Both Nasdaq indexes and the Russell 2000 closed at record highs on Monday.
That represents 60% of the top five indexes. The Dow posted a very respectable 178 point gain but failed to close above the 200-day and three other levels of converging resistance. The Dow is still the laggard of the group.
The challenge is still the political headlines. Not a day goes by that we don't get another round ot tariff headlines and the threats from our trading partners are growing in intensity. China is threatening to scrap all prior trade agreements if the U.S. tariffs against them are actually enacted. Canada, Mexico and the EU are joining forces to try and pressure the U.S. to back down. We already know that President Trump does not back down. If you threaten him, you should be prepared to bear the brunt of his fury. That means the tariff problems are going to get worse before they get better.
The economic calendar is relatively light this week but starting on Friday there are a string of critical, headline grabbing events. There is a good chance the market is going to fade late in the week simply because of the uncertainty surrounding these events. Traders are not politicians and they are more likely to take positions off before critical events rather than bet on a market positive result.
There are actually quite a few earnings this week with Broadcom the most watched on Thursday.
The S&P moved over congestive resistance at 2,740 but came to a dead stop at the psychologically important 2,750 level. This was the yearend target for many analysts after the January crash. We still have six months in 2018 so the targets are in constant flux but the 2,750 level has a lot of analyst baggage attached to it.
The Dow remains vertically challenged. With four resistance levels between the close at 24,813 and 25,000 that is going to be come hotly contest ground on the chart. Once successfully closed well over 25,000 the going should be easier. The next test is 25,400.
The Nasdaq indexes both closed at new highs but only by a few points. This is not a breakout and could easily turn into a double top. The Nasdaq is starting to reach overbought conditions as it fights the intraday highs.
The Russell posted only a minor gain of 5 points but closed at a new high. The index had stalled the last three days at the same spot and it closed today over that level. The small caps and the tech sector are lifting the market.
I am positive on the market but I am still cautious until the Nasdaq closes over the prior intraday high by a wide margin and the Dow moves over 25,000. The tariff cloud is only going to get worse and it will eventually cause serious problems in the market. The Fed meeting next week could also be a pothole if they ramp up their expectations for rate hikes.
Enter passively, exit aggressively!
Send Jim an email
NEW DIRECTIONAL CALL PLAY
MRCY - Mercury Systems - Company Profile
Mercury Systems, Inc. provides sensor and safety critical mission processing subsystems for various critical defense and intelligence programs in the United States. The company's products and solutions are deployed in approximately 300 programs with 25 defense prime contractors. Its principal programs include Aegis, Patriot, Surface Electronic Warfare Improvement Program, Gorgon Stare, Predator, F-35, Reaper, F-16 SABR, E2D Hawkeye, and Paveway. The company also designs, markets, and licenses software and middleware environments under the MultiCore Plus name to accelerate development and execution of signal and image processing applications on a range of heterogeneous and multi-computing platforms. In addition, it offers hardware products, including components, such as power amplifiers and limiters, switches, oscillators, filters, equalizers, digital and analog converters, chips, monolithic microwave integrated circuits, and memory and storage devices; embedded processing modules and boards, switch fabric boards, high speed input/output boards, digital receiver boards, multi-chip modules, integrated radio frequency and microwave multi-function assemblies, tuners, and transceivers, as well as graphics and video processing, and Ethernet and input-output boards; and integrated subsystems. The company was formerly known as Mercury Computer Systems, Inc. and changed its name to Mercury Systems, Inc. in November 2012. Company description from FinViz.com
In April Mercury reported earnings of 30 cents that missed estimates for 35 cents. Revenue of $116.3 million missed estimates for $123.3 million. Mercury said government budget issues shifted $11 million in revenue into the next quarter.
The company guided for revenue of $146.7-$151.7 million in the current quarter and significantly above Q1 levels. They raised full year guidance to $1.35-$1.38 per share on revenue of $464-$468 million.
Shares were crushed for a $16 drop or -35% on the news. They have been rebounding steadily since early May.
Bookings rose 41% to a record $150 million. They now have a record backlog of $429 million in orders. They are guiding for a 20% rise in revenue in 2018 with 23% EBITDA margins.
Earnings July 24th.
I understand the reasons for the Q1 miss. Government budget deadlines are highly unreliable. Also, they just completed the acquisition of Themis Computer, which added additional onetime costs. With the raised guidance, the drop should eventually be erased. This is a tech stock in the defense sector. How much better growth and security could you get?
Buy October $40 call, currently $2.60, stop loss $34.75.
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
CHGG - Chegg
The long call position was entered on Tuesday.
MU - Micron Technologies
The long call position was stopped at $57.55. RELOAD
Original Play Recommendations (Alpha by Symbol)
AKAM - Akamai Technologies - Company Profile
No specific news. Shares are recovering from the minor decline last week.
Original Trade Description: May 7th
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; Dynamic Site Accelerator that helps in consistent Website performance; Image Manager that automatically optimizes online images; CloudTest to conduct load testing and other analysis of Websites in a pre-production environment; mPulse that provides real-time Website performance data to provide insight about end-user experiences on a Website; and Global Traffic Management, a fault-tolerant solution. It also provides cloud security solutions, including Web Application Protector to safeguard Web assets from Web application and distributed denial of service; Kona Site Defender, a cloud computing security solution; Bot Manager Premier to identify bots; Fast DNS, which translates human-readable domain names into numerical IP addresses; Prolexic Routed to protect Web- and IP-based applications; and Client Reputation for protection against DDoS and Web application attacks. In addition, the company offers enterprise security solutions, including Enterprise Application Access that enables remote access to applications; and Enterprise Threat Protector to enable enterprise security teams to identify, block, and mitigate targeted threats. Further, it provides network operator solutions, including Aura Licensed CDN, Aura Managed CDN, and Intelligent DNS solutions, as well as professional services and solutions; media delivery solutions, such as adaptive delivery, download delivery, infinite media acceleration, media services, and media analytics solutions; and NetStorage, a cloud storage solution. The company sells its solutions through direct sales and service organization; and channel partners. Company description from FinViz.com
Akamai reported earnings of 79 cents that beat estimates for 70 cents. Revenue of $669 million rose 11% and beat estimates for $657 million. The earnings beat came from a concentrated push into cloud security along with a surge in its media delivery business. Revenue in the booming cloud security business surged 36%.
They did not provide guidance but with the cloud business booming shares should continue moving higher.
Earnings July 30th.
Shares have been consolidating for the last two months and now that earnings were positive shares are starting to move higher again. Monday's close was a 6-week high.
Update 5/14: Major gain for the week after the CEO and Founder, Tom Leighton answered an acquisition question positively. An analyst asked him if the company was for sale and he said, "We are a public company and our board, which is very professional and diligent, is always going to do the right thing for shareholders." That suggests if they are not considering any offers today, they will more than likely be receiving some in the near future. Shares exploded higher.
Update 5/21: Shares spiked $1.50 in afterhours when Akamai announced a partnership with MUFG (MUFG) to develop a blockchain payment network that could handle one million transactions per second and be operational in early 2020 or before. Akamai has the scope and the horsepower to make it happen.
Long August $75 call @ $4.30, see portfolio graphic for stop loss.
CHGG - Chegg Ing - Company Profile
No specific news. New high on Friday, minor 10 cent decline today.
Original Trade Description: May 29th
Chegg, Inc. operates direct-to-student learning platform that supports students on their journey from high school to college and into their career with tools designed to help them pass their test, pass their class, and save money on required materials. The company offers Chegg Services, which include digital products and services; and required materials that comprise its print textbooks and eTextbooks. Its digital products and services include Chegg Study, which helps students master challenging concepts on their own; Chegg Writing that enables automatically generate sources in the required formats, when students need to cite their sources in written work; Chegg Tutors that allow students find human help on its learning platform through a network of live tutors; Chegg Math, an adaptive math technology and developer of the math application; Brand Partnership, which offers various ways for student-relevant brands to reach and engage high school and college students; Test Prep that provides students with an online adaptive test preparation services; and internships services. The company rents and sells print textbooks and eTextbooks; and offers supplemental materials and textbook buyback services. The company has a strategic alliance with Ingram Content Group. Company description from FinViz.com
CHGG reported earnings of 10 cents on revenue of $77 million to beat estimates of 9 cents and $74 million for the fifth consecutive earnings beat. Cash on the balance sheet reached a record high of $500 million compared to $66 million in Q2 2017. Jefferies said the cash pile offered Chegg the opportunity to expand its business outside of its own organic growth.
Shares have been rising steadily since the earnings beat in February and closed at a new high on Tuesday in a very bad market.
Earnings August 2nd.
Long Oct $30 call @ $1.95, see portfolio graphic for stop loss.
INTC - Intel - Company Profile
No specific news. Intel is rumored to be releasing a 5Ghz Core i7-8086K 40th anniversary processor in the weeks ahead. That would be their fastest i7 processor. With 6 cores and 12 threads it promises to be super fast in a desktop gaming PC.
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.
Update 4/30: Intel spiked to a new high after reporting earnings of 87 cents that beat estimates for 72 cents. Revenue of $16.07 billion beat estimates for $16.3 billion. Data center revenue rose 24% to $5.2 billion. They guided for full year earnings of $3.85 and revenue of $67.5 billion. Shares spiked 6.4% but faded in the weak market.
Update 5/7: Late after the bell today, Qualcomm said it was shutting down its datacenter chip effort and would either shutter the unit or attempt to sell it. Qualcomm just started selling its first server chip, the Centriq 2400 last year and customer acceptance has been lacking. Intel has a 99% market share in the server chip market and releases new higher end chips constantly and for Qualcomm to try and keep up using the limited ARM chip, it would have been an expensive and time-consuming battle. This should give Intel a boost on Tuesday.
Long June $55 call @ $2.07, see portfolio graphic for stop loss.
MU - Micron Technologies - Company Profile
Morgan Stanley downgraded Micron from buy to hold with a $65 price target and shares fell $5 to stop us out of the position. I am recommending we reload this position using the August $62.50 option.
Buy Aug $62.50 call, currently $3.90, stop loss $53.85.
Original Trade Description: May 14th
Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; lower power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 DRAM and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, and automotive and industrial applications, as well as for computer memory upgrades; and hybrid memory cube semiconductor memory devices. The company also provides NAND products, which are electrically re-writeable, non-volatile semiconductor memory, and storage devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; cloud SSDs; and multi-chip package and managed NAND products. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint non-volatile memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. It markets its products to original equipment manufacturers and retailers through its internal sales force, independent sales representatives, and distributors; and through a Web-based customer direct sales channel, and channel and distribution partners. The company was founded in 1978. Company description from FinViz.com
Micron suffered in the chip decline as investors worried over Apple's declining iPhone sales rumors. As soon as Apple reported the stock began to recover and it has returned to resistance and could be poised for a breakout.
The reported earnings of $2.80 and beat estimates for $2.69 but missed the whisper number of $2.81. Revenue of $7.3 billion also beat estimates. They posted $12 billion for all of 2016 and $20 billion for 2017.
Earnings June 21st.
The company is getting out of memory technologies that have run their course and are poised to become a pure commodity. The new CEO Sanjay Mehrotra built Sandisk before selling it to Western Digital. He is rapidly expanding Micron's production in new product lines.
The company has $8 billion in cash and long-term debt is only $7 billion. The company is trading at a PE of only 5.9. That is the same level as Ford.
I am pretty sure everyone understands that every electronic product built today has memory, and those amounts are growing. The IoT devices are growing by millions every month.
Resistance is $53.50 and a break over that level should trigger some short covering. There is no reason why Micron could not make a new high in the coming months, market permitting.
Update 5/21: Micron raised Q2 guidance at the open from $2.76-$2.90 to $3.12-$3.15 and revenue rose from $7.2-$7.6 billion to $7.7-$7.8 billion. After the bell the company said it was going to buy back $10 billion in stock of roughly 16% of the company at today's closing price. Shares are going higher.
Closed 5/31: Long July $57.50 call @ $2.92, exit $4.55, +1.63 gain.
SMH - Semiconductor ETF - ETF Profile
The sector finally broke over resistance from January.
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
No specific news. The $10 drop killed the June position and we added an October call to capitalize on the longer term outlook.
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.
Update 5/14: Symantec was a major disaster last week. Fortunately, the option was cheap. They posted mediocre guidance and disclosed an internal audit. The stock fell -35%. On Monday the company held an investor call and gave some more details saying it would not likely impact past earnings. There were fears there would be a restatement. The company also firmed up revenue and margin forecasts for 2019 and 2020. Shares rebounded 10% on the news.
I am going to recommend we add a longer dated option because this dip will more than likely be recovered over the next couple months. Since the company said it would not impact past earnings, this is a buying opportunity. We will not hold the position until October but the July strikes are too close to retain any earnings premium.
Long June $28 call @ $1.21, see portfolio graphic for stop loss.
Long Oct $24 call @ $1.62, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
Volatility has fallen back to $34 and almost a 4-month low.
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
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.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.