The market finally broke through resistance and soared for three days on expectations for tax cuts and financial deregulation.
Investor may be getting overly excited about these prospects because the lead-time to execution could be a lot longer than they expect. The market has finally gone directional but the pace of the gains at this stage in the process appears to be irrational exuberance.
The president said they could unveil their new tax plan in 2-3 weeks. Investors cheered and the market exploded higher. In reality, any plan will have to go to the House and Senate where they will argue over it in committee for 2-3 months and it if passes all the various steps it might actually become law by the end of 2017. However, the republicans only have 52 seats in the Senate and it will take 60 votes to get it passed. There will be a monumental battle and it is possible that it will not pass in the first attempt. This could take months to work out.
The current tax code is 96,000 pages long. Changing that in a few weeks or even a few months will be an overwhelming task.
Overhauling Dodd-Frank is a similar Herculean task. That group of laws and regulations initially took 2,300 pages when it was passed but the act itself called for the establishment of more than 400 new regulations of which only about 250 have been completed along with thousands of additional pages of content. It required the hiring of 2,600 new employees just to implement the new rules. The law passed the house with no republican votes and only 3 GOP votes in the Senate. Getting the democrats in the Senate to approve sweeping changes to this law is going to be next to impossible. This was a signature accomplishment for the democrats and it will not die easily. Dodd Frank Explanation
Eventually the investing public is going to realize that governing is more than executive orders and tweets. The Trump honeymoon is maybe not going to end but it will probably lose momentum.
Coupled with this unbridled enthusiasm is a market that is breaking out to new highs on what were just "okay" earnings. They were positive with 5% growth but only half of the &SP companies met their revenue targets. Negative guidance is more than 2:1 over positive guidance. The earnings growth over the next two quarters is still expected to be good but not great.
The current rally is built on political expectations. The rally is also entering overbought territory and in the case of the Nasdaq indexes, very overbought territory. I would be very surprised if we did not see some significant profit taking in the coming weeks.
I am anticipating a 3% decline. That is not serious but there will be weeping and wringing of hands when it occurs. We have not had a 3% decline since early November and we normally get 2-3 a year with at least one slightly more severe.
The Nasdaq 100 Index ($NDX) was the market leader on the move higher. It is very overbought as evidenced by the RSI at 78.47 when 70 is considered overbought. Also, the index itself has gone nearly vertical in the month of February. It is up 11% since December 2nd. We could easily see a sharper than 3% decline on the NDX. A 3% drop would be to 5,100 and that level is decent support.
There were only five Dow components posting losses on Monday. Those were TRV, NKE, WMT, MCD and VZ. Goldman led the winners list again along with CAT, MMM, BA, UNH and AAPL.
The Dow is clearly in breakout mode but it is also oversold with a RSI of 72.32. There is only one Dow component reporting this week and that is CSCO on Wednesday. There are 16 Dow components at or near new 52-week highs. This has turned into a broad market rally but is still being led by the techs and financials.
The S&P is not as overbought as the other Dow and Nasdaq and it did close over uptrend resistance today. In theory, the S&P could add a few more points but it will react to whatever happens to the Nasdaq. Support should now be prior resistance at 2,300.
The Russell 2000 came very close to touching psychological round number resistance at 1,400 when it was up about 12 points at the open. Those points immediately faded to end with only a 3 point gain. The Russell remains the weakest index and as long as it is dragging like an anchor behind the big cap indexes, it will continue to be a problem. If the Russell rolls over again the support at 1340-1350 should continue to hold the decline.
The earnings calendar is uneventful this week as most big caps have already reported. This week and next is the small cap earnings cycle. There wil be plenty of events but very few headlines.
The economic calendar is headlined by the two Janet Yellen appearances. As long as she keeps up her queen of the doves act the market should be ok. We have to worry about the questions more than ever this cycle because of the strong anti-Trump bias in Washington. The senators are going to be asking her some tough questions and she has to answer perfectly or the markets could react badly.
If we do get a decline, I would consider it a buying opportunity. Any potential decline is likely to last longer than anything we have seen recently because there is a lot of profit at risk. If the market looks like it is turning decidedly negative it could scare a lot of weak holders out of their positions.
While I would love a quick 3% drop to support so we could add a lot of new positions, we rarely see the market do what we want or when we want it. Just be prepared to dive in on a dip but don't be the first one into the water. There may be some alligators lurking just under the surface. Give any decline the opportunity to mature before scheduling a date with your online broker.
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NEW DIRECTIONAL CALL PLAY
QRVO - Qorvo Inc - Company Profile
Qorvo, Inc. provides technologies and radio frequency (RF) solutions for mobile, infrastructure, and defense and aerospace applications worldwide. It operates through Mobile Products (MP) and Infrastructure and Defense Products (IDP) segments. The MP segment offers RF front end modules that combine high-performance filters, power amplifiers (PA), low noise amplifiers and switches, PA modules, transmit modules, antenna control solutions, antenna switch modules, diversity receive modules, and envelope tracking power management devices. This segment supplies its RF solutions into mobile devices, including smartphones, notebook computers, wearables, tablets, and cellular-based applications for the Internet of things. The IDP segment provides high power gallium arsenide, gallium nitride power amplifiers, low noise amplifiers, switches, radio frequency filter solutions, CMOS system-on-a-chip solutions, fixed frequency and voltage-controlled oscillators, filters, attenuators, modulators, driver and transimpedance amplifiers, and various multichip and hybrid assemblies. This segment supplies its RF solutions to wireless network infrastructure, defense, and aerospace markets; and connectivity applications for commercial, consumer, industrial, and automotive markets. Company description from FinViz.com
Triquint Semiconductor (TQNT) and RF Micro Devices (RFMD) merged in January 2015 and Qorvo was born.
Qorvo is a major Apple supplier. They will have outstanding Q3/Q4 earnings but they guided slightly lower for Q1. They blew out Q4 earnings at $1.35 compared to estimates for $1.26. Revenue of $826 million also beat estimates for $821 million.
They guided for the current quarter for earnings of 80 cents on revenue of $630 million. They said they were forecasting a decline in earnings because two China customers Oppo and Vivo along with Samsung, had postponed the launch date of their next smartphone models. Qorvo is still supplying the chips but the revenue will be delayed a quarter until those delayed launches begin to occur.
The stock dipped for about 30 minutes on the news and then began to rise again. Shares closed at a new 52-week high on Monday.
I believe this is an opportunity to get an Apple supplier well in advance of the iPhone 8 and the earnings from the other three manufacturers as well.
I am recommending an option to get us past the next earnings report where they should guide higher. Depending on our gains at the time we may hold over the report.
Earnings May 3rd.
Buy May $70 call, currently $4.00, initial stop loss $62.65.
NVDA - Nvidia - Company Profile
NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.
Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.
The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.
The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.
The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.
Nvidia announced a new chip code-named Xavier that is specifically designed for self driving cars. The chip has (8) 64-bit ARM cores, a 512-core graphics processor based on the new Volta graphics architecture, two video processors capable of handling 8K video and a specialized computer vision accelerator. The chip has more than seven billion transistors and more than twice the new Apple A9X processor. All of that capability is on one chip.
Nvidia announced a new class of supercomputing workstations with breakthrough design features. The new Quadro products provide more than twice the performance of their prior league leading technology and offer ultra-fast memory to further enhance the speed. The new GP100 GPUs provide more than 20 TFLOPS of 16-bit floating point precision computing. In English that means they are faster than the human brain can even comprehend. One TFLOP is executing one trillion floating-point calculations in one second. This workstation can do 20 TFLOPS. The Quadro GPUs can render photorealistic images more than 18 times faster than a CPU.
Nvidia posted blowout Q4 earnings of 99 cents on $2.2 billion in revenue. Analysts were expecting 83 cents on $2.1 billion. They guided for Q1 revenue of $1.9 billion and analysts were expecting 1.88 billion. The company said margins could shrink slightly from 57% because of product mix. They have so many new products there is a range of margins depending on the products and the configurations.
Despite the record earnings for the quarter and the year and 55% revenue growth in Q4, shares are declining simply because they have risen so much over the last year. Historically buying Nvidia on a dip to the 50-day average was a winning trade. That is $104.81 today. Also there is strong support at $100.
I am recommending we target a dip to $104 and buy a June $110 call. The premium should be in the $7 range if we get the entry we want.
Earnings May 11th.
With a NVDA trade at $104
Buy June $110 call, estimated to be $7, initial stop loss $95.85.
If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.
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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
QQQ - Nasdaq 100 ETF
The long call position was entered at the open on Tuesday.
SRG - Seritage Growth Properties
The long put position was closed at the open on Tuesday.
TWLO - Twilio Inc
The long call position was closed at the open on Tuesday.
We are reloading with the April $38 call at Tuesday's open.
IWM Russell 2000 ETF
The long call recommendation remains unopened until a trade at $134.00. (Revised)
Original Play Recommendations (Alpha by Symbol)
IWM - Russell 2000 ETF (LONG PUT) - ETF Profile
The Russell was the weakest index again today but there are no signs of a larger decline. The January decline did not appear as expected and this position will expire on Friday unless there is a monster market decline.
Original Trade Description: December 12th
The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.
The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.
I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 13 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,180 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.
Dow - January 2016
We also have the potential for an ugly inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.
I am recommending a long put on the Russell ETF.
There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.
I have a similar put position in the Premier Investor Newsletter because every subscriber needs to be hedged against a potential market event over the next five weeks.
Initial support is in the $130 range.
Long Feb $134 put @ $3.37, see portfolio graphic for stop loss.
IWM - Russell 2000 ETF (LONG CALL)- ETF Profile
The Russell was the weakest index again today and has been for the last five days. The potential for a decline to $131 to trigger a long position has declined significantly. If we do have a sharp decline the average is about 3%. That would drop the IWM to about $134. I revised the entry target to $134 and the call strike to $140.
Original Trade Description: Jan 3rd
The Russell ETF mimics the movements of the Russell 2000 Index with a 1:10 ratio.
The Russell 2000 has failed to break support but it was the strongest gainer in the post election rally. At one point, the Russell was up 20.1%. That suggests in a market decline it could also be the fastest decliner.
Analysts are in agreement that the markets will finish 2017 significantly higher with estimates as high as 25,000 for the Dow and 2,500 for the S&P. If the regulations currently stifling small business are removed and the tax rates changed to 15% as Trump has promised, this sector will show a major boom in earnings and could be the largest gainer in 2017.
I considered buying calls on the SPY, DIA, QQQ and IWM. I decided to use the IWM for the reasons stated above.
I am going to use a dip trigger on this position to enter the play. We already have a put position on the ISM and we will exit it at the same time this position is triggered. I am putting the trigger at $126 but there is no guarantee we will reach that level. The IWM traded at $115 just before the election.
I am using the August calls because they were only $1 more than the June strikes and we get two extra months. I do not expect to hold the position that long since the summer months are normally weak for the market. We can sell them in June with a lot of time premium left.
With an IWM trade at $134.00
Buy August $140 call, estimated premium $5, no initial stop loss.
QQQ - Nasdaq 100 ETF - ETF Profile
The Nasdaq 100 Index has gone vertical since last week. I considered just taking the roughly $1 gain and exiting the position. The NDX is very overbought but nothing prevents it was getting more overbought.
There are two trains of thought here. We can set a tight stop that takes us out on any material weakness and then look to get back in once a bottom appears. The other option would be to just hold on to the May call and try to ride it out since any decline is likely to be limited.
I am recommending the tight stop option. We are in a political game of Russian Roulette. President Trump tweets every day. Some days it results in positive market sentiment and some days it is negative for the market. We never know when the next tweet will send the market 5% higher or 5% lower.
Janet Yellen will testify before the House and Senate over the next two days. If she phrases just one sentence incorrectly, the market could tank.
There are a lot of landmines in the market's immediate path. We may miss them all but it will only take one to kill market sentiment.
Raise the stop loss to $127.65
Original Trade Description: February 6th
PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock", 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 100 big cap index has been leading the charge higher. The Nasdaq 100 and Nasdaq Composite may have been alternating days in the lead but the big cap index has seen the least volatility. The index bounced off uptrend resistance the prior week but it is back knocking on the door again today. The NDX was the only broad market index to post a gain on Monday and it closed only one point from a new high.
I believe the NDX is going to break through that resistance at 5,200 and that should trigger a new leg higher on short covering and price chasing by portfolio managers. They are currently holding cash back to buy the dips but the dips are very shallow. A breakout could convince them they are going to be left behind if they do not act.
I could just as easily predict a failure at resistance but every analyst prediction for a market failure in 2017 has proven wrong. I would rather invest $2.50 in a call option than try to bet against the trend.
Long May $128 Call @ $2.52, see portfolio graphic for stop loss.
SRG - Seritage Growth Properties - ETF Profile
We exited the position at the open on Tuesday. That turned out to be the right move since Sears caused a sharp uptick on Thr/Fri.
Original Trade Description: January 9th.
Seritage Growth Properties (Seritage) is a self-administered and self-managed real estate investment trust (REIT). The Company is engaged in the acquisition, ownership, development, redevelopment, and management and leasing of diversified retail real estate across the United States. The Company's assets are held by and its operations are primarily conducted through directly or indirectly, by Seritage Growth Properties, L.P. Its portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Its portfolio includes over 3,000 acres of land, or approximately 10 acres per site for its owned properties. Company description from finance.google.com
Seritage was spun off from Sears Holdings in July 2015 and given 230 Sears properties in the spinoff. This was a gambit to raise money for Sears and capitalize on their unleveraged real estate. Unfortunately, Sears is terminating leases on those stores at a rapid pace. They terminated a couple dozen in January 2016 and Seritage filed a notice with the SEC last week that Sears had given notice of termination on another 19 leases. These are major holdings as the company description explains above. However, if Sears terminates a lease it is because the store is unprofitable and more than likely is located in a dying mall. Finding a new retailer to take over a monster Sears location in a dying mall is a major problem.
Seritage has been successful in several locations but Sears is terminating leases faster than Seritage can remodel and remarket the empty buildings. With Sears likely to file bankruptcy in the near future, Seritage could get the majority of its existing portfolio vacated at one time.
Sears is obligated to pay a year's rent as a termination penalty but in a bankruptcy filing those penalties would be voided. That means Seritage would not have the benefit of Sears essentially paying for the remodel and remarketing.
Seritage shares are sinking fast because the investing public has caught on to the harsh reality that Seritage could be in trouble.
Earnings are Mar-9th (revised) and they could contain some unpleasant details.
I am using the February options and plan to hold over the event in case there is a disappointment. At $1.45 for the option, we have little risk.
Update 1/23/17: Seritage put out a leasing update on January 17th to counteract the negative information about Sears terminating some more leases. However, the update did not mention that Sears had terminated 19 additional leases the prior week. The report was full of numbers saying "since the company's inception we have leased 2.2 million sqft" or "We increased rental income by $41 million since the company's formation." That is all great but they have a ton of vacancies and it is not what they did since the company was formed but what are they doing now. It was clearly a press release to counter the stock slide, which it did. Shorts were forced to cover and the stock spiked 10% to $44. I applaud them for a gambit well played. The stock was at an 11-month low the day before their press release. It killed our put position temporarily but nothing really changed at the company.
Closed 2/7/16: Long February $40 put @ $1.60, exit .20, -1.40 loss.
TWLO - Twilio Inc - Company Profile
Twilio reported a beat on earnings and revenue but guidance was choppy. Shares were volatile the following day but appear to be heading higher now that the event is behind them. I am going to recommend we reload the TWLO position using the April $38 call.
Buy April $38 call, currently $2.00, initial stop loss $31.50.
Original Trade Description: January 23rd.
Twilio Inc. provides cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces. The company also provides use case products, such as a two-factor authentication solution. Company description from FinViz.com
Twilio is a cloud communications platform. That does not tell us very much but some if its biggest customers are Uber, AirBnB, WhatsApp and Messenger. Twilio has an application that matches phone numbers and internet addresses to usernames. When you send an instant message to somebody on Facebook, the Twilio app links your Facebook account to your mobile phone number and does the same thing on the other side of the conversation to your contact.
Twilio is a communications platform for new applications that do not want to reinvent the wheel and have to not only program all those linkages but build the databases necessary to connect with everyone.
Twilio had 88% revenue growth in 2015 and is expected to post 62% for all of 2016. Obviously as each year progresses and the revenue numbers soar it is harder to continue the growth when you first started and had almost no revenue. Still, 62% is outstanding.
Given its integration into numerous major applications in addition to the ones I listed above, they are a prime acquisition target. Amazon increased its stake in Twilio in December. Facebook recently increased integration of Twilio services in Messenger so it is not going to compete with the service but could decide to acquire it. With a market cap of $2 billion, pocket change to the big boys, and a dominant place in the existing technology, they are an excellent acquisition candidate.
Shares retreated from the post IPO highs of $70 to trade at $26 three weeks ago. Shares are testing resistance at $29 ahead of earnings on Feb 7th. A William Blair analyst expects the company to beat on both earnings and revenue. The analyst said "Twilio dominates the developer community, often benefitting from a first mover advantage while providing the best quality and performance in the market, particularly for its voice product of dual channel call recording capabilities."
We are in the Q4 earnings cycle so anything we add this week is going to be challenged by an earnings report over the next several weeks. On Twilio, the options are cheap and we can afford to hold over the February 7th report and we could be well rewarded.
Closed 2/7/17: Long Feb $29 call @ $1.09. exit $3.60, +1.62 gain.
RELOAD: Buy April $38 call, currently $2.00, initial stop loss $31.50.
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.
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