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Daily Newsletter, Saturday, 6/1/2019

Table of Contents

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

Market Wrap

Sold in May

by Jim Brown

Click here to email Jim Brown

The normal sell in May trend was active in 2019 but was driven by outside events not normal profit taking.

It has been a bad five weeks for the Dow with a combined decline of -1,722 points. That is a -6.9% decline since the April 23rd close at 26,656. I added the fourth week to the graphic below. The May 3rd week only lost 32 points. This is the Dow's longest consecutive losing streak since 2011.

Weekly Statistics

Friday Statistics

The new tariffs on Mexico were a bolt of lightning from a clear sky as nobody even remotely considered that a possibility. Only two days before the USMCA replacement for NAFTA was fast tracked and all was right with the world at least in North America. The lightning strike disrupted an already weak market and caused a -1.5% drop in the indexes on the last day in May. For the week the markets lost 2.5-3.0%. For the month the Dow lost -6.7%, S&P -6.6%, Nasdaq -7.9% and the Russell lost -7.9%.

An average year has two declines of 5% or more. Normally when May is down hard, June sees a decent rebound. This is not a normal year or a normal market. We are always just one tweet away from a massive short squeeze or a market crash. The Mexican tariff tweet was a prime example.

Some analysts are saying the coast could be clear for a rebound because the worst news is over. I disagree. China is going to lay out their trade claims in a white paper on Sunday and officials will take questions. This is unheard of in China where information is tightly controlled. This suggests there could be some blockbuster points in the release and signs of a government position that is even more resolute in not giving in to US demands. China has likely made the decision to try and wait for the US elections in hopes there is a new president in 2020. The eighteen month wait would be painful but the results of dealing with a democrat president would be preferable than what they are facing now.

The market is not immune to these bolts from the blue and there will always be a knee jerk reaction. Eventually after enough hits, investors will become vaccinated and they will welcome the dips to buy. Unfortunately, we are not there yet.

We are reaching levels where we should see a response from fund managers and technical traders. The 2,750 level is the year end target for multiple analysts and a level that is considered fairly valued for the S&P. A break below that level becomes a buying opportunity and that increases as we approach 2,625, which would be a strong buy zone.

Needless to say, the potential test of 2,750 next week is going to be critical. Given the recent decline and now oversold conditions, there is a good chance for at least a short-term bounce. We hope it works out better than the similar bounce from 2,800.


Friday was a good day for economic reports. The final consumer sentiment revision for May declined slightly from the first reading at 102.4 to a flat 100. That is still a great number. Analysts believe the flare up in the trade war with China was responsible for the minor decline. In early May everyone was expecting a deal to be imminent.

The present conditions component declined from 112.3 to 110.0 and the expectations component rose from 87.4 to 93.5 and a 15-year high. The strong job market and surging wage growth is responsible in part for the strong sentiment.


Personal income for April rose +0.5% and the second largest gain in a year. Analysts were only expecting a 0.3% rise. Wages and salaries rose 0.3% after a 0.4% gain in March. Wages are up 1.8% over just the last six months. Disposable income is up 3.8% over the last 12 months.

Personal spending was flat after a +0.7% rise in March. Spending on durable goods declined -0.4% and nondurable goods spending rose +0.3% with a -0.1% decline in services spending. The recent decline in gasoline prices is a good sign because it means once consumers believe fuel prices are stable at lower levels, they will spend that money on goods of some form. The savings rate rose slightly from 6.1% to 6.2%.

Continued blows to consumer sentiment will also cause a slowdown in consumer spending.

The Fed's preferred measure of inflation, the PCE Deflator, rose +0.3% after a +0.2% rise in March. On a trailing 12-month basis the PCE is showing only 1.5% inflation with the CORE PCE rising 1.6%. Durable goods inflation declined -0.4% and the third consecutive monthly decline.

The tame inflation and weak economic numbers in some areas suggests the next Fed move is going to be a rate cut. The consensus is now for two rate cuts before year end. There is a 96.2% chance of one cut and 79% chance of two cuts according to the Fed funds futures. The bar with the blue checkering is the current rate.


The various geopolitical issues and global economic weakness has pushed yields lower around the world. The US 10-year yield fell to a 21-month low at 2.14% on Friday. The Spanish ten-year yield fell to 0.718% and the London Gilt fell to 0.888%. The German Bund is negative at -0.207%. Around the world there is more than $7 trillion in sovereign debt with negative yields. That is not a sign of a rebounding global economy.


We have a busy economic calendar for next week with multiple payroll reports and two ISM reports. Despite the jobs blowout last month with 275,000 jobs on ADP and 263,000 on the Nonfarm report, the estimates are still hovering in the 175,000-180,000 area. Analysts are not going out on a limb with their forecasts.

The ISM numbers are expected to be flat but still in expansion territory. Construction spending should improve but factory orders are expected to decline due to uncertainty about the trade issues.

The Fed Beige Book comes out two weeks before the FOMC meeting. It is produced by a different Fed region each time and contains the anecdotal evidence of business activity in each of the 12 Fed regions. They could contain some weakness based on a slowdown in home prices and sales and declines in auto manufacturing.


The Mexican tariff news crushed the automakers, auto parts companies, truckers, railroads and even the consumer products companies like Colgate, Procter and Gamble and beer distributors including Constellation Brands. Chipotle Mexican Grill (CMG) lost $18 because the cost of avocados just went up.


Automakers were the hardest hit. The top four manufacturers build more than 625,000 cars a year in Mexico and import them back into the USA. Even worse for them, they have parts and assemblies that cross the border as many as 7 times during the manufacturing process. At 5% each time they move back into the US, that could get very expensive.


Mexico is a top trading partner. We import $93 billion in vehicles, $26 billion in agricultural products, $64 billion in computer products, $63 billion in machinery, $60 billion in auto parts and $16 billion in oil and gas. An extended tariff implementation will be painful for the US consumer. Contrary to White House claims, the tariffs are paid by importers, not the Mexican government. Those importers will pass those costs on to US consumers.

What it does do is incentivize importers to look for alternate sources of supply. If they think the tariffs are going to be lasting, they can move their manufacturing facilities. Pepsi just announced a couple weeks ago they were going to build a $4 billion facility in Mexico. I wonder if they are rethinking that this weekend.

The Mexican Peso was crushed on the news. Mexico lives off the money they receive from manufacturing goods to be sold in America. If this tariff program did ratchet up to 25% as proposed it would eventually cause serious problems for the Mexican economy.


The earnings cycle is nearly over. We only have a few recognizable companies reporting next week. Salesforce.com is on Tuesday and Beyond Meat will report their first earnings as a public company on Thursday.

Ciena, Zoom, Five Below, Gamestop, Ambarella and Box are the supporting cast.

We have seen 491 S&P companies report earnings with an expected final growth rate of 1.5% and 5.6% revenue growth. Of those reported, 75.2% beat on earnings and 57.1% have beaten on revenue. There have been 71 guidance warnings for Q2 and 22 guidance upgrades. Because of the market decline the forward PE has fallen to 16.3 for the S&P. Only 5 S&P companies are reporting earnings this coming week.


Companies reacting from earnings on Friday included Costco (COST) which reported earnings of $2.05 that easily beat estimates for $1.83. Revenue rose 7.4% to $34.7 billion and matched estimates. Same store sales rose 5.5% compared to 4.9% estimates. E-commerce sales rose 22%. This was a good report, but Costco shares were declining on Friday along with the market.

Costco is planning an ambitious path of store openings in China and the recent flare up of tensions could squash those plans. Costco is also at risk for higher prices from the Mexican tariffs, so shares fell $8 on the news but quickly rebounded to recover most of the loss. Analysts believe Costco is preparing to announce a special dividend.


Dell Technologies (DELL) reported earnings of $1.45 that beat estimates for $1.19. Revenue of $21.91 billion missed estimates for $22.6 billion. Results rose because of the Windows 10 refresh continues to power PC sales to businesses. Unfortunately, demand for servers and networking equipment declined. Revenue in the infrastructure solutions group declined -5% and networking revenue fell -9%. A 13% rise in commercial revenue offset a 10% decline in consumer revenue. They ended the quarter with $9.8 billion in cash.

Dell was hammered on Friday because they manufacture computers and computer equipment in Mexico. They actually moved some production from China to Mexico over the last year to escape the China trade war. Shares fell more than 10% on the news.


Dell subsidiary VMWare (VMW) reported earnings of $1.32 that beat estimates for $1.27. Revenue of $2.27 billion rose 13% and beat estimates for $2.24 billion. License revenue rose 12%. Total revenues, including unearned, rose 25%. They guided for the full year for revenue of $10.03 billion and operating margins of 33%. The board authorized a $1.5 billion stock buyback program through January 2021. The existing $1 billion authorization has $243 million remaining. Shares were also hit by the Mexican tariffs.


Uber (UBER) reported its first earning as a public company and they failed to impress. The company reported a loss of $1.01 billion for the quarter of -$2.26 per share. The loss was slightly better than the $1.00-$1.11 billion guidance. Revenue of $3.1 billion matched estimates.

Costs rose 35%. Gross bookings rose 34% to $14.6 billion from Q1-2018. Bookings rose only 3.4% from the prior quarter. Active users rose from 91 million to 93 million quarter to quarter. They did not provide Q2 guidance in the report. Shares rose at the open but quickly sold off with a little short covering at the close.


Dollar Tree (DLTR) overcame a negative market after reporting earnings of $1.14 that matched estimates. Revenue of $5.81 billion narrowly beat estimates for $5.78 billion. Same store sales rose 2.5% at Dollar Tree and 1.9% at Family Dollar. Analysts were expecting 2.1% overall so that matched estimates as well. The company guided for Q2 revenue of $5.66-$5.76 billion and earnings of 64-73 cents. Same store sales are expected in the low single-digits. Analysts were expecting $5.73 billion and 99 cents.

Full year guidance was $23.51-$23.83 billion and earnings of $4.77-$5.07. Analysts were expecting $23.67 billion, earnings of $5.30 and same store sales growth of 2.0%. So here is the problem. They only matched Q1 estimates, missed on Q2 and full year guidance. So why was the stock up $3.28 for the day? They are planning on closing 390 underperforming stores in Q2 and that will impact revenue and earnings, thus the lowered guidance. They are also planning on introducing Dollar Tree Plus, which will have items that cost more than $1 therefore a larger margin. They are also going to add adult beverages to their product offerings. Investors seemed to like the news.


If it is the weekend it must be time for an Apple update. Shares continue to fall on daily downgrades to sales expectations in China and worries about the tariff issue. I had heard that Apple had considered building a manufacturing facility with Foxconn in Mexico. Labor is cheap and importing into the US is by truck not ship or planes. If that was an actual consideration, they may be rethinking that plan.

Despite all the geopolitical issues we are only about three months away from the annual iPhone launch. Other than having three cameras rumored on the iPhone 11, the rest of the launch models are not generating any buzz. Apparently, Apple has run out of new and clever things to add to the iPhone models. There is a cheaper version with an LCD screen that could be a successor to the iPhone XR. Since this generation of phones will not have 5G the excitement is likely to fade quickly. Apple wants investors to focus on services revenue rather than iPhone sales, but phone sales are required to boost services revenue. Shares closed at $175 on Friday, down -17.5% since the May 3rd close. I said last week I would be a buyer in the $170-$175 range but the market must heal first.


The Mexican tariff proposal crushed crude prices for two reasons. We import 680,000 bpd of oil from Mexico. Every 5% increase in the tariff would raise the price to buyers by $2 million a day. More importantly, the potential for a trade war with Mexico in addition to the trade war with China and weak global economy caused traders to worry about future demand. Prices have been weak due to oversupply but a sharp decline in demand could push them significantly lower.

OPEC produced 60,000 bpd less in April because of a 400,000 bpd drop in Iranian exports. Saudi Arabia increased exports by 200,000 bpd to offset the Iranian shortage. There is plenty of oil in inventory and there is no need for any OPEC country to boost production any further.

Russian production is coming back online after the pipelines were sabotaged several weeks ago. More than 20 million barrels of Russian oil was contaminated with a strong corrosive. Those barrels had to be purified and the pipelines cleaned before anyone would buy Russian oil.

US production rebounded to 12.3 million bpd once again to offset the increased demand by refiners.

Shale producers are struggling. With oil prices falling back to the low $50s the pace of activity is going to slow significantly. White Star Petroleum filed for bankruptcy on Tuesday. They are likely to be followed by a dozen more companies. According to Rystad Energy, 8 out of 10 US shale drillers are burning cash. Out of 40 drillers surveyed only 4 had positive cash flow. With oil prices crashing it prevents them from coming back to the equity market for needed funds.

As I have written many times in the past, the shale drillers are on a production treadmill. They must keep drilling at a frantic pace to offset the rapid decline of shale production. Production can decline 50% or more in the first year and another 75% in the second year before leveling out at a trickle compared to their initial flows. In an analysis of shale fields David Hughes found that shale wells are 70-90% depleted by year three and fields without new drilling decline at 20-40% per year after the first two years. ShaleBubble.org That means producers must recover their costs in the first two years and provide enough money to drill new wells to offset the rapid decline in last year's wells. The instant they stop drilling, production begins to decline sharply and cash flow along with it.

The Exxon CEO said last week that the majors are not going to bail out the minors as the shale bubble bursts. "There is not always alignment among buyers and sellers." This means the smaller companies are not being realistic in their pricing and without a real bargain, Exxon is not a buyer.





Markets

Last weekend I predicted a continued decline and there is nothing in the charts that suggests anything different this week. However, the market is oversold and there is likely a short squeeze lurking in the near future. It may be powered by a tweet saying Mexico has agreed to work on the migrant problem and the tariffs have been postponed. There is no telling what headline will appear to trigger that short squeeze.

Secondarily, the 2,750 level on the S&P is considered fair value. That suggests the selling pressure may ease. I am sure there are portfolio managers hoping for a dip to 2,632 as a major buying opportunity but we do not know if they have the guts to wait it out if a short squeeze appears. They may decide that 2,750 was also a bargain.

The challenge is that the Chinese trade dispute has morphed into a cold war only that war is heating up with China's white paper and enemies list being made public this weekend. This will undoubtedly have a major impact on the Sunday evening futures. There is always the possibility they are going to soft peddle the issues in an attempt to bring the US back to the table, but I would not hold my breath.

Investors must deal with the potential for the issues with China and Mexico to flare up even more. It is possible. We can't always expect that situations will fade into an eventual solution. They also need to deal with the impeachment cloud that is hovering over Washington. That means there is not going to be any legislation in the near future and Congress is hopelessly gridlocked. Normally the market does well with gridlock but we have never had such a vocal war between opposing sides.

Declines in May typically lead to rebounds in June followed by a slide into the summer doldrums. Summer rallies do occur, but they are the exception rather than the rule.

The key focus for next week will be the 2722-2737 support and resistance at 2,800. If the S&P continues lower and breaks that support, then 2625-2632 should be the next target. Any rebound is going to be challenged by prior support, now resistance at 2,800.


Unfortunately, the Dow has already closed below the corresponding support level at 25,000. Friday's decline blew through that level and appears to be targeting the 10% correction level at 24,145. The Dow closed at a four-month low and has a significant lack of material support. Only four Dow components posted gains for the month.

The Dow has declined 1,881 points since the cycle high on April 23rd. This is the longest losing streak since 2011.



The two Nasdaq indexes are suffering from the same pressures with closes under the 200-day averages. The big cap tech stocks are sick with the China flu and worries over social media regulation. News that the DOJ was preparing an antitrust probe against Google did not help the market. They just agreed to pay the EU $1.7 billion for breaking antitrust rules in advertising. They had a $2.7 billion fine in 2017 and a $5.1 billion charge against the Android operating system in 2018. Multiple lawmakers are on a crusade to breakup Facebook and Google so the DOJ news was troubling.

On Thursday a judge ordered Facebook to turn over data privacy records and detail how it handled user data. Shareholders have sued claiming board members may have committed wrongdoing in connection to data privacy. Facebook may not fare well if their internal content rules are exposed in a legal battle. Multiple lawmakers have called Facebook to task for been deleting accounts of conservative pundits by the hundreds for "rules violations" ahead of the 2020 elections. They will not say what the rules are or what rule was broken. Strangely liberal pundits are not censored and thousands of wackos continue to post unimpeded by any form of civility. Lawmakers have asked multiple times why only conservatives are deleted and receive only the standard answers that rules were broken. Rant off!

These challenges to Facebook and Google are causing those megacaps to lead the indexes lower. Add in Apple and you have nearly $2 trillion in market cap in just three stocks that are leading the tech sector lower.




The Russell 2000 has declined -7.9% since the May 3rd close. The small caps have been leading the markets lower and they could be on the verge of a serious support break that could see another 5% decline.


On Saturday the Mexican president hinted his country "could" tighten migration controls in order to eliminate the tariff threat on Mexican goods. Obrador said Mexico "could" be ready to step up measures to contain migration in order to reach a deal with the US. This was a repeat of comments on Friday afternoon. He said he expects "good results" from talks planned in Washington next week. With more than 4,000 migrants crossing the border daily it is going to be a challenge.

There will be a fight, but Trump's Art of the Deal strategy is to bluster big changes and threaten big penalties. He has been successful with everyone but China. Mexico is too dependent on the US to put up much resistance. How far the president will carry the fight is unknown, but he is passionate about the border crisis.

The market is likely to react to every headline but being oversold already means there may be less risk to the downside. Markets do not move straight up or straight down without a period to reset every few days. There is nothing in the charts or in the headlines to suggest a rally ahead other than the potential for a short squeeze. Follow the trend until it ends.

Enter passively and exit aggressively!

Jim Brown

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"In life it is important to know when to stop arguing with people, and simply let them be wrong."

Helen Barry


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Index Wrap

Talks Could Take Decades

by Jim Brown

Click here to email Jim Brown
China released its white paper on the trade talks with the US and the outcome is clear. In their eyes there is no rush and they want to work out an agreement that is equal on both sides. Unfortunately, the two sides started out very unequal so moving to the center is going to be difficult. They say they are willing to work it out, but talks could take decades. China always thinks long term and, in their eyes, they stand a better chance of maintaining the current status quo if they wait to negotiate with the next president, whenever that happens to be. Until then they are hardening their negotiations stance, and nothing is likely to be accomplished.

This would probably mean there will be more tariffs on China and more blustery headlines to irritate investors and the market.

Futures do not open for another four hours so we have no clue how the market will react on Monday. There is still plenty of time for a tweet storm before morning.

The markets broke critical support last week. On strictly a technical basis the charts are bearish and pointing to significantly lower support levels. We all know this is not a technically or fundamentally driven market. This market is headline driven.

I am anticipating some positive headlines from the meeting with Mexican officials later in the week. The risks are too high for Mexico and the fix is too easy to put in place. If they don't let migrants in their southern border, then it will be easier to police the northern border. I understand that is easier said than done but I would expect Mexico to at least attempt to pacify President Trump with some new measures. This would postpone the new tariffs on Mexico while the country implements its new programs. This means we could see a dialing down of the Mexican tariff rhetoric later this week.

That leaves China and I don't see any potential progress from that area. We will likely see an increase in bluster from both sides. Fortunately, the market has had a month to digest the collapse of the negotiations so the negative headlines should have less impact.

Market breadth has turned decidedly negative and running 2:1 decliners over advancers all week. Friday was more than 3:1 on the S&P. Unfortunately, that is not washout numbers of 4:1 to 7:1. This is just a normal sell cycle and we have not reached capitulation levels yet. That does not mean we cannot rally. We are oversold and a positive headline could easily cause a monster short squeeze.

The A/D line on the S&P is in full retreat at a two-month low. If we had gone bearish when the MACD went bearish back at the beginning of May we would be big winners today.


Next stop at 2,722 after a dramatic break below 2,800 and the 200-day at 2,775.


The Nasdaq A/D line is even more pronounced at a 4-month low. Tech stocks were 3:1 decliners over advancers on Friday and volume was heavy. The combination of multiple factors were tanking the sector. China was hitting the chip sector. Mexico was hitting the tech equipment sector with $75 billion in computer equipment imported from Mexico annually. The privacy/antitrust probes surrounding Facebook and Google soured sentiment. When Apple's stock declines on downgrades and expectations, all the feeder companies that supply components also decline. It was a bad week for tech stocks.


The small cap A/D line was 5:1 decliners over advancers as the Russell crashed back to 4-month lows and very close to an even larger breakdown. The A/D line is accelerating lower and showing no signs of buyer interest.


The small caps are dragging the market lower as evidenced by the correlation between the Dow and the Russell. No buyers in sight.


The VIX is also not showing any signs of declining. The VIX closed at the high for the week but down only slightly from the intraday high. The recent pattern of early morning spikes and afternoon declines is fading. This suggests the dip buyers are thinning out leaving us with a steady stream of sellers. Friday's indexes opened lower, posted only a minor rebound before 11:AM and then sold off the rest of the day to close at the lows.


The Nasdaq fell sharply below the 200-day on Friday and there is no support until 7,332 and that is only minor. The next major support is around 7,000. This chart is in free fall and a break below 7,332 targets 7,000.


Apple and Google are dragging the big cap tech lower and there are no signs of a pending rebound. Facebook and Netflix are slowly eroding and could join the plunge at any time.


Apple's dive and the China trade tariffs are dragging the chips lower and the Nasdaq is in lock step.


The Dow is in free fall territory after blowing through the last minor support at 25,200 and round number support at 25,000. The next likely target is 24,000.


On a purely technical basis, the market should move lower. If we were to have another couple down days like Friday, we could see a flush or a capitulation event. That could take the Dow to 24,000 and could set up a decent rebound, headlines permitting. I would not recommend buying this dip until we see other less cautious buyers appear in volume. All the headlines are currently negative and that has produced oversold conditions that can always become more oversold. That means the eventual short squeeze could be violent. Be prepared for a reversal day but be hesitant to enter unless volume is strong.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Playing Defense

by Jim Brown

Click here to email Jim Brown

Editors Note:

In a bad market you must follow the winners going against the trend. In this case we are playing defensive with an actual defense stock.



NEW DIRECTIONAL CALL PLAYS

AJRD - Aerojet Rocketdyne - Company Profile

Aerojet Rocketdyne Holdings, Inc. designs, develops, manufactures, and sells aerospace and defense products and systems in the United States. The company operates through two segments, Aerospace and Defense, and Real Estate. The Aerospace and Defense segment offers aerospace and defense products and systems for the United States government, including the Department of Defense, the National Aeronautics and Space Administration, and aerospace and defense prime contractors. This segment provides propulsion systems, such as liquid, solid, air-breathing, and electric propulsion systems for space, defense, civil, and commercial applications; and armament systems. The Real Estate segment engages in the re-zoning, entitlement, sale, and leasing of the company's excess real estate assets. It owns 11,451 acres of land adjacent to the United States Highway 50 between Rancho Cordova and Folsom, California east of Sacramento. The company was formerly known as GenCorp Inc. and changed its name to Aerojet Rocketdyne Holdings, Inc. in April 2015. Aerojet Rocketdyne Holdings, Inc. was founded in 1915 and is headquartered in El Segundo, California. Company description from FinViz.com.

Earnings July 30th.

Aerojet reported earnings of 44 cents that beat estimates for 27 cents. Revenue of $491.7 million also beat estimates for $478.2 million. Revenue was flat year over year because of the phase out of the AJ60 solid rocket motor. However, the uptick in Patriot missile components offset that end of life product. Order backlogs were $3.8 billion.

I am sure everyone has noticed the increase in launches by dozens of companies and everyone needs rocket motors. SpaceX, Blue Origin, NASA and other countries all around the world are adding to the 4,091 satellites in orbit. Every satellite requires a rocket. In addition Aerojet has numerous contracts with the government to supply defense contracts. With the defense sector seeing increased orders from around the globe, the outlook for Aerojet is strong.

Shares rose over prior resistance at $38 on the strength of their earnings. New high resistance is $40 and only $1.50 away.

Buy August $40 Call, currently $2.10, stop loss $36.85.


NEW DIRECTIONAL PUT PLAYS

I do expect further declines but I also expect an oversold rebound first unless we implode on the China white paper on Sunday. I am not recommending any puts this week for that reason.



In Play Updates and Reviews

8 Year Streak

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow posted its sixth consecutive week of losses. This is the longest streak since 2011 and there appears to be no end in sight. The major indexes closed near the lows for the day. The geopolitical headlines are growing increasingly bearish and the market is following their lead.



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


SWKS - Skyworks Solutions
The long position was entered at the open on Tuesday.

TDOC - Teledoc
The long position was stopped at $57.25.

SBUX - Starbucks
The short position was entered at the open on Tuesday.

USO - US Oil Fund
The long position was closed at the open on Tuesday.


BULLISH Play Updates

CNC - Centene Corp - Company Profile

Comments:

Shares moving higher on growing opposition to the $17.3 billion acquisition of WellCare. CNC closed at a two-month high in a bad market.

Original Trade Description: April 19th

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. The company's Managed Care segment offers health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term services and support, foster care, and medicare-medicaid plans, which covers dually eligible individuals, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray, home-based primary care, transportation assistance, vision care, dental care, telehealth, immunization, specialty pharmacy, therapy, social work, nurse advisory, and care coordination services, as well as prescriptions, limited over-the-counter drugs, medical equipment, and behavioral health and abuse services. This segment also offers various individual, small group, and large group commercial healthcare products to employers and directly to members in the Managed Care segment. Its Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; and vision and dental, and management services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, correctional facilities, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Centene Corporation was founded in 1984 and is headquartered in St. Louis, Missouri. Company description from FinViz.com.

Centene has had a rocky six months and shares were recovering in early April until the sector was caught in the Medicare for All downdraft. Since then they reported strong earnings and guidance and are moving up again.

The company reported earnings for $1.39 that beat estimates for $1.35. Revenue rose 40% to $18.44 billion and easily beat estimates for $17.46 billion. Medicare revenue rose 19% to $1.38 billion and commercial policy revenue rose 19% to $3.65 billion.

They raised full year guidance from $4.11-$4.31 to $4.24-$4.44. Revenue guidance rose from $70.3-$71.1 billion to $72.8-$73.6 billion.

Given the decline from the mid $70s in November, our risk should be minimal on an earnings beat and guidance raise. They should outperform the sector.

Earnings July 23rd.

Since Centene has nothing to do with imports or exports the China trade issues should not be a factor.

Shares are facing resistance at $57-$58 but should be clear sailing after that.

Position 5/20:
Long July $60 call @ $2.15, see portfolio graphic for stop loss.


SWKS - Skyworks - Company Profile

Comments:

Shares held all week in a bad market but finally gave up ground on Friday. Shares closed at a 5-month low after an analyst downgraded Apple and the prospects for a sharp decline in phone sales.

Original Trade Description: May 25th

Skyworks Solutions, Inc., together with its subsidiaries, designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, antenna tuners, attenuators, circulators/isolators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase locked loops, phase shifters, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, voltage controlled oscillators/synthesizers, and voltage regulators. The company provides its products for use in the aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable markets. It sells its products through direct sales force, electronic component distributors, and independent sales representatives. Skyworks Solutions, Inc. has a collaboration agreement with MediaTek Incorporated to deliver standards-based 5G solution. The company was founded in 1962 and is headquartered in Woburn, Massachusetts. Company description from FinViz.com.

Skyworks shares have been crushed in the tariff war and the resulting chip-wreck. Many of the companies that buy from Skyworks have been hit by tariffs that depress their sales. However, this could be n ideal buying opportunity.

Other than Qualcomm, Skyworks probably has the most to gain from the 5G revolution. They said the amount of Skyworks chips in 5G phones will be 40% more than in a 4G phone. Skyworks recently provided a graphic showing all the components they will be supplying for most 5G phones. Their revenue per phone will increase from $18 to $25 per phone.

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5G is also going to revolutionize the Internet of Things (IoT) devices because the greater speed will allow them to perform more functions an be in more places. Skyworks will be selling those chipsets as well. Literally billions of 5G IoT devices will be sold over the next several years.

They do have risk. Huawei is on the verge of being blacklisted by the USA and the EU. They will have a hard time selling phones outside of China. Huawei is currently a large customer of Skyworks. However, just because Huawei will not be able to sell phones in the US or EU it does not mean people in those areas will not be buying phones. They will simply be buying different phones from other manufacturers and they will still contain Skyworks chips.

Skyworks rallied 36% off the December lows to close at $93.56 in April. They gave back 29% in the chip-wreck since May 1st to trade at support at $68. This is a monster drop to support and should be a buying opportunity. While we cannot foresee the future headlines, the drop back to support should prevent them from a continued decline unless the headlines are severe.

Earnings August 1st.

Position 5/28:
Long July $75 call @ $2.00, see portfolio graphic for stop loss.


TDOC - Teledoc Health - Company Profile

Comments:

No specific news. Shares dropped just enough in the weak market on Friday to stop us out.

Original Trade Description: May 4th

Teladoc Health, Inc. provides telehealth services. It offers a portfolio of services and solutions covering 450 medical subspecialties, such as flu and upper respiratory infections, cancer, and congestive heart failure. The company provides its services through mobile devices, the Internet, video, and phone. It serves employers, health plans, health systems, and other entities in approximately 100 countries worldwide. Teladoc Health, Inc. has a collaboration with Cincinnati Children's Hospital Medical Center to develop a consumer pediatric telehealth platform. The company was formerly known as Teladoc, Inc. and changed its name to Teladoc Health, Inc. in August 2018. Teladoc Health, Inc. was founded in 2002 and is headquartered in Purchase, New York. Company description from FinViz.com.

Teladoc is a subscription medical service where you can access a live doctor almost at will for $49 a month. Business is booming.

Q1 revenue rose 43% from $89.6 million to $128.6 million. They still posted an earnings loss because they are in customer acquisition mode. Long-term the subscription model will be a money maker. US paid memberships rose 28% to 26.7 million.

Subscription revenue in the US grew 33% to $81 million. International revenue more than doubled to $30 million. Gross margins were 65.3%. The cash on hand at the end of the quarter was $480 million.

Some insurance companies cover the Teledoc fees. An individual pays $49 a month for a suite of services that includes unlimited doctor consultations. US visit-fee-only access, which are users not covered by insurance, rose 7% to 10.2 million. Total global visits rose 75% to 1.06 million.

When you consider all the hassle of making an appointment with your regular doctor, driving to the appointment and back and waiting an hour in the office to see the doctor for 5 minutes, this seems like a bargain. A patient can pick up their phone and be talking to a doctor in minutes. If they have a video camera on their phone or computer, they can talk face to face, which is handy if you have some external affliction.

What does a normal doctor visit consist of other than blood pressure, pulse, sometimes temperature and a lot of waiting for the doctor to walk in for 5 minutes and write a prescription and leave.

The company affirmed full year guidance of $535-$545 million, a 29% boost in revenue. Adjusted EBITDA of $25-$35 million.

Position 5/6:
Closed 5/31: Long July $65 Call @ $3.30, exit $1.38, -1.92 loss.
Closed 5/31: Short July $75 Call @ $0.68, exit .35, +.33 gain.
Net loss $1.59.


USO - US Oil Fund - ETF Profile

Comments:

We closed this position at the open on Tuesday. That was fortunate given the $6 drop in crude prices.

Original Trade Description: May 4th

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares' NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

The USO rallied to nearly $14 in mid-April as WTI prices moved to $65. Oil prices tend to peak around Memorial Day and hold that level or slightly higher into the July 4th weekend.

We found out this weekend that one million bpd of Russian oil will be offline for the next couple weeks and that will squeeze global supply. We are also only two weeks past the elimination of waivers on Iranian oil and that removed another million barrels from the market. Turkey and China are the only two countries to defy the sanctions and continue purchases.

The stage is set for a potential oil rally back over $65. That would put the USO back near $14 or higher depending on what kind of ramp we get into Memorial Day and the beginning of the driving season.

I am recommending we buy an inexpensive July call option and target a 100% return over the next couple weeks.

Position 5/6:
Closed 5/28: Long July $13.50 call @ 39 cents, exit .10, -.29 loss.


BEARISH Play Updates

SBUX - Starbucks - Company Profile

Comments:

No specific news. Dip to two-month low on Wednesday but recovered to hold over light support at $75.

Original Trade Description: May 26th

Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates in four segments: Americas; China/Asia Pacific; Europe, Middle East, and Africa; and Channel Development. Its stores offer coffee and tea beverages, roasted whole bean and ground coffees, single-serve and ready-to-drink beverages, iced tea, and food and snacks; and various food products, such as pastries, breakfast sandwiches, and lunch items. The company also licenses its trademarks through licensed stores, and grocery and foodservice accounts. It offers its products under the Starbucks, Teavana, Tazo, Seattle's Best Coffee, Evolution Fresh, La Boulange, Ethos, Frappuccino, Starbucks Reserve, Princi, Starbucks Doubleshot, Starbucks Refreshers, and Starbucks VIA brand names. As of April 25, 2019, the company operated approximately 30,000 stores. Starbucks Corporation was founded in 1971 and is based in Seattle, Washington. Company description from FinViz.com.

Starbucks has been the king of coffee for decades. However, lately their market share has been under attack by McDonalds McCafe, Dunkin Donuts and Panera in the US. They were still king in China. Over the last decade they have opened 3,000 stores in China and continue to open one per day. Unfortunately, they have a new challenger in China that has opened nearly 3,000 stores in just the last year.

Starbucks expects to have 5,000 stores in China by 2025. Lukin Coffee plans to have 5,000 stores by the end of 2019. Where Starbucks is opening one store per day, Lukin is opening 7 stores per day.

The Starbucks theory has always been Chinese people will drink coffee once they are exposed to it. China is a tea culture. Starbucks stores appear, they get people to try coffee and some become converts and customers.

Luckin's plan is to offer a broad range of teas and coffee. That way the consumer does not have to change their taste patterns and can continue to be tea drinkers. Those that have been exposed to coffee at Starbucks can now get their coffee elsewhere.

The challenge for Starbucks is that Luckin is very price conscious. They do not accept cash. All purchases are made and paid through their app. Just signing up will get you a reward of 14 coupons on average. Some allow you to purchase a latte for as little as 69 cents where Starbucks charges $4. Once you have downloaded their app you receive a continuous stream of promotions based on what you have ordered in the past.

Starbucks is the lumbering giant in the China coffee market and Luckin is the super smart entrepreneurial kid that is running circles around the giant.

Coupled with the market share challenges in the US, Starbucks has a hard road ahead. It is very possible they will succeed but over the next several months investors are likely to be wary since China has been the growth sector for Starbucks. If their earnings begin to show weakness and loss of market share, the 2019 rally could quickly evaporate.

Earnings July 25th.

Position 5/28:
Long July $75 put @ $1.73, see portfolio graphic for stop loss.


TSLA - Tesla Inc - Company Profile

Comments:

The bad news continues to flow, and analysts are slashing prices almost daily. The Fresno Model 3 plant is now running only one shift instead of three as demand for the Model 3 continues to decline.

Despite our horrible fill, we are deep in the money on both puts. At some point we are going to have to close both sides. We have a $15 spread and our gain today is only $8.06. We need for more of the short premium to fade as it becomes deeper into the money. I would recommend placing an order to close for a $10 gain. If we get it, we can launch a new position. $180 is support. If we reach that level, I would simply close the position.

Original Trade Description: May 11th

Tesla, Inc. designs, develops, manufactures, and sells electric vehicles, and energy generation and storage systems in the United States, China, Netherlands, Norway, and internationally. The company operates in two segments, Automotive, and Energy Generation and Storage. The Automotive segment offers sedans and sport utility vehicles. It also provides electric vehicle powertrain components and systems to other manufacturers; and services for electric vehicles through its company-owned service centers, Service Plus locations, and Tesla mobile technicians. This segment sells its products through a network of company-owned stores and galleries. The Energy Generation and Storage segment offers energy storage products, such as rechargeable lithium-ion battery systems for use in homes, commercial facilities, and utility grids; designs, manufactures, installs, maintains, leases, and sells solar energy systems to residential and commercial customers; and sell renewable energy to residential and commercial customers. The company was formerly known as Tesla Motors, Inc. and changed its name to Tesla, Inc. in February 2017. Tesla, Inc. was founded in 2003 and is headquartered in Palo Alto, California. Company description from FinViz.com.

Tesla has so many headwinds you could not list them all. They are short on cash. They have multiple gigafactory construction projects underway at the same time. They have multiple models from sedans to semi trucks in pre production planning. Each one could consume $1 billion or more in manufacturing start up costs. The gigafactory in China is multiple billions to construct and populate with equipment and inventory. Sales of the Model S and Model 3 are slowing. Competition is heating up with Mercedes, Volkswagen, Jaguar and BMW starting to deliver new models of electric cars and in large quantities. GM is prepping to deliver multiple models of reasonably priced cars.

Even worse, there is suddenly a large number of used Teslas for sale. For instance TrueCar has more than 940 used Teslas for sale. The electric car fad is now over and they are becoming common place. Instead of only one car maker to choose from now there are six or more with all price ranges. I have seen the Jaguar and I would much rather have that than a Tesla. The Tesla brand is over priced and over hyped.

The constant headlines of Elon Musk in trouble with the law, the SEC, the courts, individual suits, etc, is tarnishing the brand. Musk used to be the wonder kid that could do anything. As his recent promises become even more unbelievable and undeliverable, he is being written off as a spoiled rich kid and the Tesla brand is losing its luster. He has a coming trial date on his comments calling a British cave rescue diver a pedophile and a child rapist. The diver sued him for defamation.

Goldman has a price target of $210. RBC $210 and Cowen $200. Bank of America just resumed coverage with an underperform rating (sell). Evercore has an underperform.

Shares are slowly slipping away after breaking strong support at $249.

Unfortunately, options are expensive and this will have to be a spread.

Update 5/18: Elon Musk sent a memo to employees saying the company only had 10 months of cash at the Q1 burn rate and he was going on a "hard core" cost cutting program. Tesla just raised $920 million in a bond sale in March to bring their cash balance up to $2.2 billion. That is a lot of money unless your cash burn rate is $3 billion a year.

Position 5/13:
Long July $225 put @ $17.61, see portfolio graphic for stop loss.
Short July $205 put @ $10.40, see portfolio graphic for stop loss.
Net debit $7.21.


UBER - Uber - Company Profile

Comments:

UBER reported a loss of $1.01 billion (-$2.26) and slightly better than the $1.0-$1.1 guidance. Revenue rose 20% to $3.1 billion. While the report was still ugly it was "less bad" than some expected. Shares rose slightly after the earnings but floundered intraday before posting a fractional gain at the close. Costs rose 35%. The company failed to provide Q2 guidance and that suggests they could lose even more money. I put a tight stop on the position in case a rebound appears.

Original Trade Description: May 18th

Uber Technologies, Inc. develops and supports proprietary technology applications that enable independent providers of ridesharing, and meal preparation and delivery services to transact with riders and eaters worldwide. The company operates in two segments, Core Platform and Other Bets. Its driver partners provide ridesharing services through a range of vehicles, such as cars, auto rickshaws, motorbikes, minibuses, or taxis, as well as based on the number of riders under the UberBLACK, UberX, UberPOOL, Express POOL, and Uber Bus names; and restaurant and delivery partners provide meal preparation and delivery services under the Uber Eats name. The company also offers Uber Central, a tool that enables companies to request, manage, and pay for rides for their employees, customers, or partners; and Uber Health, which allows healthcare professionals to arrange rides for patients going to and from the care destinations. In addition, it provides freight transportation services to shippers in the freight industry under the Uber Freight name; leases vehicles to third-parties that use the vehicles to provide ridesharing or eats services through the platforms; and provides access to rides through personal mobility products, including dockless e-bikes and e-scooters under the JUMP name. The company was formerly known as Ubercab, Inc. and changed its name to Uber Technologies, Inc. in February 2011. Uber Technologies, Inc. was founded in 2009 and is headquartered in San Francisco, California. Company description from FinViz.com.

Now that Uber is public and the initial volatility is over, investors should begin to focus on fundamentals. Losing $1 billion or more a quarter is not a big selling point. While Uber has a lot of other businesses in development the majority of their revenue comes from ride hailing. They have stated they are going to raise prices and pay their drivers less and that is going to be a disaster. Drivers are already protesting about the low wages and no benefits. If their commissions are cut again, many will quit. Response times will rise. If Uber raises prices they will be in a price war with Lyft. The service with the lowest prices will win. Analysts believe ride prices would have to double for Uber to break even. That would be the kiss of death to market share.

Uber has received so much bad press since the IPO that plenty of frustrated investors have exited. Others, not wanting to take a big loss probably waited for the rebound and will be exiting soon.

Update 5/26: Bad fill again. The ask that was showing last weekend was $2.95 and a reasonable premium for this stock. Unfortunately, UBER shares gapped down from $42 to $39 at the open on Monday and that ask shot up to $6.20. For years we have had a rule that a gap of more than $1 negated the recommendation. However, I have not emphasized that recently, so I am continuing the play with the bad fill. I did put a tight stop on it to take us out on any further rise.

Position 5/20:
Long July $45 put @ $5.80, no initial stop loss.




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