Option Investor

Daily Newsletter, Saturday, 3/2/2019

Table of Contents

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

Market Wrap

Momentum Slowing

by Jim Brown

Click here to email Jim Brown

The Nasdaq stretched its winning streak to 10 weeks, but the Dow, S&P and Russell are no longer in the race.

Weekly Statistics

Friday Statistics

A better than expected economic report in China boosted the overnight S&P futures and a short squeeze was born. It was very short with no follow through and the Dow returned to zero very quickly. Dip buyers appeared and the index posted a decent gain. However, it was 6 points less than what was needed to extend its weekly winning streak.

The Nasdaq was a better performer with almost a 1% gain for the week despite some weakness in the big cap FAANG stocks.

The Nasdaq is up +20% from the Christmas lows but it still 10% below the 2018 highs. There is room to run if all the market factors turned positive.

The economic factor is one area of concern. For instance, the ISM Manufacturing Index for February came in at 54.2, down from 56.6 and below expectations for 55.9. That is the lowest level since November 2016. New orders declined from 58.2 to 55.5. Thirteen of 18 industries reported growth in new orders in February. Order backlogs rose from 50.3 to 52.3. Production declined from 60.5 to 54.8 and employment fell from 55.5 to 52.3.

According to analysts the ISM was impacted by the extremely cold weather in February. Customer inventories declined from 42.8 to 39.0 suggesting there will be future order growth. This is the lowest level for inventories since July.

Trade uncertainty remains a challenge for manufacturers. They do not want to load up on import inventories when tariffs may be removed in the near future. This is a direct impact for costs and profits, and they will wait until the last minute to place new component orders.

Consumer sentiment for February is still recovering from the impact of the government shutdown. The headline number rose from 91.2 to 93.8 but that was less than the initial reading at 95.5. The present conditions component was almost flat with a slight decline from 108.8 to 108.5 but the expectations component rose sharply from 79.9 to 84.4 now that the shutdown is over. The current conditions component averaged 114.5 in 2018.

Personal spending in December declined unexpectedly by -0.6% from a +0.3% rise in November. A decline was expected since retail sales for the period also slowed. This was the largest monthly decline since 2009. Offsetting the spending was a huge jump in the savings rate from 6.1% to 7.6%. Analysts believe the impending government shutdown with 800,000 workers, skewed the results. Obviously, those workers were not out spending every dime they had and were saving for an expected loss of pay. Recreational goods and vehicles saw the biggest decline at -3.0% followed by clothing and footwear at -2.4%.

The release was delayed a month because of the shutdown and that is also thought to have caused some problems in the data collection. Surveying consumers a month after the period and asking questions about spending and saving and you are probably going to get some incorrect answers.

The personal income report for December/January showed a -0.1% decline in consumer income. This is not surprising since 800,000 workers received no income in January. This was the first monthly decline in income since June 2017.

Both of these reports are to be ignored. The data is skewed by the shutdown and questionable at best.

Vehicle sales in February came in at a 16.6 million annualized rate, down only slightly from the 16.7 million rate in January. February is always a slow month for auto sales because of the weather and the lack of tax refunds. Sales pick up in March as the tax refunds begin to appear. This report should also be ignored.

The economic headlines over the last three days spiked the yield on the 10-year treasury from 2.63% to 2.755% and a 4-week high. Better than expected manufacturing data in China and multiple people in the administration talking about fantastic progress in the China trade talks, caused rates to rise. Friday's close was not much below the high for the year.

The strong Q4 GDP number caused a spike in the dollar over the last two days to close near the high for the week. Uncertainty over the trade negotiations caused the yuan to fall and dollar strengthen. The spike in the dollar helped push commodities lower.

This is payroll week with the ADP forecast at 195,000 and the nonfarm guesstimate at 180,000. Analysts have been missing these numbers by tens of thousands and anything close to 200,000 will be considered a success. On the nonfarm report the average for the last four months is right at 250,000. Employment is very strong and now that spring is just ahead the job numbers will rise as hiring for outdoor jobs accelerates.

The construction spending report will be ignored because it covers December and is a lagging number. The ISM nonmanufacturing for February is expected to rise slightly but after the drop in the manufacturing report, I am concerned we could see weakness here as well.

The Fed's Beige Book report on Wednesday should show there is no material decline in the economy. This is a detailed report of conditions in each of the Fed regions and should show continued expansion in most.

We are only two weeks out from another Fed meeting with the decision on March 20th. There is a 98.7% chance there will be no rate hike at that meeting according to the Fed funds futures.

The Brexit is now less than 30 days away. Parliament will get to vote again on March 12th on a plan for the exit. This plan is expected to look almost exactly like the plan that failed by a record 230 votes in January. If that vote fails, there will be a vote on the 13th to "crash out" of the EU with no plan in place and suffer the consequences. If that vote fails, there will be another vote on the 14th for a short-term extension of the Brexit date.

If the first two votes fail as expected it is almost a guarantee that the date will be extended. Crashing out of the EU would be extremely damaging to the British economy. However, the EU would also have to agree to extend the deadline. March is going to be a rough month for Thresa May.

If Britain ends up with a hard Brexit it will impact our market as well because of the severe economic disruptions in Europe.

The pace of earnings continues to slow but there are some big names reporting next week. SalesForce.com, Costco, Target, Dollar Tree and Ross Stores are the highlights.

With 484 S&P 500 companies already reported the earnings expectations are now 16.7% growth. Q4 revenue is expected to rise 5.1% with 69.2% of companies beating on earnings and 60.2% beating on revenue. For Q1 there has been 70 guidance warnings and 31 guidance upgrades. The current PE is 16.6. There are 10 S&P companies reporting this week.

The earnings estimate for Q1 has declined from 5.3% as of January 1st, 2018, 8.1% as of October 1st to -1.1% as of Friday's close. Q2 growth estimates are now 3.2%, Q3 2.9% and Q4 9.3% growth. The early quarters have huge comps of more than 20% in 2018 and that is proving to be a monster hurdle. ANY earnings growth in the first three quarters of 2019 would be positive given those huge comps.

There were several large headlines garnering attention on Friday. Lyft said it was going to launch its IPO and would trade under the symbol LYFT on the Nasdaq. By launching ahead of Uber, the company will get to control the perception of the ride hailing sector. Being the first they will not have to "measure up" to whatever metrics Uber discloses when they eventually file. That is good for Lyft because their metrics are terrible.

They disclosed they lost $911 million in 2018 on revenue of $2.2 billion. Hey, we are hemorrhaging cash, so we need to IPO quickly and raise more cash. Please buy our stock.

They are reporting "net" revenue rather than gross revenue. They took in $8.1 billion but paid out nearly $6 billion to drivers. The company considers itself an agent rather than an employer. Since both riders and drivers have the ability to reject a transaction price, it is up to the drivers to set the fare and that makes them contractors. Lyft is going to report gross revenue as "bookings" and that will allow analysts to calculate how much they pay to drivers. Lyft received $1.1 billion in revenue in 2017 and $343 million in 2016. They lost more than $680 million in both 2016 and 2017. Bookings rose from $4.6 billion in 2017 and $1.9 billion in 2016. Lyft said it had 39% of the ride share market in December, up from 22% in the year ago period. Part of the reason for the rising losses has been some heavy discounting with one program of 50% off your next 10 rides.

There is definitely a price war underway and if Lyft has grown market share from 22% to 39% that means Uber has been losing market share and that is not going to look good on their IPO. Lyft is going with a dual class share structure with founders Logan Green and John Zimmer retaining voting control.

This is going to be a very interesting IPO. They are attempting to raise $100 million despite their heavy losses. Give their $911 million loss in 2018 that $100 million is only about six weeks of operating capital. Then what happens? Their initial investors have probably cut off the cash flow and that is why the rush IPO. There is a good chance the IPO will crash and burn after the first several days of trading. They will have to post several quarters of decreasing losses before investors will be willing to own the stock long term.

Gap Stores (GPS) announced it was spinning off the Old Navy brand. This is a move investors have requested for years. Old Navy produced $8 billion in revenue in 2018 and all the other Gap brands together produced $9.1 billion. Old Navy will have no trouble supporting itself. Gap said, "the spinoff will enable each company to maximize focus and flexibility, align investments and incentives to meet its unique business needs and optimize its cost structure to deliver profitable growth."

The Gap, Athleta, Banana Republic, Intermix and Hill City brands will remain in the yet to be named company. Gap is struggling with same store sales falling 5% in Q4. They also announced they were closing 230 Gap stores (30%) over the next two years to "revitalize" the brand.

Despite the struggles the company reported earnings of 72 cents that beat estimates for 67 cents. What is Gap going to do when they don't have the profits from Old Navy to support them. This could be the mother of all short opportunities when the split appears. Buy Old Navy, short the new Gap stock. You will not get this opportunity until late in 2020 when the split finally occurs. Hangtime on the current spike is likely to be short. Put options are cheap.

Foot Locker (FL) reported earnings of $1.56 that beat estimates for $1.40. Revenue of $2.272 billion also beat estimates for $2.184 billion. Same store sales spiked 9.7% and double the 4.5% analysts expected. They opened 11 stores in the quarter and closed 56 stores. They now have 3,221 stores, mostly mall based. They are the only retailer to survive the decline in the American malls. However, they also announced plans to close another 165 stores.

One analyst said we are seeing a stealthy retail apocalypse. Over the last two days more than 465 store closings were announced. Gap is closing 230, JCP is closing 21, Victoria's Secret is closing 53 and Foot Locker 165. Business Insider said that would bring the announced store closing total for 2019 to more than 4,500.

Some of the previously announced closures include:

Payless 2,500
Gymboree 805
Shopko 251
Charlotte Russe 94
Sears 70
Kmart 50
Christopher & Banks 40
Beauty Brands 25
Henri Bendel 23
Lowes 20
Macy's 9

Cloud company Nutanix (NTNX) had a very bad day. The company reported a loss of 14 cents that beat estimates for a loss of 25 cents. Bookings of $413.4 million missed estimates for $416.5 million. The big problem came in their guidance. They guided for current quarter loss of 60 cents on bookings of $360-$370 million. Analysts were expecting 28 cents and $430 million. The CFO said the revenue decline was due to inadequate marketing spending and slower than expected sales hiring. Shares fell -33%.

Tesla's big announcement on Thursday caused a big decline on Friday. The company said it was finally going to make the $35,000 Model 3 as promised in April 2016. That is the good news. However, in order to remain profitable with only a $35,000 product, Elon Musk said they were closing all of their retail stores and would only take online orders. This will allow the company to reduce expenses while they produced the cheaper vehicles.

This concept comes with a lot of challenges. Some states/cities will not allow a car company to sell cars without a retail location while others have blocked the direct sales model without independent dealers. Musk did say some high traffic locations would remain open as showrooms, but sales would only be made online. This means there will be another round of layoffs and because it will take months to shutter the stores, Musk said Tesla would not be profitable in Q1. There is also the potential for many potential sales to not be made. Salespeople, currently "selling" the cars in typical salesman mode, will no longer be there and there may be quite a few sales that never occur because nobody is standing beside the customer talking them into the purchase.

The stripped-down Model 3 at $35,000 may not actually sell. Musk said they would have to poll the current reservation holders to see if they still had interest before they could offer the car to new purchasers. Since the Model 3s over the last year had been in the $55,000-$60,000 range fully loaded, expectations have been raised. Lowering those expectations to focus on a limited range, stripped down car may be difficult.

Tesla also announced price cuts on the Model S and Model X. The long-range vehicles cost around $96,000. Those prices were reduced to $83,000-$88,000. The long-range Model S costs $4,000 more than the base version and has 65 miles of additional range and is 15 mph faster. The Model S performance version was reduced from $112,000 to $99,000. The Model X performance version declined from $117,000 to $104,000. If you want to add Ludicrous mode to either version it is now $15,000, down from $20,000. That increases acceleration by 20%. Analysts were quick to blame slowing demand for the price cuts. With so many electric cars now available, the competition is rapidly increasing.

Another casualty of closing the retail locations will be the end of Solar City/Tesla Energy. Those locations currently sell the solar products and the battery backup systems for solar installations and areas with weak power grids. If they close those locations, the solar/battery business will die. At 2-3 times the cost of a generic solar system, Tesla Energy was almost dead already.

Tesla (Musk) paid $2.6 billion to rescue Solar City in 2016. The company has never thrived and continued to decline with Musk concentrating on the electric cars, giga-factories, the Boring Company and SpaceX. Last June he cancelled a deal with Home Depot, which was selling solar in their stores. The customer acquisition cost of a solar system sold through Home Depot was averaging about $7,500 per customer and made it nearly impossible to make a profit on a $25,000 solar installation. Tesla kept raising the prices on their solar products to compensate but sales slowed to nearly zero. In June Tesla closed about a dozen solar facilities.

A Tesla spokesman told Reuters on Friday they cut solar system prices in November by as much as 25% representing savings of up to $5,000 per system. In Q4, Tesla deployed 73 megawatts of systems, down 21% from Q3 and well below Solar City's 200 megawatts per quarter before being acquired by Tesla. In the 2018 annual report the company said the production of the much touted "solar shingles" had been delayed by production problems. In January Tesla said it was training their sales teams to sell solar as well as cars. Salespeople reported that Tesla branded panels had not even been available in the last half of 2018.

Short sellers were positively giddy on Friday. They believe the demand for Tesla vehicles is falling dramatically. They also believe the stripped down, range limited, $35,000 Model 3 will bomb and poison sentiment for the higher priced versions. Muddy Waters Research, CIO Carson Block, said all the bad decisions are simply confirmation Tesla will eventually go bankrupt. Musk is too distracted, demand is slowing, prices are falling, profits are shrinking, competition is increasing and the company itself is shrinking as evidenced by everything I listed above. This could be the beginning of the end. Shares fell $25 on the news.

The Apple shareholder meeting is history. CEO Tim Cook faced some heated questions about future products and company direction. Apple is not expected to have a 5G phone until Q4-2020 because of its current dependence on Intel for the modems. Intel is running about a year behind the other manufacturers. Meanwhile Qualcomm is signing up other manufacturers almost daily.

Apple claims it is in no rush because only about 20% of the US population will have 5G coverage by mid 2020. Globally, it will take a lot longer. However, Asia is expected to be on the leading edge of adoption. Analysts believe the delay in having a phone will mean users in early 5G areas will break with Apple and move to other devices like Samsung with the faster Qualcomm chips. This could force Apple to reduce prices on their Q4-2019 phones to maintain market share, which is currently 18.2% of all smartphone users.

However, when they eventually produce a 5G phone, nearly EVERY existing Apple customer will upgrade. Who does not want 50 times the download speed, instant app download, 30 second movie download, instant response to web browsing? This will be a major windfall for Apple in 2021. According to UBS there are more than 918 million active iPhones. If only 50% of those opted to upgrade in 2021 it would be a monster year for Apple.

Unfortunately, until Q4-2020 the outlook is boring. They will sell more airpods with currently more than 20 million in use. This has been a runaway success. They will have three cookie cutter iPhones in Q4-2019 but the Apple fan sites have already lost the excitement for the rumored models. Without a new must have feature, like 5G, they are just like the current phones with a few tweaks.

Shares are struggling at $175 with a very reasonable PE of 14. In theory, they should be a long term buy but few are buying. Even Warren Buffett with 250 million shares said he was not buying any more unless the price declined significantly. If you translate that statement it means he thinks the stock is either overpriced or fairly priced at this level given the recently lowered guidance by Apple. I suspect at $150 there would be no shortage of buyers.

Amazon (AMZN) is planning to open "dozens" of grocery stores across the US and they will not be Whole Foods. The first one will be in Los Angeles by the end of 2019. Reportedly, Amazon is looking for some small chains of about a dozen stores each to acquire and rapidly expand its footprint. Whole Foods has strict rules about artificial ingredients, organic foods, etc, and it is the highest priced of any chain store. Amazon is reportedly going to get down with their new chain and compete with places like Walmart, Kroger, Aldi, etc. Kroger has more than 2,000 stores and Walmart more than 6,600 in the USA. Walmart said their online sales would grow more than 35% in 2019. Target is taking on Amazon directly by announcing they were accepting private sellers for products on the Target+ retail site. That means sellers on Amazon can sell on Target as well and that is another threat to Amazon.

However, Amazon is the king of low margin retailing. They will be a major competitor for grocery retailers. They have learned the business with the Whole Foods acquisition and now Bezos is ready explode his lower cost model across the country.

Crude prices tested $58 a couple times over the last two weeks but could not hold it. WTI declined -$1.50 on Friday on the surging dollar and late reaction to the US production increase to 12.1 million bpd. Inventories declined -8.6 million barrels because of a sharp drop in imports. With OPEC cutting shipments to the US in order to influence prices, I would have expected WTI to be higher. Saudi Arabia is cutting another 500,000 bpd starting March 1st. Around the end of March we will see refinery utilization begin to climb and gasoline prices tend to peak around Memorial Day. This will lift crude prices.

Active rigs declined by -9 to 1,038 with a drop of 10 oil rigs. I do not expect to see a surge in rigs until the new Permian pipelines are completed. There is no reason to spend money drilling the wells if there is no pipeline capacity to ship the oil.


The last half of February was true to the historical trend. The Dow closed at 25,882 on expiration Friday and 26,027 this Friday for a whopping two week gain of 145 points. Trading was volatile but the peaks and valleys were minimal. The major indexes did not decline over the last two weeks, but they also made no forward progress.

The S&P has gained 11.8% in 2019 and that is the best start for any year since 1991. The Dow is up 11.6%, Nasdaq 14.5% and Russell 17.9% since the December 31st close. They are up even more if you count backwards to the December 26th low.

Unfortunately, all the major indexes are at critical resistance and it will be tough to produce a major breakout from here. The main reason is that the expectations for a China trade deal have already been priced into the market. When Larry Kudlow and Steve Mnuchin both praised the fantastic progress in the negotiations early in the week, the market barely moved. A couple months ago that would have produced a 400-point rally in the Dow. This is clear evidence the good news has already been discounted.

We will probably get a decent bounce on news an agreement has been signed but it is likely to be brief and be followed by profit taking. Once that event is behind us the focus will immediately return to the market fundamentals. Today, that means declining economics and negative earnings growth.

Since the Christmas bottom the S&P is up 19.5%, the Dow 19.9%, Nasdaq 22.7% and Russell 25.3%. That is two months and four days of gains. Most years don't see gains that big. With declining earnings growth, the odds are extremely high we are going to see some significant profit taking after the Chinese trade agreement and possibly ahead of it as cautious investors try to exit ahead of a sell the news event. Also positive is the fact that analysts are expecting Q1 to be the trough in earnings with gains the rest of the year. They are not expecting big gains, but small gains are better than any loss. If we do get a China trade deal, the USMCA is approved by Congress and Britain has a peaceful and coordinated exit from the EU, the earnings estimates should rise along with the markets.

For the S&P the key level remains 2,815 and resistance from Oct/Nov. I believe if we can punch through that level on decent volume the next target will be the prior high at 2,930. This close to the old high that level becomes a self-fulfilling target. That does not mean we will simply blow through it to new highs because there is a better than 50:50 chance that it could turn out to be a double top.

The Dow missed extending its streak of gains to 10-weeks by 6 points. The index struggled for the week thanks to Apple, UnitedHealth, Home Depot and Walgreens. Baird added WBA to its "negative" list and shares fell 6% on Friday. Constant chatter about "Medicare for all" crashed the medical stocks and UnitedHealth shares fell -$25 in two days to knock roughly 175 points off the Dow.

If a trade deal appears in a couple weeks, we could see gains in CAT and MMM but even those tariff sensitive stocks have been struggling despite the positive news on negotiations.

We are right in the middle of the post earnings depression period and it will take some new headlines to lift us back to the highs.

The Nasdaq is holding right at resistance at 7,600 and has the best chance for a breakthrough. The next soft target would be 7,932 followed by 8,115. Two of the FANG stocks posted gains and two of them posted losses for the week. This kept the Nasdaq from advancing but the intraday dips were bought.

The Russell 2000 failed to decline materially for the week. The loss was only 0.42 of a point. The index is trapped between the 200 and 300 day averages and round number resistance at 1,600. I believe a breakout is imminent but until it happens, we are stuck at resistance.

I believe we are going higher simply because the China trade deal has not happened and there is still some hope for a miracle rally. Add to that the gravitational pull from the prior highs and that is prompting investors to put more money at risk. However, with roughly 20% gains since Christmas, there will be profit taking. The only question is where and when. Reaching the prior highs on a China trade agreement could be the starters gun on a meaningful decline.

Enter passively and exit aggressively!

Jim Brown

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"Success is not final, failure is not fatal. It is the courage to continue that counts."

Winston Churchill

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Index Wrap

Directional Pause

by Jim Brown

Click here to email Jim Brown
The major indexes barely moved off the flat line for the week as consolidation appeared. Major resistance was hit the prior week and investors used the opportunity to consolidate positions. A late week rebound brought the indexes back to the flat line and just under critical resistance. When you consider we have had 10-weeks of gains of around 20% on the indexes, it is a wonder we did not have a material decline.

As I stated in the market commentary, I believe investors are still hoping for a miracle rally after a trade agreement is signed. I also feel they will be badly disappointed by a sell the news bout of profit taking.

However, for next week, we should continue to melt up slowly. The end of February weakness is over, there are only four weeks left in Q1 and investors can use those weeks to play with Uncle Sam's money before they need to cash out to pay the tax bill in early April. Investors are more than likely going to remain invested until the trade agreement is signed and hope there is a spike to the prior highs where they can exit.

While the major indexes flatlined for the week the A/D line closed at a new high. The big cap stocks were choppy but the midcaps and techs were still showing some gains. The big caps are suffering from China fatigue and post earnings depression. The tariff sensitive stocks have been up and down so many times on headlines, the excitement has worn off.

Helping to lift the S&P and Nasdaq was the biotech sector. The $BTK closed at a four-month high on Wednesday and only one point lower on Friday. The Biotech Index has exceeded the same relative resistance that is still holding back the S&P and Nasdaq. This index could soon retest its highs.

The Dow Transports stumbled for the week after Delta (DAL) and American (AAL) were downgraded due to weakness in the global economy. The downgrade was strange because they maintained a buy on United (UAL) and United has the most exposure to overseas weakness.

The transports fell back to prior resistance as support at 10,450 but with rising oil prices over the next month, we could see further weakness here.

The chip sector was a drag on the Nasdaq after hitting a four-month high on Monday. The $SOX dropped back to consolidate around the 1,350-level midweek before rebounding slightly on Friday. Chip earnings are mostly behind us, but Broadcom reports the following week. That could be a market mover.

The energy sector was no help. Despite mostly good earnings and rising oil prices the sector was relatively dormant for the week. The XLE held over support at $65. The sector should be poised for future gains because oil prices normally peak between Memorial Day and July 4th then fade into Labor Day, then decline. This means energy stocks should rally into the May period. On the chart below the pattern is clearly visible.

The banking sector is up 23% since Christmas but the gains were paused last week. With the Fed on hold on rate hikes, the banks are over bought for the current conditions. Weak economics and the slowing housing sector could weigh on profits.

The Nasdaq was struggling because of the mixed performance of the FANG stocks. Two traded lower, two traded higher. Together they kept the Nasdaq from making a directional move. Apple, the extra A in FAANG, was flat at $175 on worries about future products and shrinking market share. With those five stocks acting as anchors it was surprising to see the Nasdaq post a 60-point gain for the week. However, the biotechs appeared to have taken a leadership role away from the FAANG stocks.

The Russell 2000 actually took over the leadership role from the Dow after being the laggard for months. This is very market positive because it confirms breadth and sentiment.

I could go on with the supporting cast of characters, but the bottom line is the 2,815 level on the S&P. This was strong resistance in Oct/Nov and a breakout over that level this week could cause some significant short covering and price chasing back to the prior highs at 2,930. I am concerned this could turn into a double top formation given the decline in Q1 earnings and the potential sell the news event on the China trade agreement.

Note the MACD, RSI and CCI all started to roll over last week. They are not critical yet but one more week of consolidation could suggest a new trend ahead.

I am recommending caution in the weeks ahead. A negative trade headline could appear at any time and the market would react negatively. Without a steady stream of positive earnings reports to provide support, the post earnings depression cycle will intensify but it should be nearing completion on the early reporting big caps that move the market. Depression in the mid and small caps could hold the market back but is not likely to cause a significant drop. As long as there is the possibility of a China trade deal, we should continue to move slowly higher. Once that event passes, I would look to take some cash off the table.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

China Rising +1

by Jim Brown

Click here to email Jim Brown

Editors Note:

China's financial markets are expanding as transparency grows. Even without a trade deal, China's equity markets are set to expand. The Russell 2000 is poised for a breakout. We will play them both.


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


ASHR - CSI China 300 ETF - ETF Profile

The investment seeks investment results that correspond generally to the performance, before fees and expenses, of the CSI 300 Index. The fund will normally invest at least 80% of its total assets in securities of issuers that comprise the underlying index. The underlying index is designed to reflect the price fluctuation and performance of the China A-Share market and is composed of the 300 largest and most liquid stocks in the China A-Share market. The underlying index includes small-cap, mid-cap, and large-cap stocks. Company description from FinViz.com.

The Chinese equity markets have been rising on anticipation of a completed trade deal. Chinese focused ETFs have been rising sharply.

However, a move by MCSI last week is going to lift them even higher. MCSI, the global index provider, announced they were raising the weighting of the Chinese mainland A-Shares from the current 5% weighting to 20% for a number of their global indexes. The weighting will rise to 10% in May, 15% in August and 20% in November.

In 2018 MCSI added 236 China listed large cap stocks to its emerging market index. Most importantly, Chinese A-shares were included in the Emerging Markets Index for the first time.

The increase in weighting will trigger more than $80 billion into Chinese equities. JP Morgan believes it could draw $85 billion and Goldman Sachs expects more than $70 billion in inflows to A-shares.

In addition FTSE Russell and S&P Dow Jones are going to begin adding yuan-denominated Chinese shares to their global benchmark indexes.

The ASHRs ETF holds a basket of 303 large cap Chinese stocks that will benefit from the index additions mentioned above. At the beginning of 2018, before all the trade issues erupted, the ASHR was trading at $35 and rising. Since the dispute shares fell to $24. With multiple index companies adding the large cap Chinese stocks to their indexes for the first time, there should be a solid ramp back to $35 or even higher. A successful Chinese trade deal will give it even more momentum.

The ETF is jerky because it is based on the overnight activity in China's market. It will normally gap open as trade begins in the US.

Buy July $29.71 call, currently $1.46, stop loss $25.85.

IWM - Russell 200 ETF - ETF Profile

The investment seeks to track the investment results of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index. Company description from FinViz.com.

This is a short-term trading position based on expectations for a Chinese trade deal to be completed in March. I expect the markets to struggle higher into that president's meeting in Florida and then roll over.

The 30-min chart on the Russell shows a potential breakout ahead over the 1,600 level. The IWM has already closed over the 200-day, which has been holding the index back. It is entirely possible the Russell could run to 1,700 over the next three weeks if the China headlines continue to be positive.

However, this is a high risk position. The slightest headline about a glitch in the negotiations could tank the market. I do believe the prior highs are going to act like a tractor beam for the indexes as long as we do not suffer a headline disaster.

The end of February weakness was right on schedule and now we are poised for a directional move. Given 10-weeks of gains, that could be in either direction.

Buy April $162 call, currently $1.48, stop loss $155.65.


No New Bearish Plays

In Play Updates and Reviews

Close but no Cigar

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P closed over 2,800 for the first time since November but resistance remains firm. The 2,800 level was round number resistance, but the 2,815 level is real resistance from Oct/Nov. Dow resistance at 26,191 is also strong and the Dow only touched 26,143 Friday morning and selling was instant.

The market is going to need a new catalyst to catapult it over these critical resistance levels. What will that be? The China trade story is already baked into the market.

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


Dell reported a loss of $287 million on revenue increase of 9% to $23.84 billion. They did NOT supply an earnings per share number with the release but in documents supplied later the earnings came out to about $1.86 per share. Analysts had expected $1.81 in adjusted earnings and a GAAP loss of $45 million on revenue of $23.83 million. Revenue in the infrastructure group rose 10% to $9.9 billion with servers and networking revenue rising 14% to $5.3 billion. They guided for full year earnings of $6.05-$6.70 and missed estimates for $6.81. I tightened the stop loss in case of post earnings depression.

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


No specific news.

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


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


Tech stocks are leading the rebound since the Christmas lows with the Nasdaq up over 20% but still 10% below the prior highs. Plenty of room to run.

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