Analysts are confused on market direction so don't feel alone. S&P targets are changing faster than the weather and with about as much accuracy. You could make up a market scenario from scratch and I bet you could find somebody already pushing that outlook on stock TV. The permabears are out in force. The gloom and doomers are preaching economic catastrophe. The permabulls are still preaching Dow 30,000. Opinions are just like noses, everybody has one.

My theory goes like this. The China trade talks have taken the back burner in the headlines because both sides are trying to get all the Ts crossed and Is dotted before President Trump and President Xi schedule the high-profile meeting in Florida. As I stated in my Option Investor commentary, Xi cannot afford a disaster where he comes to Florida to meet Trump only to have him walk out on the negotiations like he did with Kim Jong-un. For Xi, that diplomatic disgrace would be a total disaster. Therefore all the kings horses and all the kings men are trying to patch together the agreement to the point where it is acceptable to everyone and nobody can see the cracks in the facade. There will be cracks. It could take years to completely work through the behind the scenes efforts to enforce any trade agreement where both parties are willing to accept the outcome.

I believe the day the meeting date is announced is the day the agreement has been finalized. There will be a photo op where both presidents will sign something but that is just a photo op. The market rally should start on the date announcement and could continue several days past the event.

I was leaning towards a sell the news event but the market decline last week erased some of the overbought conditions. We could now see a buy the announcement rally and possibly even a minor gain after the signing. It all depends on the press disclosure of the actual details in the deal. If it appears to be a sham just to get something done before the election, the market will react badly. If there are some truly important things accomplished, the market could continue higher.

We are in that weak period where Q4 earnings are over but the Q1 earnings ramp has not yet begin. The earnings forecast for Q1 is now for a -1.4% decline. That is not the end of the world since earnings normally end up about 4% higher than the forecast at the beginning of the quarter. On the positive side the rate of decline has slowed.

As we approach the end of March, if we began to get some positive revisions, the market would likely react favorably.

The only material earnings for the week are due out on Thursday. There are several high profile tech companies that will set the market direction on Friday. We have Adobe, Broadcom, Oracle, Ulta Beauty and Dollar General.


The economic calendar has both price indexes and the most important reports for the week. The NFIB business optimism survey is also due out on Tuesday. Next week is a FOMC meeting so the later half of this week will be focused on that event unless the trade talks heat up again.


The market rebound today was stimulated by leftover short covering from Friday and comments about the state of the trade negotiations. After the Asian market meltdown last week, I am sure there was a healthy dose of relief on Monday morning that China did not melt down again.

The S&P posted a strong rebound of 40 points but failed to return to 2,800 or the real resistance at 2,815. The S&P futures are up +8 Monday evening and that suggests the rally will continue at the open. Whether it will last for more than a few minutes remains to be seen.


The Dow dodged a major bullet when Boeing fell -56 points early in the session. That is the equivalent to -394 Dow points. If the other 29 stocks had not posted some serious gains, today would have turned out a lot different. Gains in the other 29 supported Boeing and managed to lift the Dow to a 200-point gain. This was nothing short of miraculous.



The Nasdaq roared back with a 2.0% gain thanks mostly to the FAANG stocks. Facebook was the laggard with a 2.47 gain and the rest were well above that level. These gains are surprising since Elizabeth Warren used the weekend to promote her plan to breakup the big tech companies. While her plan has no hope of coming to pass, it is a threat until her presidential ambitions fade.



The small caps tried to recover with a 1.8% rebound but they failed just under near-term resistance at 1,550. With the Russell futures up 5.50 tonight we could have another chance at that resistance on Tuesday, but the real resistance is 1,600.


I would continue to caution about being overly long in this market. We are one headline away from a major decline or a retest of the recent highs. It is always harder to go higher but those highs are acting like a tractor beam for stock prices.

I want to apologize for not producing a newsletter last week. My son James has been in and out of the hospital multiple times over the last two weeks and nearly died. He was back in again today. Thank you for your patience as we work through this trial.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

CIEN - Ciena Corp - Company Profile

Ciena Corporation provides network hardware, software, and services that support the transport, switching, aggregation, service delivery, and management of video, data, and voice traffic on communications networks worldwide. The company's Networking Platforms segment offers hardware networking solutions optimized for the convergence of coherent optical transport, optical transport network switching, and packet switching. Its products include 6500 Packet-Optical Platform, 5430 Reconfigurable Switching System, Waveserver stackable interconnect system, CoreDirector Multiservice Optical Switches, and OTN configuration for the 5410 Reconfigurable Switching System, as well as Z-Series Packet-Optical Platform; 3000 family of service delivery switches and service aggregation switches, and the 5000 family of service aggregation switches, as well as 8700 Packetwave Platform and the Ethernet packet configuration for the 5410 Service Aggregation Switch; and 6500 Packet Transport System. This segment also sells operating system software and enhanced software features embedded in each of its products. The company's Software and Software-Related Services segment offers multi-domain service orchestration, inventory, route optimization and assurance, network function virtualization orchestration, analytics, and related services; and OneControl unified management system and platform software services, as well as manage, control, and plan software. Its Global Services segment provides consulting and network design, installation and deployment, maintenance support, and training services. The company sells its products through direct and indirect sales channels to network operators. Ciena Corporation was founded in 1992 and is headquartered in Hanover, Maryland. Company description from FinViz.com.

Ciena earnings rose 120% for Q4 but the stock crashed on the report. There is always something that gets blamed when investors take profits. In this cash they blamed a drop in gross margins from 42.5% to 42.2%. I could be way off the mark but I highly doubt that minor decline caused the stock to tank nearly 20% from the post earnings high.

The company reported earnings of 33 cents that rose 120% and beat estimates for 30 cents. Revenue rose 21% to $778.5 million and beat estimates for $760.6 million. Those are great numbers.

They guided for the current quarter for revenue of $815 million and that beat estimates for $805 million. However, the guided for gross margins of 42.5% and analysts were expecting 42.9%. That is still a miss but a MINOR miss.

Ciena said sales to data center customers could moderate after a strong 2018. They also said thye expected the telecom business to accelerate with AT&T, Verizon and Deutsche Telecom making large purchases.

The CEO said they began 2019 with very strong top and bottom line growth and continued market share gains. They believe their innovation and positive leadership dynamics will enable them to extend their market share gains.

Shares spiked to $45.90 after earnings and then dropped like a rock on the commentary and analyst remarks. After dropping to support on Friday morning shares have moved up steadily and rose 3% on Monday.

Buy July $43 call, currently $2.19, stop loss $37.50.




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


CVX - Chevron Corp
The long position was entered at the open on Feb-19th.

IWM - Russell 2000 ETF
The long position was stopped at $151.85.

BOX - Box Inc
The long position was stopped at $23.15.

TITN - Titan Machinery
The long position was closed at the open on Feb-19th.


Original Play Recommendations (Alpha by Symbol)


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. Shares declined from the 4-month high in the weak market but recovered nicely today.

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:

Box shares were crushed by weak guidance when they reported earnings. Q4 billings rose 16% to $237.7 million, below the "mid 20s" growth rate they had predicted and well below estimates for $255.5 million. Shares fell 25% to stop us out.

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:
Closed 2/28: Long March $21 Call @ $1.15, exit .27, -.88 loss.



CVX - Chevron Corp - Company Profile

Comments:

Chevron lifted its reserve estimates for its Permian holdings from 9.0 billion Boe to 16.2 billion Boe. They expect to raise production there from 377,000 Boepd in 2018 to 600,000 Boepd in 2020 and 900,000 Boepd in 2023. They have cut drilling costs in the Permian by 40% since 2015. Capex will be $20 billion in 2019 and be 419-$22 billion per year in 2021-2023. Free cash flow is expected to be $30 billion in 2019.

Original Trade Description: Feb 18th

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.

Position 2/19/19:
Long June $125 call @ $2.71, see portfolio graphic for stop loss.



ITW - Illinois Tool Works - Company Profile

Comments:

No specific news. Down with the market, rebounded with the market.

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:

The Russell fell -7% last week to stop us out.

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:
Closed 3/7: Long May $155 Call @ $3.90, exit $3.10, -.80 loss.
Closed 3/7: Short May $140 Put @ $1.67, exit $1.62, +.05 gain
Net loss 75 cents.



TITN - Titan Machinery - Company Profile

Comments:

We exited the position due to lack of movement and it is still not moving.

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:
Closed 2/19: Long March $20 call @ 55 cents, exit .50, -.05 loss.



BEARISH Play Updates

VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

Huge move today but we are not likely to see a trend develop until the VXXB is under 30.

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.