The market is struggling as buyers fail to appear ahead of the heart of Q1 earnings.
Volume continues to be light with no conviction on either side. Volume of 5.7 billion shares on Monday matched the low for last week, which was also the low since December 29th. This is normally a bullish period where investors are excited about the potential for strong earnings. The first round of Q1 earnings were strong with an average of 28% earnings growth. The quarter is expected to settle out around 20% with similar earnings for the rest of the year. So where are the buyers?
They have been beaten into submission by round after round of negative headlines that have damaged market sentiment. Tariffs, Syrian attacks, Russian threats, blocked mergers, export blocks, FBI raids, porn stars on every news show, etc. Earnings have been pushed to the back page.
The first three rebounds failed and investors are afraid to stick their toe back in the water .The charts are negative and companies with good earnings are being pounded in the market because of "perfection pricing." Analysts have priced in the absolute best scenario, post tax reform, and anyone that does not measure up to those high expectations are being taken to the woodshed even if the earnings beat estimates.
Add in the downgrades to Taiwan Semiconductor and Apple and the tech sector had three really bad days. Big downgrades to the chip sector always kills the Nasdaq. The chip sector is the leading edge for the majority of technology improvements. For that reason the Nasdaq Composite Index follows the Semiconductor Index ($SOX). In the chart below the $SOX in blue is crashing and the Nasdaq has lagged behind. As you can see in the rest of the chart they are almost always neck and neck. This suggests the Nasdaq will move lower unless there is a sudden reversal in the chip stocks.
The Nasdaq big caps were mostly negative on Monday but the individual losses were not large. A $9 drop in Amazon is a rounding error rather than an actual decline. The Nasdaq closed back below the 100-day and retested support at 7,100. This is a critical level and a material breakdown here could retest the 10% correction level.
The Dow has closed for two consecutive days under 24,500 and that reinforces that as resistance again The 100-day was rock solid resistance last week. The Dow is only about 500 points (2%) away from the 20% correction level and the chart is still bearish until there is a close over 25,250.
There are six Dow components reporting before the open on Tuesday. Those are CAT, MMM, VX, UTX, KO and TRV. We could easily see some heightened volatility in either direction.
The S&P managed to remain fractionally positive but the chart is still bearish until we see a close over 2,750. Downtrend resistance has not even been touched and this was the third rebound attempt that failed. Resistance remains 2,675 and 2,700 and the 100-day average at 2,703.
Amgen and Biogen are the two largest Nasdaq stocks to report on Tuesday. The tech wave begins on Wednesday with Facebook and Paypal followed by Amazon, Intel and Microsoft on Thursday.
The calendar is busy this week not there is a lack of market moving events. All are important, just not market movers unless they are dramatically different than expectations. The GDP is the most important because Q1 is a critical quarter that has averaged only 0.81% growth over the last 8 years. The Atlanta Fed is forecasting a 2% rate and consensus estimates are for 2.5%. Either of those would be outstanding.
I would recommend caution on entering new long positions until a new trend is established and the S&P moves back over 2,750. If that does not happen, we do not want to be long. You can always enter some small positions for a trade in order to scratch your investment itch but monitor them closely because any rebounds could be short lived.
Enter passively, exit aggressively!
Send Jim an email
NEW DIRECTIONAL CALL PLAY
SAIC - Science Applications International - Company Profile
Science Applications International Corporation provides technical, engineering, and enterprise information technology (IT) services primarily in the United States. Its offerings include engineering; technology and equipment platform integration; maintenance of ground and maritime systems; logistics; training and simulation; operation and program support services; and end-to-end services, such as design, development, integration, deployment, management and operations, sustainment, and security of its customers' IT infrastructure. The company serves the U.S. military comprising Army, Air Force, Navy, Marines, and Coast Guard; the U.S. Defense Logistics Agency; the National Aeronautics and Space Administration; the U.S. Department of State; and the U.S. Department of Homeland Security. The company was formerly known as SAIC Gemini, Inc. and changed its name to Science Applications International Corporation in September 2013. Company description from FinViz.com
SAIC is making waves in the military procurement arena. The previously sectored company was limited in the services it offered but that has changed in recent years. For instance they are now one of two surviving bidders to produce a floating tank. An Amphibious Combat Vehicle (ACV) for the Marine Corp. This is remarkable because BAE has supplied all amphibious vehicles for the Marines since 1941. The competition began with 5 companies building 16 prototypes. BAE and SAIC entered the second round and were awarded $100 million and 18 months to build 16 prototypes by June 2017. The winner of the competition gets a $1.2 billion contract to deliver 204 vehicles by 2020.
This is just one example of SAIC successfully branching out in to other areas of military procurement. With $700 billion in military funding passed and the money being spent, there are going to be a lot of contracts doled out over the next several months.
For Q4 they reported earnings of $1.16 compared to estimates for 81 cents. Revenue of $1.13 billion beat estimates for $1.07 billion.
Earnings are expected around June 28th.
Shares spiked to $86 on earnings and then pulled back for a couple weeks in the struggling market. Over the last week they have returned to $86 and appear ready for a breakout.
Buy Aug $90 call, currently $3.80, initial stop loss $79.85.
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
SYMC - Symantec
The long call position was entered on Tuesday.
Original Play Recommendations (Alpha by Symbol)
BOTZ - Robotics & AI ETF - ETF Profile
Chip stocks recovered somewhat last week but have started lower again. This is simply a cheap way to play the chip sector but it is also tied to chip fortunes.
Original Trade Description: February 26th
The Global X Robotics & Artificial Intelligence ETF seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index.
The ETF has 28 stocks including NVDA, ISRG, TRMB, BRKS, IRBT, MZOR, Toshiba and Cyberdyne.
The ETF is somewhat slow moving since it just began trading in September. Volume has increased significantly to average 2.55 million shares.
The key to this ETF and this position is that the stock rarely goes down and the options are cheap. There have only been 3 periods of decline in 2017 and each drop was only about 60 cents. The ETF rose steadily since April and hit a new high in January just before the market correction. If this continues, even allowing for some declines, that would equate to a nice gain by the end of the Q1 earnings cycle and that would be our exit target. This is not going to set the world on fire like a Facebook or Netflix but it should be dependable, stable gains. Obviously, past performance is no guarantee of future results.
Long June $26 call @ $.90, see portfolio graphic for stop loss.
CAT - Caterpillar - Company Profile
Citigroup upgraded CAT from neutral to buy ahead of earnings.
Original Trade Description: February 26th
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Peoria, Illinois. Company description from FinViz.com.
CAT reported their rolling 3-month sales rose 34% globally. There was a 23% rise in North America. Resource segment sales rose 49%, construction sales +30%, rnergy and transportation rose 16%, power generation +8%, industrial sales +13% and oil and gas sales +27%. This company is in the sweet spot of the global economic boom. They report the rolling 3-month average to smooth out the big ticket sales spikes from month to month.
I have had several people email me lately asking why I do not recommend short puts to offset the cost of long calls on stocks with good relative strength. I believe that is a great strategy but got away from recommending it over the last couple years because a lot of readers have smaller accounts and do not have the margin availability. I am going to start recommending it again as an option. Those who want to use it can but it is not a requirement for the position.
Long June $160 call @ $6.25, see portfolio graphic for stop loss.
CVX - Chevron - Company Profile
No specific news. Earnings on Friday.
Original Trade Description: March 5th
Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Chevron Corporation was founded in 1879 and is headquartered in San Ramon, California. Company description from FinViz.com
Chevron probably has more new production in the pipeline than any other U.S. company. Most of that production is gas with two monster projects in Australia. The Gorgon project is a $54 billion LNG facility with the export capability of 15.6 million tons per annum (MTPA)(2.184 Bcf/d) of LNG to Asian markets. Demand for gas to Asia is expected to double by 2025. The fields feeding this LNG plant have more than 40 Tcf of gas with new discoveries every month.
The $29 billion Wheatstone project consists of two LNG trains with a combined capacity of 8.9 MTPA (1.25 Bcf/d) with the option to expand to 25 MTPA (3.5 Bcf/d). The first LNG output was in 2016. More than 80% of the gas supplied to Wheatstone will come from Chevron fields. Another 20% will come from an Apache find in the same region. Chevron has made 21 major discoveries of gas in the region since 2009. The initial discovery was 9 Tcf of gas but more is being added every month.
They have been planning/building these facilities for the last 10 years and all the capex expenses are behind them. Now that production is well underway they are producing cash flow rather than burning cash flow.
In the last ten years Chevron has added 13 billion barrels of oil reserves. Chevron said it replaced 161% of what it produced in 2017. They added four barrels of oil for every barrel produced and 6 cubic feet of gas for every one produced. They touted their 1.7 million acres in the Permian as their future production capability. They drilled 310 Permian wells in 2017 compared to 201 in 2016. They have been in the Permian for so long that they pay very little or even zero royalties for their acreage.
Chevron reported Q4 earnings of 73 cents that missed estimates for $1.27. Revenue of $37.62 billion just barely beat estimates for $37.55 billion. They did report a new discovery in the Gulf of Mexico that should be a gusher 7-9 years from now. That is a very long lead time project.
Chevron currently pays a $1.12 quarterly dividend. With the rising cash flows from the LNG facilities, shale reserves in the Permian and offshore production, their dividend is secure.
The monster drop in January is a buying opportunity. Bank of America upgraded them last week from neutral to buy.
Crude prices are normally weak in March/April but rebound sharply in May as the summer driving season begins. Prices typically peak in August. I am recommending we buy the September call and ride it into that August peak.
Update 3/26/18: The Chevron CEO said deepwater oil is coming back thanks to new technologies that pump the oil for miles underwater to existing topside platforms rather than building new platforms for each new discovery. Chevron is currently bringing online the 170,000 bpd Jack/St Malo with a distributed well system. Transocean's CEO saif all but a handful of the current 29 deepwater projects have breakeven costs in the low $40 a barrel range. This is great because Chevron has a lot of reserves they have not even started to develop.
Update 4/16/18: Chevron approved a $5 1 billion expansion of the $54 billion Gorgon LNG project in Australia. They will drill 11 more wells in the offshore gas fields that feed the Gorgon facility. With priced rising for LNG, Chevron is in the right place at the right time. The original $54 billion has already been spent and thesteadily increasing production is going to be a well deserved windfall in the years ahead.
Long Sept $120 call @ $4.46, see portfolio graphic for stop loss.
IBM - International Business Machines - Company Profile
IBM continued to implode after their earnings disappointment the prior week. This is a May option and it will more than likely expire worthless. I am recommending we drop it but not close it because lightning could still strike.
Original Trade Description: March 13th
International Business Machines Corporation operates as an integrated technology and services company worldwide. Its Cognitive Solutions segment offers Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. This segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and finance, procurement, talent and engagement, and industry-specific business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system. Its Global Financing segment provides lease, installment payment plans, and loan financing services; short-term working capital financing to suppliers, distributors, and resellers; and remanufacturing and remarketing services. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. International Business Machines Corporation was founded in 1911 and is headquartered in Armonk, New York.
Company description from FinViz.com
Earnings April 19th.
This is going to be a simple play. IBM posted its first revenue gain in 14 quarters for Q4. They have a ton of new products and services. Their cloud business is growing and they have a new mainframe server that is in high demand. They are investing in blockchain technologies and they are selling noncore assets and reducing staff in legacy businesses. They are making all the right moves and the stock is showing some good relative strength. Shares were up on Monday when the Dow was down -157 points.
I believe investors are coming back to IBM as a undervalued growth play. The stock has not been able to maintain a positive trend for years but it is rebounding from the market correction .Shares fell from $170 to $145 post earnings when the correction bit and it has rebounded to $160.
Dropped 4/23: Long May $165 call @ $3.70, expiring, -3.70 loss.
INTC - Intel - Company Profile
No specific news. Earnings after the bell on Thursday.
Original Trade Description: March 26th
Intel Corporation designs, manufactures, and sells computer, networking, and communications platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Intel Security Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, 2 in 1 systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, and mobile communication components; enterprise, cloud, and communication infrastructure; and retail, transportation, industrial, video, buildings, and other market segments. The company offers microprocessors that processes system data and controls other devices in the system; chipsets, which send data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; and system-on-chip and multichip packaging products that integrate its central processing units with other system components onto a single chip. It also offers NAND flash memory products primarily used in solid-state drives; security software products that secure computers, mobile devices, and networks; programmable semiconductors and related products for communications, data center, industrial, military, and automotive market segments. In addition, the company develops computer vision and machine learning-based sensing products, mapping and driving policy technology solutions for advanced driver assistance systems, and autonomous driving technologies. It serves original equipment manufacturers, original design manufacturers, cloud and communications service providers, and industrial, communications, and automotive equipment manufacturers. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.
Intel has shows excellent relative strength over the last couple weeks of market volatility. Monday's close was a new high and there is nothing to keep it from moving higher. Long term support is $43 but I seriously doubt we will see that again.
Intel does not need a lot of play description. It is a big cap tech stock in a chip driven world.
Update 4/16: Consumer tests of the new Windows notebooks with the Qualcomm Snapdragon processor have gone badly. The notebooks have the same processor as the Samsung Galaxy S8 phone. That should give you a clue as to notebook performance. It does not run 64 bit applications. Suffice to say Intel is not going to lose a lot of business to Qualcomm.
Long June $55 call @ $2.07, see portfolio graphic for stop loss.
MCD - McDonalds - ETF Profile
No specific news. McDonalds is having a free French fry promotion on April 27th if you pay with Apple Pay. Earnings are April 30th.
Original Trade Description: April 2nd
McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. Company description from FinViz.com.
McDonalds has revitalized their menu and now offers fresh burgers rather than frozen, all day breakfasts, inexpensive drinks, healthier sides and reasonable prices. This is not your father's McDonalds.
Same store sales in the last quarter rose 5.5%, which is unheard of for a fast food chain the size of McDonalds. The CEO said, "We're building a better McDonald's and more customers are noticing. Our relentless commitment to running great restaurants and keeping the customer at the center of everything we do is generating broad-based strength and momentum across our entire business."
Their latest surprising innovation is food delivery. They have partnered with multiple mobile delivery services and business is booming. McDonalds said delivery orders were significantly larger than dine in or take out because people now realize they can order for parties, football games, family dinners, etc. They order multiples of everything and the average check is significantly higher than a dine in order.
They are also implementing mobile ordering and payment with the order. You just show up and pick up your meal and it is ready to go. No lines to pay, no waiting for your food. They will have mobile order/pay in more than 20,000 stores by the end of 2017. The CEO said they were also seeing higher check sizes of 1.2x to 2.0x when mobile ordering is used.
McDonalds said it was selling some of the McCafe beverages in supermarkets in 2018 through a partnership with Coca Cola. The company also announced three new espresso drinks for its own stores. They are Carmel Macchiato, Cappuccino and Americano. They are going to rebrand the McCafe offerings with a new logo and packaging. They are rolling out new coffee makers to nearly all of their 14,000 stores.
A consumer research company said sales at McDonalds were soaring in states that had legalized marijuana. They said 43% of users were eating at McDonalds, 18% Taco Bell, 17.8% Wendy's and 17.6% Burger King in order to satisfy their munchies after smoking pot. A side effect of marijuana is increased appetite.
Jefferies upgraded McDonalds (MCD) saying the partnership with Uber Eats will continue to push sales higher. McDonalds has said their delivery orders have a higher average ticket than traditional on site orders. Jefferies raised the price target from $150 to $200. The company restarted its dollar menu in January and there are $1, $2 and $3 items on the menu. An example would be any size drink or cheeseburger for $1, McDoubles and small McCafe drinks for $2 and Happy Meals and triple cheeseburgers for $3.
In their Q4 earnings, sales for all stores rose 8%, up from 7% in Q3. Same store sales rose from 2.7% to 5.5%. That was down slightly from Q3 at 6.0% but still very respectable. Starbucks only posted 2% same store sales and Wendy's 3.4%. Earnings per share rose 19%. Capex spending in 2018 will be $2.4 billion with the majority going to update 4,000 restaurants and update marketing signage. They plan to open 1,000 new stores in 2018.
Earnings April 29th.
MCD shares crashed with the market in January and then fell again in late February after JP Morgan said the company did not have a "hero" item on the menu to draw people into the stores. Shares rebounded quickly and then ran into the second market correction. Shares were flat over the last two weeks despite the Dow trending lower in a high volatility market.
The burger joint was actually positive in Monday's market crash.
Long May $165 call @ $2.40, see portfolio graphic for stop loss.
NTGR - Netgear - Company Profile
No specific news. The earnings date is April 25th.
Original Trade Description: January 8th
NETGEAR, Inc. designs, develops, and markets innovative networking solutions and smart connected products for consumers, businesses, and service providers. The company operates in three segments: Retail, Commercial, and Service Provider. The Retail segment offers home WiFi networking solutions and smart connected products. The Commercial segment provides business networking, storage, and security solutions. The Service Provider segment offers made-to-order home networking hardware and software solutions, including 4G LTE hotspots sold to service providers for sale to their subscribers. The company also offers commercial business networking products, such as Ethernet switches, wireless controllers and access points, Internet security appliances, and unified storage products; broadband access products, including broadband modems, WiFi gateways, and WiFi hotspots; and smart home/Internet-of-Things connectivity and products comprising WiFi routers and home WiFi system, WiFi range extenders, powerline adapters and bridges, remote video security systems, and WiFi network adapters. It markets and sells its products through traditional retailers, online retailers, wholesale distributors, direct market resellers, value-added resellers, and broadband service providers worldwide. Company description from FinViz.com
Expected earnings May 8th.
Several weeks ago Amazon bought Blink. You may not have heard about Blink but they launched in 2016 with an inexpensive wireless camera and video doorbell. This is the hot new sector for video surveillance. You have probably heard about Ring video doorbells, which is a different company.
The point to this commentary is that Netgear is making the very popular Arlo security camera and sales are booming. Netgear also has 48% of the market for home routers.
With Amazon likely to go big in this category after the acquisition of Blink, that means Netgear is suddenly a target. Global Equities said Facebook, Google or even Apple could acquire Netgear because that gives them a top position in the space. Google would be the prime candidate because they could link the Arlo system to Google Home. It would also allow Google access to trillions of terabytes of data related to the home routers and networking equipment. Monitoring those devices would be like keeping their finger on the pulse of technology. They would know how many people are watching Netflix, how much data was being consumed by what subset of users, etc. This could be very important in their planning for the future.
Apple is not likely to make a play for Netgear because they do not do big acquisitions and Netgear has too many "common" products for Apple to manage. They would be more likely to buy Tesla or Netflix if they were going to make a big splash.
Arlo is an entirely new category for Netgear and a category that is exploding in sales. In their Q4 earnings they said the Arlo cameras posted record sales that exceeded their already optimistic expectations.
Since I wrote that in the initial play description Netgear has announced a spinoff of the Arlo security cameras. They will spin less than 20% and retain the rest. The cameras are so popular the IPO should be a big success and a good way for Netgear to monetize their investment. This will provide them a significant amount of capital to expand on their other product lines.
In reality, nobody has to buy Netgear for them to succeed. Netgear demonstrated new products at the CES show and the crowd loved them. Apparently, so did investors. They announced the Nighthawk Pro Gaming system of network gear that will cut lag time and enhance multiplayer game play for serious gamers. They also demonstrated the Orbi Wi-Fi system, which has also been very successful. With the rapid ramp of the Arlo video cameras for security, they have completed an entire cloud support system that allows storage of video, multiviewer capability for home monitoring, etc.
They reported Q4 earnings of 71 cents on revenue of $397.1 million,, up 7.9%. They guided for the current quarter for revenue of $330-$345 million. Analysts were expecting $348.2 million. However, Netgear has beaten estimates for six consecutive quarters so they may have been guiding lower so they can beat again.
The combination of the light guidance and the market declined knocked $15 off the stock in February. Shares appear to have bottomed at $56 and have risen for the past two days. This is proving a buying opportunity on a previously strong stock.
Long June $65 call @ $3.26, see portfolio graphic for stop loss.
QQQ - Powershares QQQ - ETF Profile
The Nasdaq peaked on Wednesday and has declined for three days. We need some blowout tech earnings to reverse this trend.
Original Trade Description: March 26th
PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ-100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.
The Nasdaq crashed along with the Dow but did not retest the February lows. The Nasdaq actually set a new high two weeks ago before the second drop arrived. The tech stocks led out of th einitial correction and I believe they will lead through the Q1 earnings cycle. Even though the Nasdaq gained 3% on Monday, there could be a lot more to go and the index should make another new high before the Q1 earnings cycle is over.
I am going to offset the call with an optional short put to reduce our cost significantly just in case the expected rally does not appear.
Long June $170 call @ $4.31, see portfolio graphic for stop loss.
Position 4/3: Short June $140 put @ $2.36, see portfolio graphic for stop loss.
Previously Closed 3/28: Short June $150 put @ $1.47, exit $4.49, -3.02 loss.
SMH - Semiconductor ETF - ETF Profile
Taiwan Semiconductor and Apple were both downgraded and the chip sector collapsed again. Support on the SMH at $97 needs to hold.
Original Trade Description: April 2nd
VanEck Vectors Semiconductor ETF (SMH) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor production and equipment. ETF description from VanEck.com.
The chip sector peaked in early March with the SMH at $114.50 and it has since declined to $100. The world runs on chips. The sector has been crushed by several analysts calling for an end to the shortage of memory chips although the actual companies claim demand remains strong. The sector also fell last week on worries about tariffs on chips coming out of China. With President Xi Jinping putting an end to the tariff worries on Tuesday after the bell, the chip stocks should return to rally mode.
The world runs on chips and with IoT devices expected to grow by the tens of billions and AI becoming a potential blockbuster technology, the demand for chips will continue to grow.
The SMH closed at $100 with the 200-day average at $97. If we do not get a rally on Tuesday, support is only $3 away.
Long June $105 call @ $3.70, see portfolio graphic for stop loss.
SYMC - Symantec - Company Profile
Symantec said a new hacker group called Orangeworm has begun attacking xray, MRI and other medical machines in an effort to learn how they work and how to cause greater problems later.
Original Trade Description: April 16th
Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, direct marketing and co-marketing programs, e-commerce and telesales platforms, distributors, Internet-based resellers, system builders, Internet service providers, employee benefits providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Company description from FinViz.com
Symantec has gotten a bad rap over the last year and it was undeserved. They make the best consumer antivirus software available for a reasonable price. You are living in a fantasy land if you don't believe that cyber attacks are going to continue to skyrocket. Hijacking cryptocurrencies rose significantly in 2017. Ransomware continues to grow in popularity and severity. Cryptojacking, where your computer is hacked and forced to run coin mining programs to mine coins for others, is also exploding with an 8,500% rise in 2017. Even Tesla's computers were cryptojacked and used for coin mining.
Symantec announced a new AI process on Monday that will allow subscribers to automate the discovery of targeted attacks. The program is called Targeted Attack Analytics. Targeted attacks are rarely accomplished with brute force but are done skillfully utilizing known holes in the system firewall. They are normally disguised as a brute force attack in order to hide in the mountain of daily alerts received by system managers. TAA identifies these attacks before they can get inside the system and then alerts the network so that millions of other machines are protected in advance.
The Symantec team discovered Stuxnet, Regin, Lazarus, Swift and WannaCry among thousands of other viruses.
Earnings May 10th.
Shares have been fighting resistance at $28 since early January. I believe a breakout is imminent.
Long June $28 call @ $1.21, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
Volatility is starting to decline and should continue lower as long as the political headlines remain calm.
The VXX always moves lower eventually.
Original Trade Description: September 18th.
The VXX is a short-term volatility ETF based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
As evidence of this flaw, they have now done five 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
We know from experience that the VXX always declines.
Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a new rally into the Q1 earnings cycle we could see a sharp decline in the VXX over the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.
The VXX is hard to short. There are 34.2 million shares outstanding and ShortSqueeze.com says 44.5 million are short. The shares are out there and being traded because the volume on Monday was 46.5 million. More than 221 million traded on Feb 5th. This ETF is a favorite vehicle for the computer traders so the volume is always high. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.
Previously: On Feb-5th a reader emailed me saying a friend was short 1,000 shares. When the VXX spiked $21 in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.
We are not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position.
In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better today.
Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!
Short VXX shares @ $49.16, no initial stop loss.
Prices Quoted in Newsletter
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