Long Term Diagonal Spread On Steroids

Method 2 : How To Setup A Bullish Long Term Diagonal Spread

This strategy is known also a poor man’s covered call and definitely deserves a place within your trading arsenal. The long term diagonal spread strategy simply replaces the long stock positions in your portfolio with deep in the money call options. Furthermore we chose call options usually that don’t expire for a number of years and their delta (the change in an option’s value for a change in the price of the underlying product). is usually above 0.8.

This strategy is a no-brainer for the investor/trader who has a small account but still wants heavy diversification. Furthermore if we return to Gilead for example from the last post, here is how a potential long term income trade could be set up. With the move Gilead had after its second quarter earnings announcement, adopting this strategy is smart play as it puts far less capital at risk compared to owning stock outright. Here is how would set it up.

1. We look for a liquid long term in the money call option.

If we pull up an options chain again and go for the longest expiry we can find (January ‘2019 or 534 days out), we can see that we can buy the 80% delta in the money call option (60 call) for around $17.60. What does this mean ? It means we can control 100 shares of Gilead through a long term LEAP call option for $1,760. Buying 100 shares on the market this very minute would cost over $7,500 so this is already a saving of almost $6,000 already. This option’s value will move roughly 80% of what the stock will move.

Image Of A Long Term (Leap) Call Option Chain In Gilead

This long call essentially now plays the same role as long stock does in a traditional covered call strategy. That’s the long component sorted out. Now its time to sell call(s) against this long position

2. Sell 30 to 45 day calls against this long position

Now all we have to do is adopt the same trading strategy as we did in the last example. We sell out of the money calls ( 30 to 45 days away) and buy them back we when have at least a 30 to 50% gain on the calls. As the option chain illustrates below, the most likely candidate at present would be the September $77.5 call which currently is worth around $1.13. As we can see the delta of this particular call is 37%. However if this call were to get in the money, its delta would change pretty quickly which is why this trade has to be set up properly from day 1. Here is how we do it.

Image of a 30-45 day call option chain in Gilead


3. How To set up a long term diagonal or “Poor Man’s Covered Call” trade from scratch

The one thing you have to be careful with in the long term diagonal spread strategy is that there is sufficient long deltas in your call because if the price of the underlying goes up (which means the short call goes in the money), we still want to make sure that we have a profitable trade on our hands. Here is how we do it. The formula I use is the following

Price of the LEAP long call < Width of the Strikes + Price of the short call
(Gilead Example)         $17.60 < (77.5 – 60 = 17.5) + (1.13)
$17.60 < $18.63 – We Are Good to Go

Doing this work beforehand ensures that if the price of Gilead spikes up, the long call will rise in value quicker than the short call. Management of the trade is the exact same as the traditional covered call strategy when the short call remains out of the money. We just take profits when they present themselves (only on the short-dated short call) and the wait for Gilead to rally once more so we can sell more out of the money calls (30 to 45 days out) against our long fixed LEAP option. Trade management though is different if the price of the stock gaps through our short call. Here is how we do it.

4. Trade Management of a Diagonal Spread when the short call is deep in the money.

Firstly you need to watch the specific deltas of your trade. For example, if the short call gets deeper and deeper in the money (stock gaps through your short strike aggressively), the price of the short call will eventually rise in value faster that the long call. This is always my cue to exit the trade which will always be a winner. Let me explain by showing you a screenshot of a similar trade I have on at the moment in (NYSE:GDX) which is a diagonal spread

Image of how one can control deltas in a long term diagonal spread

As the screenshot shows, GDX is presently trading at the $22.85 mark. I am short the $23.5 call in September and long the December $21 call. One does not have to be worried about closing this diagonal in full until the short call goes in the money (above $23.50). When it does, I really get clued into the deltas on both the long and short components of the trade. As you can see from the screenshot, the “Delta Dollars” of the long call is still much larger (1,675) than the (873) we have on the short call. If GDX keeps rallying the difference will get smaller. Ultimately when I see only a marginal difference in delta dollars between both sides of the trade, I would close the whole trade out for a winner and move on to the next trade.

The second area to watch is the dividend. Be mindful of dividend dates and take the trade off (in full before 4 to 7 days before the ex-dividend date) if the call is well in the money. If you don’t, you could wake up one morning and find that your short call has now become short stock which means you will be on the hook for payment of the dividend. Its just not worth the risk. Remember, the whole trade should be a winner if the short call is in the money. Take your profits and move on. Don’t try to get too greedy here by hoping your short call finishes out of the money by the expiration date.

Summing The Strategy Up.

The long term diagonal spread or poor man’s covered call is an excellent strategy to use in low volatility environments as the long call at the outset of the trade will invariably gain value quicker than the short call. Furthermore the long term diagonal spread strategy is excellent for traders with limited capital as one can spread their capital across a larger range of stocks and ETF’s which increases diversification. Whereas strict option traders normally only monitor volatility and liquidity, I would encourage you (before picking your underlyings) to also monitor sentiment, valuation and momentum indicators. Here is how things would shape up with one of the stocks currently on our watch-list – L Brands.

1. Momentum Indicators Oversold

Image showing how momentum indicators become oversold
2. Sentiment On The Floor In L Brands.

Image of how sentiment becomes excessively pessimistic
3. Volatility High As Earnings Approach

Image of high implied volatility in a stock as it approaches earnings

In an earlier post, we went through how cheap L Brands is when compared to its historic valuation. The issue here though is implied volatility. As earnings are expected to be announced shortly, this explains why implied volatility in the stock is over 40% which is well above its 12 month average. One could wait until earnings have been announced before adopting the long term diagonal spread strategy as a post earnings “L Brands” would have far lower volatility levels which would suit this strategy. However by waiting, the trader runs the risk of missing a big move after earnings are announced. This is why in the stock market, no matter how much you follow a mentor, ultimately the buck stops with you when it comes down to decisions like this.

Learn More Here

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Trading Gilead For Income

METHOD 1 – Selling Covered Calls Against Long Stock

We touched on this method in are earlier post. There are many complex option strategies out there. This in one of the simplest but yet the best for long term income generation in my opinion. Why? Because it combines robust fundamental analysis with an option strategy that forces you to take profits. Some investors reading this will not agree with this strategy as it invariably means selling stock at one time or another. However please now revert back to the Walmart example I outlined in an earlier post this year. Holding a stock indefinitely doesn’t make sense if the stock is not performing. Utilizing covered calls forces you to take profits. It is a strategy where you give up upside potential in return for a greater probability of success on the respective trade. Traditionally, investors were recommended to sell these every month but there are ways we can put this strategy on steroids in order to achieve better returns. Let’s go through a few examples to explain.

In the Gilead chart below, we can see that the stock has moved into overbought territory as its momentum indicators ( RSI on a setting of 5) are well above 70. In saying this, the stock despite its strong rally still only has an earnings multiple of 8.25. Gilead’s average earnings multiple over the past 5 years is 20. This could imply that this stock has plenty more upside but when that potential upside takes place is the million dollar question. In these types of scenarios, I believe the prudent approach is to sell covered calls against maybe half of your shares. So if one was holding 600 shares of Gilead, one could sell 2 call options when the stock becomes overvalued which would mean 200 shares would be at risk of eventually being called away. Long term investors may not agree with this approach but here are the advantages of adopting this strategy.

1. You are forcing your portfolio to take profits

In fact, theoretically, the best way to manage this trade over multiple months and quarters would be to sell covered calls all the way back up until Gilead reached its historic average valuation once more. My aim for this setup would be to be totally rid of this stock once its price to earnings reaches 20. Furthermore I would have no problem selling covered calls early in this setup as long as I had another ripe undervalued opportunity to deploy the potential capital that would come off the Gilead trade. Selling covered calls forces you to take profits and gets your portfolio working for you this minute as “theta decay” now works in your favor.

2. Improve returns even more by selling covered calls when implied volatility is high and/or when the stock is overbought

Gilead reported earnings at the the end of July so its implied volatility at present is not elevated. This means the prices of its options are not that expensive compared to their 12 month averages.

Source : Interactive Brokers

You see the four spikes in the chart above? This was when Gilead announced each of its quarterly earnings numbers over the past year. Just before these announcements would have been ripe times to sell covered calls as the call options prices would have been inflated. ( We will go through a pre-earnings example in posts that follow). Just remember to not give up your shares for nickels on the dollar. The time to sell covered calls aggressively is when the stock has high implied volatility and/or when the stock is overbought on a short term basis. The perfect combination of both high implied volatility and overbought conditions may not show up at the same time though so ultimately you will have to make a decision as to which way you want to play this. My preference is to sell covered call contracts in the monthly expiration cycles (30 to 45 days out) as that is where there will be more liquidity.

So presently, Gilead’s RSI momentum indicators are in overbought territory which will be reason enough for many to keep the foot to the floor and keep selling covered calls. Here is the state of play at present. Gilead’s next ex-dividend date is on the 14th of September ( time of writing – 2nd of August – Gild shares at $75.70) The next monthly cycle that will interest us with the cycle ending on the 15th of September. Below is a screenshot of the price of the calls from that given cycle.

Source : Interactive Brokers

With the stock trading at $75.70, the $77.5 call (trading for around $1.10) sticks out as the most obvious strike price to start selling calls on. The next way to supercharge this strategy is to take profits early which we will discuss here

3. Don’t let the call option expire worthless if this are healthy profits to be achieved

This is a crucial step in the management of your portfolio and one that should not be overlooked. For example, after you sell the above mentioned call for $1.10, the stock could easily gap down to the $74 or $73 level ( remember – it is overbought momentum wise) which could easily decrease the value of the call option down to the $0.70-$0.75 level. Personally, I would be taking profits here and here is why. If there is 30 to 35 days left to go to expiration and $0.70 for example is the maximum I can make on this call option, it doesn’t make sense to hold it until expiration. The stock could easily turn around and rally again which would increase the price of the call. Why would I then hold it if I have already made a 30 to 50% paper gain? It just doesn’t make sense. I usually take profits when they get presented and wait for the stock to rally once more so I can sell more calls against my long stock. Rinse, wash, repeat. Yes this strategy requires more management but you are going to make so much more money this way. In that 44 day cycle for example, you could easily sell 5 to 10 different covered call contracts whereas if you only sell one, the maximum you could make is the initial credit received – $110

Now what if Gilead keeps on rallying aggressively and spikes above our initial strike price of $77.50? Well if the price of the shares are above $77.50, then 100 shares per call option will be called away and you will have made full profit on the call option plus the capital gain appreciation of the stock. This is going to happen from time to time. You need to be ready for it. However this doesn’t mean you will never enter into this stock again. Furthermore as long as you have other ripe opportunities, I see no problem in letting your shares go. Remember, covered calls force you to take profits and nobody ever went broke making profits consistently.

The one thing though you have to watch is when your call is in the money ( strike price below the price of the shares) as the buyer of the call will exercise the option to collect a potential dividend. For example, Gilead has just announced a $0.52 quarterly dividend that will go ex-dividend on the 14th of September. Recipients of this dividend will have to be holding shares 2 to 3 days before this date to ensure they will indeed collect this dividend. Therefore our shares could be at risk of being called away early if the call buyer feels he will benefit more by exercising the call option ( which is to take possession of the shares instead of leaving the call option run). Traders ( who don’t usually hold stock) will usually attempt to avoid these circumstances as a naked call exercised would result in the respective trader who is short the call end up being short stock if the option were to be assigned. There are rolling strategies also one could undertake to ensure the collection of the dividend but here is my stance on this. If Gilead was trading well above $77.5 or $80 at expiration, there is a very good chance that call options will be exercised.

Don’t worry about it. Remember the calls are covered. What simply happens is that you transfer your shares over to the call buyer ( which happens automatically) between your brokerage account and his. Remember the shares were going to be called away anyway. Furthermore missing the dividend is not a big deal and here is why. When you tot up what you make from the capital appreciation of the shares plus the call option, the dividend payout will only make a very small percentage of the total profit you made here. I just wanted to mention this in-case you see your shares being called way before the expiration date. Shares will still be called away at the strike price you have sold the covered calls at plus you now have capital freed up earlier to sell more premium against quality dividend growth stocks.



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Companies With Strong Competitive Advantages

First off, I believe it is important to have a watch-list of stocks with strong competitive advantages. By simply buying these stocks when they get cheap and selling them when they get expensive is a strategy in itself. Why? Because the downside is protected to a large extent with these companies. They all have solid financials, a strong balance sheet and a growing dividend. Therefore it is quite common to see these stocks being snapped up quite quickly when they become excessively oversold. Here is a present typical watchlist that I pick from when trading companies with strong competitive advantages. Some of these stocks will be slightly overvalued at present whereas others will be undervalued. However from the research I have done on these companies below, their long term financials and forward looking fundamentals entitles them to be on this list.

L Brands (NYSE:LB)
General Electric Company (NYSE:GE)
Microsoft (NYSE:MSFT)
Emerson Electric (NYSE:EMR)
Procter & Gamble (NYSE:PG)
Visa Inc (NYSE:V)
Walmart (NYSE:WMT)
Chevron (NYSE:CVX)
Exxon Mobil (NYSE:XOM)
McKesson (NYSE:MCK)
Pfizer (NYSE:PFE)
Starbucks (NYSE:SBUX)
Twenty First Century Fox (NYSE:FOX)
CSX Corporation (NYSE:CSX)
Coca Cola (NYSE:KO)
Costco (NYSE:COST)
Deere & Co (NYSE:DE)
Intel Corp (NYSE:INTC)
McDonald’s (NYSE:MCD)
PepsiCo Inc (NYSE:PEP)
Novartis AG (NYSE:NVS)
3M Corp (NYSE:MMM)

Before we get into trading examples, let’s see how these stocks’ valuations are shaping up at present. Straight away we want to zone in on the companies which are trading below their 5 year averages with respect to the key valuation metrics. Many companies in the table will actually be trading above their historic valuations as stocks have been in a roaring bull market since 2009 ( information recorded – 07/31/2017). However many of these will one day become undervalued once more which is why they remain on the watchlist for the long term. Presently though, the stocks that stick out from a valuation standpoint are L Brands, McKesson Corp, CVS Health Corporation and Gilead so we will be focusing our attention to these stocks in upcoming posts

First though, lets go through some long term strategies for the dedicated income investors. Many investors prefer a hands off approach with their portfolios due to time restraints but still obviously want a portfolio that will perform well over the long term. Believe me, I totally get it. Therefore if you are an investor who just wants to set up a portfolio from scratch, buying all these stocks today and reinvesting the dividends every quarter would be a solid long term strategy. My recommendation would be to deploy the quarterly dividends ( annual in the case of Novartis) into the stocks which have been beaten up the most ( the 4 we have earmarked above). This will increase the long term returns over time.

Income investors need to understand that their portfolio may go down in value over time but the “income” element should always tend to increase to the upside as long as significant capital is not being withdrawn from the portfolio. Remember that the annual or quarterly gains are much more important than the overall value of the portfolio. Long term income investors should never sell their stock to ensure their income grows over time.

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Portfolio Update – July 20

The NASDAQ (INDEXNASDAQ:.IXIC) has had a pretty good day today despite the S&P500 and Dow finishing slightly down for the day. I believe that’s where we will most probably put the rest of our capital to work for the remainder of this cyclical top in equities – either the tech sector or the biotech sector. The biotech sector probably holds more potential because it is still nowhere near it’s all time highs of 2015.

Nevertheless you have the whole regulation cloud continuing to hang over the sector so it is riskier. If you look at something like (NYSE:LABU) which is the triple Bull leverage biotech ETF, it has gone up by 100% over the last few months alone. There is serious potential in biotech but the safer place probably to stay is tech through the likes of the Q’s (NASDAQ:QQQ) and maybe (NASDAQ:TQQQ).

As we enter this bubble phase, cycles and sentiment are going to come far less useful so it’s just going to be a matter of getting in and holding on. I would warn traders that buying call options or trading on margin is very risky. Not too long ago, I was talking about this sector probably undergoing an intermediate decline which just didn’t happen. Now that doesn’t mean it’s never going to happen so we have to make sure that if we are long in this sector with a substantial position, we need to be able to weather a potential draw-down at any stage. Just keep this in mind when you are deciding on the size of your positions. Position sizing is so crucial so open any trade with the end in mind.

With respect to the other sectors, I wrote an article recently on whether gold has printed an intermediate low or not. There are some variables that are not answered such as volume not being there at the moment, such as miners still continuing to lag and sentiment not dropping to levels where it should have dropped. I don’t know yet if we have a daily low or an intermediate low in gold and silver. We will know fairly soon though because both gold and silver after recent market action, have their sentiment at optimistic levels on a short term basis. Their RSI levels are also overbought so if this isn’t the start of a brand new intermediate cycle, they should have no problem pushing through short term resistance. If not, they’re going to come back down fairly soon.

Source : Sentimentrader.com

We also got a few emails with relation to some of our energy positions Chevron (NYSE:CVX) and (NYSE:ERX), Long term, I think these positions are fine because oil rallied again today resulting in crude oil being above $46 a barrel so the probability that the intermediate low is in is very high. Crude oil has been forming a solid base now for a good few months & I think it’s only a matter of time before energy stocks catch up. Therefore we will hold our energy positions because I do see them coming good over time.

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Novartis On Its Way To $100

Novartis (NYSE:NVS) announced its second quarter earnings report there this week and I don’t think there was anything in the announcement that should make long investors doubt their current position. Why? Well if we look at the fundamentals of the company, its apparent in my opinion that there are still far more growth triggers than potential headwinds. There was an array of approvals and results in the second quarter and some important phase III trials definitely impressed when you dig down into the actual results.

For example CTL019 could easily become a blockbuster in the cell therapy segment as it’s a huge market and there is nothing currently approved to treat cancer in this area whether it be in the U.S or Europe. Other compounds in the pipeline this I like the look of at present are RTH258 in Ophthalmology & ACZ885 in the cardiovascular area. There is a good chance that both compounds will get approved. The former helps patients maintain their vision and the latter reduces inflammation for patients who have suffered a previous heart attack. These are markets where approved drugs should gain traction quickly. The next few quarters will be interesting.


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Too Dangerous To Short McDonald’s

McDonald’s (NYSE:MCD) is closing in on $160 a share and I see a lot of commentary online stating that the stock is overvalued at these levels. From an earnings standpoint, the company’s present price to earnings ratio is well ahead of its five-year average of 27. However, the company’s price to earnings ratio actually surpassed 30 before the Great Recession. The present price that we have, is definitely not the highest price McDonald’s has traded at from an earnings standpoint.

Basically, if you look at what happened McDonald’s in the Great Recession, when its earnings multiple came back into sync through drastic improvements in earnings, then there is every reason to say that McDonald’s could do the exact same thing again if equity markets, or even if its own restaurant sector, came down anytime soon. McDonald’s has proven it can gain market share in markets where money is tight or where there is a contraction taking place. I think this is something that investors miss. They always think that just because a company is trading a little higher than normal with respect to an earnings multiple, then it’s overvalued. That’s not necessarily so.

Just look at how the company is looking to increase its earnings. It’s radically digitizing its operations with regard to delivery and with regard to getting food into its customers’ hands as quickly as possible. I think overtime all of these initiatives are going to pay dividends. The company’s also bringing fresh meat into its restaurants. This may in the near term slowdown cooking times to an extent but this point is being over-exaggerated by the bears.

But I do think that, as I’ve said, all of these initiatives eventually will pay dividends. I think McDonald’s is a smart play here, because as the chart above shows, it has rallied aggressively with the S&P 500 (NYSE:SPX) over the past few years. I do think the stock, as it has proved in the past, will hold up very well when the downturn eventually comes. 

There has been a lot of question marks raised about its debt which it’s using to buy back shares and the like. Again, all of these symptoms and problems can be sorted out through increased earnings. That’s something that I think is missing from the analysis online at present. Even though the company will probably trade through $160 a share in the near term, McDonald’s remains a very risky short, and I would not be entertaining any idea of shorting McDonald’s here.

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Has Gold Printed A Mild Intermediate Low ?

Gold is in limbo at the moment when you study its cycles and its sentiment readings. We definitely are in the timing band for an intermediate cycle low which could have taken place on the eleventh of July. But there are still some variables that haven’t been answered yet which could mean that lower lows could still be on the cards. For example if you look at a technical chart, the weekly slow stochastics just didn’t drop to the levels we usually see at intermediate lows. Furthermore even though we did produce a failed cycle in this intermediate cycle (which basically means that the recent lows in July went below the last daily cycle low in May), sentiment just didn’t drop to what we would usually see at hard lows.

Moreover volume (Banks & big institutions) in the mining sector (NYSE:NUGT) didn’t spike to levels we usually see at major bottoms. This capital usually comes into sectors when smart money sees really low sentiment levels and huge risk/reward set ups. This volume was missing though in these recent lows of early July so the question then is whether we have a new daily cycle in play at present or we have indeed printed a mild intermediate cycle. We probably won’t know for a while though. What I would like to see is for gold to continue its rally at least up to the 1,270 level over the next week or so. Usually the first daily cycle of an intermediate cycle is the most powerful so we need to start seeing this sustained momentum soon. Remember if the lows are not in yet, this intermediate cycle has now gone well over 30 weeks which means the cycle is stretched as it is. Lower lows you would think would have to come quickly because intermediate cycles rarely last this long which would mean the following IC should be a bit shorter – maybe around the twenty week level.

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Express Scripts To Get Back To $70 Soon

Express Scripts (NYSE:ESRX) seems to be finally catching a bid which means its sub $60 lows should now end p being a thing of the past. The main reason we saw those lows was because of its biggest client “Anthem” basically threatening to pull their business which is sizeable to say the least. In fact the contract that both parties have at present is expected to end within two and a half years ( by the end of 2019). Anthem added over $17 billion to Express Scripts’ turnover last year so from a top line point of view, it’s definitely a big deal in the near term. However long term investors will see this as opportunity for a number of reasons especially when you observe how low sentiment fell to recently.

Source : Sentimentrader.com

The first reason is the company’s long term financial history which looks very sound. In fact every important financial metric is well up over the past decade . Net income grew to over $3.4 billion last year and free cash flow surpassed $4.5 billion. Furthermore analysts (despite the pending loss of the anthem business), are still expecting Express Scripts to grow their earnings at an annual rate of something like 12% per annum over the next five years. Therefore I feel one would have to would have back the company here.

Along with proven financials a second reason would be the company’s competitive advantages. In the pharmacy benefit managing sector scale both on the buying side and on the selling side is obviously hugely beneficial. Express Scripts at present is the biggest benefit manager in the US. It just needs to concentrate on developing more relationships over the next 30 months or so. The company has a ninety eight percent retention rate which demonstrates clear customer satisfaction and economies of scale.

Another reason would be the biotech sector in general. If you look at the biotech ETF below (NASDAQ:IBB), this E.T.F. actually bottomed about 12 months ago and has been making higher highs and higher lows ever since. Nevertheless Express Scripts has been declining since the cyclical biotech top in June of 2015 as it has failed to make higher highs over any sort of sustained period. However I don’t think you’re going to see this divergence continue indefinitely as Express Scripts is just too strong a stock to keep on going down in the face of a health sector rally. With an earnings multiple of just over 11 at present, I think you’re going to ultimately witness a big move appear in Express Scripts shortly. Could earnings be the catalyst ? You will know in a couple of weeks..

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Shorts Could Be In For A Whole Lot Of Pain

As I write the S&P500 (NYSE:SPX) after about forty minutes into the trading session on the eleventh of July is trading at 2,425 which means it is down just a bare 2 handles on the session. As my subscribers will know, I have been looking for a correction in equities for the past couple of weeks now. In fact probably since the high that we printed on the nineteenth of June. I was expected a steeper decline than we have had up to now. As the chart illustrates below, the last two intermediate cycles before this one both in July and November of last year retraced all the way back to the S&P’s two hundred day moving average. Now as the chart shows, we just haven’t been able to undergo any type of correction since basically the elections. I’ve plotted out some Fibonnacci retracement levels just to give you an idea of how weak the decline was into the April lows. Now with the market rallying up over the fast past few sessions its becoming more than probable that last intermediate low actually took place in April at the 2,328 level.


Even though we didn’t get the correction down to the two hundred day moving average. as the sentiment chart illustrates below sentiment did actually retrace to levels even lower than we saw in November of last year. Therefore we still could be looking at an intermediate low here despite not producing a convincing failed daily cycle within the intermediate cycle. This would mean we are now coming out of a daily low within the context of this bigger intermediate cycle (which started in April). So I think the best way to play this market going forward is to hold all positions maybe with a trailing stop in some sectors which are volatile. To reduce individual company risk, one could concentrate on vehicles such as (NASDAQ:QQQ), (NYSE:IBB), & (NYSE:SPY) because there has been some weakness in certain sectors such as retail and the like. I will be watching the upcoming commitment of traders reports where I will need to see bullish numbers in terms of positive net contracts as this will mean more bulls are entering the equation. Investors and traders who are short could be in for a lot of pain here as the covering of these shorts will only drive the market higher in the near term especially if we break out to new highs shortly (over 2,453 on the S&P500).

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Allergan Has Potential But Can It Deliver ?

Allergan has a very strong aesthetics business as well as 6 potential blockbusters in clinical trials. However can it deliver ?

Allegan (NYSE:AGN) is a stock that I’ve been watching closely due to the huge decline its stock underwent from mid 2015 to December of last year. Allergan’s share price lost 40%+ but I don’t think that decline was warranted as I still believe the company is fundamentally strong. In saying this, Allergan relies more on acquisitions than other big biotech companies as it doesn’t have big in-house R&D budgets. The company is always on the watch for smaller companies especially within areas currently such as Nash where a huge unmet need remains unaddressed. If a company such as Allergan for example sees any potential among smaller companies, it usually comes in and acquires in aggressive fashion. We saw this behavior recently when Allergan bought Tobira for $1.7 billion and also Akarna for $50 million i the space of 48 hours.

The company has basically availed of three Nash treatments out of these two acquisitions and is rolling those out currently by getting them into trials in an attempt to get something approved from the FDA. Also Allergan has gone into partnership with Novartis (NYSE:NVS) as it wants to use a combination therapy of it so on C.V. C. oral treatment along with Novartis’ FXR agonist in an attempt to again just get their name stamped on some indication or an approved treatment within this sector. There are no prescribed treatments for NASH at present so its a sector with a huge unmet need. There’s an awful lot of M&A activity at present so I don’t see the level of these acquisitions and mergers slowing down anytime soon. So that’s one of the big six drugs that Allergan has in R&D at present.

Another one which again I like because of the market it wants to address is right past in this drug is Rapastinel for the depression sector which again has a huge unmet need. The benefits that Rapastinel has over other treatments in the sectors is that it provides instant relief which lasts for more time. Furthermore there seems to be less side effects over other drugs which again this looks very promising. Allergan should have results of these trials again by the back end of this year. So shareholders are definitely optimistic about at least two to three of the company’s six treatments that it has in late stage clinical trials at the moment. My own picks would be Rapastinel and its NASH treatments.

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