The S&P confirmed Friday's break over resistance by adding another 10 points on Monday. The S&P closed at 2,832 and well over prior resistance at 2,815. There is no material resistance between Monday's close and the prior historic high at 2,930. The only resistance is likely to be economic and political headlines and further declines in Boeing.

Regulators are piling on Boeing and every day it appears more likely it will be a long time before the 737 Max 8 is back in the air. This is weighing on the Dow with Boeing erasing 45 Dow points on Monday.

However, support at $370 has been rock solid. Every new headline that causes a knee jerk reaction to the downside has stopped around $370 and there have been a lot of headlines.

While support has held, there is no guarantee against a worse headline suddenly appearing. I do not know what it would be, but anything is always possible.

As long as Boeing holds at $370 the Dow should continue higher.

The Brexit fiasco continued to bubble but it does not seem to have any impact on the US markets. Prime Minister May is scheduled to pitch the EU on Thursday about an extension of the deadline to exit the EU. All 27 members must vote unanimously, or the proposal would fail and there would be a hard Brexit on March 29th. I suspect investors can't comprehend lawmakers allowing that to happen, so they are not afraid of the proceedings.

The China trade talks are continuing with alternating positive and neutral comments. Again, investors expect a positive resolution, so they are no longer afraid of the outcome. This could be a disaster if talks fail.

The NAHB Housing Market Index this morning was neutral at 62 and the market ignored it. The factory orders due out on Tuesday are a lagging number for January and they are not a market mover unless there is a dramatic miss.

The Fed decision and press conference on Wednesday is the highlight of the week and the Philly Fed Survey the most important of the regional Fed surveys.


Earnings are over for all practical purposes. The three high profile earnings reporters for the rest of the week are for a quarter ending in February. As such they are the leading edge of the Q1 reporters. Guidance will be critical.


A Tuesday before a Fed decision is normally positive. If we do see a continued move higher it would be additional confirmation the next stop is going to be 2,930. The resistance at 2,865 is not material. We could see a minor pause, but I expect the market to continue higher.

However, I am worried about a trend change at the 2,930 level. With Q1 earnings growth currently negative, economics choppy, China plunging and EU fading fast on Brexit worries and tax selling just ahead there is little to lift the market to new highs. The summer doldrums are the weakest period of the year and we will be entering the "why buy" period ahead of the doldrums. I hope my fears are false and we continue higher, but we need to be prepared.

The last 17 years after a midterm election, the market has rallied. There is a perfect record since 1950 with an average of a 14% return. Analysts believe this is due to gridlock in Washington and nothing getting done in the last two years of a president's term.


The Dow is being held down by losses in Boeing. The index is trying to struggle higher, but it is a battle with Boeing erasing 45 Dow points today. This is a liquidity driven rally and the Dow stocks should continue higher. Resistance is 26,191.



Facebook was the biggest drag on the Nasdaq with a $5 decline. Facebook erased 11 Nasdaq points. Amazon added 12 and Microsoft 11. The index has moved over the 7,635 resistance level and is also in breakout mode with the prior high at 8,109 now the target.



The Russell was the biggest gainer on a percentage basis of the major averages on Monday. That is not a big deal given the low gains across all the indexes. The Russell has strong resistance at 1,583 and the 200-day average. We need the Russell to show some leadership if the market is going to continue higher.


As I stated above, Tuesday before a Fed meeting is normally positive. The Fed is not expected to say or do anything to harm the market, but we can never be sure until the event is over. Loose lips, sink ships and equity markets. I would continue to buy dips until we return to the highs then a change of strategy could be appropriate.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

COST - Costco - Company Profile

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio products; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel business. In addition, the company provides gold star individual and business membership services. As of September 2, 2018, it operated 762 membership warehouses, including 527 warehouses in the United States, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, 2 in Spain, 1 in Iceland, and 1 in France. Further, the company sells its products through online. The company was formerly known as Costco Companies, Inc. Costco Wholesale Corporation was founded in 1976 and is based in Issaquah, Washington. Company description from FinViz.com.

On March 8th, Costco (COST) exploded higher after their earnings beat. Revenue rose $2 billion to $35.4 billion and earnings of $2.01 rose 42% and blew away estimates of $1.69. Revenue was a fraction light, but nobody seemed to care given the 6.7% rise in same store sales and 25.5% rise in online sales.

In addition to their quarterly earnings the company said revenue for February rose 5% to $10.72 billion with same store sales up 4.7%. For the 26-week period ending March 3rd, revenue rose 8.6% from $68.51 billion to $74.42 billion. This is yet one more confirmation that Amazon is not a problem for Costco. They might as well be in different sectors.

Shares spiked $20 over four days without looking back. The last three days the stock consolidated but shares accelerated into the close. I think the post earnings depression, all three days of it, is over and we will see a new high soon.

We can't buy longer term options because the prices are too high and the strike prices too wide. I am going to recommend a May strike and this will be a short 3-4 week position.

Buy May $240 call, currently $4.65, stop loss $232.65.
Optional: Sell short May $220 call, currently $1.40, stop loss $232.65.
Net debit $3.25.




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


CIEN - Ciena
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 closed at a new high on Friday and only pulled back slightly today in a choppy market.

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.



CIEN - Ciena Corp - Company Profile

Comments:

Ciena is not participating in the Nasdaq rally but the 60-day average has been long term support. I am giving it another week.

Original Trade Description: March 11th

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.

Position 3/12/19:
Long July $43 call @ $2.15, see portfolio graphic for stop loss.



CVX - Chevron Corp - Company Profile

Comments:

New 5-month high as crude prices trade over $59 on their way to $65 by Memorial Day.

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.

Update 3/11: 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.

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. Testing resistance and a breakout could be strong.

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.



BEARISH Play Updates

VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

New 5-month low on Friday with only a minor uptick today in a choppy market. The VXXB is headed in the right direction.

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.