Option Investor
Newsletter

Daily Newsletter, Saturday, 11/26/2016

Table of Contents

  1. Market Wrap
  2. Index Wrap
  3. New Option Plays
  4. In Play Updates and Reviews

Market Wrap

Runaway Rally

by Jim Brown

Click here to email Jim Brown

The "end of uncertainty" rally is ignoring calls for its demise and continues making new highs. We will eventually pay for this excess.

Weekly Statistics

Friday Statistics

The markets shook off the midweek slump to surge forward on Friday to close at another new high. The Russell 2000 is now up 15 consecutive days for a gain of 16.4%. As each day passes with a new gain the odds increase for a significant bought of profit taking. With each move higher there is a better chance for a deeper decline when that profit taking appears.

A normal retracement would be 2%-3% but we are well past normal in this rally. We could see 5%. It all depends on how it happens. A couple days of bottomless declines could be the equivalent of ripping off a band aid followed by an equally strong rebound. Or, we could see a week or more of choppy declines as traders rotate out of winners and into stocks with smaller gains. The only guarantee is that we will see some profit taking soon and next week is the logical place since the holiday is over.


There was only one economic report on Friday. The International Trade deficit for October was -$61.99 billion compared to -$56.1 billion in September. Exports declined -2.7% from September to October. Imports rose +1.1%. This is going to be a drag on Q4 GDP because we are seeing the impact of the soybean exports that were pulled forward into Q3. However, the Atlanta Fed GDPNow is tracking at +3.6% growth for Q4 so we have room for a little deterioration and still have a great number. That is nearly double the blue chip consensus estimate for only +2.1% growth. The trade report was ignored because everyone was shopping.

We have a monster calendar for next week. There will be another flurry of Fed speakers telling us the Fed is going to hike soon. The December meeting is on the 14th and you can bet there will be a rate hike. Of the 10 Fed heads charting their expectations on the "dot plot", five of them expect to end 2017 with interest rates between 1.5% and 2.0%. The CME FedWatch Tool is projecting a 93.5% chance of a December hike.


This is also employment week with the ADP forecast at 160,000 jobs and the Nonfarm Payrolls at a whopping 215,000 jobs. Obviously at least one of those estimates is very wrong. Since November is the start of the holiday shopping/shipping season, I would bet the Nonfarm number is the closest to accurate.

The Fed Beige Book is on Wednesday and that summarizes the economic conditions in the various Fed regions. The last report was slightly weaker than the prior version but it was ignored.

Wednesday is also notable because of the OPEC production decision. This could send crude prices back to $40 or over $50 in the coming weeks so the decision is critical.

It is also month end and there will definitely be some window dressing for November after the big rally. That may not move the market since the MSCI quarterly index rebalance comes at Wednesday's close with monster volume that could overpower any window dressing gains. Link to MSCI changes (PDF)

We will get the ISM Manufacturing Index on Thursday and the expectation is for a minor rise from 51.9 to 52.5.


In stock news Swiss biotech Actelion (ALIOY) shares rose 20% on news Johnson & Johnson (JNJ) had offered to acquire the company for $17 billion. The company is working with an advisor to analyze strategic alternatives. Shire (SHPG) was the last company to make an offer to acquire the company.


United Technology (UTX) shares were up slightly over the last two days on news Trump had reached out to subsidiary Carrier Air Conditioning about keeping their plant in Indiana and was reportedly making progress. This would keep 1,400 jobs in Indiana that had been slated to move to Mexico. Nobody knows what Trump has offered or threatened but it would have to be serious. Carrier workers in Indiana make between $16 and $20 per hour. When they complete the move to Mexico, they will pay Mexican workers $3 an hour. Multiply that by 40 hours a week and 1,400 employees and the incentive would have to be more than $44 million a year to offset the additional employee costs. However, in terms of available tax incentives that number would be a drop in the bucket.


Ctrip.com (CTRP) reported earnings of 17 cents compared to estimates for 11 cents. Revenue of $835.5 million beat estimates for $801.8 million. The company also said it signed an agreement to acquire the travel search site Skyscanner for $1.74 billion.


Tesla (TSLA) appears to be recovering from the SolarCity acquisition and shares have moved up for the last week. Morgan Stanley continues to dump on the acquisition saying it makes no financial sense and will become a black hole for Tesla cash. Musk feels different and Tesla stores have already begun selling energy products. Musk and Tesla reported a project to completely power the American Samoa island of T'au with a solar grid and 60 Tesla battery power packs. While that feat could be accomplished by any of the major solar manufacturers, it is confirmation that Tesla is moving rapidly to integrate the two companies. Shares have risen from $180 to $196 over the past few days.


How high is too high? U.S. Steel (X) shares have risen 61% since the election. The fundamentals really have not changed and could actually be worsening. Steel costs are expected to rise and coal is used to make the steel. Coal prices are also expected to rise. With the dollar at 13-year highs, exports of steel are going to be more expensive. I believe this stock has gotten well ahead of its skis and could be headed for a nasty fall. A lot of traders believe this as well because the January $32 put is $2.39 and very high on a historical basis. Open interest is 3,659 when most strikes averaged only a couple hundred in open interest a month ago.


Goldman Sachs (GS) said S&P-500 companies have about $1 trillion in cash overseas. Capital Economics said total cash held overseas is closer to $2.5 trillion. Trump has pledged to change the corporate tax rate to 15% and pass a 10% repatriation tax. Goldman believes that will happen in the second half of 2017.

Goldman expects about $200 billion to be immediately repatriated with a significant portion being used to fund stock buybacks. They expect $150 billion of that to be added to buybacks to increase the total by 20% to $780 billion. That will only be the second time in the last 20 years that S&P companies spent that much on share repurchases. Total cash returned to shareholders through buybacks and dividends would rise to $1.2 trillion. If there is no change in the repatriation tax rate, Goldman said buybacks would only rise about 5%.

FactSet said the blended earnings growth rate for Q3 has risen to +3.2% now that more than 98% of S&P companies have reported. That compares to estimates for a decline of -2.2% at the beginning of the quarter. However, Q4 estimates have declined slightly to earnings growth of +3.3% and 5.0% revenue growth. Earnings for all of 2017 are now forecast to show 11.4% growth and +5.9% revenue growth. That would be a good year but those forecasts change monthly and are normally optimistic at the beginning of the year. The forward PE is now 16.8 and well above the 10-year average of 14.3.

The dollar hit a new 13 year high on Wednesday as the Euro fell to a 13 year low. The turmoil surrounding the Euro is increasing as other countries discussing leaving the currency bloc. The dollar strength is the primary reason for the slight decline in earnings estimates for Q4. At these levels, it is very damaging to anyone exporting products and selling overseas.



Mortgage applications fell -9% last week as interest rates surge. Borderline borrowers are being told they no longer qualify for mortgages because of the higher rates. The annual pace of new home sales fell from 593,000 to 563,000 last week as the selling season ended and those buyers still shopping were scared off by the rates. The yield on the 10-year treasury rose to 2.41% intraday on Wednesday to hit a 15-month high.


Crude prices fell -$2 on Friday after Saudi Arabia cancelled their appearance at a meeting of non-OPEC producers scheduled for Monday, two days before the regular OPEC meeting on Wednesday. With OPEC members in rebellion mode and cannot even agree among themselves about a production cut/freeze/ceiling, there was no reason for Saudi officials to meet with Russia and others to explain an agreement that does not exist and try to get those producers to trim production as well. Saudi officials said they were not attending the meeting in order to focus on reaching a consensus within the organization first. The Monday meeting was supposed to "seal the deal" on a joint cut between OPEC and non-OPEC producers.

OPEC has managed to keep prices from collapsing for the last two months by routinely floating headlines that suggested there could be a deal this time. Unfortunately, they have run out of time and if there is no "credible" deal announced on Wednesday, oil prices will collapse. OPEC had record production in October and probably again in November. Based on the comments out of other OPEC producers, if there is going to be a material production cut, it will have to come from Saudi Arabia and they have said repeatedly they would not accept that fate. Barclays said Saudi could cut 500,000 bpd, the UAE and Kuwait 100,000 bpd each or possibly 200,000 bpd each but Iran, Iraq, Libya and Nigeria will be increasing by an equal amount so there would be no real production decline.

Iran is expecting Trump to impose new sanctions so they will not voluntarily agree in advance to restricting production. They will want to produce every barrel possible until the sanctions hit again.

Most analysts believe OPEC will announce some "face saving" agreement of some sort but nobody will actually comply with the terms. It will strictly be a political statement to make it appear they are doing something. I would expect a sell the news drop on the announcement unless it is much stronger than expected.

The alternative view from Bank of America is that OPEC will be forced to cut production for several reasons related to the Trump victory. Interest rates and the dollar are rising. That forces the price of oil lower on a commodity basis. Trump has also threatened to boost U.S. production significantly and raise the current supply glut and force prices lower. BofA thinks the threat to Iran of a Trump presidency will force them to freeze production with OPEC in an effort to raise prices. BofA believes Iran cannot increase production significantly from current levels without additional foreign investment. Those potential investors will be taking a wait and see attitude before committing additional funds that could get trapped in a new sanctions program.


Active rigs rose by 5 with three of those oil rigs and 2 gas rigs. Activations this week are likely to be low as producers wait to see what the OPEC decision does to prices.


 


 

Markets

Volume was not just low on Friday, it was nonexistent. Only 3.0 billion shares traded across all markets. Nobody expected any volume but that was still 200 million shares more than the 2.8 billion on the same day in 2015.

Internals were still positive with 4,445 advancers to 2,339 decliners. There were 835 new 52-week highs. Tuesday saw the most with 936 new highs followed by 896 on Wednesday.

With month end on Wednesday along with the MSCI index rebalance we should see a significant volume increase on Tue/Wed that could overpower any directional trend. High rebalance volume is typically neutral for the market because stocks are being bought and sold in relatively equal dollar volume.

BofA said prior to the election more than $130 billion had been taken out of equity funds year to date. Since the election, more than $30 billion has flowed back into equities. If we really are at the start of the Great Rotation from bonds back into equities, there are hundreds of billions of dollars still to flow. It will not all happen at once but as long as the markets keep making new highs that is a powerful incentive to accelerate the rotation.

Most professional traders and analysts are taking a wait and see approach. The market has gone too far, too fast and while they would like to add more long positions, they would rather do it on a dip. This thought process suggests any profit taking dips in the near future are likely to be shallow.

The S&P blew through the next to last line of uptrend resistance at 2,205 on Friday with a nearly 9-point gain to close at 2,213. The next level of concern is 2,225. The index is overbought and could/should rest at any time. The 2,175 level should be worst-case support but I would be shocked if we dipped to that level.


The Dow has moved into blue-sky territory with no material resistance in sight. There is light uptrend resistance from 2014/2015 around 19,500. The biggest problem for the Dow this week is simply its overbought status. Some individual components are eventually going to weaken and that will create the drag needed to slow the ascent. The prior uptrend resistance is probably going to be support when the profit taking appears. That is 18,900 today and where I would be a tentative buyer.

The Dow is setting up for an attack on 20,000 by year-end. That would be the mother of all sell the news events. After what would be a monster rally to get to that point, the touch of 20K could be the equivalent of a lightning strike. There will be year-end tax trading considerations as well as severe inauguration risk. With as many as two million protestors reportedly ready to converge on Washington to block the event, this could turn into a very ugly mess. I hate to be talking about this well in advance but portfolio managers with billions at risk, have teams of people that do this kind of research in order to avoid surprises.

I am looking for the Dow to make new highs in December but every step higher increases the year-end event risk. January's have not been kind the last two years and investors tend to remember those events.



The Nasdaq Composite finally kicked into gear and started making new highs as well. The big cap techs are still hit and miss with choppy trading from day to day. Note that none of the FANG stocks are in the list of gainers below. The smaller tech stocks including the chip sector are doing well. Unfortunately, the biotech sector lost traction and struggled all week to close with a minor loss. This held the Nasdaq to some mediocre gains.

The Nasdaq has uptrend resistance around 5,500 and that would be a good target for year end after some minor retracements for profit taking along the way.



I am bullish on the market over the next several weeks but expect any continued gains to be interspersed with some bouts of profit taking. I believe money from bonds will be flowing into equities but maybe not at a breakneck pace until after the inauguration.

We cannot continue the recent gains but dip buyers should keep any declines relatively shallow. The market is making new highs and that is the drug of choice for investors. Everybody wants to chase new highs for fear of missing out on a long-term rally. Retail investors do it because they do not really understand. They are hooked on the momentum. Fund managers do it because they have to or their performance will lag their peers and they risk losing their jobs. Try not to be lured by the Pied Piper of new highs and plan on buying the dips instead.

 


 

PUT OPTION INVESTOR
ON YOUR SHOPPING LIST


Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day




Random Thoughts


The surge in bullish sentiment continues. Bulls are almost over 50% and bearish sentiment is at a five-month low. Bullish sentiment has risen from 23.6% at the beginning of November to 49.9% a rise of more than 100%. This survey ended on Wednesday.

Last week results


David Stockman, Director of Office of Management and Budget under President Reagan, does not share the bullish view of most investors. He is calling this the "Greatest Suckers Rally of All Time." "This 5% eruption is meaningless. It is some robot machine trying to tag new highs." He said he "sees a recession in 2017 and the market is going to go down and stay down long and hard because for the first time in 25 years there is nothing to bail it out." "Sell stocks, sell bonds. Get out of the casino. Bonds have already lost $2 trillion globally and have miles to go." Complete Source Article


General James Mattis is being considered for the Secretary of Defense. Mattis is a soldier's general. He and President Obama did not get along because Mattis was too aggressive in his desire to take the fight to ISIS. He was called "Mad Dog Mattis" by the soldiers under his command and his codename was "Chaos." Nobody wants to fight a war. However, if we do have to fight, then the goal is to win, not play to a draw or political retreat. Mattis is the kind of general a soldier wants to follow.

In late 2003, a colleague of General James Mattis wrote to him asking for a few words on the importance of reading and military history for the officer, even where it might seem that one was "too busy to read." The general was known to carry a library of 6,000+ books with him everywhere he was assigned. His response went viral.

"The problem with being too busy to read is that you learn by experience (or by your men's experience), i.e. the hard way. By reading, you learn through others' experiences, generally a better way to do business, especially in our line of work where the consequences of incompetence are so final for young men.

Thanks to my reading, I have never been caught flat-footed by any situation, never at a loss for how any problem has been addressed (successfully or unsuccessfully) before. It does not give me all the answers, but it lights what is often a dark path ahead.

With TF 58, I had with me Slim's book, books about the Russian and British experiences in AFG, and a couple others. Going into Iraq, "The Siege" (about the Brits' defeat at Al Kut in WW I) was required reading for field grade officers. I also had Slim's book; reviewed T.E. Lawrence's "Seven Pillars of Wisdom"; a good book about the life of Gertrude Bell (the Brit archaeologist who virtually founded the modern Iraq state in the aftermath of WW I and the fall of the Ottoman empire); and "From Beirut to Jerusalem". I also went deeply into Liddell Hart's book on Sherman, and Fuller's book on Alexander the Great got a lot of my attention (although I never imagined that my HQ would end up only 500 meters from where he lay in state in Babylon).

Ultimately, a real understanding of history means that we face NOTHING new under the sun. For all the "4th Generation of War" intellectuals running around today saying that the nature of war has fundamentally changed, the tactics are wholly new, etc, I must respectfully say… "Not really": Alex the Great would not be in the least bit perplexed by the enemy that we face right now in Iraq, and our leaders going into this fight do their troops a disservice by not studying (studying, not just reading) the men who have gone before us.

We have been fighting on this planet for 5000 years and we should take advantage of their experience. "Winging it" and filling body bags as we sort out what works reminds us of the moral dictates and the cost of incompetence in our profession. As commanders and staff officers, we are coaches and sentries for our units: how can we coach anything if we don't know a hell of a lot more than just the TTPs? What happens when you're on a dynamic battlefield and things are changing faster than higher HQ can stay abreast? Do you not adapt because you cannot conceptualize faster than the enemy's adaptation? (Darwin has a pretty good theory about the outcome for those who cannot adapt to changing circumstance - in the information age things can change rather abruptly and at warp speed, especially the moral high ground which our regimented thinkers cede far too quickly in our recent fights.) And how can you be a sentinel and not have your unit caught flat-footed if you don't know what the warning signs are - that your unit’s preps are not sufficient for the specifics of a tasking that you have not anticipated?

Perhaps if you are in support functions waiting on the warfighters to spell out the specifics of what you are to do, you can avoid the consequences of not reading. Those who must adapt to overcoming an independent enemy's will are not allowed that luxury.

This is not new to the USMC approach to warfighting - Going into Kuwait 12 years ago, I read (and reread) Rommel's Papers (remember "Kampstaffel"?), Montgomery's book ("Eyes Officers"…), "Grant Takes Command" (need for commanders to get along, "commanders' relationships" being more important than "command relationships"), and some others. As a result, the enemy has paid when I had the opportunity to go against them, and I believe that many of my young guys lived because I didn’t waste their lives because I didn't have the vision in my mind of how to destroy the enemy at least cost to our guys and to the innocents on the battlefields.

Hope this answers your question. I will cc my ADC in the event he can add to this. He is the only officer I know who has read more than I.

Semper Fi, Mattis"



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria."

John Templeton


 


Index Wrap

Jenga Market

by Jim Brown

Click here to email Jim Brown
Have you ever played that kids game where each player removes piece after piece of the puzzle until the tower comes crashing down?

Do you feel like the minor market gains every day are the equivalent of stacking another layer on our Jenga market? In the game Jenga there is no way out of the game without a collapse. In the current market, we may actually escape for several more weeks before the bricks come tumbling down.


We all know the market cannot continue to rally every day to another new high. The market has to rest and retrace some gains so investors on the sidelines feel better about entering positions. The market needs to "ebb and flow" in order to remain healthy. Too many days in one direction eventually produces an opposite reaction.

In our current environment, we have several factors working for us. The investing paradigm appears to have changed. This means a lot of money has to be repositioned.

Mutual funds are currently managing more than $31.38 trillion dollars worth of stocks and bonds. There are 79,669 mutual funds worldwide and 9,260 funds in the USA. If they are an actively managed fund they are scrambling to rotate funds from various sectors expected to do poorly into sectors expected to do well in the new environment. Energy, industrials, financials, healthcare, biotechs, defense and transportation stocks should be the winners.

Funds are rotating out of bonds as their value comes crashing down. More than $2 trillion in value has been lost in the global bond market since the election. There are trillions more to be lost if the current rotation continues. The yield on the ten-year treasury has risen from 1.33% in July to 2.37% in November. That is a 78% increase in yields in four months due to selling in treasuries and the drop in prices.

Only the very long-term institutional holders will stick with bonds in this environment. In order to recover their existing losses they need to hold to maturity. Investors not willing to take the paper losses are dumping bonds and treasuries to rotate into equities in hopes of catching a momentum wave into 2017.

The correlation between the High Yield ETF (HYG) and the S&P is breaking down. The S&P has taken the lead and the ETF is faltering. Historically they run in tandem and the breakdown is proof investors are rotating out of bonds.


Equities are being favored with the exception of the big cap techs. The Nasdaq 100 ($NDX) has yet to make a new high as investors cash out of large positions to raise cash to invest in the sectors that should win in 2017. The defense sector has exploded higher with Trump promising to rebuild the military and end the sequester that has crippled defense spending. Each daily gain is the equivalent of adding another layer of blocks on a Jenga tower.


The Biotech sector is an example of what happened when the tower became unsteady. Somebody dumped the wrong stock and the index crashed back from 3,500 to 3,200 in a very short period of time. The index was up 22% since November 3rd in a knee jerk reaction to the events. Therein lies the problem.


The Russell 2000 Small Cap Index has posted gains for 15 consecutive days. That is the best performance since 1996. This Jenga tower is growing to the sky. Since that is impossible we know a critical event will eventually remove the last support piece and the index will decline. In the case of the Russell, it may decline sharply because the small caps lack liquidity and once a bunch of stop losses are triggered, the avalanche can be dramatic.


Another index where the gains are unsupported is the Dow Transports. The transport index is up 12% compared to the 6% gain in the S&P. The transports are nearing critical resistance at 9,200 and the odds are slim they will make it through in the near future. Declining transports tend to drag the Dow lower. Conversely, a breakout over 9,200 would be very bullish for the Dow and the market.


The big cap tech stocks are recovering from their post election dip but the progress is slow compared to the other indexes. Facebook, Google and Netflix have been laggards holding the index back. Amazon has recovered somewhat over the last six days but Apple is still struggling. Until those tech generals decide to lead the charge higher, that new high may be elusive.


The broadest major index is the Russell 3000. That index broke out to a new high on the 17th and has not looked back. Although the market breadth has been shrinking, the decline amounts on individual stocks has been minimal while the gainers are adding points at a fast clip. The Russell 3000 represents the broader market and it is showing no weakness.


I could be very wrong but I believe we are going to see some profit taking soon. However, I also believe any retracement will be shallow and brief. There are far too many investors waiting on the sidelines for a chance to join the party.

The oscillators suggest we could have a continued rally because we have not yet reached the levels seen back in July. The percentage of S&P stocks over their 50-day average reached 69.6% but that is well below the 87% from July when the indexes were a lot lower. This means quite a few stocks have not taken part in the rally and are lagging the market. Investors will be hunting these out as underappreciated opportunities.


Likewise the Bullish Percent Index has only returned to 63.4% compared to the 76% or higher we have seen twice in 2016. This percentage of S&P stocks with a current buy signal. This suggests the market has room to run.


I would be a dip buyer in the week ahead. I am afraid that buying the market momentum after a three-week rally is asking for trouble. If you have a long time horizon and can stand a $3 to $5 temporary decline then you could buy the breakouts but I would rather buy the dips. Let somebody else take that hit and we can profit from our patience.

Keep those stops in place because it is always better to look back and say "I am glad I got out" instead of "I wish I had gotten out." There is always another day to trade as long as you have capital to invest.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Tiptoe Carefully

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the markets very overbought we have to be careful about what plays we enter. I am going to try and add a play that is not extremely overbought in hopes that the rally continues and that investors begin looking for underappreciated companies.



NEW DIRECTIONAL CALL PLAYS

CONE - CyrusOne Inc - Company Profile

CyrusOne Inc., a real estate investment trust (REIT), owns, operates, and develops enterprise-class, carrier-neutral, and multi-tenant data center properties. The company provides mission-critical data center facilities that protect and ensure the continued operation of information technology infrastructure. Its customers operate in various industries, including energy, oil and gas, mining, medical, technology, finance, and consumer goods and services. As of December 31, 2015, the company's property portfolio included approximately 32 data centers in the United States, the United Kingdom, and Singapore collectively providing approximately 2,954,000 net rentable square feet. Company description from FinViz.com.

One commodity that will never see a surplus of supply is data center properties. As fast as they can be built they are filled up as data storage and cloud services expand exponentially. These centers capture top dollar from renters and they almost never leave.

CyrusOne reported earnings (FFO) of 67 cents compared to estimates for 63 cents. They posted revenue of $143.8 million that beat estimates for $136.2 million. They guided for full year earnings of $2.59-$2.62 and revenue of $523-$530 million.

Shares have been declining since August as REITs fell out of favor. There was a rebound in progress when the election knocked shares back -$5 as investors raised cash for industrials and financial stocks. That post election dip has been erased and shares are starting to move higher again.

They have a yield of 3.5% and after the big decline, there is significant opportunity for share appreciation as well.

Earnings Jan 30th.

Options are cheap.

Buy March $45 call, currently $2.20, initial stop loss $36.50


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Get Ready

by Jim Brown

Click here to email Jim Brown

Editors Note:

The holidays are over and the Trump rally is three weeks old. Get ready for some profit taking. The Dow closed at a new high and the Russell is now up 15 consecutive days. It is only a matter of time before we get hit with some decent profit taking.

I continue to raise the stop losses to try and take us out as close to the top as possible. I would not be surprised to see one big downdraft knock out all our positions at once. We cannot use wider stop losses because we do not know how far the profit taking will dip or how long it will last. It could be a one day wonder with a major dip or a week or two of choppy declines. Whichever event occurs we will try and reenter some positions on the dip with longer dated options.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.




Current Position Changes


No changes



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates


AAPL - Apple Inc - Company Profile

Comments:

Apple's first return to the Black Friday hoopla was a dud. The company offered gift cards of up to $150 that could be used for its older products. The iPhone 7 was not on the menu. Shares did rise 50 cents.

Original Trade Description: November 16th.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. Company description from FinViz.com.

Apple shares have been under pressure since topping at $118.25 before their Q3 earnings. Q4 estimates are rising thanks to the problems with the Samsung Note 7 that forced its removal from the market. Sales are said to be booming despite tight supply. Apple cannot make enough phones to fill the demand going into the holiday season and that suggests it should be a good quarter.

The company is also expected to announce some new products soon including "digital glasses." The rumors breaking about the next iPhone model to be announced next September already have Apple fanatics excited. Those include full frontal screens without any edges. This will allow full use of the phone's screen and allow for smaller phones overall sizes while keeping the screen sizes the same. There is rumored to be a 4.7 inch, 5.0 inch and 5.5 inch model. The 5.5 inch model is said to be an OLED screen with curved edges.

Regardless of the future new product rumors, several high profile funds have increased positions in the stock. Steve Cohen and Ray Dalio have reportedly increased their stakes.

Apple shares dipped to $104 on Monday and touched the 200-day average. That has been support/resistance dating back to September 2013. Since Monday's dip, which was seen as the last bout of climax selling for the big cap tech stocks, Apple shares have risen for two days.

Today, with Apple at $108, somebody bought 160,000 contracts of the December $115 calls. Even at the average price of 75 cents that was a $12 million dollar bet that Apple is going higher over the next 30 days. That takes some serious conviction. I am recommending we follow them only use the January option just in case they are wrong about the timing.

Earnings January 24th.

Position 11/17/16:

Long Jan $115 call @ $1.85, no initial stop loss.


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. Minor gain but closed at a new high.

Original Trade Description: November 19th.

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

ADP reported a 26.5% rise in earnings to 86 cents that beat estimates by 9 cents. Revenues rose 7.5% to $2.92 billion and beat estimates for $1.91 billion. The number of employees on client payrolls rose 2.7%. They ended the quarter with $2.82 billion in cash and long-term debt of $2 billion. The announced the sale of their CHSA and COBRA business to WageWorks for $235 million. The sale will be completed in Q2 2017.

The company guided for 2017 revenue growth of 7% to 8% and 15% to 17% earnings growth. The PEO Services segment revenues are expected to rise 14% to 16%.

The company just declared a 57-cent quarterly dividend to raise the annual dividend to $2.28.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

There is resistance at $96 but given the time of year and the overbought conditions in the rest of the market, we could see a breakout. Options are relatively cheap.

Position 11/21/16:

Long Feb $95 call @ $2.50, see portfolio graphic for stop loss.


FB - Facebook - Company Profile

Comments:

No specific news. Oppenheimer saud FB was one of the most attractive stocks in the market today after the post election decline.

Original Trade Description: November 12th.

Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.

The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.

Facebook still makes a lot of money and they still have a lot of assets to monetize. Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.

Earnings February 1st.

Position 11/16/16:

Long Feb $125 call @ $3.05, see portfolio graphic for stop loss.


FFIV - F5Networks - Company Profile

Comments:

No specific news. Shares still fighting resistance at $144 but closed just a fraction over that level.

Original Trade Description: November 21st.

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Link Controller, which monitors the health and availability of each connection in organizations with more than one Internet service provider; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; and Traffix Signaling Delivery Controller for diameter signaling and routing. Company description from FinViz.com.

The big attack on the Internet several weeks ago was driven by malware that had been placed on IoT devices including security cameras, cable boxes, burglar alarms and dozens of other device types. These devices are typically delivered without any material malware defenses. It is up to each manufacturer to overcome this in the future with some kind of defense.

However, FFIV provides software and hardware to prevent denial of service attacks from these devices as well as the more robust attacks from computers and servers. With more and more servers in the cloud it is harder to protect them from attack like you would dedicated physical servers in a dedicated data center. This is where FFIV excels.

The company's Silverline service places a sophisticated cloud based filter around critical infrastructure that stops attacks instantly. Aided by hardware based firewalls in dedicated data centers they protect data and equipment from all outside attacks.

For Q3 they reported earnings of $2.11 compared to estimates for $1.94. revenue ot $525 million beat estimates for $520 million.

Earnings Jan 21st.

FFIV shares spiked on earnings in late October and have been moving steadily higher. They are about to break over resistance at $144 and we could see another leg higher when that happens.

Position 11/22/16:

Long Jan $150 call @ $3.15, see portfolio graphic for stop loss.


IWM - Russell 2000 ETF - ETF Profile

Comments:

Excellent relative strength continued. The Russell 2000 is now up 15 consecutive days. That is the best 3-week performance since 1996. I am going to continue raising the stop loss because this cannot last.

Original Trade Description: November 5th.

The IWM currently holds 1,975 stocks and attempts to replicate the performance of the Russell 2000 Small Cap Index.

The S&P has now declined for nine consecutive days and the longest streak in 36 years. That is the equivalent to red coming up on the roulette table nine times in a row. The index is short-term oversold after a 4.8% decline. I believe the sell off over election uncertainty is nearly over. Investors and funds have had a week since the end of the October fiscal year end to make changes to their portfolios and raise cash for their post election purchases.

We all know there are several sectors that will not do well under a Clinton presidency and some that will prosper. Under a Trump presidency there are more profitable sectors but there is a greater fear of the unknown. He is a take no prisoners type of person and he has a lot of ideas about how to make American great again. Unfortunately, it may start off with a larger market sell off on that uncertainty.

Clinton is still ahead in the polls with two days to go and she is pulling out all the stops. The electoral map favors Clinton because there are more democrats than republicans. The heavily populated coastal states with a high number of electoral votes are liberal democrat while most of the flyover states are conservative republican.

The key point here is that Clinton is favored to win despite all her problems. If that turns out to be the case the market is expected to rally 3% to 5% very quickly.

There is always the possibility of a Trump upset and a temporary market dip but that would be the "Brexit dip" that should be bought. This is a headline event rather than a sudden change in the government. It would take many months or even years to get his changes passed into laws, and some would never be passed. The key point is that a Trump victory could be a sell the news event followed by a Brexit type rebound.

I am recommending a call position on the Russell 2000 ETF because the Russell is the most oversold. It is also cheaper for a speculative position.

I am going to recommend two entries. One for a positive move higher and one for a dip buy. It is entirely possible we could end up with both positions. If the dip entry is triggered first, cancel the rebound entry.

This is a SPECULATIVE position. Do not invest money you cannot afford to lose.

Rebound entry:

Position 11/7/16: With an IWM trade at $117.25
Long Dec $119 call @ $2.47, see portfolio graphic for stop loss.


SMG - Scotts Miracle Grow - Company Profile

Comments:

No specific news. Minor gain and tied for record close.

Original Trade Description: November 12th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter, sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

Position 11/14/16:

Long March $90 call @ $3.90, see portfolio graphic for stop loss.


WDC - Western Digital - Company Profile

Comments:

No specific news. New 10 month high.

Original Trade Description: November 12th

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

Last week WDC announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy with a price target of $69.64. Shares closed at $58.89 on Friday.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Position 11/14/16:

Long Jan $62.50 call @ $2.20, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

VXX - VIX Futures ETF - Company Profile

Comments:

Only a fractional decline ahead of weekend event risk and the potential for a market decline next week. Because this is a December option, I put a tight stop on the position. If we are stopped out, I will reenter the position on the next bounce with a longer term put.

Original Trade Description: September 21st.

The VXX is a short-term volatility product 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 ETF. 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, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now