Every week seems to bring another round of tariff woes.
This week the combination of new tariff threats and month/quarter end portfolio restructuring caused a massive decline in the tech sector as well as the already beaten down industrials. The Dow rebounded 166 points from its intraday low of -494 but still posted a very ugly 328 point loss. The Nasdaq rebounded 55 points from its 216 point intraday drop but still closed with a -2.1% loss. The Russell 2000, which had been the strongest performer gave back 28 points for a -1.6% loss.
FANG stocks were especially hard hit since they had been outperformers in May/June. Portfolio managers had built up significant profits and the elected to trim those positions ahead of the summer doldrums when low volume would make the market even more susceptible to high volatility. The end of the second quarter tends to see some profit taking as managers take a late "sell in May and go away" position with hopes of buying the dips in August/September.
The S&P tested strong support at 2,700 and the 100-day average at 2,702 and rebounded slightly. This would be a perfect spot to stage a goal line stand and fight off the sellers. Easy to see support points typically attract the most buyers. However, we are likely to see more pain before the tariff battle is over. We have not reached the max pain point yet in the negotiations. This suggests the S&P will test those levels again and possibly even the 200-day at 2,664.
The Dow dipped well below the 200-day but rebounded to close only about 28 points below that average. The Dow is not normally reactive to moving averages but the 200-day is significant. That average held on both the April and May dips.
There is also strong support at the 10% correction level of 23,954 and prior support at 23,850. The key here is not specifically Dow support but tariff headlines. If the headlines fade or it appears negotiations are proceeding towards a conclusion, the market will rally.
The Nasdaq has decent support at 7,425 and 7,325 and those should provide a stopping point on any continued decline. Much of the selling is simply portfolio restructuring at the end of the quarter and once that is over, new buyers will appear. I would buy the dip to 7,425 on the Nasdaq.
The Russell had the most accumulated profit and was very overbought. It is no surprise that the index took a serious tumble. However, it remains the strongest index and the most likely to rebound as long as tariffs are a risk.
The economic calendar is not a threat to the market. There are no market moving reports this week. This is just good solid economics that will confirm the economy is doing well and continuing to grow.
There is nothing material on the earnings calendar until Thursday when two Dow components report.
The S&P futures have rebounded from -4.50 to +3.00 in the overnight session but there is still a lot of darkness before the dawn. I would hesitate to recommend buying this dip but i did add a potential index rebound play with the Russell ETF. If we do not get a rebound, it will be a loser. However, the market is typically positive going into the July 4th holiday. If the president can restrain from tweeting tariff threats until after the holidays, the market may calm and investors will begin to return. Until the tariff issue is solved, there will always be risk for a lower low. Be prepared for turbulence.
Enter passively, exit aggressively!
Send Jim an email
NEW DIRECTIONAL CALL PLAY
IWM - Russell 2000 ETF - Company Profile
The S&P futures have recovered from -4.50 earlier in the session to +3. The Dow dipped to the 200-day and then rebounded to close just below that critical average. It could be close enough to attract some risk takers.
The S&P dipped to the strong support of the 100-day at 2,702 and rebounded to close just above the 50-day at 2,716. These averages should be decent support as long as there are no additional tariff surprises. In President Trump's speech tonight, he was careful to push hard on the topic that the tariff war would be resolved peacefully. While we may not end up with no tariffs between countries, he teased that tariffs would be reduced significantly. That appeared to ease the market tensions overnight.
I wanted to play the SPY instead of the IWM because it has fallen farther and could rebound the most. However, as long as there are tariff threats the place to be is the Russell and the drop in the IWM gave us an entry point.
Buy Sept $168 call, currently $3.85, stop loss $159.85.
Optional: sell short Sept $155 put, currently $2.44, stop loss $159.85.
Net debit $1.45.
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
IBM - IBM Inc
The long call position was stopped at $140.65.
MU - Micron Technologies
The long call position was stopped at $53.85.
SYMC - Symantec
The June long call position was stopped at $20.25.
Original Play Recommendations (Alpha by Symbol)
AKAM - Akamai Technologies - Company Profile
No specific news. Shares closed at a new high on Tuesday then declined with the Nasdaq the last three days.
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
Chegg fell on Thursday after Jefferies downgraded the stock from buy to hold. With the stock up 500% in two years and valued at 9x sales. Shares fell again in the Nasdaq crash.
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.
IBM - International Business Machines - Company Profile
No specific news. IBM got caught in the China tariff battle and finally broke long-term support today to stop us out.
Original Trade Description: June 11th.
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
IBM is on the way back. The last several lyears have been hard to watch but they have turned the company around with their strategic imperative restructuring program. About half of IBMs revenue now comes from those strategic imperative applications that did not exist 10 years ago.
IBM just announced the most powerful supercomputer in the world named Summit. This computer can do 200,000 trillion calculations per second. Companies are going to be beating a path to their door for run time on this beast but even better they will be ordering smaller versions for themselves.
The company just announced a major expansion to their cloud with 18 new availability zones around the world. They already have 60 zones and this will add to them. A zone is a geographically located set of data centers and customers near a particular zone will benefit from lower latency times and faster processing. IBM's clour business already generates $17.7 billion in revenue and growing rapidly. IBM is already the leader in enterprise cloud services.
IBM is also a blockchain company. They have multiple blockchain development projects underway for things like mobile payments, faster crypto currency transactions, real estate records, etc.
IBM trades at a PE of 12 with a 4.5% dividend yield. Shares closed at a five-week high on Monday and almost a breakout over short term resistance.
Earnings July 17th.
Update 6/18: IBM announced the acquisition of Oniqua Holdings Pty Ltd, based in Denver. Financial terms were not disclosed. The 56 person company makes software to track maintenance and spare parts inventories in oil and gas operations, mining, utilities, transportation and similar industries. A study by the Aberdeen Group found that half of unscheduled downtimes was due to a lack of spare parts in inventory. IBM sees this acquisition as a way to bolster their IoT movement.
Closed 6/25: Long August $150 call @ $3.13, exit .94, -2.19 loss.
MRCY - Mercury Systems - Company Profile
No specific news. Shares were rebounding again until today.
Original Trade Description: June 4th
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?
Long October $40 call @ $2.60, see portfolio graphic for stop loss.
MU - Micron Technologies - Company Profile
Micron beat on earnings and posted higher guidance but investors sold it any way after one analyst said all the good news was priced into the stock. Add to that a chip sector in full decline and we were stopped for a big loss.
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 20th.
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 or roughly 16% of the company at today's closing price. Shares are going higher.
Closed 6/25: Long Aug $62.50 call @ $4.05, exit 1.28, -2.77 loss.
Prior Position 5/15/18:
Closed 5/31: Long July $57.50 call @ $2.92, exit $4.55, +1.63 gain.
SYMC - Symantec - Company Profile
No specific news. The rebound was fading and the Nasdag negativity since Thursday pulled Symantec shares down to hit our stop loss.
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.
Closed 6/25: Long Oct $24 call @ $1.62, exit .35, -1.27 loss.
Previously closed: Position 4/17/18:
Closed 6/15: Long June $28 call @ $1.21, expired, -1.21 loss.
VXX - Volatility Index Futures - ETF Description
The last several days has seen a 6 point spike in the VXX but we know it always moves lower eventually. This tariff tantrum will eventually become resolved or fall into the category of old news.
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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