January is normally a good month for stocks and the conditions today suggest this could be a strong month. The markets have been up for two consecutive weeks and this one is starting out well. The S&P futures on Monday evening are up +10 after two days of market gains. Normally after a couple days of gains the futures would be lower as traders anticipate some profit taking.

Powering the move is news from China that the Vice Premier showed up unexpectedly at the trade talks suggesting China is serious about doing a deal. There are rumors Trump and high-ranking Chinese officials are going to meet on the sidelines at the World Economic Forum in Davos at the end of January. That would also be strong news for the market. With China's economy struggling, they have realized just how much they need the USA. The government is doling out stimulus again to support the markets and halt the erosion. Getting a trade deal done would eliminate the uncertainty and give investors and business owners confidence to put money to work.

The US markets are rising because of a lack of bad news, huge amount of cash on hand in funds that liquidated positions in the market crash, stock buybacks and just a favorable investing environment. Many stocks are trading at single digit PEs and all stocks are still oversold on a relative basis. If you are going to invest in the market in 2019 this is the time to do it.

The small cap Russell 2000 was the biggest gainer on Monday and the Nasdaq was not far behind. With the tech sector pulling out of its funk and industrial stocks moving higher on hopes from China there is plenty of market support. Even the banks have risen for the last two weeks. Oil is almost back to $50 and Saudi Arabia is planning additional cuts than was originally announced.

There is a lack of negative news. The political headlines are now old news and constantly repeat the same tired topics. The government shutdown is dragging on but has lost its shock value. President Trump will give a speech from the Oval Office on Tuesday night in an effort to force some cooperation.

The S&P punched through round number resistance at 2,500 and then resistance from last February at 2,532. The next hurdle will be 2,580 and 2,630. Several more days of gains will require a pause but for now the buyers have the advantage.

Friday was a 90% up volume day. That is extremely bullish. December 26th was also a 90% day. These only happen once or twice a year and are almost always turning points. On Monday advancers were 3:1 over decliners despite the lackluster Dow gain. The other indexes were stronger.


The Dow had a rocky start on Monday. After trading on both sides of zero multiple times it finally found some traction and traded well over 200 before giving back half of the gains in the afternoon. Fortunately, it was the normally defensive stocks that were negative, suggesting investors are becoming more confident and moving back to growth and industrials.

The index hit resistance at 23,531 and that is exactly where it closed. With the futures up 10 points late Monday we could see another attempt to push through that level making the next target 24,000.



Amazon and Netflix were big winners and helped lift the Nasdaq. One noted investor said Amazon could double of triple over the next 3-4 years and that was a powerful boost to sentiment. Netflix is still riding the Goldman Sachs upgrade to the "conviction buy list" on Friday.

Tesla was surging on news they broke ground on another gigafactory in China as a preliminary step to building the Model 3 and Model Y in China.

Nvidia was posting gains after the 2-hour press conference hosted by the company ahead of CES 2019 this week.

The Nasdaq edged just over the same relative resistance as the Dow at 6,811 on the Nasdaq. The Nasdaq futures are up +24 this evening and that could be enough of a spurt at the open to break free of that resistance level. The real challenge will be at the 7,300 level.



The Russell 2000 was the biggest gainer at 1.78% because small caps are no longer hindered by fear of the Fed. When Powell effectively put the rate hike cycle on hold with his patient and flexible remark, a cloud lifted from the small cap sector.


The only material events on the calendar are the FOMC minutes on Wednesday and the Philly Fed Manufacturing Survey on Thursday. The minutes will be studied to see if Powell was telling the truth in his recent comments or will the minutes tell the real story. The Philly Fed will tell us if the drop in the ISM Manufacturing last week was just a one-month wonder.


There are no material earnings this week with the possible exception of Constellation Brands. The home builders will be interesting but not market moving. Next week more than 250 companies report.


I would be a buyer of the market today. I would prefer to buy weakness and not just run blindly into the market. After two weeks of gains there will be some profit taking this week. We just do not know when. I doubt it will be strong so be prepared to buy on the dips. The trend should be our friend for the rest of January.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

IBM - International Business Machines - Company Profile

International Business Machines Corporation operates as an integrated technology and services company worldwide. Its Cognitive Solutions segment offers Watson, a computing platform that interacts in 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 tailored industry solutions; 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. International Business Machines Corporation has a strategic partnership with Samsung Electronics to manufacture microprocessors. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. The company was founded in 1911 and is headquartered in Armonk, New York. Company description from FinViz.com

IBM is buying Red Hat to significantly increase their cloud offerings. This is a major deal and will completely change the focus and add to market share for IBM. Most analysts are just waking up to the fact this is a game changer.

The IBM CEO will present the keynote speech at CES 2019 on Tuesday. This could be a market moving speech. I propose we enter at the open and then hold until earnings on January 17th and then decide whether to hold over.

Buy Feb $125 call, currently $1.71, stop loss $114.65.



CAT - Caterpillar - Company Profile

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. Company description from FinViz.com.

For Q3, they reported a 47% increase in profits but that was not good enough. In Q1 earnings rose 99% and 120% in Q2. Expectations were high. Earnings per share were $2.86, up from $1.95 but just barely over estimates for $2.85. The company affirmed their full year guidance of $11-$12 saying nothing had changed since the last quarter. That should be good news. Any changes would have been expected to be negative. They said the China market remained healthy and produced a 40% rise in excavators in 2018. They previously guided for a $100-$200 million hit from tariffs and said with the year 75% over it looked like the impact would be at the lower end of the range.

In any normal period, a 47% increase in profits would be outstanding. Given the sharply declining market and the dumping of anything related to China and tariffs, CAT shares were crushed.

In late November CAT said the three-month rolling sales growth for the October quarter rose 18%. That was still good but down from the 21% in September. Total industry sales rose 46% after a 47% rise in September and 35% in August. Energy and transportation retail sales were up 7%, with oil and gas up 20%. The report showed some slight moderation, but it was still a good month despite the tariffs.

With the Chinese trade talks accelerating the odds of a deal are improving. The Chinese Vice Premier showed up unexpectedly at Monday's talks signifying China's interest in actually doing a deal.

Earnings are January 24th. ANY positive news on China will cause this stock to rocket. I am proposing a short term call and then decide ahead of earnings if we want to hold over.

Buy Feb $135 Call, currently $3.40, stop loss $120.35.




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


CRM - Salesforce.com
The long position was stopped at $123.65. RELOAD


Original Play Recommendations (Alpha by Symbol)


CRM - SalesForce.com - Company Profile

Comments:

Salesforce.com crashed in the final December dip and stopped us out about $3 from the bottom. Since that drop the stock has gained $40. They say timing is everything. If we had been naked with no stop loss it would have probably dropped to $100. I still believe in the stock and I am going to reload the position using the Feb $150 calls.

Buy Feb $150 call, currently $3.60, stop loss $133.65.

Original Trade Description: Dec 10th.

SalesForce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com

When the market is weak, go with strength. CRM shares rallied on the strong earnings then pulled back only slightly during the latest Nasdaq crash. The Nasdaq was the strongest index on Monday and hopefully we are nearing an actual bottom. With CRM shares showing relative strength, this may be a safe port in a volatility storm.

SalesForce.com reported earnings of 61 cents that beat estimates for 50 cents and the year ago quarter of 39 cents. Revenue rose 26% to $3.39 billion and beat estimates for $3.37 billion. The company guided for revenue as much as $3.56 billion in Q4 and analysts were expecting $3.53 billion. They said they were on path for $16 billion in revenue in 2020 and $22 billion by 2022.

Billings, metric of future performance, rose 27% to $2.89 billion and beat estimates for $2.68 billion. Revenues rose 25% in the Americas, 26% in APAC and 31% in EMEA using constant currency. Sales cloud revenues rose 11%, service cloud rose 24% and marketing and commerce cloud rose 37%. Platform and "other" cloud revenues rose 51% or 30% if you exclude the acquisition of Mulesoft. The number of deals for more than $1 million rose 46%.

Adjusted gross profit of $2.6 billion came from gross margin of 76.9%. They ended the quarter with $3.45 billion in cash.

This company can seemingly do no wrong. When the tech sector eventually recovers SalesForce will be a leader.

Position 12/11/18:
Closed 12/20: Long Feb $150 call @ $4.40, exit $1.54, -2.86 loss.



BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

The VXX surged to 50 once again but never closed over that resistance level. It will eventually go to single digits. We just have to be patient.

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 history 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

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