Investors found themselves suddenly afraid of the dark on Monday. The president said he would have news on Chinese tariffs after the market closed and investors raced to the sidelines. The conventual wisdom was that if he was waiting until after the market closed it must be very bad news. Rumors had leaked earlier in the day that he would impose the $200 billion in tariffs against China but rumors are just rumors until the announcement becomes official.

The official announcement was for 10% tariffs until the end of 2018 then they will jump to 25% .This will ease the pain on the consumer during the holiday shopping period. He also exempted some 300 products including the Apple Watch, AirPods and speakers, high chairs, bicycle helmets, etc. The president said if China retaliates against the U.S. he will immediately pursue tariffs on an additional $267 billion in imports. That would mean all Chinese products would have a tariff. The first round of tariffs was $50 billion on each side.

When the tariffs were not as bad as expected and some high tech products were exempted, the futures rebounded in the afterhours session. The S&P futures are almost back to unchanged. It is very possible that investors will buy this dip just like they did on every prior tariff headline dip.

The worst performing index by percentage was the Nasdaq at -1.4% but the worst chart was the Russell 2000. The index crashed because of the broad based selling that hit the small cap as well as the large cap tech stocks. The A/D ratio on the Nasdaq was more than 2:1 decliners over advancers. The small caps were almost 3:1 in favor of decliners.

The small cap stocks should be the beneficiaries of increased trade tensions because they are mostly domestic and immune to tariffs. They should rebound now that the uncertainty has been erased.


The Dow was evenly divided between advancers and decliners with Boeing and Apple the two biggest anchors. Surprisingly, Caterpillar, a normally tariff sensitive stock actually gained over $1 on no news.

The Dow has failed for three consecutive days at 26,165 but the declines have not been bad. Even with today's 92-point drop, the index remained above the 26,000 level and prior resistance. This is actually decent relative strength given the headline stream.



All the big cap Nasdaq stocks were negative but it was the FAANG stocks that really fell off the cliff. Amazon lost $62 to lead the Nasdaq lower. Amazon erased 26.1 Nasdaq points and Apple subtracted 25.2 points. Those two stocks accounted for about half of the Nasdaq decline.



The Nasdaq Composite is trading below 8,000 again but has held at the 50-day at 7,875. That uptrending support has held since late June. Since some Apple products were exempted from the tariffs, we could see a strong rebound. However, there are multiple news reports that the inexpensive iPhone XR is the hot product and the new X models are not in demand. That means Apple earnings could be pressured and the average selling price decline sharply.

As Apple goes, so goes the Nasdaq.


The S&P fell a respectable 16 points but most of that was Amazon and Apple along with other big cap techs and Boeing. Take out the top ten tariff sensitive stocks and the index might have been flat. Support is 2,867 and it closed more than 20 points higher. Any rebound at the open could trigger some rapid short covering.


The calendar is heavy on housing reports this week but the most important regional manufacturing report for the month is the Philly Fed on Thursday. Next week is the Fed meeting and analysts will begin fretting over rate hikes as soon as the tariff headline fades on Tuesday.


The big earnings for the week were Oracle and FedEx after the close on Monday. Both disappointed and both traded down sharply in afterhours. Micron is the next major tech to report on Thursday.


I would buy this dip as long as it does not break support on the S&P. I believe investors have decided the Chinese trade war will eventually have a successful ending. The Canadian talks are not even discussed in the press at this point. Everyone knows they will eventually concede and it is just a matter of time. The new headline is Kavanaugh and the chance for his nomination to implode. That is not a market mover but it will consumer a lot of the oxygen in the room and overpower market concerns. Sometimes a good distraction at the right time can make all the difference in the world.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

QQQ - Nasdaq 100 ETF - ETF Profile

Invesco QQQ 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 imploded on Monday with a -114 point decline. The big cap tech stocks were flushed with the emphasis on the FAANG stocks. Since none of those stocks would be impacted by the $200 billion in tariffs, it was an unusual move. However, we did not know until after the market closed that the president had made exceptions for Apple products and some other important tech equipment like Cisco products.

Since we did not know how much the tax would be or what products would be covered, the markets sold off hard into the close. The S&P futures were down over 12 points in the afterhours session but they have recovered to less than -2. The Nasdaq futures were down hard and have rebounded 33 points to currently down -10.

I believe investors will buy this dip just like they bought the dozen or so dips in the long list of tariff headlines. Tech stocks are the highest growth stocks and the least impacted by tariffs.

I am recommending we buy some calls on the QQQ. If the market manages to make new highs over the next 10 days or so, we could be off to the races now that the big $200 billion shoe has dropped and it looks like it will be ignored.

Buy Dec $188 call, currently $3.50, no initial stop loss due to potential volatility.





Current Portfolio


Open Positions

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


AKAM - Akamai Technologies
The long position was stopped at $74.85 in the Nasdaq crash.

NTNX - Nutanix
The long position was stopped at $47.50 in the Nasdaq crash.

MNK - Mallinckrodt
The recommendation was untriggered and has been cancelled.


Original Play Recommendations (Alpha by Symbol)


AKAM - Akamai Technologies - Company Profile

Comments:

No specific news. We had a decent position underway last week but the Nasdaq weakness knocked us out.

Original Trade Description: August 13th.

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. Akamai Technologies, Inc. was founded in 1998 and is headquartered in Cambridge, Massachusetts. Company description from FinViz.com.

Akamai reported earnings of 83 cents on revenue of $663 million. Analysts were expecting 80 cents on $661.9 million. The CEO was very positive on the 34% increase in earnings. He was more excited about the surging growth in their security portfolio. Akamai is getting away from simple caching and serving up websites around the world. For instance, if I had a video streaming site in Idaho that was attracting viewers in Singapore, Sydney, London, etc, I could pay Akamai a fee to maintain an exact copy of that website on multiple servers in high use areas around the world. This was originally Akamai's claim to fame.

Today they are moving rapidly into cloud security. Revenue in that division rose 33% in Q2 to more than $600 million annualized. Web division revenue rose 11% to $351 million. Median and Carrier revenue rose 8% to $312 million. Platform revenue, the caching of websites, declined -14% to $44 million and almost immaterial given the total revenue of $663 million. This shows how far Akamai has come from their roots.

The biggest take away from the earnings is the 33% growth in their cloud security division. This is where they are going and the business is booming with it now 25% of revenue. Their new Edge security product was recently named best in class by Forrester, Gardner and IDT.

Shares collapsed post earnings despite a 30% increase in the bottom line and raised guidance for the year. The stock was caught up in the Nasdaq volatility. That appears to have faded after shares found support at $71. With the Nasdaq weak for the last two weeks, it is about time for the sector to turn positive again. I believe Akamai will be a favorite because it has already corrected and has strong earnings and guidance.

Earnings Oct 30th.

Position 8/21/18:
Closed 9/17: Long Nov $77.50 @ $2.68, exit $3.00, +.32 gain.




DLTR - Dollar Tree - Company Profile

Dollar Tree, Inc. operates discount variety retail stores in the United States and Canada. It operates through two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1.00. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables, such as household paper and chemicals, and frozen and refrigerated food; various merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and seasonal goods, which include Valentine's Day, Easter, Halloween, and Christmas merchandise. This segment operates 6,650 stores under the Dollar Tree and Dollar Tree Canada brands, as well as 11 distribution centers in the United States and 2 in Canada, and a store support center in Chesapeake, Virginia. The Family Dollar segment operates general merchandise discount retail stores that offer consumable merchandise, which comprise food, tobacco, health and beauty aids, household chemicals, paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies; and home products, including housewares, home decor, and giftware, as well as domestics, such as comforters, sheets, and towels. It also provides apparel and accessories merchandise comprising clothing, fashion accessories, and shoes; and seasonal and electronics merchandise, which include Valentine's Day, Easter, Halloween, and Christmas merchandise, as well as personal electronics that comprise pre-paid cellular phones and services, stationery and school supplies, and toys. This segment operates 8,185 stores under the Family Dollar brand, 11 distribution centers, and a store support center in Matthews, North Carolina. Dollar Tree, Inc. was founded in 1986 and is headquartered in Chesapeake, Virginia. Company description from FinViz.com.

Dollar Tree posted earnings with a minor hiccup and the stock was crushed. They reported earnings of $1.15 that missed estimates by a penny. Revenue of $5.525 billion narrowly missed estimates for $5.536 billion. Same store sales rose 1.8% to match estimates.

Guidance for the current quarter earnings was $1.11-$1.18 and estimates were $1.16 just barely over the midpoint of $1.15. They guided for revenue of $5.53-$5.64 billion and analysts were expecting $5.58 billon and right at the midpoint. Full year guidance narrowed from $4.80-$5.10 to $4.85-$5.05 and analysts were expecting $5.55. This was the major problem.

However, look at the companies guidance. They had previously $4.80-$5.10 and and they narrowed that same range. It is the analysts that got it wrong. When a company gives guidance and 3-months later reiterates that same guidance, analysts should not be trying to bid up estimates just to play the "mine are bigger than yours" game.

DLTR did what they said they were going to do and they are still forecasting decent earnings for the current quarter. I think they were unjustly the victim of analyst creep. We see this all the time.

There are no November options.

Position 9/11/18:
Long Jan $90 call @ $3.30, see portfolio graphic for stop loss.




NTNX - Nutanix - Company Profile

Comments:

This was not a good day for Nutanix with a $6 drop. The Information reported that Google Cloud is accelerating its efforts to gain market share in the private data-center space. Citing "two people with knowledge" the software giant is reportedly testing "customer designed computers" with storage and networking capabilities "for a handful of large customers to run in their private data centers." This is almost the exact same business model as Nutanix which combines "hyperconverged infrastructure technology" including combining computing, storage, networking and virtualization.

The article goes on to say that Google may not expand their marketing beyond the few enterprise customers in the design phase but if it did, Nutanix would suffer.

How much they would suffer is up for debate. Nutanix is exiting the hardware side of the business and that represented only 12% of its revenue last quarter, down -50%. Nutanix is moving towards the all software as a service model of combining all forms of cloud computing in one easy interface.

Shares fell $6 to stop us out but I would buy it again once it finds a bottom. Google is a long way from testing a private hardware model for several enterprise customers to suddenly challenging Nutanix in the hyper-convergence space.

Original Trade Description: Sept 10th.

Nutanix, Inc. develops and provides an enterprise cloud operating system software. It offers enterprise applications, virtual desktop infrastructure, virtualization and cloud, big data, remote and branch office IT, and data protection and disaster recovery solutions; and hardware platforms and software options; and support and services. The company's products include Acropolis, a hyperconverged infrastructure solution to run any application; Prism, an infrastructure management solution with one-click operations; Nutanix Calm, an application-centric IT automation solution; Xi cloud services; Nutanix Xpress that eliminates the need for clunky SANs, expensive hypervisor licensing, and complex data protection and management software; and tools and technologies. It serves education, energy and utilities, financial services, healthcare, retail, and service provider industries, as well as state and local government, and the United States federal government. Nutanix, Inc. was founded in 2009 and is headquartered in San Jose, California. Company description from FinViz.com.

The company reported a loss of 11 cents for Q2 compared to estimates for a loss of 22 cents. Revenue of $303.7 million rose 20% and beat estimates for $298.6 million. The problem came with the guidance. They expect a loss of 26-28 cents on revenue of $295-$310 million. Analysts were expecting a loss of 23 cents on $309 million. Shares had been near the recent highs and crashed back $13 to $50.

Nutanix is shifting from a hardware sales model at zero margins in order to get their software installed on a subscription basis to a software only model and exiting the hardware business. They can do this because they are over the consumer acceptance stage. They no longer have to "buy" accounts with sweetheart hardware deals. The evolution out of the hardware space is a drag on revenue but revenue at zero margins is not a plus. Getting out of the high revenue low margin business is a plus but it means the revenue numbers will be a challenge for the first year.

Multiple analysts came out in support of Nutanix saying the new long-term subscription offerings should trump the additional capex spending. Raymond James said they anticipate growth acceleration driven by new opportunities in multi-cloud as well as new products. RJ upped their price target from $64 to $74 and the stock is at $50. JMP Securities said the shares are undervalued and the higher capex and sales and marketing expenses were "prudent" due to the large market opportunity.

Stifel remained positive with a $64 target saying "We believe Nutanix will sustain strong double digit software growth in coming years given its expanding product set."

What was not shown in the bare earnings numbers was the 66% YoY growth in software and support billings and 49% YoY growth in software and support revenue. They also generated 78% adjusted gross margin in the shift to a Software-Defined business. Billings rose 37% to $395.1 million. Cash on hand rose 168% to $934.3 million.

They added more than 1,000 customers in the quarter to put their base over 10,000 and they signed their largest deal in history for more than $20 million.

For the current quarter they guided for revenue growth of 40-45% and billings growth of 50-55% with adjusted margins of 78-79%.

Any company would move the sun and moon to have those kinds of revenue and margin projections. This is why we need to buy Nutanix on the selloff.

Position 9/11/18:
Closed 9/17: Long Jan 2019 $55 Call @ $5.70, exit $3.40, -2.30 loss.




SKYY - Cloud Computing ETF - ETF Profile

Comments:

No specific news. Shares dropped with the Nasdaq.

Original Trade Description: July 9th.

The First Trust Cloud Computing ETF is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before the Fund's fees and expenses, of an equity index called the ISE Cloud Computing Index. The index is a modified equal dollar weighted index designed to track the performance of companies actively involved in the cloud computing industry. To be included in the index, a security must be engaged in a business activity supporting or utilizing the cloud computing space, listed on an index-eligible global stock exchange and have a market capitalization of at least $100 million.

All securities are then classified according to the following three business segments: Pure Play Cloud Computing Companies: Companies that are direct service providers for "the cloud" (network hardware/software, storage, cloud computing services) or companies that deliver goods and services that utilize cloud computing technology. Non Pure Play Cloud Computing Companies: Companies that focus outside the cloud computing space but provide goods and services in support of the cloud computing space. Technology Conglomerate Cloud Computing Companies: Large broad-based companies that indirectly utilize or support the use of cloud computing technology.

The ETF was started in 2011 and now has $1.4 billion in assets. The ETF really took off in 2016 and has been rising steadily. There have been some hiccups recently as some major companies disappointed on earnings and when the Nasdaq corrected in February and March. The ETF has caught fire in the recent tech rebound and with the Nasdaq about to break out to a new high it should continue to do well.

With Q2 earnings over the next six weeks, picking a tech stock gives us a limited time for appreciation and there is always the risk of a disappointment in a stock in the same sector. By using the ETF we can benefit from the tech rally without having too much exposure to a single stock. The idea is to profit from appreciation while reducing volatility.

Shares appear poised to break out to a new high.

Position 7/10/18:
Long October $57 call at $1.25, see portfolio graphic for stop loss.


SYMC - Symantec - Company Profile

Comments:

After the bell today, Symantec named three Starboard nominees to the board. Starboard had nominated 5. The company said it would also negotiate with Starboard for one more seat to be filled at the annual meeting. The managing member at Starboard, Peter Feld, was one of the new board members. Symantec said two current directors would not stand for reelection. When the nominations are completed there will be 13 board members and at least four from Starboard. This should build a fire under Symantec shares. The announcement came too late for the stock to trade in the afterhours session.

Original Trade Description: August 27th.

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. Symantec Corporation was founded in 1982 and is headquartered in Mountain View, California. Company description from FinViz.com.

Symantec reported earnings of 34 cents and analysts expected 33 cents. Revenue fell from $1.18 billion to $1.16 billion and barely beat estimates for $1.15 billion. The company guided for Q3 earnings of 31-35 cents and analysts were expecting 37 cents. The guided for revenue of $1.13-$1.16 billion and analysts expected $1.17 billion. The CEO said large multiplatform sales are taking longer to close. Several large deals had been expected to close and it would have lifted them to solid revenue growth. Those deals are still in the pipeline. They signed one deal in Q1 with more than 100,000 users in a single company and there are more to come.

Shares fell -15% on the report. After a minor rebound the shares rolled over again until Aug 16th when Starboard said they had taken a stake and nominated 5 directors. Shares rebounded back to $20 and should continue to creep higher on hopes that Starboard stirs up the board and turns the company around.

Analysts believe there is 30% upside in the stock after the post earnings decline. Having Starboard in the mix could increase that gain. Shares are easing higher after making a 2-year low at $18 in early August. There is limited downside and unlimited upside.

Earnings Nov 1st.

Position 8/28/18:
Long Jan $21 call @ $1.26, see portfolio graphic for stop loss.




VXX - Volatility Index Futures - ETF Description

Comments:

The VIX/VXX rebounded slightly today but considering the market decline the VXX move was minimal.

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!

Position 2/13/18:
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.