The short squeeze in the market on Monday caught a lot of shorts off balance and expecting the worst.
With the S&P futures up +9 on Monday evening it appears there are still more shorts that need to cover. We are in what are normally the two worst months of the year, Aug/Sep, and apparently a lot of traders were short in preparation for the decline. The Nasdaq and Russell had been negative for more than a week so the bears were expecting a feast once we hit this week. This is normally the weak where the decline becomes apparent.
In war they say the best prepared plans tend to evaporate when the first shot is fired. That is the same way in trading. We can study and prepare for weeks ahead of an event and the instant that event does not go as planned, everyone is scrambling for the mouse to exit positions.
I do not want to be that investor that is so loaded up with positions, either short or long, that a reversal of the historical trends causes a race to the exits and a bunch of stops to be hit. There is no urgency in trading. If the market does not move according to plan we should either wait for the market to move or change plans. I favor waiting for the eventual buying opportunity.
The S&P has recovered all its losses from Thursday and closed just over resistance but the chart is still bearish. Today's close is just a lower high until it moves over 2,480 again. We had a one-day decline and a one-day rebound. That is not a trend.
The short squeeze on Monday all happened in the first hour. There was no follow through. If we get another one on Tuesday, we need to check for follow through there as well.
The Dow has a similar chart with Monday's gains almost erasing Thursday's losses. The 22,000 level has become resistance again and we are going to need some strong earnings from HD on Tuesday before the bell to provide some lifting power for the Dow. The banks provided the early lift on Monday but declined well off their highs by the close.
The Dow is still overbought even after the Thursday decline. The high at 23,118 is going to be a challenge to cross and could turn into an August double top. This is expiration week so there will be some added volatility on the Dow stocks because of their big gains.
The Nasdaq rebounded to prior support, which is now resistance. Like the S&P chart, this is just a lower high until it moves over 6,400 again. The index recovered its losses from Thursday and now the excesses have been removed. The next 60 points will be the tough points.
The Russell remains the weakest index despite the 1.46% gain on Monday. That was huge but compared to the 5.4% decline from the high, there is a long way to go. The intraday chart on the Russell was the most positive with a slight uptick in the afternoon but it only gained 1 point more at the close than it gained at the open.
There are three Dow components and 20 S&P-500 stocks reporting this week. HD and WMT are before the open and CSCO after the close. Alibaba will be the most watched when it reports on Thursday.
The FOMC minutes will be the most important event for the week as analysts try to read between the lines and determine what the Fed will do at the September meeting. The retail sales and Philly Fed are the most important reports but they are not likely to move the market.
At the risk of sounding like a broken record, we should be planning for a buying opportunity rather than chasing stocks higher. We do not know if the typical Aug/Sep weakness will actually appear or whether the good earnings, low rates, Fed on hold, gridlock in Washington will keep stocks moving higher. What we do know is that there will be volatility in the last two weeks of September when the budget battle and debt ceiling come back into focus. There is already talk of a government shutdown. There is no reason to add a bunch of plays ahead of those events because portfolio managers are probably not going to wait until the gavel falls before they begin to raise cash. They will raise cash over the next four weeks in order to take advantage of any buying opportunity. Right or wrong, this is my opinion,
Enter passively, exit aggressively.
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NEW DIRECTIONAL CALL PLAY
This is a really tough week to pick new plays. We are in the typically weak months of Aug/Sep, the two worst months of the year, and I really hate to just keep adding longs like it was a typically bullish period. The Nasdaq drop last week was a warning. The short squeeze rebound on Monday had no follow through. However, the futures are up +9 again tonight so Tuesday could also be strong. We know that one or two days does not make a trend in either direction.
We have closed 9 positions in the last two weeks and we were very profitable. Just because we only have 3 positions left is not a reason to ignore the seasonality and add a bunch of plays. We already know September is going to be volatile because of the budget and debt ceiling battles. Both sides are already digging their foxholes in preparation for a heated battle. We just need to be patient and carry a light load until the smoke clears.
NFLX - Netflix - Company Profile
Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. It operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. The company offers TV shows and movies, including original series, documentaries, and feature films. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. As of April 28, 2017, it had approximately 100 million members in 190 countries. Company description from FinViz.com.
Everybody is suddenly bent out of shape because Disney is going to pull some of its content away from Netflix in 2019. Shares are down $12 since the news broke last week. Seriously? Netflix just broke 100 million subscribers and will have 120 million by 2019. They are creating original content as fast we possible and signing new content creators almost every week.
I understand if you are planning on holding the shares five years that you might be concerned but your concerns would be misplaced. Disney is large and they have a lot of content but are they really going to have the capability to stream content in 190 countries in 21 different languages 18 months from now? The short answer is NO.
Netflix is the Amazon of video streaming. They own this space and even Amazon Video is not able to cause them any trouble. Remember Blockbuster? Netflix shut them down.
Barron's had an article this week warning that Netflix would decline 50% by 2020. If they did an article on any other stock, it would have imploded. Netflix declined 40 cents. Apparently, very few people are worried.
Is there any doubt that Netflix will beat on earnings and subscriber numbers for Q3? Not in my mind. I am proposing we buy an October call now that the premiums have been deflated and play the ramp into earnings.
Earnings Oct 16th.
Because premiums have not deflated that much it will still have to be a spread.
Buy Oct $180 call, currently $7.80, initial stop loss $164.85.
Sell short Oct $195 call, currently $3.35, initial stop loss $164.85.
Net debit $4.45.
If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.
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Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.
Current Position Changes
ABBV - AbbVie
The long call position was entered at the open on Tuesday.
AMED - Amedisys
The long call position was entered at the open on Tuesday.
Original Play Recommendations (Alpha by Symbol)
ABBV - AbbVie - Company Profile
No specific news. We were doing great until the Nasdaq crash on Thursday.
Original Trade Description: August 7th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Labratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.
Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11. AbbVie reported Q2 earnings of $1.42 compared to estimates for $1.40. Revenue of $6.94 billion narrowly beat estimates for $6.93 billion. They guided for the full year for $5.44-$5.54. Shares declined because the sales of its Hep-C drug, Viekira Pak were $225 million and well below estimates for $257 million. This is a temporary setback because they have multiple drugs in the pipeline that are expected to generate more than $1 billion in sales annually. Shares declined $3 on the earnings.
Next expected earnings Oct 27th.
Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.
The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.
The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.
The company received a favorable opinion on MAVIRET, a once daily Hep-C drug, from the European Medical Agency and the CHMP. This is an 8-week cure for Hep-C that will compete with Gilead's products.
Analysts claim AbbVie's pipeline is the strongest in the industry. The post earnings drop is a buying opportunity and shares are rebounding.
Options are very cheap.
Long Nov $72.50 call @ $1.90, see portfolio graphic for stop loss.
AKAM - Akamai Technologies - Company Profile
No specific news. We bought the late July dip and shares were rebounding nicely until last week. The Nasdaq drop on Thursday dented the rebound once again. No specific news but Barron's suggested the company would benefit from the Disney ESPN streaming product coming up in a few months.
Original Trade Description: July 31st.
Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution that consists of an integrated suite of Web delivery, acceleration, and optimization technologies; Dynamic Site Accelerator that helps in consistent Website performance; IP Application Accelerator to enable enterprises to deliver Internet Protocol-based applications; Global Traffic Management, a fault-tolerant solution; Image Manager that automatically optimizes online images; and Cloudlets, which provides self-serviceable controls and capabilities. It also provides cloud security solutions, including Kona Site Defender, Bot Manager, Fast Domain Name System, Prolexic Routed, and Client Reputation; enterprise solutions comprising Enterprise Application Access and Akamai Cloud Connect. In addition, the company offers media delivery solutions, such as adaptive delivery solutions, download delivery solutions, media delivery acceleration solutions, media services, media analytics, and NetStorage, a cloud storage solution. Further, it provides network operator solutions, including Aura Licensed CDN suite of solutions, Aura Managed CDN solutions, and Intelligent DNS Solutions; and professional services and solutions. Company description from FinViz.com
Expected earnings Oct 24th.
Akamai beat on earnings and revenue for Q2 but analysts thought the guidance was a little light. Shares were crushed for an $8 loss. The company posted earnings of 62 cents that beat estimates for 60 cents. Revenue rose 6.4% to $608.9 million and beat estimates for $604.5 million.
The company guided for Q3 earnings of 57 to 60 cents and analysts were expecting 61 cents. Revenue guidance was $604-$616 million and expectations were $619.4 million.
Akamai is losing business from the "Big Six" including Apple, Amazon and Netflix as those companies refine their "do it in house" strategies to keep from having to pay so much to Akamai. The income from the big six fell 9% to $178.9 million. Akamai has reported on this metric for the last two years and this was the 7th quarter of decline. Akamai is still the largest content delivery service and total revenues are still rising.
Revenues in their new cyber security business rose 32% and the web performance business rose 15%. Akamai said the rapid advancement of video on demand was a strong factor in future earnings since they are the largest provider of content. Also seeing a rapid ramp was the cloud storage business. Akamai has a security hook in that growth and the redundancy of that storage.
I believe the big drop in the shares was an overreaction and their new businesses are growing so rapidly that revenue will continue to expand. They are forecasting 6% growth in Q3 and 5% to 8% growth for the year with a 64% gross margin. There is nothing wrong with their business.
If the market is going to be weak, these shares in companies that have already been punished will look like value stocks to investors looking for a safe haven after they exit the FAANG stocks.
Long Nov $50 call @ $2.28, see portfolio graphic for stop loss.
AMED - Amedisys - Company Profile
No specific news. Shares are rebounding slowly.
Original Trade Description: August 7th.
Amedisys, Inc., together with its subsidiaries, provides healthcare services in the United States. It operates through three segments: Home Health, Hospice, and Personal Care. The Home Health segment offers a range of services in the homes of individuals for the recovery of patients from surgery, chronic disability, or terminal illness, as well as prevents avoidable hospital readmissions through its skilled nurses, physical and speech therapists, occupational therapists, and aides for its patients to complete their important personal tasks. The Hospice segment offers care that is designed to provide comfort and support for those who are dealing with a terminal illness, including heart disease, pulmonary disease, Alzheimer's, HIV/AIDS, and cancer. The Personal Care segment provides assistance for patients with the activities of daily living. As of March 1, 2017, the company owned and operated 420 care centers in 34 states. Amedisys, Inc. was founded in 1982. Company description from FinViz.com
On July 26th, the Centers for Medicare and Medicaid Services (CMS) said it may reduce reimbursements for home healthcare in 2018 by 0.6$. This was less than the 0.7% reduction in 2017 but shares imploded. On July 27th, the company reported earnings of 63 cents that beat estimates for 50 cents. Revenue of $378.8 million missed estimates for $380.6 million. The combination of the two events knocked $15 off the stock.
Amedisys has 385,000 home health, hospice and personal care patients in 34 states. In Q1, home health was responsible for $271 million of the total $370 million in revenue. Medicare paid 73.4% of the billing for those services. Obviously a -0.4% drop in reimbursements would be painful, it was less than the -0.7% decline in 2017. Amedisys understands this annual reimbursement process and they deal with it. The news was not worth a $15 drop in the stock price.
Next expected earnings October 25th.
I would normally go for the $50 strike price but since we are entering the normally weak Aug/Sep period, I am bumping the recommendation to the $55 strike and the 50% cheaper option. There is not a November option series so the December $55 gives us plenty of time for a decent rebound.
Long Dec $55 call @ $2.12, see portfolio graphic for stop loss.
Prices Quoted in Newsletter
At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
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