomm chips. Qualcomm had won a patent case there and the court allowed an injunction preventing sales of some iPhone models. This was a major blow to Apple, and they had no choice but to revert back to Qualcomm chips in order to avoid losing sales on a large number of units.

FANG stocks had a bad day on Friday despite the big market gains. The FANG trade has fallen out of favor as we near the potential for a resolution of the China trade problem. Industrials are in favor on the expectations for a rebound in overseas sales. Some 50% of profits earned by international companies are made overseas. FactSet projects 2019 earnings by domestic companies like small caps to rise by 8.0% while profits from international companies will rise only 1.7%. If we achieve a meaningful trade agreement with China, those international profits will soar. This is fueling the transition from tech growth to industrial stocks.

Facebook and Google are under a privacy cloud and how private information is used. Hardly a day goes by without some headline about an inquiry or action proposed by an overseas country. The UK is preparing to release a report calling for them to be regulated. Major fines, expected to be record amounts, are being negotiated in the US for past privacy breaches.

Netflix is the only one of the four that is maintaining forward momentum. This could also be related to post earnings depression in the tech sector. The Nasdaq Composite only gained .61% and the $NDX +.46% when the Dow was up 1.74% on Friday.

How much do you make in your regular job? According to SV Business Journal, if you work for Facebook the median salary is $240,000 per year plus free catered meals, generous paid vacations, on-campus gyms, nap rooms, laundry facilities, free rides to work, stock options, etc. That is three times what a typical worker at Paypal makes and $40,000 a year above what a Google employee makes. In fact, Facebook employees make about four times the lowest paid tech employee at major companies. Facebook has 36,000 employees.

Median Salaries:
Yelp $59,298
Micron $56,540
Bio-Rad $62,450
Coherent $64,707
Hewlett Packard Ent $65,652
Agilent Tech $68,579
PayPal $70,228
Dell $83,139
Qualcomm $85,592
Oracle $89,887
AMD $89,909
EA $96,336
Intel $102,100
Symantec $102,869
Illumina $102,920
Netgear $105,318
Cadence $110,038
AMAT $113,999
Ebay $122,891
Cisco $132,764

Crude prices rebounded again after Saudi Arabia said they were going to cut another 500,000 bpd starting March 1st. They are doing this because Russia has not cut their production as promised. There was also an outage of 300,000 bpd when a ship's anchor cut a power cable to the Safaniyah offshore field in Saudi Arabia.

Also helping lift prices was the sanctions on Venezuelan oil exports. Those sanctions have put a serious crimp in the sale of oil from Venezuela. Tankers continue to be stuck in a holding pattern while Venezuela tries to find willing buyers. Opposition president elect Gauido named a new board to Citgo in a move intended to seize control of the US-based subsidiary of PDVSA and restart oil sales with the proceeds going to the new Venezuelan government. China has also begun talks with the new opposition government in order to reinforce their claims on more than $20 billion remaining on $50 billion in loans they made to Venezuela. China has been taking oil in payment on the loans.

The progression of trade talks with China also lifted oil prices. A resumption of trade would increase demand. China's imports and exports also rose faster than expected in January, reducing fears of a dramatic slowdown and improving the outlook for oil demand.

The EIA revised its production forecasts for 2020 to 13.2 million bpd, up from last month's estimate of 12.9 mmbpd. They now expect 12.4 mmbpd in 2019 and that is a 300,000 bpd jump in the estimate just since last month.

The IEA warned that the loss of heavy oil production from Venezuela, Iran and Mexico was causing problems for refiners. WTI production is soaring but heavy oil production is declining for various reasons. The IEA said it could cause a significant price hike for heavy oil as refiners put a premium on those barrels. Refiners setup to process heavy oil could be challenged to find enough supply and that would boost prices on oil and on refined products. Analysts believe a lack of resolution on the Venezuelan heavy oil exports would prevent the US from ending the waiver program on Iran when it is scheduled to end in May. The world may need the heavy oil from Iran if it cannot get it from Venezuela.

Note that the refinery utilization declined significantly last week from 90.7% to 85.9% as refiners move into the maintenance season to prepare for the production of summer blend fuels. Also note the sharp drop in imports of roughly one million barrels per day. OPEC has urged their members to restrict shipments to the US in order to influence the price of WTI, which is governed by US inventory levels. This decline in imports is also the result of refiners going offline for maintenance. If they cannot refine oil over the next 60 days, there is no reason for them to continue accepting deliveries over that period.


On Thursday the S&P futures dropped -30 points to 2,730 over an hour ahead of the open. After struggling back to 2,758 at 3:PM they crashed again at the close. This was the third consecutive day the markets sold off at the close. By 2:45 Friday morning the futures were down -14 points when a China headline broke and the short squeeze began. The futures rebounded to gain 47 points by the close.

The market went from ugly with the futures at a 3-day low at 2:30 am to closing at a two-month high at 4:PM on Friday. When I wrote the Option Writer newsletter late Thursday evening, the outlook was grim. Friday's performance is solid proof of how much headlines control the market as shorts are squeezed.

Analysts are puzzled as to why the market keeps rising. The Dow, Nasdaq and Russell have been up for 8 consecutive weeks. Another streak that is not getting as much attention is the 11 consecutive weeks of outflows from equity funds. Bank of America said $83 billion has flowed out of equities over the last 11 weeks. These two facts seem to contradict each other. How can the markets rally for 8 weeks if there have been outflows for 11 weeks?

The market cap of the US equity market is $34 trillion. The $83 billion in outflows is only 0.00237% of the total market cap. This is the proverbial drop in the bucket. This does not mean $83 billion is not material because the vast majority of the US market cap never changes hands. Those stocks sit in investor accounts for years or even decades at a time without being traded. Average daily trading volume is about $350 billion. The $83 billion in outflows over the last 11 weeks equates to about $1.5 billion a day. Compared to the $350 billion average daily volume, it is insignificant. This is another example of people worrying about a headline that is immaterial in the bigger picture. It sounds like a big number, but it isn't once you do the math.

What is important is the resistance at 2,815 on the S&P. This level repelled rallies three times since October and we are getting close again. The S&P has rallied 429 points since the December 26th low at 2,346. There have been three periods of decent retracement along the way, but this rebound is very overbought given the length of the rebound and the weak fundamentals in economics and earnings. Nobody will be more excited if we break through that 2,815 level but I remain skeptical until it happens.

We do know that these high-profile resistance targets act like tractor beams when the index gets close so the odds are good, we will test it. It is the results after the test that are important. Do we push through or fail again? Also, since this level is such a high-profile event the bears are likely to be setting up their shorts once we pass 2,800.

The Dow benefitted from the rotation into industrial stocks and stocks that will benefit from a Chinese trade agreement. Boeing continues to be a leader whenever the China talk turns positive. The index closed over the first line resistance at 25,817 with the next target at 26,191. The giant round number in our future is 27,000. If we get through that resistance from November, the 27,000 level is going to be the instant target.

The Nasdaq Composite closed just barely over the 200-day at 7,465 and a move over 7,500 should set up a sprint to 8,000 and the highs from October. The decline in the FANG stocks held the index back on Friday.

The Russell 2000 closed 3 points over correction territory with the second-best percentage gain at 1.56% of all the major indexes. The small caps reacted much stronger than expected on the positive news from China. They should not be impacted as much from the tariffs other than cost of goods and raw materials. The small caps are mostly domestically focused companies and do very little business in Asia.

With the government shutdown out of the way and Chinese negotiators coming to Washington to play nice once again, there is nothing in the headlines to roil the market. That is almost scary. The market does best when it is climbing a wall of worry and we seem to be entering a calm period. However, the last two weeks of February are normally the weakest as post earnings depression weighs on the market. With the major indexes nearing their prior highs on weak earnings projections ahead of a weak period on the calendar, what could possibly go wrong? Obviously, quite a bit but investors are drunk on the potential for a trade agreement.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"A house divided against itself cannot stand."

Abraham Lincoln

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Index Wrap

Headline Bonanza

by Jim Brown

Click here to email Jim Brown
The end of the budget battle and positive comments on China lifted the indexes to new levels. I feel like I am writing this from the Twilight Zone this weekend. The market remains very overbought but bad news is being ignored and good news produces monster rallies. In real life this is what we want to see. In any other chart picture this would be bullish. However, after 8 weeks of gains from the Dow, Nasdaq and Russell, I have serious worries about the market's ability to keep posting week after week of gains without a rest.

We did have some minor dips over the last couple weeks and maybe that was enough to equalize the pressures and allow sidelined investors to enter new positions. I hope that is the case.

As I wrote in the Option Investor commentary, the major levels we are currently targeting are acting like tractor beams to pull us higher. I am afraid that once we get there it could be a sell the news event. Many times the markets will target a specific level for several weeks and once there, the rally fizzles. It is like the dog that catches the car, he does not know what to do with it and sometimes gets run over by being stupid and running in front of the wheels.

We do not want to be stupid and fully invested when this current streak of eight weekly gains comes to an end. We need to be observant and ready to exit the moment a dip is not bought.

I also do not want to be Chicken Little and continue to warn the sky might fall while we watch the market soar into the heavens. The trend is our friend until it ends, and I am just suggesting we look for dips in the road ahead while we enjoy the ride to higher highs.

It would be nearly impossible to look at the chart below and not be bullish. The A/D line for the S&P is at a massive new high and no weakness in sight. Across the entire market advancers were roughly 3:1 over decliners on Friday. On the S&P advancers were 7:1 over decliners. That is the strongest since January 18th when they were 10:1 in favor of advancers.

Another example of the overbought conditions is the 92.5% of S&P stocks now over their 50-day moving average. That is the most since March 2016. Just remember that the sharp dive in December turned the averages lower so the stocks did not have to rebound as far to move above them. This is still bullish, but it has to be taken in context. The percentage over their 200-day average has risen to 61.4% and moving closer to the September highs.

Volatility has fallen below 15 on the VIX and a four-month low. However, remember we spent five months at 12 back in the summer. It would be even lower today were it not for the market hiccups on the 7/8th and 14th. Each of those declines spiked the VIX again. There are some volatility-based funds that buy stocks as volatility drops and then sells them as volatility rises. They have been doing well in recent weeks.

One of those volatility based ETFs is the SPLV or S&P-500 low volatility ETF. This is the 100 S&P stocks with the lowest volatility. It is rebalanced and reconstituted every quarter. That means the lowest volatility stocks for the last quarter are in the ETF for the current quarter. Stocks in rally mode typically have low volatility where stocks declining or struggling to pick a direction have higher volatility. Unfortunately, there are no silver bullets in the market. Every strategy has its negative points and the market always has the edge just like the house has the better odds in Vegas.

I am impressed with the chip sector. The chips continue to lead the Nasdaq higher and are actually pulling away from the index. The FANG stocks with the exception of Netflix are moving lower. The Nasdaq only gained 0.6% on Friday while the Dow gained 1.74%. This was due to the decline in the FANG stocks.

The biotech sector was also a Nasdaq supporter. The $BTK broke out to a 4-month high after three weeks of consolidation from the January gains. The sector was due for a breakout and I was early when I tried to play it two weeks ago.

The financial sector also broke out to a 2-month high on Friday. When you get chips, biotechs and financials all positive at the same time the Nasdaq and Russell 2000 are going to be in rally mode.

The Russell 3000 broke above the 200-day average and is closing in on strong resistance at 1650-1660. This is the 3,000 largest stocks in the market and for all purposes this is the market. If the R3K can move over 1,660 we could add a couple hundred S&P points before the R3K tops out at 1,740.

The S&P resistance that corresponds to the R3K is at 2800-2815. If by some chance we were able to break through that level the market could catch fire from all the price chasing. Any sidelined investor would be racing into the market for fear of missing out. (FOMO)

The trend is our friend until it ends. As long as the China news continues to be positive and the potential exists for a successful agreement, the market should remain positive. There is a good chance any actual agreement could turn into a sell the news event but maybe not on the day of the announcement. The next 48-72 hours would be the key. Investors have their eye on the prize and there is always the chance it turns into a pile of paper tied up with a nice bow to confuse consumers into thinking it was a great deal. Investors will not be easily misdirected and even a good deal has already been priced into the market.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Chips Leading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The chip sector is leading the Nasdaq charge higher. Intel is turning into a broad-based chip producer for the IoT and anything 5G.


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


INTC - Intel - Company Profile

Intel Corporation designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, desktops, and wireless and wired connectivity products; enterprise, cloud, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. The company offers microprocessors, and system-on-chip and multichip packaging products. It also provides NAND flash memory products primarily used in solid-state drives; and programmable semiconductors and related products for communications, data center, industrial, military, and automotive markets. In addition, the company develops computer vision and machine learning, data analysis, localization, and mapping for advanced driver assistance systems and autonomous driving. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has collaboration with Tata Consultancy Services to set up a center for advanced computing that develops solutions in the areas of high performance computing, high performance data analytics, and artificial intelligence. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.

In November Intel announced a $15 billion share buyback program. Intel had $4.7 billion remaining under a prior authorization putting them just shy of $20 billion. This represents almost 10% of the outstanding shares. Six years ago, Intel had 6.5 billion shares outstanding. If they complete this buyback program, they will have just over 4 billion shares outstanding.

Intel is poised to profit from the coming 5G revolution. Apple has already said they are going to use Intel's 5G model in their 2020 phones. Intel has participated in more than 25 5G trials with potential partners. In the last quarter Intel said revenue from communications service providers rose 30%. The company said in August it is pursuing the $24 billion communications infrastructure segment of the market and expects to gain significant market share by 2022. Intel is not just a PC and server processor company any more.

Intel reported Q4 earnings of $1.28 that beat estimates for $1.22. However, revenue of $18.66 billion missed estimates for $19.02. Their biggest problem was guidance for Q1 of 87 cents on $16 billion in revenue. Analysts were expecting $1 on $17.29 billion.

Intel is poised to benefit from a trade agreement with China. They currently get 24% of their revenue from China. With the advent of 5G, Intel is poised to be a leading player. They bill themselves as an "end to end" provider. The 5G revolution is not only going to replace nearly every piece of networking gear on the planet, every cellphone owner will be upgrading to a new 5G phone, many with an Intel modem. Remember the old commercials from the 2000's, "Intel Inside?" With Intel's new push into the internet of things (IoT), smartphone communications and self-driving vehicles, they really will be inside most electronic products.

Intel is expected to grow revenue by 5% in 2019. That is better than the sector forecast for 2% growth.

Earnings April 25th.

We have to reach out to the June option cycle to get a strike that comes after earnings and will keep the premiums inflated. We can buy time, but we do not have to use it.

Buy June $55 call, currently $1.65, stop loss $48.50.


No New Bearish Plays

In Play Updates and Reviews

Reversal of Fortune

by Jim Brown

Click here to email Jim Brown

Editors Note:

Thursday's close was ugly but headlines came to our rescue again. News that Chinese negotiators were coming back to the US next week and that Trump and Xi would meet soon to sign a memorandum of understanding, energized the market. Shorts who loaded up as the market slid south on Thursday were squeezed again on the opening gap higher Friday morning. It was a broad based move with a lot of stocks posting minor gains rather than a few large stocks posting giant gains.

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

MRK - Merck
The long position expired at the close.

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


No specific news. New closing 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.

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


Merck shares traded slightly over $80 intraday but it was not enough to inflate our expiring $80 call. The position expired.

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:
Closed 2/15: Long Feb $80 call @ 85 cents, expired, -.80 loss.

PAYX - Paychex Inc - Company Profile


No specific news. New closing high.

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


The Nasdaq was a laggard on Friday with a 45 point gain but it was still a gain and a two-month closing high.

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


Canopy Growth reported stellar earnings growth and talked up the future, but it only added $1 to Constellation's stock price. This is a long-term story. Shares are melting up a little higher every day and a breakout of this consolidation phase should be imminent.

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