Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/27/2019

Table of Contents

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

Market Wrap

Busy Day On Capitol Hill

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Not one but three important testimonies were given on Capitol Hill and the market took it in stride. Testimonies include day-two of Jerome Powell's visit to the House, comments, and remarks from Trade Representative Lighthizer to the Ways And Means Committee, and evidence from former-Trump lawyer Michael Cohen.


Mr. Powell's testimony is perhaps the most important to the market although Mr. Lighthizer's work on the China trade deal comes in a close second. To start, Mr. Powell reiterated his positions from yesterday stating the U.S. economy is still healthy but risks are present. Regarding outlook for the economy and assuming a trade deal is reached, he expects economic activity will begin to pick back up, inflation will begin to rise once again and there will be a need for additional rate hikes sometime down the road.

More importantly, Mr. Powell made some interesting comments about the balance sheet. First, the market should not expect to see the balance sheet return to pre-crisis levels, it's just not possible. The balance sheet has quadrupled since before the crisis, allowing it to run off to pre-crisis levels would throw the economy into recession. That said, Mr. Powell indicated the 'decision the market has been waiting for' is close to hand. The only decision from the FOMC the market is waiting for is when they will end the balance sheet wind-down otherwise known as Quantitative Tightening.

Market Statistics

Mr. Lighthizer's comments were equally interesting if of a different nature. His testimony centered on trade-relations with China and progress on negotiations. He says talks are progressing well but one negotiation won't solve all the problems with China. Translated is; we're close to a deal but it doesn't cover everything. The problem for him, as it has always been, is not in the details of the deal but in its enforcement.

Michael Cohen's testimony was a joke. He may have brought in new evidence but they didn't talk about it much. The esteemed Members of Congress from both sides of the aisle used their times to attack Cohen, grandstand, and posture instead of examining new evidence. If his evidence is worth anything it will go to Mueller and be added to the pile.

Trump is in Vietnam today, meeting with Kim Jong Un. So far, based on the Tweets, the meeting is going well. Trump's new tactic is showing Kim how prosperous North Korea could be if it would only give up its nukes. We'll see how far he gets.

The bull market is about to turn ten years old so we are going to start seeing a lot about it in the news. At ten years old it is long in the tooth but for those who think it is close to ending let me say this. We are in a secular bull market, not just a regular old bull market. In my opinion, and I'm going out on a limb here, the fundamental make-up of American demographics is set up to drive the secular bull market for another ten years. We may see bear markets develop within the longer-term uptrend, those consolidations may take months or even years to unfold, but mark my words, they will provide fantastic buying opportunities for long-term capital gains.


Economic Calendar

The Economy

Mortgage applications jumped another 5.3% in the last week. The surge is attributed to lower interest rates and points to a solid home-buying season this spring.

Pending Home Sales jumped 4.6% in January. This is about 4.0% more than expected and another sign home-buying activity is rebounding in 2018. The rise is due to lower rates and aided by slowly increasing inventories. Despite the increase, sales are down -2.3% from last year making this the 13th month of year over year decline. If mortgage apps and sales continue to increase at it looks like they will the YOY comparison should turn positive in the next month or so.

Factory Orders rose a tepid 0.1% in December, a full half percent below expectations. The slowdown is not unexpected but weaker than forecast and a new drag on already weak GDP forecasts. Within the report shipments, unfilled orders, and inventories declined. New Orders for Durable Goods increased by 1.2%.


The Dollar Index

The Dollar Index fell in early trading but rebound midday to recover the losses. The index closed with a small gain creating a small green candle. The candle shows support at the $96 level but the indicators remain bearish so downward pressure is still dominant. Tomorrow's data, GDP, is likely to have an impact on the index direction but the more important data, PCE prices, comes out on Friday. If the DXY moves lower support is at the short-term EMA and then $95.50, if it moves higher I would expect to find resistance near$97.50.

The index is caught in a mix of sentiment that may cause some volatility in the near to short-term. On one front there is the FOMC talking about patience and ending QT, bearish for the dollar, while on another there is the data. The data, from here and abroad, shows US economic dominance and suggest upward movement for the dollar. While there is still so much uncertainty I expect the DXY to remain within the range of $95.50 to $97.50 but which way it moves and when is hard to predict.


The Gold Index

Gold prices fell in today's session as traders seek clarity on the metal's longer-term direction. The spot-price shed about -0.80% to set a two-week low and it looks like it could fall a little further. Today's low is just above the short-term moving average but there is still some room for it to fall. The indicators are also bearish and suggest downward momentum is building. A break below the moving average would be bearish but additional support targets exist at $1,300 and along the uptrend line. A move below the uptrend line would be bad news for gold bears.


The Gold Miners ETF GDX fell -2.0% in today's trading and could go lower. The ETF is now below the $22.50 support target and indicated lower by both MACD and stochastic. The next target for support is the short-term moving average near $22.00 and may be easily broken if gold prices continue to fall as well. A move below $22.00 would be bearish and likely take the ETF down to the $21 level.


The Oil Index

Oil prices surged today extending the rebound from recently tested support levels. The move began in response to OPEC's response to Trump's Monday Tweet, they basically yawned and ignored him, and then later accelerated on bullish inventory data. The EIA says U.S. crude stockpiles fell 8.6 billion barrels which is far more than expected. The data was partially offset by a build in distillates but that was in turn wiped out by a larger than expected decline in gas storage. Bottom line, OPEC's plan to tighten the market is working, slowly but surely, and oil prices are rising. If we get a close above $57 I think $60 and $64 are right behind.


The Oil Index is gearing up to move higher and aided by rising oil prices. The index moved up in today's action but did not set a new high. The index is in consolidation with mixed indicators but supported by oil prices so a move up is more likely than not. When that happens the first target for resistance is near the long-term moving average, a break above that would be bullish and take the index up to 1,400 in the near to short-term.


In The News, Story Stocks and Earnings

Other analysts on Wall Street are chiming in following UBS stark downgrade of Caterpillar. The general consensus is that the move was extreme and investors shouldn't run away from this dividend aristocrat. Shares of the stock rebound 1.0% in today's action and look like they could begin a sustained move higher. The price is above both moving averages and the moving averages are set to form a bullish crossover so there is some momentum here. Resistance is present just above today's close, near the Monday high, and may keep prices from moving higher in the near-term. Once broken, however, I suspect this stock will move up into the $150 $160 range.


Home improvement retailer Lowe's reported before the opening bell. The company delivered some mixed results but one thing is clear, it is catching up with competitor Home Depot and taking market share. The company reports comps were up 1.7%, 2.4% in the U.S., margins declined 70 bps, and inventory is up 10.3%. The number of stores in operation fell 137 over the last year as the company cuts costs and overlap. Forward guidance is calling for a 2% revenue growth on a 3% increase in comp sales and helped drive the stock up more than 5.0%.


Discount retailer TJ Maxx also reported before the open. The company beat on the top line but EPS was only as expected, not bad but not great either. Comparable store sales rose 6.0% in the quarter to beat the consensus by 4%. Comp's were strong in all three brands but led by Marmaxx. Net margin was also better than expected and helped drive shares higher in early trading. The company also announced an 18% increase to the dividend and an additional $1.5 billion in buybacks which helped the stock extend its gains during the session.


Best Buy reported before the bell and beat on the top and bottom lines. The company says comp sales are nearly double the consensus estimate and led management to up guidance for the coming year. Guidance is now in a range around consensus with consensus estimates near the low end of that range. The company also replaced the existing buyback plan with a new one worth $3 billion and sent shares zooming higher.


Fitbit reported after the close of trading and did not offer a healthy outlook. The consumer-tech company report revenue for the quarter was flat from the year-ago period as lower selling costs offset an increase in sales. Gross margins fell slightly, active users grew 9%, and sales rose 3%. Looking forward the company expects sales in the first quarter to be light compared to past quarters, news that sent the stock down about -10% in after-hours trading.


The Indices

the indices opened lower and then moved lower but buyers eventually won the day. The indices are showing evidence of near-term support but I don't think we're clear of danger yet. Today's leader is the Dow Jones Transportation Average with a loss near -0.50%. The transports created a small red candle with visible lower shadow, set a new two-week low, and broke the 10,500 level in today's action. The move was met by buyers but the indicators remain bearish so I expect to see support tested again at least. A close below10,500 would likely lead the index down to 10,300, a move below that will likely retest 10,000.


The Dow Jones Industrial Average was the second biggest loser in today's action with a loss near -0.25%. The blue-chips moved down to test for support at my uptrend line and so far support is present. The indicators remain consistent with a top so I expect to see support tested again. A move below the trend line, near 25,900, would be bearish but the move may not be very deep or sustained.


The S&P 500 opened lower but was able to move up to close with only a small loss and form a green candle. The bad news is that today's resistance is my long-term uptrend line so prices may have a hard time moving up over the next few days. The indicators are still rolling into bearish signals so downward pressure is present, a move lower would confirm resistance at this level and may lead the index down to 2,750 or lower.


The NASDAQ Composite was able to close with a small gain, about 0.05%. Today's action shows support at the 7,500 level but the candle is not strong and the indicators do not concur. The indicators are still consistent with a top at this level and suggest a move lower is on the way. A close below 7,500 would be bearish and may take the tech-heavy index down to 7,300 in the near-term.


Today's action was iffy. It looks like there is support in the market at current levels but it's questionable how strong it is. With earnings season coming to a close all that's left to support the market is outlook and that leaves something to be desired. The outlook for earnings isn't bad but it's not great either. There is growth in the forecast but there is at least one hurdle and a headwind for the market to overcome.

The hurdle is first-quarter earnings, the cycle is expected to produce negative earnings growth and to me that means negative market movement. The headwind is analysts estimates, analysts estimates for 2019 are still falling if otherwise bullish. Once we're in a position to look past the first quarter earnings cycle I'll feel more confident of a market rally. When the estimates begin to rise I'll be sure of it. For now, I remain firmly bullish for the long-term but neutral in the near-term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Pass

by Jim Brown

Click here to email Jim Brown

Editors Note:

Without a market trend after multiple days of weakness, this may not be a buying opportunity. For weeks I have been warning that the last half of February is normally the weakest and that has come to pass. The news headlines are not focused on the market but on digging up dirt on politicians, Korean peace talks and obscure Fed rules on commodity margins. The market found nothing today to provide incentive for the bulls. Thursday is not likely to be better. This is month end and not even the normal month end buying was able to lift the market. I am recommending we pass on adding a new position today. We could be looking at a better buying opportunity in the days ahead.

 

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

No Gain

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap markets remained weak as February draws to a close. The S&P lost 1 point and the Dow -72 while the Nasdaq indexes were mixed. The small cap Russell gained 3 points but remains well under resistance.

The 2,815 level on the S&P, 7,600 on the Nasdaq and 26,191 on the Dow remain the levels to beat and this is not shaping up as a tenth consecutive rally week. The markets are overbought and struggling to retest resistance. I would not be a buyer the rest of the week.



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. Only a minor decline from Tuesday's 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.


INTC - Intel - Company Profile

Comments:

Deutsche Bank raised the price target from $55 to $65 following meetings with company management. The analyst said Intel is working to expand its total addressable market (TAM) with new products.

Original Trade Description: Feb 16th

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.

Position 2/19:
Long June $55 call @ $1.53, see portfolio graphic for stop loss.


PAYX - Paychex Inc - Company Profile

Comments:

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

Comments:

The Nasdaq 100 posted a minor loss and the Composite a minor gain. The QQQ lost 11 cents and hardly a market moving day.

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.


BEARISH Play Updates

No Current Puts