Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/3/2019

Table of Contents

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

Market Wrap

Trade Hope Lifts Stocks

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Trade lifts stocks but most of the good news is priced in. With the two sides nearing an agreement it is questionable how much further the major indices can advance. Today's action saw the broad market open higher but struggle to hold the gains.

Market Statistics


Today's trade news includes a report from the FT that U.S. and Chinese negotiators were closing in on a deal. Mnuchin, Lighthizer, and He have been able to overcome most issues with only a few sticking points left to be worked out. The major hurdle is what to do with current tariffs and enforcement; China wants the U.S. to remove all tariffs imposed since the trade war began, Washington wants some assurances China will stick to its promises.

The situation developing now is this; what kind of deal will be struck, and what will be left for Trade War Part II. Chinese views on intellectual property and hacking are at the core of the remaining issues and likely not to be resolved with the first deal. The good news is that, according to Kudlow, Chinese officials have begun to acknowledge we have a point when it comes to IP theft, forced tech transfers, and hacking, a development that helped move the trade talks along. Vice Premier Liu He is in Washington now talking with Mnuchin and Lighthizer.

In political news, Senator Elizabeth Warren has introduced a new bill that would make it easier to charge and jail executives for the wrongdoing of their companies and employees. While it is a good idea to hold people accountable the bill would open a can of worms, unleashing attack dogs on corporate America, and raises the question of double jeopardy. In her bill execs of companies with more than $1 billion in annual revenue, if found guilty of a crime or who have entered into plea agreements/settlements, would be liable.

Brexit drama wears on. The MP's have reached no consensus, Theresa May is unable to garner support for her deal, and the new Brexit deadline is next Friday. Without direction or a deal, May will have to ask for another extension and the EU will have to grant it or force the hard-Brexit.

Economic Calendar

The Economy

Today's data was good but subdued. Both the labor and PMI figures were lighter than expected and point to slowing and slowdown in the U.S. economy. On the labor front, the ADP report on payrolls says U.S. job creation totaled 129,000 last month. This is about 60,000 below expectation and about 60,000 below the consensus for Friday's NFP figure. Small businesses created almost no new jobs while mid and large-sized businesses both created 60,000+ new jobs. Manufacturing jobs shrunk by -6,000 led by a decline in construction jobs (probably weather related) while services job increased 135,000. There was also some weakness in the revisions, January was revised up by 14,000 but that was more than offset by a -36,000 decline in the December read.


Mortgage applications soared in the last week as interest rates continue to fall. The rate on a 30-year mortgage made its biggest decline in years hitting 4.36% in the last week. The total number of applications jumped 18.6% for the month, up 28% YOY, with most of the increase attributed to refi's. Refi applications jumped 39% MOM and 58% YOY while applications for mortgages to buy a house rose only 3.0% and 10% YOY. Regardless of the breakdown this is good news. On the one had apps for new houses are on the rise providing fuel for home sales while on the other, millions of Americans are locking in lower payments providing fuel for the consumer economy.

The Markit Services PMI was slightly better than expected at 54.6 but still down from the previous month. The read alleviated some fear of slowdown but not all and was offset by the ISM report. The ISM report on non-manufacturing PMI says activity slowed and more than expected. The headline index came in at 56.1%, expansionary, but down from 59.7% and less than expected 5.1%.

Activity, New Orders, and Employment are all positive but Activity and New Orders both slowed considerably. Employment edged up 0.7% to hit 55.9%. Prices paid also edged higher gaining 4.3% to hit 58.7%. The good news is that the economy expanded, the bad news is that acceleration is slowing faster than expected and prices are moving up again. The only data tomorrow is jobless claims and the Challenger report on layoffs.


The Dollar Index

The Dollar Index fell from yesterday's shooting star and has confirmed the top of the trading range. The move is driven by today's weaker than expected PMI data and compounded by strong data from abroad. In the EU PMI was hotter than expected and coupled with better than expected retail sales while in Australia retail sales were also above consensus and the trade surplus unexpectedly grew. If this situation persists, weak data at home and strong data abroad, the dollar is going to retest the bottom of its range in the not-too-distant future. The indicators are consistent with a top and the top of the range so sideways to downward movement is expected in the near-term. There is not a lot of data due out tomorrow but the ECB will be releasing its minutes and that could move the euro.


The Gold Index

Gold prices moved lower despite the falling dollar. The move is likely tied to the trade deal and growing likelihood a deal will be made soon. The spot price looks like it is consolidating for another move and that move is most likely lower. Price action is below my support/resistance target at $1,300 and forming a flag pattern that could send spot price down to $1,280. $1,280 is still a decent target for support; if it is broken though, a much deeper move becomes possible.


The Gold Miners ETF tried to rebound in today's session but met resistance. The ETF formed a small doji shooting star within the near-term downtrend and looks like it is heading lower. The indicators are consistent with a move lower but the decline might not get much further. The $21.50 level is a target for strong support; if that gets broken the long-term moving average is just below.


The Oil Index

Bearish inventory data had little effect on oil prices today. The EIA says U.S. crude stockpiles grew an unexpected 7.2 million barrels in the last week. While bearish, and compounded by rising U.S. production, it is also offset and mitigated by other data. On the production side of the equation, the EIA says U.S. drillers pumped 12.2 million barrels per day in the last week, a new record if confirmed.

Offsetting and mitigating the jump in crude supply is a larger than expected drawdown in gasoline (-1.8 million barrels) and distillates (-2.0 million barrels). Additionally, much of this weeks increase in crude reserves is due to downtime among gulf refiners. WTI moved up to set a new high but fell back by the close to post a small loss.


The XOI Oil Index fell in today's action shedding about a half a percentage point. The index fell from the long-term moving average and may move lower but support is just below at the short-term moving average. The index is being squeezed in a tighter and tighter range between the two moving averages and getting ready to pop. The indicators are perfectly neutral showing very little momentum or direction in prices. It looks like the market still can't make up its mind what to do but, with oil prices rising on OPEC support, a move higher is a more likely outcome. The caveat is in the data, slowing data is capping demand outlook and they may weigh on prices in the near term.


In The News, Story Stocks and Earnings

The chipmakers were among today's hottest sectors after a series of bullish reports hit the market. Analysts see a significant increase in business for Intel, AMD, and TSMC. The general consensus is factors over the past 2-3 months have tightened supply (after fear of oversupply had reached a peak) and the slowdown in shipments has bottomed. The Semiconductor Index advanced roughly 3.0% and set a new high but there are some red flags. First and foremost is the indicators which are both highly divergent from this new high. Second, the candle is very shooting star-like and price action looks frothy.


Constellation Brands is set to report before the opening bell tomorrow. The stock corrected harder than most at the end of last year and has yet to really recover despite a history of revenue and earnings growth. Based on today's action I think someone else thinks the company will report well tomorrow, the stock gained 1.7% and looks ready to move higher. Analyst sentiment is bullish, 19 of 27 who follow the stock recommend a buy, so upward movement is likely over the long-term.


The VIX moved up in today's session. More than that, it is confirming the presence of support at my target level of $13.40. It may be nothing but, in light of recent activity, the VIX looks like it could be reversing. The indicators are consistent with growing support at this level, if crossovers were to form here, I would consider it a strong signal. Until then we may see fear trend to the side as the market digests data, trade developments, and waits on earnings. If fear has entered a range the top is near 17.80, a move above that would be bullish for fear and bearish for the broad market.


The Indices

The indices advance but the move is timid and without commitment. The biggest move of the day was made by the NASDAQ Composite, 0.59%. The tech-heavy index was supported by today's move in semiconductors but, like the semis, the candle is not strong. Today's action shows resistance to higher prices and uncertainty among the bulls. A fall in tomorrow's trading would confirm it as a shooting star. The indicators are bullish so it is possible the index will move higher, the indicators are also significantly divergent from the high which suggests weakness and potential for correction. If the index falls my first target for support is 7,800.


The broad-market S&P 500 posted an advance of 0.21% and formed a spinning top doji. The candle is red bodies and sitting on potential support so the rally may continue. The risk is that today's is the second of two spinning tops which suggests a third is on the way. The indicators are weakly bullish but bullish which supports rising prices, the caveat is that they are diverging from the new high and reveal underlying weakness in prices. A move lower, a solid move lower, would confirm resistance at the key level of 2,873 and a previous all-time high.


The Dow Jones Transportation Average is showing resistance at the top of a two-month range. The index formed a tombstone doji after setting a new high confirming resistance at 10,685. The indicators are bullish so resistance is likely to be tested again; if it is broken a move up to 11,000 is possible. Notably, the short and long-term moving averages are forming a bullish crossover so there may be more to this move than meets the eye.


The Dow Jones Industrial Average made the smallest advance at 0.14%. The blue-chip index formed a small doji spinning top after setting a microscopically small new high. The indicators are bullish so higher prices are expected, the risk is that divergences are present here as well and that is never a good thing. The next target for resistance is at the all-time high, just shy of the all-time high.


The market looks like it will move higher. The problem is that the Vee-bottom correction is so extended, the market is so highly valued, resistance targets so immediate, that it's hard to get too excited about it. Factor in hope, the fact that hope is a major player in the Vee-bottom correction, and the cause for hope (trade talks) is so close to resolution, and the odds this bubble will burst soon grow exponentially. I'm not saying you shouldn't be bullish on near-term market movement, just not to expect too much out of it and be wary, I fear a correction is on the way. I am neutral for the near-term but still firmly bullish for the long-term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Bad Times Over

by Jim Brown

Click here to email Jim Brown

Editors Note:

Closing at a 52-week high is a good sign when there is 40% upside. XRAY is fighting resistance at $50 but has room to run to reach the $70 highs from 2017.

 

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


NEW DIRECTIONAL CALL PLAYS

XRAY - Dentsply Sirona - Company Profile

DENTSPLY SIRONA Inc. designs, develops, manufactures, and markets various dental and oral health products, and other consumable healthcare products primarily for the professional dental market worldwide. The company operates in two segments, Technologies & Equipment; and Consumables. Its dental supplies include endodontic instruments and materials, dental anesthetics, prophylaxis pastes, dental sealants, impression materials, restorative materials, tooth whiteners, and topical fluoride products; and small equipment products comprise dental hand pieces, intraoral curing light systems, dental diagnostic systems, and ultrasonic scalers and polishers. The company also offers dental laboratory products, such as dental prosthetics that include artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials. In addition, it provides dental technology products, including dental implants and related scanning equipment, treatment software, and orthodontic appliances for dental practitioners and specialist, and dental laboratories; and dental equipment, such as treatment centers, imaging equipment, and computer aided design and machining systems for dental practitioners and laboratories. Further, the company offers healthcare consumable products, such as urology catheters, medical drills, and other non-medical products. It markets and sells dental products through distributors, dealers, and importers to dentists, dental hygienists, dental assistants, dental laboratories, and dental schools; and urology products directly to patients, as well as through distributors to urologists, urology nurses, and general practitioners. The company was formerly known as DENTSPLY International Inc. and changed its name to DENTSPLY SIRONA Inc. in February 2016. DENTSPLY SIRONA Inc. was founded in 1899 and is headquartered in York, Pennsylvania. Company description from FinViz.com.

XRAY was one of the three worst performing healthcare stocks in 2018. Things are looking up now that they are well into their restructuring program. The company reported earnings of 58 cents that beat estimates for 54 cents. Revenues of $1.06 billion beat estimates for $1.03 billion. Both metrics were down from the year ago quarter.

However, the company projected for earnings to rise 15.5% in 2019 with revenue of $3.95-$4.05 billion, which beat estimates for $3.94 billion. They guided for 2019 earnings of $2.25-$2.40 with a midpoint of $2.32 that easily beat estimates for $2.15.

Shares spiked sharply after the report and have traded sideways for the last month. There is an uptick in progress and Today's close was a 12-month high.

Earnings May 31st.

If XRAY can move over current resistance they have room to run.

Buy July $55 call, currently $1.55, stop loss $48.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Still Waiting

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market continues to wait for progress in the China trade talks. Investors are also waiting for Q1 earnings to begin and the Friday Nonfarm Payrolls. The market is slowly melting up towards new highs but at a very leisurely pace. Nobody is getting too excited because there is always the potential for disaster. The group from China are planning on staying a couple extra days to try and complete the talks but there are still sticking points. China's Xi is worried Trump will invite him for a visit then walk out if Xi does not give in on all the points. For that reason they are trying to get all the points agreed in writing in advance. Until an announcement is made, investors will wait patiently.



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

INTC - Intel - Company Profile

Comments:

Intel shares popped after they announced the hiring of Qualcomm's CFO to be CFO at Intel and bring "discipline" to the chipmakers finances. It also helped that Nomura initiated coverage with a buy rating. Shares gained $1.12 to a 9-month high.

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.


LOW - Lowes Companies - Company Profile

Comments:

Shares up on news they are going to experiment with same day delivery in select markets using a FedEx robot. After the bell they priced $3 billion in notes.

Original Trade Description: March 30th

Lowe's Companies, Inc., together with its subsidiaries, operates as a home improvement retailer in the United States, Canada, and Mexico. It offers a line of products for maintenance, repair, remodeling, and decorating. The company provides home improvement products in various categories, such as lumber and building materials, tools and hardware, appliances, fashion fixtures, rough plumbing and electrical, seasonal and outdoor living, lawn and garden, paint, millwork, flooring, and kitchens, as well as outdoor power equipment. It also offers installation services through independent contractors in various product categories; extended protection plans; and in-warranty and out-of-warranty repair services. The company sells its national brand-name merchandise and private branded products to homeowners, renters, and professional customers. As of November 5, 2018, it operated 2,390 home improvement and hardware stores. The company also sells its products through online sites comprising Lowes.com and Lowesforpros.com; and through mobile applications. Lowe's Companies, Inc. was founded in 1946 and is based in Mooresville, North Carolina. Company description from FinViz.com.

Earnings May 29th.

Lowes is in the midst of a restructuring and the new CEO, Marvin Ellison took over in July. Since then he has closed stores all across the country and hired thousands of IT workers to improve online sales. As a result, Lowes is closing the gap with Home Depot.

In the last quarter the company posted earnings of 80 cents that beat estimates by a penny. Overall revenue rose 1% to $15.65 billion. The slower revenue growth was due to the store closures.

The CEO said the hard work has now been done over the last six months and they are fully prepared for a strong spring and summer selling season. In January alone, same store sales rose 5.8%.

Shares closed at a 6-month high on Friday and appear poised to retest the peak of $117 from September. I am using the June option to retain premium ahead of the May earnings. We will exit before the earnings.

Position 4/1/19:
Long June $115 call @ $2.51, see portfolio graphic for stop loss.


MSFT - Microsoft - Company Profile

Comments:

Morgan Stanley said tech spending will continue to rise and Microsoft shares should hit $140. They closed at $119.

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.

Earnings May 1st.

Position 3/25/19:
Long May $120 call @ $2.99, see portfolio graphic for stop loss.


NTNX - Nutanix - Company Profile

Comments:

No specific news.

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