Will Dow 20K last?

Yesterday’s market was the first in which the Dow Jones Industrial Average closed above the much anticipated 20,000 mark. As we shared back in December, we expected it to break through that ceiling during the first few months of 2017, not in 2016, but we have to admit happened far quicker than we expected.

It would seem that much the way President-elect Trump looked to deliver on the campaign promise to bring jobs back to the US, President Trump is as serious about jumpstarting the US economy. Not even a week in office and Trump’s moves to cut regulations and promote infrastructure projects bolstered shares of manufacturing and financial companies as investors warm to the notion that Trump is likely to keep other campaign promises and foster a far more business-friendly environment than we’ve seen over the last eight years.

We continue to be hopeful, but we are detail driven people and while policy specifics are still somewhat elusive, we have to admit we have a “buy the rumor, sell the news” feeling in our stomachs. We have that feeling in part because of the speed with which the Dow moved those last 1,000 points to close over 20,000 — it took all of 42 days and was the second fastest thousand point gain in the index’s history. The fastest came in 1999 (yes, during the dot.com boom) when the Dow moved from 10,000 to 11,000 in just 24 days.

Then there’s the data… In looking at total rail carload and intermodal unit traffic thus far in 2017, it’s down 0.5 percent — far better than the declines that we’ve seen in 2016, but far from indicating robust industrial activity. We’ll continue to watch the data for signs of either a pick up in activity or ones that suggest the recent pick up was just a head fake. As we do that, we’ll also parse the earnings onslaught to see if forward guidance looks to match expectations.

Making Two Connected Society Thematic Option Plays

As we noted in yesterday’s Tematica Investing, our Alphabet (GOOGL) and Facebook (FB) shares have been getting quite a bit of attention, including bullish comments and upgrades. Are we surprised? No, for once again the market is coming around to realize the accelerating shift toward digital advertising from radio, print and broadcast TV toward digital search and advertising — the key pillars of our Connected Society investment them.

Together, Google and Facebook control 54 percent of digital advertising, up from 44 percent a year ago. According to NetMarketShare, Google has nearly 78 percent market share for desktop search and almost 94 percent for mobile and tablet search. According to a recent report from eMarketer, YouTube is the market share leader for digital video content consumption. Given the strong share gains in online shopping this holiday, Google’s search and advertising business likely benefitted as did its Google Shopping business.
And so, we are making the following two moves:

• Adding Alphabet February 2017 $875 Call
  Against the heavy tailwinds mentioned earlier — both near and longer-term — we are adding the Alphabet (GOOGL) February 2017 $875 call (GOOGL170217C008750000) that closed last night at 12.67 to the Tematica Select List. Given that Alphabet is set to reports its 4Q 2016 earnings after the close tonight, there is a shorter than usual window on this trade, but we would add the call up to 15.25. Also realizing that earnings can be volatile, we will set a protective stop loss for this position at $8.50.

• Adding Facebook 2017 2017 $140 Call
  Facebook will report its 4Q 2106 results next week (Feb. 1), and here too we see the company’s expanding monetization efforts driving revenue and earnings higher. We’ve seen these efforts expand from Facebook to Instagram and more recently Messenger. To capture what is likely to be another positive quarter, we are adding the Facebook (FB) February 2017 $140 calls (FB170217C00140000) that closed last night at 1.05 to the Tematica Select List. As with the above Alphabet trade, here too we are adding a protective stop loss at 0.60. Unlike the Alphabet trade, we have several days to go until Facebook reports, which means we are setting a ceiling for getting into the calls at 1.40.