The markets are climbing a wall of worry thanks to the gravitational pull of big round number targets.

The S&P is targeting 2,800, Nasdaq 7,500 and the Dow 26,000. If those targets are reached and surpassed the next targets will be the prior historic highs. When we get this close, these targets become almost irresistible with investors like moths to a flame. I just hope the results are better than what happens to the moths.

The wall of worry is primarily based on trade news surrounding China. The prior week the market tanked temporarily on news we were a long way from an agreement and there would be no meeting between Trump and Xi. Last week the market exploded higher on news the talks were progressing and negotiators would return to Washington this week for further talks. Furthermore, Trump and Xi agreed to meet at the end to sign a memorandum of understanding once an agreement was reached. Trump even said he was willing to postpone the March 1st tariff increase if there was measurable progress in the talks.

Using the recent trend, it would suggest there will be another round of negative news this week. The president is fond of the carrot and stick approach. The prior week was a stick week, last week was a carrot week and this coming week could be another dose of the stick involving a new round of threats.

With the markets closing in on strong resistance from two months ago it is going to take another carrot week to lift us over those levels. Futures on Sunday evening were positive but only barely. Futures on Monday evening are slightly negative. There are no indications of direction. The Asian markets are mixed with minor gains and losses.

On Monday President Trump is threatening military involvement in Venezuela if an orderly transition of power cannot be made. While the conditions in Venezuela are horrific, the market will not be happy with a military incursion because Venezuela is supported by China, Russia, Iran and Syria, four of our favorite countries. Russia and China could respond because of their extensive investments in the country. They will not want to lose billions of dollars in debts and facilities. Venezuela owes China more than $20 billion in oil backed loans. Russia was using the country as a military base in South America to project power closer to the USA.

Analysts are puzzled as to why the market keeps rising. The Dow, Nasdaq and Russell have been up for 8 consecutive weeks. Another streak that is not getting as much attention is the 11 consecutive weeks of outflows from equity funds. Bank of America said $83 billion has flowed out of equities over the last 11 weeks. These two facts seem to contradict each other. How can the markets rally for 8 weeks if there have been outflows for 11 weeks?

The market cap of the US equity market is $34 trillion. The $83 billion in outflows is only 0.00237% of the total market cap. This is the proverbial drop in the bucket. This does not mean $83 billion is not material because the vast majority of the US market cap never changes hands. Those stocks sit in investor accounts for years or even decades at a time without being traded. Average daily trading volume is about $350 billion. The $83 billion in outflows over the last 11 weeks equates to about $1.5 billion a day. Compared to the $350 billion average daily volume, it is insignificant. This is another example of people worrying about a headline that is immaterial in the bigger picture. It sounds like a big number, but it isn't once you do the math.

What is important is the resistance at 2,815 on the S&P. This level repelled rallies three times since October and we are getting close again. The S&P has rallied 429 points since the December 26th low at 2,346. There have been three periods of decent retracement along the way, but this rebound is very overbought given the length of the rebound and the weak fundamentals in economics and earnings. Nobody will be more excited if we break through that 2,815 level but I remain skeptical until it happens.

We do know that these high-profile resistance targets act like tractor beams when the index gets close so the odds are good, we will test it. It is the results after the test that are important. Do we push through or fail again? Also, since this level is such a high-profile event the bears are likely to be setting up their shorts once we pass 2,800.


The Dow benefitted from the rotation into industrial stocks and stocks that will benefit from a Chinese trade agreement. Boeing continues to be a leader whenever the China talk turns positive. The index closed over the first line resistance at 25,817 with the next target at 26,191. The giant round number in our future is 27,000. If we get through that resistance from November, the 27,000 level is going to be the instant target.


The Nasdaq Composite closed just barely over the 200-day at 7,465 and a move over 7,500 should set up a sprint to 8,000 and the highs from October. The decline in the FANG stocks held the index back on Friday.


The Russell 2000 closed 3 points over correction territory with the second-best percentage gain at 1.56% of all the major indexes. The small caps reacted much stronger than expected on the positive news from China. They should not be impacted as much from the tariffs other than cost of goods and raw materials. The small caps are mostly domestically focused companies and do very little business in Asia.


We have a light calendar for next week with the FOMC minutes the highlight. The Philly Fed Manufacturing Survey and the Existing Home Sales are the next most important.

Chinese trade negotiators will travel again to Washington this week in hopes of getting closer to a final deal before the March 1st trade deadline. The meeting days have not been published.


The Q4 earnings cycle is 80% over with 394 S&P companies having already reported. Q4 earnings growth is now projected at 16.4% with 6.0% revenue growth. Some 69.5% of companies have beaten estimates and 61.7% beat on revenue. For Q1 there have been 56 guidance warnings and 23 guidance upgrades. The are 51 S&P companies reporting this week. The forward PE has risen to 16.3%. The Q1 earnings forecast has declined to -0.5%. Energy is the biggest drag with a projected decline of -13.6% and healthcare is the strongest sector with a +6.2% forecast.

The earnings calendar is shrinking. Dow component Walmart will report on Tuesday. Agilent, CVS, Dominoes Pizza and Hewlett Packard Enterprise should be the most watched for the rest of the week.


With the government shutdown out of the way and Chinese negotiators coming to Washington to play nice once again, there is little in the headlines to roil the market. The market does best when it is climbing a wall of worry and we seem to be entering a calm period. However, the last two weeks of February are normally the weakest as post earnings depression weighs on the market. With the major indexes nearing their prior highs on weak earnings projections ahead of a weak period on the calendar, what could possibly go wrong? As investing moths, we need to move towards the bright lights of the prior highs but try our best to turn away at the last moment or suffer a painful fate. Keep your stops tight.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

CVX - Chevron Corp - Company Profile

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. The company has a strategic cooperation agreement with China National Offshore Oil Corporation. Chevron Corporation was founded in 1879 and is headquartered in San Ramon, California. Company description from FinViz.com.

Chevron is the most favored integrated energy company. They are aggressively exploring, adding to reserves and they have a $4.76 annual dividend for a 4% yield. Every long-term investor should own this stock.

Chevron reported Q4 earnings of $2.06 that beat estimates for $1.87. A year ago they only earned 73 cents. The difference is their rapid growth in LNG production as well as Permian and offshore US production. Revenues rose from $37.62 billion to $42.35 billion.

We are approaching the prime time for oil prices. Typically, prices rally in the spring to hit highs around Memorial Day and then flat line until late July when they begin to decline into the fall.

This year OPEC is determined to raise prices. Saudi Arabia has already cut production by more than 800,000 bpd and they just said they were going to cut another 500,000 bpd starting March 1st to make up for Russian cuts that did not happen.

Add in the falling production and inability to sell oil from Venezuela, the end of the sanction waivers on Iran on May 1st and outages in Mexico and Libya and prices are going to rise.

Chevron shares peaked at $131 last May and they could easily hit that level again in May 2019 if oil prices cooperate.

Earnings are May 3rd.

Buy June $125 call, currently $2.81, stop loss $115.65.




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


ADP - Automatic Data Processing
The long position was entered at the open on Tuesday.

IWM - Russell 2000 ETF
The long position was entered at the open on Tuesday.


Original Play Recommendations (Alpha by Symbol)


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. Shares at 4-month high.

Original Trade Description: Feb 11th.

Automatic Data Processing, Inc. provides business process outsourcing services worldwide. It operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers various human resources (HR) outsourcing and technology-based human capital management solutions. Its offerings include payroll, benefits administration, talent management, HR management, time and attendance management, insurance, retirement, and compliance services. This segment provides a range of solutions, which businesses of various types and sizes can use to activate talent, as well as recruit, pay, manage, and retain their workforce. It serves approximately 630,000 clients through its cloud-based strategic software as a service offering. The PEO Services segment provides HR outsourcing solutions through a co-employment model. This segment offers HR administration services, including employee recruitment, payroll and tax administration, time and attendance management, benefits administration, employee training and development, online HR management tools, and employee leave administration. It also provides employee benefits that enable eligible worksite employees with access to a 401(k) retirement savings plan, health savings accounts, flexible spending accounts, group term life and disability coverage, and an employee assistance program, as well as group health, dental, and vision coverage. In addition, this segment offers employer liability management services comprising workers' compensation program, unemployment claims management, safety compliance guidance and access to safety training, access to employment practices liability insurance, and guidance on compliance with the United States federal, state, and local employment laws and regulations. The company was founded in 1949 and is headquartered in Roseland, New Jersey. Company description from FinViz.com.

ADP is simply a solid company. However, they are not flashy or sexy as an investment. They just perform but they do tend to react to the Dow's movement. However, recently they have outperformed the Dow as they approach new highs. They raised earnings guidance for 2019 from 18-20% growth to 20-22%.

Interest on funds held for clients rose 21%. Average client balances rose 5% to $23.6 billion.

Earnings May 1st.

They have rebounded back strongly from the December market crash and are approaching resistance at $148 and again at $152. However, all the indicators suggest the stock will succeed in making a new high, market permitting.

There are only 32 days left in the March options, so we need to reach out to the May cycle. There are no April options at this time. I am recommending a combination position to offset the high option prices.

Position 2/12:
Long May $150 call @ $6.00, see portfolio graphic for stop loss.
Optional: Short May $135 put @ $2.00, see portfolio graphic for stop loss.

Net debit $4.00.



BOX - Box Inc - Company Profile

Comments:

No specific news. Shares still rising on the Goldman rating and $31 price target.

Original Trade Description: Jan 21st

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage and share their enterprise content from anywhere or any device. The company's Software-as-a-Service platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 23 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, and energy industries, as well as government sector primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Box, Inc. was founded in 2005 and is headquartered in Redwood City, California. Company description from FinViz.com.

Earnings February 27th.

Box is a provider of cloud content management services to enterprise customers. Procter & Gamble and GE are two of its largest customers. Over the last several weeks there has been a persistent rumor they will be acquired. Google has been a rumored acquirer but it is more likely Microsoft or even Hewlett Packard could be interested.

Entering a position on acquisition rumors is rarely a good move. More than 90% of the time nothing happens. In this case revenue is growing in excess of 25% for 2018 and they guided for 20%+ for 2019. They also guided for their first quarterly profit in Q4 since they went public in 2015.

Their customer retention rate is close to 100% and they had more than 90,000 customers at the end of Q3. Box has enough scale that it makes sense to be acquired rather than a large company trying to replicate their product and service and spend years stealing market share. Buying Box now would be an instant add on to profits.

Shares closed at a 4-month high on Monday in a bad market. The saucer base is complete and shares are rebounding.

Because of the potential earnings volatility in the market I am going to stay short term with cheaper options and less risk. I am recommending March but the June options are only slightly more expensive and twice the time.

Position 1/29/19:
Long March $21 Call @ $1.15, see portfolio graphic for stop loss.



ITW - Illinois Tool Works - Company Profile

Comments:

The board authorized a quarterly dividend of $1.00 payable April 10th to holders on March 29th. Shares exploded higher to gain more than $5 on Friday. .

Original Trade Description: Feb 4th

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. The Automotive OEM segment offers plastic and metal components, fasteners, and assemblies for automobiles, light trucks, and other industrial uses. The Food Equipment segment produces warewashing, cooking, refrigeration, and food processing equipment; kitchen exhaust, ventilation, and pollution control systems; and food equipment, maintenance, and repair services. The Test & Measurement and Electronics segment produces equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. The Welding segment produces arc welding equipment; metal arc welding consumables and related accessories; and metal jacketing and other insulation products for various industrial and commercial applications. The Polymers & Fluids segment produces adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. The Construction Products segment produces engineered fastening systems and solutions for the residential construction, renovation/remodel, and commercial construction markets. The Specialty Products segment offers beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. It serves the food and beverage, consumer durables, general industrial, printing and publishing, and industrial capital goods markets. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Illinois Tool Works Inc. was founded in 1912 and is headquartered in Glenview, Illinois. Company description from FinViz.com.

ITW reported Q4 earnings of $1.83 that beat estimates for $1.82. Revenue of $3.6 billion matched estimates. They guided for 2019 for earnings of $7.90-$8.20. For Q1 they expect $1.73-$1.83. Analysts were expecting $8.02 and $1.94.

However, the rest of the story is that ITW guidance included restructuring costs of 7 cents, forex headwinds of 7 cents and tax charge of 5 cents. That is 19 cents in addition to their estimate making the guidance above the street. Investors did not read through the news and shares fell sharply on Friday. After the news was disseminated shares rebounded $4 today and will probably continue rebounding.

ITW also has a $4 dividend giving them a 2.89% yield. With S&P earnings likely to decline in Q1, these big dividend stocks are going to be in favor.

Position 2/5:
Long June $145 Call @ $3.70, see portfolio graphic for stop loss.



IWM - Russell 2000 ETF - ETF Description

Comments:

Excellent gain for the week and the outlook remains positive. However, strong resistance at $157.

Original Trade Description: Feb 4th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. Specifically, the Russell 2000 Index. The Russell is heavily weighted in Financials, Health Care, Industrials, Information Technology and Consumer Discretionary.

The Russell showed bullish relative strength on Monday with a 12 point gain of almost 1% while the big cap indexes were mixed. Normally, in bullish markets, the small cap stocks lead. Fund managers and investors buy the small caps to get more bang for their bucks than putting money in big cap stocks with billions of shares outstanding.

The Russell closed only 1 point below a two-month high. If the government is not going to be shut down and there will eventually be a China trade deal, the small caps should rally sharply.

Position 2/12:
Long May $155 Call @ $3.90, see portfolio graphic for stop loss.
Optional: Short May $140 Put @ $1.67, see portfolio graphic for stop loss.
Net debit $2.23.



TITN - Titan Machinery - Company Profile

Comments:

No specific news. No momentum. Close the position.

Original Trade Description: Jan 21st

Titan Machinery Inc. owns and operates a network of full-service agricultural and construction equipment stores. It operates through three segments: Agriculture, Construction, and International. The company sells new and used equipment, including agricultural and construction equipment manufactured under the CNH family of brands, as well as equipment from various other manufacturers. Its agricultural equipment comprise tractors, combines and attachments, application equipment and sprayers, planting and seeding equipment, tillage equipment, hay and forage equipment, and precision farming technology and related equipment for use in the production of food, fiber, feed grain, and renewable energy; and home and garden applications, as well as maintenance of commercial, residential, and government properties. The company's construction equipment includes compact track loaders, compaction equipment, cranes, crawler dozers, excavators, forklifts, loader/backhoes, loader/tool carriers, motor graders, skid steer loaders, telehandlers, and wheel loaders for commercial and residential construction, road and highway construction machinery, and mining operations equipment. It also sells maintenance and replacement parts. In addition, the company offers repair and maintenance services that include warranty repairs, on-site and off-site repair services, and scheduling off-season maintenance services, as well as notifies customers of periodic service requirements; provides training programs to customers; and sells extended warranty services. Further, it rents equipment; and provides ancillary equipment support services. The company operates in North Dakota, South Dakota, Iowa, Minnesota, Montana, Nebraska, Wyoming, Wisconsin, Colorado, Arizona, and New Mexico, the United States; and Romania, Bulgaria, Serbia, and Ukraine, Europe. Titan Machinery Inc. was founded in 1980 and is headquartered in West Fargo, North Dakota. Company description from FinViz.com

Think of Titan equipment as the poor man's Caterpillar. They are a fraction of the size of Caterpillar but their prices are reasonable compared to the yellow metal giant.

They reported Q3 earnings of 49 cents compared to analyst estimates for 36 cents. Earnings rose 400% over the year ago quarter. Revenue of $363.6 million rose 10% and edged out estimates at $360 million.

They guided for similar sales in Q4 but raised their margin guidance from 8.7%-9.2% to 9.1%-9.4%. They guided for earnings of 65-75 cents. Consensus estimates are well below that level.

Shares have rebounded sharply from the December market crash and are right on the verge of breaking out to an 8-month high. Given their recent gain I would normally not recommend them but with the outlook on China improving and the market in rally mode, I am going to buy the breakout. Options are cheap.

Earnings February 28th.

Position 1/22/19:
Long March $20 call @ 55 cents, see portfolio graphic for stop loss.



BEARISH Play Updates

VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

The China news caused a major market rally and the VXXB declined -3.5%. it would have been more but weekend event risk probably provided support.

Original Trade Description: Feb 4th.

The investment seeks return linked to the performance of the S&P 500 VIX Short-Term Futures Index TR. The ETN offers exposure to futures contracts of specified maturities on the VIX index and not direct exposure to the VIX index or its spot level. The index is designed to provide investors with exposure to one or more maturities of futures contracts on the CBOE Volatility Index. Company description from FinViz.com.

The VXXB is a short-term volatility ETN 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 ETN. 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, the prior VXX ETN had 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 VXXB and its predecessor the VXX always decline long term.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETN and forget it. 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 may put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

The VXXB will be hard to short. The shares are out there and being traded because the volume on Monday was 18.5 million. 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.

Position 2/5/19:
Short VXXB shares @ $33.70, see portfolio graphic for 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.