Option Investor
Newsletter

Daily Newsletter, Monday, 7/31/2017

Table of Contents

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

Market Wrap

The Dow Continues To Outshine the Others

by Keene Little

Click here to email Keene Little
The Dow continued its journey to new all-time highs while the other indexes hang back (SPX) or sell off (techs and RUT). Not even the TRAN will follow the Dow and the Dow's lonely performance is reason for concern.

Today's Market Stats

The indexes got a little pop up with this morning's gap up but it was immediately sold into. The Dow was the only index to hold in the green on the quick pullback and then it proceeded higher while the other indexes dropped into the red. The tech indexes suffered higher relative losses again, thanks mostly to the selling in the FAANG stocks. We have a fractured market and that's generally not a healthy sign.

Many are saying this is the most hated bull market and based on the lack of participation by so many investors there's a good chance for a melt-up conclusion to the bull market, perhaps something similar to the late 1990s. I think it's a very different time than back then and comparing the two periods is like comparing night to day. If not for corporate buybacks and the outperformance by a few stocks (FAANG in particular) we'd have a very different kind of bull market.

There's an interesting "investment memo" from Howard Marks, the highly successful investor and founder of Oaktree Capital, that gives all of us some things to think about. The full memo to his investors can be found on Oaktree's site at Howard Marks memo and I've highlighted a few key comments and ideas he discussed, which can be summarized as "it's time to be cautious." As he said, "I think it's better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses."

Marks is happy to take some chips off the table at a time when returns are likely to be lower and likely negative. Stock values are high across the board and the S&P 500 is now trading 25 times trailing 12-month earnings, which is considerably higher than the long-term median of 15. At the same time we're seeing a record-low VIX indicating most investors believe the trend will continue without a worry. Stability breeds instability but very few are thinking about that.

The VIX hasn't been this low since Bill Clinton became president in 1993. Back then we had world peace, faster economic growth and a much small deficit, all reasons to be more hopeful for a continuing bull market than what we have today. Yardeni Research shows the percentage of investors who believe the market will fall is now at its lowest level since 1987.

Another quote from Howard Marks:

"Most people can't think of what might cause trouble anytime soon. But it's precisely when people can't see what it is that could make things turn down that risk is highest, since they tend not to price in risks they can't see. With the negative catalyst so elusive and the return on cash at punitive levels, people worry more about being underinvested or bearing too little risk (and thus earning too low a return in good markets) than they do about losing money."

Marks also touched on the explosion in ETFs as more money is moved from active investment funds into passive funds. Cap-weighted indexes have especially distorted the investment landscape because the large-cap stocks get most of the money when it flows into an ETF that includes those stocks. A higher percentage of money flows into the largest cap stocks, whether they deserve it or not, while the smaller companies (many of which are more deserving) get a smaller piece of the investment pie. It is this reason why the FAANG stocks have significantly outperformed the other stocks and why ETFs like the QQQ could be in significant trouble when the selling begins.

The climb in NDX (and QQQ) has been primarily driven by the five FAANG stocks and whichever direction they go so goes the index. Today all 5 FAANG stocks were down and so was NDX, QQQ and the Nasdaq. One can only guess how quickly things could turn bad for the tech indexes when the tech ETFs are sold since once again the large-cap stocks will bear the brunt of most of the selling. Ah, we reap what we sow.

One indicator of a lack of concern about the market/economy is the performance of the high-yield bond market (otherwise known as the junk bond market). In an era of uber-low interest rates many retirement investment funds, such as pension funds, have pursued higher yields in an effort to get at least close to the 8% many of their funds need in order to satisfy the future needs of retirees. The spread between high-yield funds and U.S. Treasuries is back down to where they've been at prior important tops in the market. HYG is a high-yield corporate bond fund and worth keeping an eye on, especially since it tends to trade with the stock market but provides early signs of topping.

HYG tends to form rising wedge patterns as it tops out and it's no different for the rally from last November. From an EW (Elliott Wave) perspective, the rally from November is now a 5-wave move inside a wedge and therefore should be topping literally any day now. The bearish divergence against the October 2016 high is another warning sign and when this breaks down it's likely to go fast. HYG will have confirmed a top is in place when it drops below its July 7th low at 87.45.

High Yield Corporate Bond Fund, Weekly chart


Volatility index, VIX, Daily chart

While HYG has been showing the same bullish complacency as the stock market, we're seeing the same thing in other countries' bonds (Argentina 100-year bonds at 8% anyone, or how about Italian bonds at 6.25%?). Thee VIX has of course garnered much attention with last week's intraday low below 9 after the July 21st close at 9.36. As I had pointed out last week, the quick spike below the bottom of its rising wedge last Wednesday has been followed by a quick spike back above 10 and is now on a buy signal.

Trading the VIX is not for the faint of heart and while the VIX could start to rally it doesn't mean the stock market will fall. But it does mean the worry factor will be on the rise and we could see that start to affect trader sentiment. This market needs more buyers to fill in behind the last buyers (the greater fool theory) and with a market that is priced high and to perfection, it can't tolerate worry.

For the past week or more we've had a fractured market, especially between the Dow and all others. The tech indexes and the RUT have been struggling more to hold onto this month's gains and SPX is showing weakness. A fractured market is typically a warning sign that the trend (up in this case) is coming to an end. The money running into the Dow could be a defensive move, especially out of the higher-beta stocks like the techs and small caps. SPX could be our "tweener" as it splits the difference between the bluest of the blue chips and the riskier stocks. I'll start tonight's review of the indexes with the SPX


S&P 500, SPX, Weekly chart

The parallel up-channel for the rally from 2010-2011 is shown in bold green (lighter green for the top of the channel). The dashed green line is the mid-line of the up-channel and it has been acting as resistance since the recovery off the January 2016 low. This is typical price behavior for the 5th wave of a channel and it's been a matter of trying to figure out where the 5th wave will likely finish since it will be the completion of the rally from 2009.

For the past several months I've been thinking SPX could make it up to the 2475-2516 area for a final high. There were many times it was looking vulnerable to a breakdown before that target zone but here we now are at the lower end of the zone (last Thursday's high was 2484). The bulls would love to see a breakout above 2516 (where the 5th wave of the rally from 2009 would equal the 1st wave) since it would negate the bearish divergence and suggest a blow-off top (melt-up) is in progress.

The 5th wave of the rally from January 2016 is the leg up from March and it's showing bearish divergence against the March 1st high, which helps confirm the wave count. The pieces are in place to call a top at any time but there's no evidence yet that a top is in place. A drop below the June 29th low near 2505 would be the first warning sign for the bulls to pay attention to. In the meantime the bears need to stay aware of the uptrend still intact and higher potential.


S&P 500, SPX, Daily chart

Zooming in the leg up from March I'm showing the potential for a rally at least to about 2507, where the move up from May 18th would achieve two equal legs up, but I'm not feeling confident about that potential. Last Thursday's sharp decline has been followed by a choppy bounce correction and that suggests lower prices dead ahead. That expectation can only be negated with a rally to a new high above 2484. A drop below last Thursday's low near 2460 would keep SPX on a sell signal.

Key Levels for SPX:
- bullish above 2484
- bearish below 2440


S&P 500, SPX, 60-min chart

It's possible last Thursday's sharp spike down was the completion of a pullback correction off the July 20th high and we'll see SPX chop its way higher to the 2500 area in the next week or two. But if we're in the beginning of a more significant pullback/decline we should see stronger selling kick in tomorrow. Perhaps new-month money will push SPX a little higher, especially if the Dow manages to continue climbing, but I see more downside risk than upside potential from here.


Dow Industrials, INDU, Daily chart

The Dow has clearly been the outperformer for the past week and it's hard to tell if that's bullish or simply a sign that money is rotating out of the riskier stocks and into the relative safety of the bluest of the blue chips. Funds that need to stay invested will find it much safer to be in more liquid stocks when the time comes to sell.

The Dow rang the bell today at 21888, where the 5th wave of the rally from April equals the 1st wave. It also hit the trend line along the highs from April 26 - June 19, which fits as the top of a rising wedge for the rally from April. The late-day selling brought the Dow back down to the trend line and left a shooting star at resistance. A red candle on Tuesday would leave a sell signal following the little throw-over above the top of the wedge, which would only be negated with a rally to a new all-time high. Keep in mind that wedges tend to be retraced much faster than the time it took to build them. If the bulls can hold on here we could see the Dow make it up to at least 22025 where it would run into the top of a small parallel up-channel for the leg up from June 29th. Tuesday should provide the answer as to which direction the Dow (and likely the rest of the market) will likely head this week and next.

Key Levels for DOW:
- bullish above 21,900
- bearish below 21,496


Nasdaq-100, NDX, Daily chart

NDX looks like SPX -- the sharp decline last Thursday has been followed by a choppy bounce correction and that keeps things looking more bearish than bullish. This morning's gap up was followed by immediate selling and the morning low was then followed by a sideways consolidation. Again, more bearish than bullish and it's looking like we should expect a continuation lower, in which case the selling should become stronger. The question for Tuesday, as with the others, is whether or not new-month money coming into the market will hold things up for at least a day.

Key Levels for NDX:
- bullish above 6025
- bearish below 5780


Russell-2000, RUT, Weekly chart

Forgetting about the daily squiggles, even those squiggles have resulted in the RUT being down 4 days in a row, the big picture of the RUT is what should be scaring bulls into submission. The big megaphone topping pattern and the rising wedge from March into the top of the pattern looks like a very dangerous time to be long at least this index. If it can bust a move to the upside, with a sustained break above 1452 I'd give up my bearish opinion.

But if the RUT breaks its uptrend line from February-November 2016, currently near 1417, and then its July 6th low near 1399 we'd have a confirmed high in place. A breakdown would likely be followed by strong selling in this index, along with the techs, and it would likely catch more than a few complacent bulls asleep at the sell button.

Key Weekly Levels for RUT:
- bullish above 1452
- bearish below 1398


Transportation Index, TRAN, Daily chart

The TRAN has been consolidating since last Thursday when it landed on its uptrend line from June 2016 - May 2017. The consolidation is what was expected if we have a bearish turn down from the July 14th high. A more significant sell signal would come from a break of the 200-dma, now near 9111 since that would also be a confirmed break of the uptrend line as well. Note the bounce off the 200-dma on May 18th. The TRAN needs to get back above price-level S/R near 9490 in order to turn the pattern back to bullish.


Relative Strength of TRAN vs INDU, Daily chart

It's instructive to look at the relative strength (RS) of the TRAN vs. the Dow since so many look to their relationship to help determine the health of a bull market and to warn of possible trouble. The TRAN outperformed the Dow into December 2016 but has been underperforming the Dow since then. The "rally" in the TRAN's RS from May into early July was a 50% retracement (to the 1/10th of a penny) of the December-May decline and that's been followed by a strong decline since the peak on July 10th.

Note the 5-wave decline from December into May and the 3-wave bounce correction, both of which point to continuation lower in the RS of the TRAN. The July decline is likely only the beginning of the TRAN's further weakening in its RS compared to the Dow. The significance of this is that the TRAN is forecasting further weakness in the economy, something that hasn't been reflected yet in the broader averages. I think this is an important message from the market that most traders are not paying attention to.

One thing to keep in mind about this RS relationship is that it tends to reverse following stock market peaks. It's usually not because the TRAN starts rallying but instead because the Dow falls faster. In others words the weakness in the TRAN foretells what's coming and then when the Dow starts to fall it falls harder than the TRAN (as it "catches up" with the TRAN).


U.S. Dollar contract, DX, Daily chart

The US$ has now made it down to the bottom of a down-channel for the portion of its decline from May. This follows the breakdown below the bottom of the down-channel for the initial portion of the decline from its January peak. With today's close below price-level support near 93 it could certainly break below the bottom of the steeper down-channel, in which case it will head for possible support at the trend line along the lows from February 2015, currently near 90.35.

If the waterfall appearance of the dollar's decline from January continues with a break below 90 it could turn into a very nasty and scary selloff in the dollar, one which would likely shock the world (and hurt the buying power of all those emerging countries that tie their currencies to the U.S. dollar).

Could a crash in the dollar be the thing that breaks the back of the stock market rally? It's too early to speculate about that, especially since we could see the dollar get a bounce off support here. What kind of bounce follows, if it bounces, would tell us more about whether or not to expect lower prices for the dollar.


Gold continuous contract, GC, Daily chart

The dollar has declined nearly -11% since January and while gold's path has been more erratic, it's up nearly +11%. Whether or not the dollar finds support near 93, lower near 90, or not until much further below, will help determine whether or not gold can make a bullish breakout from here. Today gold broke back above its broken uptrend line from December-May, currently near 1270, so bulls want to see that level hold on any pullback.

The stronger line of resistance is the downtrend line from September 2011 - July 2016, now near 1282. Gold is now overbought so it might not make it through this time but obviously it would be bullish above 1282, especially if it holds the downtrend line as support on a back-test.


Oil continuous contract, CL, Daily chart

Last Friday oil jumped above both its downtrend line from April-May and its broken 200-dma, both at 49.40. Today it added to those gains and popped above its broken uptrend line from April-November 2016 but pulled back slightly to close on the line near 50.20. If it pulls back and holds support at its broken downtrend line from April it will stay bullish. Otherwise a back-test of its broken uptrend line followed by a drop back below its 200-dma and the downtrend line would leave a failed breakout attempt.


Economic reports

It's going to be a busy week for economic reports, which will be capped off with the NFP report on Friday. The ADP employment report has not been providing a very good view of what to expect from the NFP report but at the moment they're both close with 190K-200K estimates. Tuesday morning we'll get personal income and spending, PCE Prices (a Fed-favored inflation gauge), Construction Spending and ISM but none of them are expected to show much of a change from May. We'll then get the auto and truck sales reports tomorrow afternoon. Auto sales are starting to drag as buyers deal with maxed out credit cards and higher default rates on existing auto loans, which is causing banks to tighten lending standards a little more.


Conclusion

We have a few indexes suggesting the rally from November has completed, which means the rally from 2009 could be finished. It's obviously too early to make a call for either one but the wave count for the rally suggests now is not a time to be aggressively chasing this market higher, or even aggressively buying pullbacks. If the top is in, even for the Dow, the next big move will be at least a multi-month pullback correction before possibly heading higher. The more bearish potential is that the bull market that started in 2009 is now complete.

There are a lot of reasons to believe the current bull market has much further to run, especially since there appears to be a lot of money coming into our market. Liquidity is the driver and right now we seem to have plenty of it. But complacency is running high while volatility is at an historical low and that's not a good combination. As I quoted Howard Marks at the beginning of this report, "...it's precisely when people can't see what it is that could make things turn down that risk is highest...".

There is no fear and the number of investors who fear a stock market decline is at its lowest level since 1987. We have reasons to be worried to the point of being careful. Employing some downside protection (puts, short hedges, inverse funds) might limit your upside potential but it's the downside risk that you should now be protecting against.

Good luck and I'll be back with you a week from Wednesday.

Keene H. Little, CMT


New Option Plays

Beat and Guide Lower

by Jim Brown

Click here to email Jim Brown

Editors Note:

Most companies beating on earnings tend to raise guidance. Fortinet guided below analyst estimates and the stock is plunging.

Finding stocks today was very tough. I went through almost my entire screen of more than 600 charts and the vast majority were either broken, negative, looked like Boeing, or had earnings over the next two weeks. While the majority of the charts were negative, the S&P futures are up +5 as I type this. There could be a big day for end of month retirement cash flows but Wednesday's direction will be determined by Apple.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

FTNT - Fortinet - ETF Profile

Fortinet, Inc. provides cybersecurity solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which offers a single point of network log data collection. It also provides FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; FortiDDos and FortiDB database security appliances; and FortiSIEM family of products to provide a cloud-ready security information and event management (SIEM) solution for enterprises and service providers. Further, it offers security subscription, technical support, training, and professional services.Company description from FinViz.com.

Expected earnings October 25th.

The company reported Q2 earnings of 14 cents that beat estimates for 8 cents. Revenue of $363.5 million also beat estimates for $361 million. All the normal metrics were good to great but their guidance failed to impress. Full year guidance was higher but Q3 guidance disappointed.

They guided for revenues in the $367-$373 million range and analysts were expecting $372 million. Earnings guidance for 22 cents matched estimates. Investors normally do not want a match, they want a raise. The lower level on the revenues is also a caution. Shares fell $3 over the last three days and are right on the verge of breaking through support.

The entire cybersecurity sector has been weak despite the recent attacks. This is another weight on FTNT.

Buy Sept $36 put, currently $1.00, initial stop loss $39.25.



In Play Updates and Reviews

One Index Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow remains the only index posting gains and the others are testing support. The Nasdaq retested support at 6,335 and the Russell broke below support at 1,425. The S&P remains in congestion territory just above light support at 2,465. The Dow cannot continue to be the lone survivor and continue making new highs with the other indexes declining.

End of month retirement cash flows should support the indexes for a several more days with the normal August volatility not expected until the second week of August.



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


IBM - International Business Machines
The long put position was entered at the open.



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

COST - Costco - Company Profile

Comments:

Costco declared a 50-cent quarterly dividend payable Sept 1st to holders on August 18th.

Shares spiked $5.62 on Monday after Cramer pounded the table on the stock. The dividend was announced after the close.

Original Trade Description: July 26th.

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; 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 businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

Costco shares were knocked for a $32 loss on the news that Amazon was buying Whole Foods. There was panic that Amazon was getting into the grocery business and would decimate the sector. Nothing could be further from the truth. Even if it was it would cause the most trouble for chains like Kroger, Safeway, Sprouts Farmers Market, etc.

If the acquisition goes through, and there is growing doubt, I do not foresee Whole Foods selling big screen TVs, winter parkas, cameras, caskets, cruises or ketchup and toilet paper by the case. The two stores are not compatible.

Furthermore, 45% of Costco members are already Amazon Prime members we as well based on a Morgan Stanley survey. Members of both services are looking for deals.

Costco makes the majority of its money from memberships (75%) and very little margin on its products. Amazon and Whole Foods are not going to undercut Costco on prices. Costco had 48.3 million members at the end of last quarter, up from 47.9 million. There were 37.4 Gold Star members and 18.3 million executive memberships. Total cardholders rose from 88.1 million to 88.9 million. Whole Foods has 350 stores and only about 12 million estimated repeat shoppers.

Did you know that Costco sells its products on Amazon. Costco's private label brand, "Kirkland" makes up about 20% of Costco's sales in the stores and those same products are available on Amazon. Actually, sales of the Kirkland products on Amazon are higher than in the stores.

Earnings August 24th.

Costco shares are starting to recover from the decline. Shares appear to have bottomed at support at $1.50. I expect them to rise as we get closer to earnings. Any remaining shorts will not want to hold over an earnings report that is likely to be strong. It the market decides to weaken in August, Costco is insurance since it has already sold off. Investors will be looking to buy the beaten down stocks as a safety play.

Update 7/28/17: WR Baird reiterated an outperform rating with a $200 price target. They see the 15% decline a major buying opportunity and expect revenue to grow 4% to 5% in the current quarter. They see Costco as the leader in the retail sector.

Position 7/27/17:

Long Sept $155 Call @ $2.40, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

The VIX is holding at just over 10 with the Dow up and everything else down. If the Dow finally rolls over we could drop like a rock.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss. Target $22 to exit.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow ETF - ETF Profile

Comments:

The Dow posted another positive close thanks to gains in Boeing, Goldman, Home Depot and 3M. The Dow was the only index in positive territory. This will eventually end.

Original Trade Description: July 27th.

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average (the "Index"). The Dow Jones Industrial Average (DJIA) is composed of 30 "blue-chip" U.S. stocks. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity. The DJIA is a price-weighted index of 30 component common stocks.

The Dow closed at a new high in an ugly market solely because of big gains in Boeing, Disney and Verizon. If the rest of the market continues lower, the Dow will eventually crater as well. I am recommending we enter a put position on the Dow ETF at the current high.

Position 7/28/17:

Long Oct $215 put @ $3.33, see portfolio graphic for stop loss.
Short Oct $205 put @ $1.29, see portfolio graphic for stop loss.
Net debit $2.04.


IBM - International Business Machines - ETF Profile

Comments:

No specific news. Shares posted a minor gain thanks to the rally in the Dow.

Original Trade Description: July 29th.

International Business Machines Corporation provides information technology (IT) products and services worldwide. Its Cognitive Solutions segment includes Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. The company's Cognitive Solutions segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system for z systems. It has a strategic collaboration with ABB Ltd to develop industrial artificial intelligence solutions. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. Company description from FinViz.com.

Expected earnings October 17th.

IBM reported revenue of $19.29 billion, down -5% annually and the 21st consecutive quarterly decline. Analysts were expecting $19.49 billion and that was already on the low side. Earnings were $2.97 and beat estimates for $2.74 thanks to a lower tax rate of 9.2%. Full year guidance was reiterated for "at least" $13.80. Several years ago, they made a big deal out of forecasting $20 a year in earnings. That is not likely to happen in this decade. All five of IBM's reporting segments posted revenue declines.

The problem with IBM is the lack of a light at the end of the tunnel. There is no way out of this problem without major changes which could include splitting the company up or going on an acquisition spree. Shares hit $182.50 in February but hopes have now been dashed twice with Q1 and Q2 earnings. The outlook is dim.

If the market were to roll over and the Dow decline materially, IBM would be a leader in that decline. It has been losing ground even when the Dow is setting new highs.

With earnings Oct 17th we can use the Oct options which expire on the 20th. They should hold their premium well.

Position 7/31/17:

Long Oct $140 put @ $3.10, see portfolio graphic for stop loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

End of month retirement cash inflows kept the indexes from any material declines. One more day and then Apple's earnings will determine the Dow direction.

Original Trade Description: July 24th.

• The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index (the "Index") The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.

The S&P is marching slowly towards a date with destiny and 2,500. Since the median estimate by the top 16 analysts was a 2,450 yearend price target on the S&P, the arrival at 2,500 could be a tripwire that triggers an August correction. We have not had a 5% drop in a year and it has been 9 months since a 3.5% decline. With earnings rapidly playing out and most of the high profile companies will finish reporting by next Wednesday, I am going to recommend a bearish position for August/September.

I am going to set an entry trigger for a SPY put with the S&P at 2,495. Since aggressive traders normally want to anticipate a particular number, I want to enter the position just before we reach that level.

Update 7/26/17: The Dow was up +100 points, Nasdaq +10, Nasdaq 100 +20 and the S&P only gained 70 cents. The Russell 2000 lost -6 and the S&P-400 lost -15. We may not get to that 2,495 level. I am going to add another trigger/strike in case we get a failure from this level.

Position 7/27/17 with a S&P trade at 2,465:

Long Oct $243 put @ $3.65, see portfolio graphic for stop loss.




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