Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/27/2019

Table of Contents

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

Market Wrap

Rates Fall, Stocks Follow

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Comments from Stephen Moore, Trump's pick for the Federal Reserve, sent bond rates to new lows and equity markets followed suit. Moore, who has been critical of the FOMC, say's he's no sycophant to Trump but he would call for an immediate rate cut. While not a confirmed member his comments were treated like he were. It didn't help that the Reserve Bank of New Zealand issued a warning with their policy statement last night. The RBNZ says their next policy is most likely a rate cut reinforcing the idea of a global slowdown and impending recession.

Market Statistics


Conversely, in the EU, ECB President Mario Draghi cautioned markets that slowing global growth is not necessarily an indication of recession. The caveat for us is that said signal typically leads the market by quarters if not a year or more, and there is still no sign of an actual recession, only slowing growth. The yield for the 10-year Treasury fell below 2.375 deepening the inverted yield curve.


Secretary of the Treasury Steve Mnuchin and Trade Ambassador Robert Lighthizer are on their way to China. They are going to meet with Chinese Vice Premier Liu He for the third time. The word from the White House is that trade negotiations are still progressing positively, we should get some confirmation of that this weekend (or the opposite). Liu He is also expected in Washington in early April, contingent on the success of this weeks meeting, with a possible meeting between Xi and Trump next month but don't hold your breath.

In the EU the Brexit fight is nearing its endgame. Theresa May is desperately fighting for support of her deal, the only deal available to the UK, and has offered to resign if it is accepted by Parliament. Parliament is voting on a series of issues this evening that will help them determine the course they wish to take. As an outside observer, it seems as if there are but three choices; the May Brexit Deal, a no-deal Hard-Brexit, or no Brexit at all. Ironically, if the UK does go Hard-Brexit they will have much more flexibility in dealing with us and every other nation on the planet except the EU, a fact that may sway Parliament or even the EU to change their minds.

Economic Calendar

The Economy

There is at least one sector benefiting from the interest rate scare; housing. With rates on the decline, mortgage applications are surging. Over the last week, the rate on a 30-year mortgage fell another 10 basis points to 4.45%. The number of mortgage applications surged 8.9% and is at another new high. The Mortgage Purchase Index, the Mortage Market Index, and the Refinance Index all made strong gains over the past week. The housing market may still be sluggish but it is gaining momentum, this year could be a stellar year for the builders.

The U.S. Trade Deficit fell in the last month and much more than expected. The deficit came in at -$51.1 billion versus a smaller drop to about -$57.7 billion. The decline is driven by China and an increase in the number of soybeans they are purchasing. It's a small step but a good sign that U.S./China trade negotiations are bearing fruit and that relations are normalizing. A few more data points like that or some positive on the trade deal and the market might stop worrying about a recession.

The Dollar Index

The Dollar Index tried to advance today but fear of slowing growth capped gains. The index extended its move above the short-term moving average to hit resistance at $97 and fall back to break even. The index is still trapped within its range likely to remain there in the near-term. The risk is that there are several potential catalysts including news on Brexit, the Trade Deal, or inflation that may send the dollar moving sharply in either direction. The Brexit and Trade Deal are kind of floating out there in limbo where they could pop out to scare traders at any time, news on inflation is due out on Friday and more likely to miss than beat consensus estimates.


The Gold Index

Gold prices fell about a half percent today. Today's candle shows resistance at the uptrend line and support at the short-term moving average that is likely to keep the metal range bound in the very near-term. Uncertainty over inflation, interest rates, and geopolitics has the metal moving sideways within a new range. Based on the last MACD peak which was quite extreme I am still expecting a retest of the recent low sometime soon but that doesn't mean a test of $1,340 won't come first. The indicators are consistent with range-bound trading so I don't think any big moves are brewing for gold right now.


The Gold Miners ETF GDX fell back from its peak in today's trading. The ETF is showing signs of resistance at the top of its trading range that may keep it from moving much higher. The indicators are weakly bullish but show signs of peaking which are consistent with range-bound trading. A move higher may make it to $23.50 without another catalyst, a break above that level may be bullish. It looks like there is some support at $23.00 but it isn't strong, if prices move below there a drop to the short-term moving average is likely.


The Oil Index

Oil prices fell today but the move was small, the uptrend is intact. Today's move was driven by unexpected inventory data that showed a larger than expected build in WTI storage levels. WTI storage jumped 2.8 million barrels versus an expected draw of 1.1 million. The news is bearish for oil but offset by a much larger than expected draw in distillates. U.S. production is helping to keep oil prices from shooting higher but OPEC's tightening scheme is the stronger force. Couple that with news Venezuela's primary oil terminal is without power and the odds of global supply tightening increase.


The Oil Index fell today as well as it winds up for its next big move. The index is caught between the short and long-term moving averages where it is getting squeezed. The indicators are mixed but with bullish bias and set up to fire bullish crossovers so I am optimistic the index will move higher. The outlook for energy profits is already on the rise with oil prices edging higher and likely to carry the sector higher with it. A break above the long-term EMA will be bullish and may take the index up to 1,400 or higher in the near-term. A fall from this level may be bearish but it would depend on the cause.


In The News, Story Stocks and Earnings

Boeing was able to make a small advance in today's session. The stock bounced from the long-term moving average to form a small green candle as it reestablishes support near the $375 level. Today's move is driven by news the company has a fix for its 737 MAX problem, what it doesn't have a fix for is the political fallout that is only now gaining momentum. The FAA and Boeing are both in the hot seat over the approvals process and Boeing is the only one the government can fine. The fix includes a software update, increase pilot training, and cockpit alerts for the specific problem that caused the two crashes. Safety inspections have not revealed any new issues. Analysts at Citigroup have reinstated Boeing at a buy so this may mark a turning point for the stock.


KB Homes reported after the bell yesterday with mixed results. The company says revenue fell -7% in the last year but EPS beat by a wide margin. More importantly, the company raised its forecast for revenue and profits in the second half citing improving conditions. These comments jibe with what I'm seeing in the mortgage data and may yet be underestimating the strength of pent up demand. Shares of the stock jumped more than 3.0% in today's session but triggered resistance at the $25.00 level.


The Homebuilders SPDR XHB moved up more than 1.0% on mortgage outlook and results from KBH. The ETF is moving up from a strong support level and confirmed by the indicators so higher prices are expected. The stochastic and MACD are forming a relatively strong bullish trend-following signal so we may see this ETF make an extended run to the upside. My first target for resistance is $39.50, a move above that could run as high as $46 in the near to short-term.


Lululemon reported after the bell and there are only three things to say about it. The company reported strong revenue, strong earnings, and gave strong guidance above the analyst's consensus. Results are driven by strong comps, 17%, that are above the consensus as well. Shares of the stock rose 10% on the news and likely to move higher longer-term as the company executes on its strategies.


The Indices

The indices fell fairly hard this morning but didn't hold the gains. A midday bounce from support more than halved the day's losses in most cases. The only index to close with a gain is the Dow Jones Transportation Average and it managed to move higher all day. The transports created a medium-sized green candle moving up to test resistance at the pair of moving averages and resistance was there. Today's action may be bullish and is loosely supported by the indicators, the problem is that price action is still below both moving averages and there is little impetus to buy. A move above the moving averages may be bullish, a fall from today's close would confirm resistance and a possible return to recent lows.


The day's biggest loser is the NASDAQ Composite. The tech-heavy index shed about -0.60% at the close and shows both resistance and support in a single candle. The candle is large and red but mostly shadow and sitting above support. Support is at the short-term moving average and may be strong enough to cause a bounce but the indicators don't confirm that outlook. The indicators are both pointing lower following bearish crossovers which is consistent with lower prices. A move below the short-term EMA would be bearish and could take the index down to 7,400, 7,200, or 7,200.


The S&P 500 closed with a loss of -0.39%. The broad market index closed below my uptrend line and confirm resistance at this level. The candle points to lower prices and that is supported by the indicators which are both bearish and gaining strength. The caveat is that there is still support at the short-term moving average that may keep the index from falling much further. A fall below the 30-day EMA would be bearish and may take the index down to 2,730.


The Dow Jones Industrial Average closed with the smallest decline, only -0.12%. The blue-chips fell more than that but were able to regain most of the loss by the close. The candle is a medium-sized doji showing resistance at a long-term uptrend line and support at the short-term moving average. The indicators are bearish and gaining strength so it looks like support is the more likely loser in this battle. A move below the 30-day EMA would be bearish and may take the index down to 25,100 and the long-term EMA.


The indices are still trying to decide what to do. There are signs of a possible recession, economic data is slowing, but the outlook for growth remains positive. If near-term trends in economics persist we may indeed see a recession but that still won't be for several quarters at least unless something drastic happens to curb activity. The more likely scenario, assuming trade relations don't worsen, is that global economic growth will stabilize as we go into the summer and fear of recession will fade. In the meantime there are many reasons to expect some volatility and a sell in the market, negative earnings growth in the first quarter, Brexit, Trade Negotiations are only three of them. I remain firmly bullish for the long-term and neutral for the near-term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Tempting Fate

by Jim Brown

Click here to email Jim Brown

Editors Note:

Entering new positions at the open on Thursday would be tempting fate. The markets are establishing a bearish pattern and appear to be on the edge of a breakdown and the S&P futures are down -14 tonight. They could reverse as they sometimes do but market sentiment is fading fast. If we do make some lower lows on the S&P and Russell it would be lights out for this rally. It already has the interest rate flu and it would not take much to add a dose of earnings pneumonia and really create a death spiral. Be patient, we will eventually get a buying opportunity.

 

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

Another Day, Another Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

This is starting to look like a trend where resistance holds, and support is tested daily. The Dow dropped -232 intraday and recovered to close with only a 32-point loss but it was still a bearish day. We are seeing progressively lower highs and came very close to a lower low. The futures are down -14 and tomorrow could be rough.



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


CRM - SalesForce.com
The long position was stopped at $155.85.


Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.


BULLISH Play Updates

CRM - SalesForce.com - Company Profile

Comments:

Salesforce hit a pothole today after 50 women filed a suit saying the company had created custom apps for the prostitution portal Backpage.com. The site is now out of business but the suit claims the custom apps allowed pimps, johns and sex traffickers to profit from the website. The 50 women were sold for sex across the US and they claim the apps allowed the pimps and traffickers to "database" their johns and their women and match them for sale. I have to admit I did not see this coming. We were stopped on the drop.

Original Trade Description: March 16th

Salesforce.com, Inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com.

Shares fell from $165 to $150 after the company reported earnings of 70 cents that beat estimates for 55 cents. Revenue of $3.6 billion beat estimates for $3.56 billion. The problem came on the guidance. They projected earnings of 60-61 cents on $3.67-$3.68 billion. Analysts were expecting 63 cents on $3.69 billion. For the full year the company projected $2.74-$2.76 on a 20% increase in revenue to $15.95-$16.05 billion. Analysts expected $2.75 and $15.97 billion. SalesForce also projected revenue of $26-$28 billion in 2023.

The company said it was fighting headwinds because of the strong dollar. However, billings rose 22% to $6.79 billion and beat estimates for $6.43 billion. Their future unearned contract revenue rose 25% to $25.7 billion. This is money that will become due in future months. If a customer signs a 24 month deal for $1,000 a month, SalesForce only gets to count that revenue as it is earned at $1,000 a month. They have $25.7 billion in contracted but unearned revenue. Their RPO, contracted revenue expected to be earned within 12 months, rose 24% to $11.9 billion. They also expect that number to be up 24% at the end of the April quarter.

The "SalesForce Platform and Other" segment saw revenue grow 54% to $825 million. Revenue from the EMEA region rose 25%. Revenue from Asia-Pacific rose 25%. Contracts over $20 million rose 48%. There were two deals over $100 million signed last quarter.

Yes, shares fell after earnings but who would not want to own a business that is growing this fast? It was just a knee jerk reaction and I wish I had recommended it again the prior week.

Position 3/18/19:
Closed 3/27: Long May $170 call @ $3.00, exit $1.69, -1.31 loss.


INTC - Intel - Company Profile

Comments:

No specific news. Shares down with the market.

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.


MSFT - Microsoft - Company Profile

Comments:

Microsoft said it seized 99 websites used by Iranian hackers to steal sensitive information and launch other cyberattacks. Unfortunately it did not keep their shares from declining in a weak market.

Original Trade Description: March 23rd

Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. Its company's Productivity and Business Processes segment offers Office 365 commercial products and services, such as Office, Exchange, SharePoint, Skype for Business, Microsoft Teams, and related Client Access Licenses (CALs); Office 365 consumer services, including Skype, Outlook.com, and OneDrive; LinkedIn online professional network; and Dynamics business solutions comprising financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and medium businesses, large organizations, and divisions of enterprises. The company's Intelligent Cloud segment licenses server products and cloud services, such as SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; and enterprise services, including premier support and Microsoft consulting services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions, as well as provides training and certification to developers and IT professionals. Its More Personal Computing segment offers Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, and MSN display advertising; devices comprising Surface, PC accessories, and other intelligent devices; Xbox hardware and software and services; and Bing and Bing Ads search advertising. The company markets its products through original equipment manufacturers, distributors, and resellers; and online and Microsoft retail stores. Microsoft Corporation has collaboration with E.ON; strategic alliance with Nielsen Holdings plc and PAREXEL International Corp.; collaboration with NIIT Technologies Ltd.; and a strategic collaboration with Mastercard Incorporated. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.

Microsoft is closing in on one billion Windows 10 installations. This is a money printing machine. Their server software, Office 365, SQL Server, Azure cloud service, are all money printers. They are very close to killing the video game market and putting Gamestop out of business by releasing a download only video game console. They are going to put the Xbox in the cloud. This is called Project XCloud. The idea is to be able to play any game on any device at any time without a controller or software CD. This took some of the excitement out of the Google Stadia announcement.

This is a simple recommendation. Shares closed at a new high on Thursday and pulled back to short-term support on Friday. "IF" the market recovers, Microsoft should make new highs again. Position 3/25/19:
Long May $120 call @ $2.99, see portfolio graphic for stop loss.


NTNX - Nutanix - Company Profile

Comments:

All the major cloud stocks were down hard today. Analysts blamed it on the drop in Salesforce.

Original Trade Description: March 13th

Nutanix, Inc., together with its subsidiaries, develops and provides an enterprise cloud platform in North America, Europe, the Asia Pacific, the Middle East, Latin America, and Africa. Its solution addresses a range of workloads, including enterprise applications, databases, virtual desktop infrastructure, unified communications, and big data analytics. The company offers Acropolis, an open platform comprising hyperconvergence, native virtualization, enterprise storage, virtual networking, and platform services; and Prism, an end-to-end consumer-grade management plane providing management and analytics across its software products and services. It also provides Nutanix Calm that offers native application orchestration, automation, and lifecycle management to its enterprise cloud platform. In addition, the company offers Beam, a multi-cloud optimization service; and Frame, a desktop-as-a-service. It serves customers in a range of industries, including automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology, and telecommunications, as well as service providers. The company was founded in 2009 and is headquartered in San Jose, California. Company description from FinViz.com.

Nutanix shares were crushed on March 1st after they posted an adjusted loss of 14 cents. Analysts were expecting 25 cents, so this was a beat. Revenue of $335.4 million beat estimates for $331 million. However, billings rose from $355.9 million to $413.4 million. Analysts were expecting $416.5 million and not a big miss.

The problem came from guidance. They guided for the current quarter for a loss of 60 cents on revenue of $290-$300 million and billings of $360-$370 million. Analysts were expecting 28 cents on revenue of $348 million and billings of $430.2 million. That was a major miss.

The CFO said, "The guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring." "We took a critical look at these areas and have taken actions to address them."

Shares fell $17 to $33 on the news. After a week of sideways consolidation shares have started to move higher. The CFO said they corrected the problem. That may not mean there will be a recovery in the current quarter but there will be a recovery. I am recommending we buy the dip.

The first option cycle out of the 30-day premium depreciation window is July. We can buy time, but we do not have to use it.

Position 3/14/19:
Long July $42.50 call @ $3.25, see portfolio graphic for stop loss.


BEARISH Play Updates

No Current Puts