Option Investor
Newsletter

Daily Newsletter, Monday, 8/7/2017

Table of Contents

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

Market Wrap

More Of The Same

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The broad market moved sideways within a very narrow range for the 13th trading day in a row, and the Dow set another new all time high. Neither moved looks very strong yet both are supported by fundamentals and outlook; the economy is growing, earnings are growing and both are expected to keep growing. The Index of Labor Market Conditions has been indicating the onset of robust economic growth for some time, the Index of Leading Indicators has begun to confirm that outlook.

Asian indices moved higher in their Monday session. Traders were cheered by the strong NFP figures from Friday and the prospect of economic strength in the US. Australia led with a gain near 1.0% while others in the region closed with gains closer to 0.5%. European indices were not so buoyant as tension between North Korea and the rest of the world escalate. The United Nations imposed new sanctions aimed at cutting $3 billion out of the countries export income which resulted in new threats from Pyongyang. The strategy now appears to be taunting North Korea into expending their arsenal with empty threats.

Market Statistics

Futures trading was quiet this morning. US indices were indicated to open flat to mildly positive and that held true throughout the morning as there were little in the way of earnings and no economic reports to move the market. The open was calm and orderly, the indices began trading with marginal gains that pushed the Dow Jones Industrial Average to a new all time high. An early morning test of support resulted in a double bottom and reversal that led to new intraday highs for all the major indices. The new highs were only a hair above the opening highs and after noon trading moved sideways from there so overall action was tepid and sideways.

Economic Calendar

The Economy

No official data today but we did still get the Moody's Survey of Business Confidence. This week global business confidence fell -1.0% to a 4 month low. Despite the fall Mr. Zandi says confidence remains strong and evidence of an economy growing above its potential. Pricing power has been able to hold up through the summer as sales, hiring and investment remain firm.


Another earnings cycle is drawing to a close and once again the final rate of growth is well above expectations going into the season. So far 84% of the S&P 500 has reported earnings and of those 72% beat EPS estimates while 70% beat revenue estimates, both well above average. On a sector by sector basis 10 of the 11 S&P sectors are showing growth and 10 of 11 sectors are doing better than expected. The blended rate of growth jumped another 2% this week to 10.1% and is now sitting at the highest level this cycle and matching expectations dating back to early February. With another 36 companies reporting this week the figure is likely to rise further.


Looking forward expectations are still positive and gain strength into the end of next year but, of course there is a but, those expectations have taken a hit in recent weeks. Looking to next quarter earnings growth is expected to 5.6%, this is down from near 10% earlier in the year. The following quarter, Q4, is now expected to see earnings growth of 11.4%, down from 12.5% 3 months ago but still robust. The bright side is that full year growth outlook is on the rise and at a 3 year high. Also, based on the averages, we can expect to see the final growth rates for each of these quarters come in about 4% better than expected which will boost full year growth further.


The Dollar Index

The Dollar Index gave up some of the gains it made Friday as traders come to terms with the NFP release. The release was above expectations at 209,000 but not overly strong. It supports the idea of tightening labor markets and economic growth but not so much an impetus for the Fed to raise rates in the near to short term. The CME's Fed Watch Tool still shows only, at best, a 50/50 chance for rate hike by December. Economic data may support the dollar between now and then but likewise strong or strengthening data in the EU could lift ECB outlook and undermine the dollar. Today's action shaved about -0.17% off the index which is trading just above long term 15 month lows. This level may prove strong enough to stop or even reverse the dollar but I expect to see it tested once or twice before giving that kind of signal.


The Gold Index

Gold prices hovered at a one week low. The metal fell last week on a surge in the dollar that today looks like it could be a knee-jerk counter trend movement. Spot price trade around $1264 in a very tight range while traders try and decide what to do next. This is a low impact data week save for Friday's CPI release so sentiment more than anything will drive prices. A break below $1260 may find support at $1250 or $1235, a bounce from this level will likely retest the recent high just above $1280 with a chance of moving up to the short term highs just above $1300.

The Gold Miners ETF GDX fell -0.15% to sit just above support targets at the bottom of the 7 month trading range. The ETF failed to move up from the bottom of the range and is now hanging just below the long term moving average and indicated lower. Both MACD and stochastic are showing bearish crossovers and stochastic showing a bit of strength. The stochastic signal now qualifies as a strong signal albeit one within a trading range and just above potentially strong support. This support is near $22, a break below which would be bearish.


The Oil Index

Oil prices trend sideways today in a volatile session. Prices were pushed lower on rising output and high supply levels and then later supported by economic growth outlook, demand hopes and this week's OPEC compliance meeting. OPEC ministers are meeting today and tomorrow to discuss the production cap and how to encourage compliance. OPEC has been struggling with its self imposed cap because member nations sneak oil onto the market. Most recently ramping production in violence plagued Libya and Nigeria are impacting overall supply from the cartel. If they aren't able to stem the flow in some way prices are sure to fall back below $45. WTI fell more than -1.0% intraday and closed with a loss of -0.5% but the daily range was within the near term 7 day range. A break below this range, bottom near today's low at $48.40, would be bearish.

The Oil Index shed -0.75% today but price remained within the near term consolidation pattern. The index appears to be in consolidation within a near term up trend and posed to move higher. The indicators are currently pointing lower in confirmation of resistance levels but convergences with recent highs suggest those levels will be tested again. A break above those highs, just above the long term moving average, would be bullish but face additional resistance near 1,170. If OPEC fails to support prices and the index falls support is likely to be found near 1,120 and the short term moving average.


In The News, Story Stocks and Earnings

Tyson Foods reported before the bell. The supplier of all things meat delivered juicy results beating on the top and bottom line. EPS of $1.28 beat by more than 6% on revenue that grew 4.8% YOY and beat estimates by 3.7%. Gains were driven by volume and pricing increases that led management to raise forward guidance to a range above consensus. Shares of the stock jumped more than 5% on the news but were capped at the top of a short term trading range.


CBS reported after the bell and beat on the top and bottom lines. According to CEO Les Moonves the skinny bundles work. He went on to say that Showtime had a terrific quarter and that 2018 would be even better (for CBS). EPS of $1.04 beat by $0.06 and helped drive share prices up by more than 1% in after hours trading.


The VIX continues to trend at/near long term and historic lows. It has in fact moved down to set a new long term low since the last time I looked at it. Today's action saw the index move down from the short term moving average in a move that looks like it will continue going lower to retest the new long term low. The indicators are consistent with an asset trading within a range and possibly moving lower within that range. If so, downside target is near 9.00. A move up may indicate a near term rise in fear but would not be significant until breaking above resistance at the long term 150 day moving average. Until then the index is consistent with bull market conditions.


The Indices

The indices moved higher but once again the move was not very strong. The days leader was the S&P 500 with a gain of 0.16% but the index has still not set another new high. Today's action created another small bodied candle trading within the near term consolidation range. The indicators are consistent with consolidation within an uptrend and have begun to roll over into what may become the next trend following entry. A break to new highs would be bullish with upside target in all time territory.


The Dow Jones Industrial Average posted the 2nd largest gain in today's action, 0.12%, and did set a new all time high. The blue chips created a small bodied candle at new all time highs in a move that continues to drift higher. The indicators are bullish and pointing higher so this move may continue into the near term.


The NASDAQ Composite made the 3rd largest move, 0.11%, and may have begun to move higher after its recent drop to support. Today's action is still within the 7 day trading range but bullish and moving toward the top of the range. The indicators have begun to roll over into bullish trend following signals which would support such a move. A break above 6,400 would be bullish and take the index up to the current all time high with the possibility of reaching new all time highs.


The Dow Jones Transportation Average brings up the rear with a gain of only 0.08%. The transports created a very small spinning top doji just below resistance and looks like it may trade sideways for the next day or so. The indicators are a bit mixed but rolling into a bullish signal that would reverse the near term down trend and confirm the short and long term up trends. Resistance is at 9,300, near a former all time high, a break above which would be bullish. Support is currently along the long term moving average, a break below which would be bearish.


The indices are moving higher and there doesn't seem to be much in their way. The moves, while weak in the near term, are continuations of long and short term trends that are themselves supported by economic growth, earnings growth and positive outlook for both. I am firmly bullish for the longer terms and cautiously bullish for the nearer because it's better to be cautious than busted. When the next sell-off correction occurs I'll be ready.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Wings Clipped

by Jim Brown

Click here to email Jim Brown

Editors Note:

This highflying drug stock got its wings clipped by an earnings and revenue miss.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

PCRX - Pacira Pharmaceuticals - Company Profile

Pacira Pharmaceuticals, Inc., a specialty pharmaceutical company, develops, manufactures, and commercializes proprietary pharmaceutical products primarily for use in hospitals and ambulatory surgery centers in the United States. It develops pharmaceutical products based on its proprietary DepoFoam drug delivery technology. The company's lead product includes, EXPAREL, a liposome injection of bupivacaine, an amide-type local anesthetic indicated for infiltration into the surgical site to produce postsurgical analgesia. Its development pipeline comprises DepoTranexamic Acid, a long-acting local antifibrinolytic agent, which is in Phase II clinical development for the treatment or prevention of excessive blood loss during surgery by preventing the breakdown of a clot; and DepoMeloxicam, a long-acting non-steroidal anti-inflammatory drug, which is in preclinical development for the treatment of acute postsurgical pain. Company description from FinViz.com.

Pacira reported a loss last week of 29 cents that missed estimates for 28 cents and was well over the 2 cent loss in the year ago period. Revenue of $70.9 million ros eonly 1.9% and misses estimates for $74 million. Rising revenues for their top product, Exparel, were offset by falling revenues elsewhere. Exparel revenues rose 6.1% but DepoCyte and other product revenues declined -81.1%. Research and development costs rose 10`% and G&A costs rose 9.4%. Revenues slowing and expenses rising are never a good combination.

The company reaffirmed their full year revenue guidance for Exparel in the range of $290-$310 million.

Shares declined to a 6 month low after earnings.

Expected earnings November 3rd.

The optimistic outlook faded in late July when a Phase III trial of Exparel did not produce the desired results in treatment of total knee arthoplasty or TKA. Pacira is trying to expand the uses for Exparel as a way of expanding sales. This was a blow for the stock in July and the weak earnings is causing further declines.

Support is well below at $30.

Buy Sept $35 put, currently $1.55, initial stop loss $41.25.



In Play Updates and Reviews

Time for Turnaround Tuesday?

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the major indexes posted gains and the S&P closed at a new record high. The Dow has now posted a gain for 10 consecutive days and 9 consecutive record highs. After such a long string of gains, is it time for a Turnaround Tuesday?

The key point for today is that the Nasdaq rebounded but did not reach solid resistance at 6,395. With the S&P joining the Dow in new high territory, the market is looking bullish headed into the typically weak Aug/Sep period. Shorts are being squeezed since the majority of traders are not expecting further gains.

A secondary negative was the minor 1-point gain on the Russell. That along with the Nasdaq weakness over the last several days, suggests the market is still suffering from lack of conviction in the broader indexes.



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


ITW - Illinois Tool Works
The long cal position was entered at the open.



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BULLISH Play Updates

ITW - Illinois Tool Works - Company Profile

Comments:

Perfect timing. Evercore ISI downgraded ITW this morning from outperform to in-line. Shares declined $1.21 and retraced the gains from Friday. Fortunately, most of the drop was a gap lower at the open so we did not take a hit on the entry. The option was actually a little cheaper.

Original Trade Description: Aug 5th.

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The Automotive OEM segment produces plastic and metal components, fasteners, and assemblies for automotive-related applications. The Test & Measurement and Electronics segment provides equipment, consumables, and related software for testing and measuring of materials and structures. This segment also offers equipment and consumables used in the production of electronic subassemblies and microelectronics. The Food Equipment segment provides commercial food processing, warewashing, cooking, and refrigeration equipment; and kitchen exhaust, ventilation, and pollution control systems, as well as related services. The Polymers & Fluids segment produces adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. The Welding segment produces arc welding equipment, consumables, and accessories; and metal jacketing and other insulation products for various industrial and commercial applications. The Construction Products segment produces engineered fastening systems and solutions. The Specialty Products segment provides beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Company description from FinViz.com.

ITW reported earnings of $1.69 that beat estimates for $1.63. Revenue of $3.6 billion missed estimates for $3.62 billion. Shares fell from $147 to $139 and traded sideways for two weeks. They guided for Q3 for earnings of $1.57-$1.67 and analysts were expecting $1.68. For the full year, they expect earnings of $6.32 to $6.52. Shares had risen 20% in 2017 and the minor miss caused some profit taking.

The company said on the earnings call that revenue was driven by the automotive sector plus some cyclical areas like welding, test and measurement. Organic revenue rose 2.6%. GAAP earnings rose 16%.

They guided for full year organic growth of 2%-4%, up from 1.5%-3.5% in January. They did guide for slower growth in Q3 because of the slowdown in the automotive sector. Vehicle sales have plateaued the last several months and there is always a pause in August while the manufacturers retool the plants for the next model year vehicles. ITW expects a 6% decline in auto builds in Q3 and a 2% decline in Q4. However, even with that decline, ITW is still predicting the 2% to 4% organic growth rate for the full year with a 1% to 3% growth rate in Q3.

Earnings expected on Oct 23rd.

On Friday, they announced a regular quarterly dividend of 78 cents payable Oct 10th to holders on September 29th. Shares rose $1.45 on the news to close at a two week high.

I am recommending ITW because it has already reported earnings, was punished for the revenue miss and was starting to tick higher before the dividend announcement. This is a good company and even with the auto slowdown, will continue to grow. The dip and the low cost of the option gives us a little insurance against a market decline. Support is $140.

Position 8/7/17:

Long Dec $145 call @ $3.90, see portfolio graphic for stop loss.


VAR - Varian Medical Systems - Company Profile

Comments:

No specific news. Shares posted another minor decline with a potential retest of support at $96.

Original Trade Description: Aug 2nd.

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.

Expected earnings October 26th.

On July 26th, Varian reported earnings of $1.04 that beat estimates for 95 cents. Revenue of $662.4 million just barely missed estimates for $663.2 million due in part to currency translation issues. They sell their high dollar imaging systems all over the world.

The guided for the current quarter for earnings of $1.15-$1.23 and analysts were expecting $1.18. This should have been positive but the stock fell $6 because of the minor revenue miss.

If the market is going to be historically weak in August, shares that have already been beaten up will fare better than the rest of the market. I am choosing the $105 strike instead of the $100 strike for reduced cost/risk going into August.

Position 8/3/17:

Long Nov $105 call @ $1.75, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

With all indexes in the green on Monday and the VIX fell back under 10 at the close. Plenty of time with our November option.

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 GS, BA and Apple. The index has been fortunate that some new stock or two has rotated into the leadership role every day for the last couple weeks. The Dow has been up 10 consecutive days and has made a new high on 9 consecutive days. There will be a retracement soon.

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.


FTNT - Fortinet - ETF Profile

Comments:

No specific news. Prior support at $37 is now resistance and that is exactly where the rebound stopped again today. All the indexes were positive and that kept marginal stocks from declining.

Original Trade Description: July 29th.

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.

Position 8/1/17:

Long Sept $36 put @ $.90, see portfolio graphic for stop loss.


IBM - International Business Machines - ETF Profile

Comments:

A judge in Indiana ruled IBM must pay the state $78 million for failing to complete the automation of much of the state's welfare services system. The court case came after the state cancelled the $1.3 billion automation contract because of numerous complaints about long wait times, lost documents and improper rejections. An appeals court found that IBM had committed a material breach of its contract by failing to deliver improvements to the welfare system.

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.

Update 8/5/17: Wedbush initiated coverage with a neutral rating saying IBM is going to face "structural headwinds" and free cash flow will continue to be consumed by "aggressive M&A." The analyst said the world has moved away from the labor intensive model of IT services with cloud computing and cloud software replacing those IT consultants. Legacy IT services contracts are going to see margins decline due to "pricing resets" and an industry wide "skills mismatch." He said IBM's lack of transparency about its current business models suggests they are lagging the evolution curve.

Position 7/31/17:

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


SPY - S&P-500 ETF - ETF Profile

Comments:

Only a minor gain of 4 points on the S&P but that was a record close. All the market indexes were positive. If we do not get a "turnaround Tuesday" it may be time to bail from this position despite the historical trends.

August has been down 5 of the last 7 years and up only 5 of the last 20 years. If the historical trend is going to appear, I wish it would hurry.

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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