Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/16/2017

Table of Contents

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

Market Wrap

Stock Market Fighting Off the Bears

by Keene Little

Click here to email Keene Little
Last week's week decline emboldened the bears but the recovery off the lows now has the bulls believing they can push the indexes to new highs. Today's political and Fed (one and the same?) news created some volatility but the bulls held the upper hand.

Today's Market Stats

Today finished with a small doji candlestick, which could be the mark of a top for the bounce off last week's lows or just an indecision day on its way to higher highs. The political news and then Fed news this afternoon caused a little bit of volatility but the VIX dropped back down a little more and the stock indexes added a couple more points to their rally from last week. The big question is whether the rally is just a bounce correction or the start of the next leg up to new highs.

The political drama surrounding the Trump administration probably is not causing much stir in the market anymore since most people think it's just a bunch of noise (they're right). But the disbanding of the President's business advisory councils, which I'm sure had nothing to do with the recent departure of key CEO's from the council (wink), has many wondering what that might mean for businesses. Keep in mind that much of the "Trump rally" was an expectation that there would be some important changes to help businesses. Much of what Trump wanted to accomplish has been blocked by people with different agendas.

The other news today was from the Fed and their FOMC minutes from their last meeting. They're turning a little more dovish as they recognize the fact that the low inflation rate might be more than something "transitory." As noted in the minutes, the Fed "saw some likelihood that inflation might remain below 2 percent for longer than they currently expected." The Treasury market took notice and rallied, which dropped the 10-year yield to 2.23% (-1.8%).

The Fed's economists, all essentially schooled in the same beliefs (can you say "group think"?), believe in the Phillips Curve thesis, which is a simple mathematical inverse relationship between unemployment and inflation rates. The theory is that the lower the unemployment rate the higher the demand for good workers and therefore the greater the demand for higher wages, i.e., inflation. The problem is the unemployment rate does not reflect the state of employment as more workers have been forced to find lower-paying jobs just to get employed.

The Fed seems unable to assimilate the information from this changed economy and how to plug it into their black & white formula. The Fed is truly befuddled by the lack of inflation in this "low" unemployment environment. It's a good example of what I call "intellectually intelligent, common sense stupid."

I saw the same thing happening with the Fed in the lead-up to the bursting of the housing bubble in 2006-2007 with the sub-prime debacle, which of course led to the collapse in the financial industry (which was bailed out by the government). Bernanke and the rest of the Fed heads were incapable of seeing it coming and the Fed is just as incapable of figuring out our new (weaker) economy. And yet the market still pays rapt attention to the Fed. I don't get it.

The other news from the FOMC minutes, as well as recent statements from some of the Fed heads, is an expectation for a reduction in the Fed's balance sheet. Expectations are for a Fed announcement following the September meeting. The market has been prepared for this and so far there's been no reaction and certainly to "taper tantrum."

Housing Starts and Permits were reported this morning and they came in a little weaker than expected (down -4.8% from June). This caused some concern today, also reflected in lower Treasury yields, since a slowing housing market can be a real drag on the economy. It's also a reflection of the fact that so many consumers are tapped out from carrying too much debt, although the blame for the slowing market was blamed on supply rather than demand. The slowing retail sector is another sign the consumer could be in trouble.

As for the "what, me worry?" market, the strong bounce off last week's lows shows we still have active dip buyers who believe the market has higher highs ahead. "Damn the torpedoes, full speed ahead." From a pattern perspective I can see a good possibility for a continuation of the rally but maybe after a little more of a pullback from today's highs. As always, we'll let the charts lead the way.


S&P 500, SPX, Weekly chart

It's possible the August 8th high was the final high for this rally but there's been no confirming evidence yet that the rally is finished. There are some market breadth indicators that are weakening but we don't have the usual strong negative divergences that we've typically seen at previous market highs. So we still need to respect the upside potential while watching for evidence of a top, especially since we've entered the typically weak period of the year (August-September).

The weekly chart of SPX, which I consider a good market proxy at the moment, shows how it has chopped its way higher since the end of March (where I've labeled the low the 4th wave of the rally from January 2016). The 5th, and final, wave for the rally has been in progress since March and it's showing the expected weakness as compared to the 3rd wave (which finished at the March 1st high), as seen on the MACD and RSI indicators.

For the longer-term rally, from March 2009, the 5th wave is the leg up from January 2016 (as I'm counting the pattern) and it would equal the 1st wave at 2516, which I've noted on the chart. That projection crosses the top of a rising wedge for the rally from January 2016 and the mid-line of the parallel up-channel from 2010-2011 at the end of this month. From a weekly perspective this is a good upside target for both price and time.

The first sign of trouble for the bulls would be a break below the rising wedge (uptrend line from February-November 2016), currently near 2420. Confirmation of a top being in place would be a drop below the June 29th low near 2406.


S&P 500, SPX, Daily chart

As mentioned above, the 5th wave of the rally from January 2016 is the rally from March and I've drawn a parallel up-channel for the rally on the daily chart. The top of the channel will be near 2536 by the end of the month, so we have a 2516-2536 upside target zone to watch for if the rally keeps going. Currently SPX is struggling to get back above its broken 20-dma, near 2470, which it back-tested today. A drop back down would leave a bearish kiss goodbye and a drop below last week's low near 2437 would be a strong indication that the top is already in place. But until proven otherwise it's looking like we should keep looking higher for at least this week and possibly into the end of the month.

Key Levels for SPX:
- bullish above 2480
- bearish below 2437


Dow Industrials, INDU, Daily chart

The Dow's pullback into last week's low stopped just short of its 20-dma, showing some strength by not actually hitting it. Assuming we'll see the Dow make it up to another all-time high, the leg up from last Friday's low has two price projections to watch for. The first is based on two equal moves up from April 19th with the midpoint being the June correction, which points to 22352. That projection crosses a trend line across the April 26 - August 8 highs a week from today.

A higher projection, at 22459, is based on a price projection inside a rising wedge pattern. In this case it's where the 5th wave of the wedge would equal 62% of the 3rd wave (green labels). It's not clear what the wave count is so I'm looking at different ideas and price projections. The higher projection crosses the top of the rising wedge on September 1st, which is a good possibility if there will be an effort to push the market as high as possible for August and before it will have to deal with Congress's inability to get an agreement on a budget in September.

The first obvious sign of trouble for the bulls would be a decline below last Friday's low near 21843. In that case I would say the August 8th high has a good chance of standing for a while (possibly a long while).

Key Levels for DOW:
- bullish above 21,180
- bearish below 21,830


Dow Industrials, INDU, 60-min chart

The Dow's rally from June 29th has formed a parallel up-channel with two upper lines for the top of the channel. One parallel line is attached to the July 3rd high and the other is to the July 14th high. You can see how price chopped its way slowly higher between these two top channel lines between August 1-8 and then back down to the bottom of the channel by last Friday.

A return to the top of the channel could see the Dow hit 22400 by this time next week, which would place it inside the 22352-22459 target zone shown on the daily chart above. The other thing I'm watching is the mid-line of the channel, currently near 22130, since this is often resistance to the last leg of the rally inside a channel like this. Maybe just a retest of the 22179 high by Friday?


Nasdaq-100, NDX, Daily chart

NDX has a very similar pattern as the blue chips except for the lack of a new high on August 8th. Its pattern off the July 27th high looks like an a-b-c pullback correction, which keeps things pointing higher. Unless NDX drops below last Thursday's low near 5783, which would also be a break of its uptrend line from June 2016 - July 2017, a pullback from here should be a good buying opportunity for a run higher. Upside potential is to the trend line along the highs from November 2014 - July 2015, which will be near 6085 by the end of the month.

Key Levels for NDX:
- bullish above 5973
- bearish below 5783


Russell-2000, RUT, Daily chart

The RUT continues to be the weak sister and while it got a strong bounce on Monday, it looked to be primarily short covering. There was no follow through on Tuesday and while the other indexes traded sideways the RUT started to pull back again. This morning's bounce attempt failed to even test Monday's high while the others went on to make new highs above Monday's.

There remains the possibility for at least a larger bounce if the rest of the indexes press higher, in which case watch for a back-test of the broken support line along the lows since June 22nd, near 1405. Two equal legs up from last Friday points to 1410 so we have a 1405-1410 target zone for a higher bounce, if we get it. The bulls would be in trouble if the RUT drops below last Friday's low near 1368.

Key Levels for RUT:
- bullish above 1426
- bearish below 1368


10-year Yield, TNX, Weekly chart

I've been thinking for a long while that we haven't see the end of the bond's bull market (low for yields) but the weekly pattern is making me wonder. I see the potential for at least a much larger bounce off the July 2016 low with another rally leg following the pullback from December 2016. The pattern of the pullback is forming a bullish descending wedge and we could see a little further pullback to just below 2% before launching another rally leg. It might also continue to hold price-level support at 2.117%

A break above the downtrend line from 1988-2007, which stopped the rally into the March 2017 high, would be a bullish move. The next upside target after that would be the downtrend line from 1994-2007, which will be near 2.92% by the end of the year. If TNX makes it much below 1.95% I'd then start to think more bearishly sooner rather than later.


High Yield Corporate bond fund, HYG, Daily chart

While on the subject of bonds, HYG is a junk bond and worthwhile to watch for clues about the stock market. The same bullish sentiment that drives the stock market higher also drives junk bond prices higher. The search for higher yields drives many bond bulls into the junk bonds as long as they believe the risks are on the low side. When they think junk bonds are getting too risky they step away and look for the relative safety of AAA bonds and Treasuries.

For this reason HYG is often a good leading indicator for how well the stock market will do. As long as corporate performance continues to look good we'll see investors continue to buy HYG. When they start to get spooked and sell HYG we'll often see the stock market not far behind. The daily chart of HYG below shows a reason to start being concerned.

After the low on July 6th I thought we'd get one more minor new high to complete the 5th wave of the rising wedge for the rally off the November 2016 low. The July 26th high (ahead of the stock market) fit well as the completion of its rally and from there it dropped below the bottom of the wedge on August 9th. Yesterday's and today's highs were back-tests of the bottom of the wedge (uptrend line from March-July) and now we wait to see if it will be followed by a bearish kiss goodbye. This is a bearish setup for HYG and if it follows through to the downside it will be a warning sign for the stock market.


Transportation Index, TRAN, Weekly chart

The transports started diverge after the July 14th high for the TRAN since the Dow went on to make new highs into the August 8th high. It will be interesting to see if the divergence continues if and when the Dow makes more new highs. If the Dow is unable to push higher from here and instead drops below last week's low we'll then be able to look back and say the TRAN was warning us the Dow would soon follow in a reversal back down. But at the moment it's not clear if the TRAN is going to try again for a new high.

The pullback into the August lows was supported by the uptrend line from June 2016 - May 2017, currently near 9225 (arithmetic price scale). Short term I see upside potential for its current bounce to about 9470 but not above price-level resistance near 9490. A rally above 9490 would tell me there's a good chance new highs are coming, which would be a bullish sign for the broader stock market. Conversely, a drop back below its August 11th low at 9117 would be a bearish sign.


U.S. Dollar contract, DX, Daily chart

Off its August 2nd low I expected to see the US$ bounce up to the bottom of a previously broken down-channel for the initial decline off the January high and the top of a steeper down-channel for price action since May. So far the bottom of the shallower down-channel is holding as resistance, including for today's high shortly before the FOMC minutes were released. Dovish comments by the Fed is bearish for the dollar.

A little 3-wave bounce off the August 2nd low looks like it might now be followed by a drop lower towards a downside target near 90. But if the dollar can get above this morning's high at 94.05 we'll likely see at least a larger choppy bounce/consolidation before heading lower.


Gold continuous contract, GC, Daily chart

Gold is looking like it could break finally break free of its downtrend line form September 2011 - July 2016, which had stopped the rally into the June 6th high. It broke the downtrend line last week but was stopped at the previous highs in April and June near 1298. A drop back below the downtrend line was bearish but today's recovery back above the line is bullish. Gold bulls need some bullish follow through to open the door to higher highs for the current rally. A drop back below today's low at 1273 would be trouble for the bulls while a rally above 1293 would be a bullish sign.


Silver continuous contract, SI, Daily chart

I like to watch silver to see if it's confirming a move by gold and so far I'm not seeing bullish confirmation. Silver has been struggling to get back above both its 200-dma and its broken uptrend line from December 2015 - December 2016, currently at 17.09 and 17.17, resp. It has not yet had to deal with its downtrend line from July 2016 - April 2017, near 17.60. If silver rolls back over from here I would not bet long on gold either.


Oil continuous contract, CL, Daily chart

Oil's rally into the August 1st high was a back-test of its broken uptrend line from April-August-November 2016 and the selloff from there is a bearish kiss goodbye. That puts it on a sell signal that can only be negated with a rally above the high at 50.43. If the current decline continues we'll likely see oil test its uptrend line from February 2016 - June 2017, currently near 44, bounce and then continue lower.


Economic reports

Thursday's economic reports include the usual unemployment data and the Philly Fed, Industrial Production and Capacity Utilization before the opening bell. The Philly Fed is expected to show some slowing but nothing major.


Conclusion

The stock market's bounce off last week's lows looks bullish but we might see a little more of a pullback before the indexes continue higher. If the market does continue higher into the end of the month there is the potential for the Dow to reach at least 22400 and SPX to make it a little higher than 2500, which would ring the bell for many analysts. Betting higher than that could be a lot riskier and those highs will only be if we see new highs above the recent highs for the indexes. The RUT is one of the few indexes that look doubtful for new highs but never say never.

Next Monday we'll have a unique event with a total solar eclipse across the U.S. and only the U.S. Many believe these events have a strange effect on people and that effect often shows up in stock market reactions. With opex ending on Friday and normal post-opex price action next Monday, this one could be different than the others. If we are heading higher into next Monday I would not be at all surprised to see some kind of volatile event and maybe even a blow-off top or strong reversal. Many poo-poo this kind of thing but I've seen too many "coincidences" with astrological events to ignore the possibility (even if I don't understand them). Just be aware that it might be one more factor in the market's moves next Monday.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT


New Option Plays

Uncertainty Rising

by Jim Brown

Click here to email Jim Brown

Editors Note:

Today's political events and earnings disappointments are increasing market uncertainty. We are already in a seasonally weak period and the recent flurry of earnings disappointments is a problem for stocks. Add in the political circus in Washington and the unprecedented events of this week and investors may decide it is time to take some chips off the table. With the S&P futures down -4 and slowly declining we could be setting up for that seasonal weakness after option expiration. We should never put money in the market unless we have a good idea on direction. There is no current direction despite the slight rebound this week. We are already biased to the downside and there is no reason to add to those positions.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Wounded

by Jim Brown

Click here to email Jim Brown

Editors Note:

The political headlines over the disbanding of two of the president's CEO councils was a major blow to the president and the market. The president suffered a significant blow politically through his handling of the Charlottesville demonstrations. This has put his entire agenda at risk with GOP lawmakers running for cover and disavowing any relationship.

The markets gave back significant intraday gains and I am surprised they did not close negative. The futures are down -4 and falling. VP Pence has been called back early from his overseas trip and that has quite a few commentators talking/wishing for a major change.

This political event is unprecedented and given the normal seasonal weakness in Aug/Sep, there is even a greater chance now that the market will fade.



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


FTNT - Fortinet
The long put position was stopped at $37.25.

PCRX - Pacira Pharma
The long put position was stopped at $27.75.



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 said it was planning on spending $1 billion over the next 12 months on original programming for Apple TV, Apple Music and iTunes. Executive Jimmy Iovine told Bloomberg they would release as many as 10 original shows by the end of the year. This spending compares to $4.5 billion by Amazon and $6 billion by Netflix.

Original Trade Description: Aug 12th.

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. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. Company description from FinViz.com.

Earnings Oct 31st.

We exited a position on Apple just prior to earnings. The report was strong and shares spiked $9 at the open the following day. After 9 days of trading they have been higher and lower but they refuse to give up their gains. Shares were up $2 on Friday when the rest of the big cap market was flat.

The reason Apple may have less risk than the rest of the market is the expected production announcement in September. They are expected to announce 2 new iPhone 7s and the iPhone 8/Pro plus some other upgrades. This is going to be a major product announcement that could propel Apple to $200 over the next six months. We know Apple shares normally ramp into an announcement and then decline shortly thereafter on a sell the news event. We will decide a couple days ahead of the announcement if we want to hold over.

I am using the November strikes because that is after earnings and the options should hold their value more in case of market volatility than an option that expires before earnings. Just because we buy more time does not mean we have to use it. I am recommending a spread because of high option premiums.

Update 8/14/17: BlueFin Research, as reported in Barrons, claims the production ramp for iPhones in Q3 is at record levels with 53 million phones expected. They will be split between the 7s, 7s Plus and the iPhone 8/Pro with the iPhone 8 only 5-6 million of that total. That will change in Q4 to 44 million of the model 8 with 30 million a quarter for the rest of 2018. They did not disclose sources but it is believed they are basing their estimates on the component quantities being shipped to manufacturers.

Aetna (AET) and Apple held talks last week with Aetna wanting to offer the Apple Watch either free or discounted to all 23 million of its members. They currently offer the watch to their 50,000 employees as part of a fitness program.

Another news story said that Google is paying Apple a license fee of up to $3 billion for 2017 to remain the default search engine on Apple devices. That would equate to 5% of Apple's total annual profit and 25% of their earnings growth. That is the largest contributor to the growth in service revenues. Bernstein said Google pays a fee to Apple of 34% of whatever it earns from ads delivered to Apple users. That is huge!

Position 8/14:

Long Nov $160 call @ $8.05, see portfolio graphic for stop loss.
Short Nov $175 call @ $2.72, see portfolio graphic for stop loss.
Net debit $5.33.


MMM - 3M Co - Company Profile

Comments:

No specific news. CEO Thulin, quit the president's business council just before President Trump disbanded them.

Original Trade Description: Aug 9th.

3M Company operates as a diversified technology company worldwide. The company's Industrial segment offers tapes; coated, non-woven, and bonded abrasives; adhesives; advanced ceramics; sealants; specialty materials; separation and purification products; closure systems for personal hygiene products; acoustic systems products; automotive components; and abrasion-resistant films, and paint finishing and detailing products. Its Safety and Graphics Business segment provides personal protection products, traffic safety and security products, commercial graphics systems, commercial cleaning and protection products, floor matting, roofing granules for asphalt shingles, and fall protection products. The company's Health Care segment offers medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, dental and orthodontic products, health information systems, and food safety products. Its Electronics and Energy segment provides optical films; packaging and interconnection devices; insulating and splicing solutions; touch screens and touch monitors; renewable energy component solutions; and infrastructure protection products. The company's Consumer segment offers sponges, scouring pads, high-performance cloths, repositionable notes, indexing systems, home improvement and care products, protective materials, and consumer and office tapes and adhesives. Company description from FinViz.com.

On July 25th, 3M reported earnings of $2.58 that missed estimates for $2.59. Revenue of $7.81 billion missed estimates for $7.88 billion. The company guided for full-year earnings of $8.80-$9.05. Traders were in knee-jerk mode and the stock fell $14 on the news.

The miss was minimal and the company did increase earnings 22.6% for the quarter. They reported organic growth of 3.5% and reaffirmed their full year estimate for 3-5% organic growth. There is nothing wrong with this company.

Expected earnings Oct 24th.

Shares have recovered half of their post earnings losses and the dip over the last couple of days has weakened the option premiums to allow us to enter. Resistance is $212.

Bear in mind that the market is struggling and it would not be a surprise to see further declines in the Dow. Today's rebound from the opening drop was encouraging enough for me to take a chance on 3M because MMM shares have already been hit. They could look like a safe port in the coming storm.

If the market does extend its rebound, 3M could be a Dow leader again.

Position 8/10/17:

Long Oct $210 call @ $2.91, see portfolio graphic for stop loss.


VAR - Varian Medical Systems - Company Profile

Comments:

No specific news. Shares continue to rebound in a weak market.

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:

Not a material decline after the market gave back its opening gains.

Plenty of time with our November option. We still have to get past the budget battle and the debt ceiling fight.

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 $20 to exit.



BEARISH Play Updates (Alpha by Symbol)

CAH - Cardinal Health - Company Profile

Comments:

No specific news. The post earnings decline continued in a weak market.

Original Trade Description: July 29th.

Cardinal Health, Inc. operates as a healthcare services and products company worldwide. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, over-the-counter healthcare, specialty pharmaceutical, and consumer products to retailers, hospitals, and other healthcare providers. It offers distribution, inventory management, data reporting, new product launch support, and contract pricing and chargeback administration services to pharmaceutical manufacturers; pharmacy and medication therapy management, and patient outcomes services to hospitals, other healthcare providers, and payers; consulting, patient support, and other services to pharmaceutical manufacturers and healthcare providers. This segment also operates nuclear pharmacies and cyclotron facilities that manufacture, prepare, and deliver radiopharmaceuticals, as well as operates direct-to-patient specialty pharmacies; offers logistics, marketing, and other services; and repackages generic pharmaceuticals and over-the-counter healthcare products. The company's Medical segment distributes a range of medical, surgical, and laboratory products and services to hospitals, ambulatory surgery centers, clinical laboratories, and other healthcare providers, as well as to patients in the home. This segment also develops, manufactures, and sources medical and surgical products comprising surgical drapes, and gowns and apparel; exam and surgical gloves; fluid suction and collection systems; cardiovascular and endovascular products; and wound care and orthopedic products, as well as assembles and offers sterile and non-sterile procedure kits. In addition, it offers supply chain services, including spend, distribution, and inventory management services to healthcare providers; and post-acute care management, and transition services and software to hospitals, other healthcare providers, and payers. Company description from FinViz.com.

Cardinal reported earnings of $1.31 that beat estimates for $1.24. Revenue of $33.0 billion beat estimates for $32.7 billion. While the company may be winning some market share from McKesson, the cost of the wins means lower margins.

The company said generic deflation and competition was depressing margins. They had previously guided lower for 2018 in April and did it again with earnings. For fiscal 2018 they guided for earnings of $4.85 to $5.10 and analysts were expecting $5.25. They also said earnings would be impacted by some "company discrete items" that could result in a profit decline for the drug business. They reemphasized that in the recent earnings report saying these actions will be detrimental in the short term but improve our trajectory in 2019.

Investors like it when companies build for the future but in the case of CAH, the short term including the rest of 2017 and 2018 is actually long term for traders. They bailed on the stock and it is still falling.

President Trump tweeted about lowering drug prices this morning and it is a good bet it will eventually happen in some form. Just talking about it is going to pressure CAH.

Expected earnings Nov 1st.

Position 8/15/17:

Long Sept $65 put @ 77 cents, no initial stop loss.


DIA - Dow ETF - ETF Profile

Comments:

The Dow gapped up 77 points and then collapsed back to a 25-point gain in reaction to the political news. This chart could easily turn into a double top.

I am recommending we target 215.50 for an exit.

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. Shares spiked just enough to stop us out of the position at $37.25.

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:

Closed 8/16: Long Sept $36 put @ $.90, exit .53, -.37 loss.


IBM - International Business Machines - ETF Profile

Comments:

No specific news. Shares posted a minor gain in a weak market on the CEOs stand against Trump.

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.

Update 8/7/17: 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.

Position 7/31/17:

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


PCRX - Pacira Pharmaceuticals - Company Profile

Comments:

No specific news. Another minor rebound on no news. It was just enough to stop us out at $37.75.

Original Trade Description: August 7th.

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.

Position 8/8/17:

Closed 8/16: Long Sept $35 put @ $1.44, exit .65, -.75 loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

Decent spike at the open but immediate decline when the political headlines began displacing stock news.

I am recommending we target $241 for an exit.

August has been down 5 of the last 7 years and up only 5 of the last 20 years.

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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