Option Investor
Newsletter

Daily Newsletter, Saturday, 8/26/2017

Table of Contents

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

Market Wrap

No Volume, No Conviction

by Jim Brown

Click here to email Jim Brown

Market volume averaged only 5.17 billion shares for the week with a low of 4.8 billion on Friday.

Weekly Statistics

Friday Statistics

This was the lowest volume for a non-holiday week in recent memory. Traders were either on vacation, avoiding the Yellen/Draghi speeches or are simply waiting for the normal buying opportunity in September. The lack of volume suggests there is no conviction in either direction. These minimal market moves suggest investors are just passing time ahead of the September volatility. Investors are showing no interest in selling but they are not buying either.

The Dow gained +123 at the open but it was quickly erased. The minor buying in the afternoon was also erased at the close as weekend event risk caused positions to be sold.


The only economic report on Friday was the Durable Goods for July. After a 6.5% gain in June, orders fell -6.8% in July. Analysts were expecting a -5.6% decline. Excluding transportation, orders were up +0.5%. Excluding defense, orders declined -7.8%. The decline in orders came mostly from non-defense aircraft, autos and machinery. Non-defense capital goods orders declined -20.2%. The inventory to sales ratio remained flat at 1.7 as where it has been for the last 7 months.

Janet Yellen's speech on Friday was a non-event. She said nothing about monetary policy or tapering QE. She said the financial system was safer today than during the financial crisis although some regulations needed to be adjusted. She warned that future crises are inevitable but the recent crash taught regulators some important lessons.

She said, "A broader set of changes to the new financial regulatory framework may deserve consideration. Such changes include adjustments that may simplify regulations applying to small and medium-sized banks and enhance resolution planning." She suggested the Volcker rule, which limits the ability of banks to trade for their own account, may need some "simplifying." She cautioned against broad changes when it came to risk taking in the market.

After her speech, the Dollar Index fell nearly 1% to 92.74 and the lowest close since January 16th, 2015. Adding to the decline was comments from Draghi about the strengthening of European economy. Comments earlier in the week from President Trump about ending NAFTA and potentially shutting down the government in a budget battle in September, also contributed to the decline for the week.

The Euro had an opposite reaction to the Draghi speech with a 1.08% rise to a new 30-month high.



The economic calendar for next week is chock full of important events. It is payroll week with the ADP on Wednesday and the Nonfarm Payrolls on Friday. The revision of the Q2 GDP is on Wednesday. Analysts are expecting no change to the initial 2.6% reading but we could be surprised.

The Atlanta Fed real time GDPNow is still projecting a 3.4% rise in Q3.


The national ISM Manufacturing Index is on Friday and it is expected to decline slightly but not enough to be a market mover. There are lots of other reports but none are expected to cause a market hiccup.


Twitter (TWTR) shares were downgraded by Jefferies from buy to hold saying despite the companies broad engagement with users, the monetization is slipping. Jefferies warned having a "strong brand" was not enough and they cut the price target from $20 to $16. In the last earnings report, revenue declined -6% and they added zero monthly active users. Jefferies said the ROI on Twitter ads was falling and advertising revenue fell -6% despite a 15% increase across all social media sites. Shares fell slightly on the downgrade. There is no future in owning TWTR shares. It has become a trading stock rather than an investment. The only reason to hold TWTR shares would be if you were expecting a buyout. However, with declining metrics, that is not likely to happen at the recent price ranges.


Amazon (AMZN) announced on Thursday they were going to close the Whole Foods Market (WFM) acquisition on Monday. On Wednesday, the FTC cleared the $13.7 billion acquisition. Amazon said shoppers would immediately see cheaper prices on the best selling grocery and produce items including salmon, eggs, produce, meat, etc. The company also said they would begin implementing a Prime loyalty program in the stores. Survey's claim about 60% of Whole Foods shoppers are also Amazon Prime subscribers. This will be a match made in heaven for Prime members. In addition, the Whole Foods brands like 365, Whole Foods Market, Whole Paws and Whole Catch will be available on Amazon.com, AmazonFresh, Prime Pantry and Prime Now.

Here is the key point. Amazon has a history of selling below cost to capture market share. Once they have that share, they raise prices to just over breakeven and turn up the volume. It only makes sense that Amazon is going to use the first six months of the Whole Foods operation to sell products really cheap to capture market share from people who always thought Whole Foods was expensive. If Amazon can lure them back with low prices and specials, that would also bring them into the Amazon ecosystem. With just over three months until the holiday shopping season, you can bet Amazon will be making a full court press to capture those shoppers before the holidays.

Conditions are going to be tough in the coming months for Sprouts Farmers Market (SFM), Fresh Market (TFM) and Natural Grocers (NGVC). Kroger (KR) and Wal-Mart (WMT) will see the eventual impact but it will be farther down the road. Those stores have a lower dollar customer and far more saturation as a neighborhood store. Whole Foods only has 450 stores. Kroger has close to 3,000 stores. Wal-Mart has 17,000 stores. Whole Foods will have a local impact on Kroger but it will only be minimal. In neighborhoods where both stores exist, they each have their own demographic clientele. There will not be that much bleed over initially.

Costco will see no impact from the acquisition. Some 82% of Costco customers are already Prime subscribers. The Costco stores and merchandising methods are completely different than a Whole Foods. This sell off hysteria on Costco is ridiculous. This is a definite buying opportunity on COST. Claiming Amazon/Whole Foods is going to cause a significant impact is like saying a sale on Harley-Davidson motorcycles is going to impact Cadillac sales. The businesses are just not the same.



Big Lots (BIG) reported earnings of 67 cents that beat estimates for 62 cents. Revenue of $1.22 billion beat estimates for $1.21 billion. They guided for the current quarter to earnings of 1-5 cents and full year earnings of $4.15-$4.25. Same store sales rose 1.8%. The CEO said the closing of thousands of retail stores was giving Big Lots numerous opportunities to open new stores or relocate existing stores in better locations at favorable rates. The store closures are also redirecting consumer traffic to other stores in the area including the Big Lot stores. Shares dipped sharply at the open but recovered to lose only 48 cents.


Autodesk (ADSK) reported a loss of 11 cents that was a penny better than expected. Revenue of $501.8 million beat estimates for $494.8 million. They guided for the current quarter for a loss of 12-16 cents and revenue of $505-$515 million. Analysts were expecting $515.7 million. For the full year, they guided for a loss of 54-61 cents with revenue of $2.03-$2.05 billion. The losses are the result of shifting from a one-time software sale retail model to a cloud subscription model. For the first 24 months of a conversion, revenue declines but long term revenue rises and becomes more predictable. Shares spiked on the news.


Pure Storage (PSTG) reported a loss of 11 cents that beat estimates for a loss of 14 cents. Revenue of $224.5 million beat estimates for $218.8 million. They guided for the current quarter for revenue of $267-$275 million and $985 million to $1.02 billion for the full year. Shares spiked $19% on the guidance.


Ulta Beauty (ULTA) was suffering from an earnings hangover on Friday. The company reported earnings of $1.83 that beat estimates for $1.78. Revenue of $1.29 billion, rose 20.6% and beat estimates for $1.28 billion. Same store sales rose 11.7% but that was down from the 14.4% rise in the year ago quarter. They raised earnings guidance to grow in the "high 20% range" up from prior guidance of "mid 20% range." Same stores sales guidance was raised from 9% to 10%-11%. They opened 20 new stores in Q2 and plan to open 100 in 2017. Ecommerce revenue rose 72%.

Overall, this was an incredible earnings report. However, it may have been too good. BMO Capital downgraded them from outperform to market perform and cut the price target from $345 to $235. Telsey Advisory Group reiterated an outperform but cut the price target from $360 to $300. RBC warned continued high expectations may be ignoring the competition. One analyst said Ulta was a perfect target for Amazon because they have high margins and ship products in boxes. Another said the makeup business cannot continue to grow at the current rate because of the flood of copy cat cosmetics currently hitting the market. However, RBC pointed out that despite all the perceived negatives, Ulta's customer base rose 23% to 25.4 million. That is hardly a weak gain.

I believe this is simple profit taking in a weak market. ULTA had more than tripled over the last three years and there was a lot of profit to be captured. The slight slowing in same store sales was blamed but ULTA said it was because they were less promotional in Q2. So when is making a decision to expand margins a bad thing? They had a blowout quarter without giving away the store in promotions. If by chance the stock declined to $150, I think it would be a major buying opportunity. I am not expecting that but would love to see it.


Earnings for next week include Best Buy, Ctrip.com and Costco. The pace continues to slow with only 7 S&P companies reporting to bring the total to 498. Q2 earnings have risen 12.1% with 73.5% of companies beating estimates and 69% beating revenue estimates. For Q3 there have been 64 guidance warnings and 42 companies issuing positive guidance. The forward PE is now 17.6.


DuPont (DD) will be replaced in the Dow Industrial Average by a new company created when it mergers with Dow Chemical. The new company will be called DowDuPont with the ticker DWDP. The change will occur on Sept 1st.


In years past the appearance of a hurricane in the Gulf of Mexico would send oil prices higher and everyone would be panic stricken that some disaster would befall the production platforms. Since there has not been a major hurricane in the Gulf since Katrina in August 2005, that worry seems to have evaporated. I think the new crop of energy traders did not live through the major outages in the 1990s. With the current surplus of inventories we are not as susceptible to shortages if a storm did blow though the oil patch.

Corpus Christi has five refineries with capacity of about one million bpd or 4% of our total. The Houston area has 35 refineries with capacity of 9.0 million bpd or 46% of our capacity. Currently about 10% of Gulf production is offline. The hurricane's path took it up the Texas coast and it missed the majority of the oil patch south of Louisiana.

While there appears to be no imminent danger to the energy sector there will always be the unexpected. If Harvey rebounds back over the Gulf and makes landfall in the Houston area or farther east, the biggest damage potential is flooding. The refineries are built strong to be immune to storms. However, the 6-12 foot storm surge and forecasts for up to 36 inches of rain, could overpower the drain pumps and shutdown the facilities for weeks. With the driving season ending on Labor Day weekend, it would take a monster facility outage to cause any real problems.

Crude prices are reflecting this fact with no material movement and stuck in the $47-$48 range.


Active rigs declined by 6 to bring the total decline to 18 over the last 4 weeks. Producers are getting ready for what could be another drop in prices in Sep/Oct.




Markets

The S&P posted a big rebound on Tuesday that got everyone excited but it stalled right at 2,450 and that was resistance the rest of the week. The very low volume is going to be even lower next week and it is going to be harder to generate an upside move.

Bank of America said on Friday that equities have seen the biggest outflows since 2004. Since that period covers the financial crisis, that is a strong statement. Over the last 10 weeks, investors have pulled $30 billion from U.S. stock funds. With this lasting streak, it is even more amazing that the major averages are still only down about 2% from their highs from August 8th.

The bank said internal positioning showed investors were becoming more defensive in their equity allocations. Over the last week, $600 million fled technology stock funds, the largest outflow in 49 weeks. Financials lost $35 million for the second consecutive week. Consumer stocks lost $1.5 billion, the third largest weekly outflow ever. Utilities were the only sector to see inflows last week.


On Friday, the Transports were the best performers out of all 11 S&P sectors.


As we move into September, the potential for volatility increases. I will be very surprised if we do not retest the 2,400 level or lower. Even if we did test 2,400, that is only a 3.3% decline and definitely not a major market event. The S&P would have to dip below 2,380 to make investors nervous.


The Dow rallied 123 points at the open but gave back all but 30 by the close. The A/D breadth was still good for the Dow with only six stocks negative. The Dow's mix of different companies and sectors is helping keep it afloat.

The 21,900 level appeared as resistance on Tuesday's short squeeze and that level was still in play on Friday's early rally with a 21,906 high. The Dow chart is giving us no clue as to future direction but we are moving into a weaker period on the calendar so the odds of a continued rally are slim but not zero. The 22,000 level would be the next resistance point.



The Nasdaq has an uphill battle in the weeks ahead. I wrote last Tuesday that the big cap tech stocks were on the verge of a breakdown. That has not changed. Amazon has broken support. Netflix, Google, Priceline and Facebook are very close to critical support breaks. If one of the big cap stocks suffers a significant breakdown, it could poison sentiment for the rest and they could follow. It is highly unusual for all of them to be right on the edge of the cliff at the same time. The potential for a chain reaction decline is very high.








The Nasdaq is only down just over 2% from its highs but is in danger of a bigger decline. The 6,200 level was short-term support last week but the real target for this decline is 6,100. Unless the big cap stocks suddenly rebound out of danger, we could see that level soon.


The Russell posted some consecutive gains but they were minimal compared to the recent decline. The 1,350-1,340 levels need to hold or we could be in for a major change in sentiment. That is a lot of white space between 1,340 and 1,150.


The market was just passing time last week ahead of the Yellen and Draghi speeches. Next week we have the twin payroll reports and while they are not expected to move the market, any material surprise in either direction could upset the idea that the Fed is on hold.

With lawmakers still out on recess until after Labor Day, the political risk should be minimal, but given the current administrations fondness for random tweets, there is always some risk.

This is a holiday week and volume will be very low. That means the averages could be dormant or they could experience significant volatility on an unexpected headline.

Why buy? There is no reason to rush into the market this week. There will more than likely be a better buying opportunity in September. Be patient and keep some cash in your account.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


Random Thoughts


This survey ended on Wednesday the day after the big short squeeze. Bulls lost a lot of recent converts and they went all the way to bearish instead of just neutral. 72% still believe the market is not going higher.



When the iPhone 8 arrives, there will be some unhappy users. According to Sensor Tower, more than 187,000 apps will no longer work. Apple has been signaling they were dropping support for 32-bit apps for a long time. They first introduced a 64-bit processor in the iPhone 5s. The new Apple iOS 11 will no longer support these applications. Users are going to be getting messages like these that show the incompatibility.


Apple said it removed popular Iranian apps from the App Store on Friday. Apple cited new U.S. sanctions against Iran as the reason. "Under the U.S. sanctions regulations, the App Store cannot host, distribute or do business with apps or developers connected to certain U.S. embargoed countries." Apple has an 11% share of the smartphone market in Iran. Needless to say, Iranian users were not happy. The iPhone 8 may not sell well in Iran this year.


Everybody knows one of the main reasons for using Bitcoin is the lack of transparency. In theory you can buy and sell items and nobody knows who is conducting the transaction. Unfortunately, the IRS is preparing to crack down on Bitcoin users. With the astronomical price rise over the last several years, there are thousands of Bitcoin millionaires. There are also thousands of money launderers, drug deals and terror related transactions.

Using a customized software program from Chainalysis, the IRS is planning on tracking transactions and the inflation in the price of coins held for investment. Chainalysis says it is able to track more than 50% of the Bitcoin activity.

The problem is that nobody has ever legislated Bitcoin's description. Is it a currency, is it a derivative or is it a security? Depending on what regulation is passed to define it, the IRS will tax it accordingly.


The hermit kingdom is playing with fireworks again. North Korea launched 3 missiles on Saturday and went 0 for 3 on the tests. Two of the missiles reportedly blew up in flight after roughly 150 miles. The U.S. later revised their analysis of those two missiles, saying there was no confirmation they were a failure. I guess it is possible they could have been planned to blow up rather than fall into the sea. The third blew up almost immediately after it left the launch pad.

It was just last week that U.S. officials had praised Kim Jong-Un for showing restraint and not launching any new missiles since July. On Wednesday of last week, Kim ordered the production of more rocket engines and missile warheads during a visit to a missile research center. North Korean state media published some diagrams that suggested the DPRK was pressing ahead to develop even longer range ICBMs. Publishing the pictures of Kim and the diagrams were obviously intended to be an implied threat.

North Korea has been caught twice in the last six months shipping chemical weapons to Syria. Sanctions do not appear to be holding them back.

Did you ever notice that pictures of North Korean military officers always seem to show them very thin, almost skin and bones? Their uniforms are always baggy.



Germany's Bundesbank said it completed the shipping of 674 tonnes of gold bars ($27.9 billion) back to Germany from France and the US. They announced the plan to bring the gold home in 2013 and it was expected to take until 2020 to move it. The 53,780 bars, each weighing 27.5 pounds, have been moved to the basement under the headquarters of the Bundesbank. Now just over 50% of their reserves are stored in Germany with the remainder split between the USA and Britain. The Federal Reserve is holding 36.6% of Germany's gold and the Bank of England is holding 12.8%. If Germany were to encounter an economic emergency, those reserves could quickly be converted into dollars or euros by the two central banks.

Bank of England Gold Vault 4,600 tons


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Diplomacy is the art of saying "nice doggie" while you are looking for a rock."

Will Rogers


 


Index Wrap

Watching Grass Grow

by Jim Brown

Click here to email Jim Brown
The markets moves so slow last week it was like watching grass grow.

The volume was very light averaging 5.2 billion shares with 4.8 billion on Friday. There was no conviction in either direction. All the market's gains for the week came on the Tuesday short squeeze. The S&P gained 24 points on Tuesday but ended the week with a total gain of 17 points.

I have written several times about the expected low volume the last two weeks of August and last week was a textbook example. Nobody was trading and everyone was just hoping to get out of August without any major losses.

Unfortunately, September is typically worse than August. Volume next week is going to be even lower and there are some growing problems that could change market sentiment to bearish. I wrote about the large cap tech stock breakdown in the market commentary and that is a dangerous possibility. If those support levels break we could see a strong hit to market sentiment.

However, the majority of tech stocks were actually positive for the week. The A/D line for the Nasdaq closed at a two week high. It is just the big cap techs that are weakening. We would rather have the troops advancing than only the 15 generals but the generals are the stocks that determine sentiment.


The A/D line on the S&P also improved bit not as much as the Nasdaq. However, it did not decline as much as the Nasdaq either. The S&P A/D is actually neutral for the week because it closed right in the middle of the three-week range.


The bullish percent index on the S&P declined to 64% and a nine-month low. That is the percentage of S&P stocks that have a buy signal on a point and figure chart. It is widely seen as a strength indicator for the market.


The percentage of S&P stocks over their 50-day average declined to 41.6% on Monday and a ten-month low. This is another breadth indicator for the market. The percentage over their 200-day average also fell to a ten-month low at 63%.



Another breadth indicator is the McClellan Summation Index on the NYSE. This is calculated on the net advancing issues (advances - declines) on the 2,400 stock NYSE. The NYSI is also at a ten-month low.


If you look at all the market breadth indicators above they are telling us that the market is weakening. However, if you look at the charts of the actual indexes the declines are minimal. All the major indexes are only about 2% below their recent highs. Appearances can be deceiving. This is the case of a few stocks holding up the market while the support base is eroding around the edges.

We have all seen the videos of a house on a cliff over a riverbank. From the front of the house everything seems ok but the flood stage river is slowly eating away at the cliff behind the house. Everything is ok until suddenly it is not and the house crashes over the cliff and into the river never to be seen again.

That is the way I feel about the market this week. The indexes are somewhat weak but not dangerously so. The breadth indicators are all eating away at the foundations and eventually there will be a market collapse. I hope I am wrong but that is the picture in the charts.

The S&P is fighting resistance at 2,450 and a support test at 2,420 could appear in the coming weeks.


The Dow has a similar pattern with resistance at 21,900 and again at 22,000. The Dow was the strongest big cap index last week but it is not immune to the underlying weakness. A retest of 21,600 or 21,500 could be the next move.


The Nasdaq is the index most in danger because of the fade in the big cap tech stocks. If they break support, the Nasdaq could easily retest 6,100, which would be my target for dip buyers to appear.


Note that Facebook is the best performing of the FANG stocks but it is still in decline. It is amazing the Nasdaq has held up as well as it has with all of these stocks in decline.


We are rapidly moving towards the FOMC meeting on Sept 20th when the Fed is expected to announce their plan to taper QE purchases. For the last two years, the Fed has been reinvesting the proceeds from matured securities into new securities in order to maintain their balance sheet at $4.5 trillion and interest rates at very low levels. Even though everyone expects the taper announcement that does not mean the market is going to react well.


This week is month end and there is typically some buying but for August, it is normally minimal. The key for this week is the expected low volume and the continued weakness in the big cap tech stocks. If they break support, the market is likely to decline sharply. If they can hang on to current support levels, we could see another week like last week where the market goes nowhere. With September expected to see significant volatility around the debt ceiling and budget battles, I would not be surprised to see investors moving to the sidelines ahead of the events.

The market lows for the second half are typically set in late September and early October. That is a long way off with a lot of minefields in our path.

Unless you are a short-term trader, the risks of holding long-term positions over the next 8 weeks are very high. If you have them, hold them but I would not add any new ones until we see a buying opportunity.

There is always another day to trade if you have money in your account.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Hurricane Relief

by Jim Brown

Click here to email Jim Brown

Editors Note:

Some companies will make a fortune off Harvey. There will be billions of dollars in losses but some companies will profit from this disaster.



NEW DIRECTIONAL CALL PLAYS

HD - Home Depot - Company Profile

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. The company also sells its products through online. It operates through approximately 2,278 stores, including 1,977 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 119 in Mexico. Company description from FinViz.com.

Home Depot and Wal-Mart have two of the best responses to national disasters. When a storm is named and the track is posted, both companies immediately begin to route truckloads of supplies to the affected areas.

Home Depot activated its Hurricane Response center in reaction to Harvey and truck loads of buliding supplies, generators, roofing materials, etc were already headed to Texas before the storm ever made landfall. Home Depot has been responding to storms for more than 30 years and they know exactly what products will be in high demand.

Home Depot has four distribution centers that support hurricane response. Once a storm forms they rush trucks to the areas likely to be hit to prestock stores with disaster supplies. When people come to the stores to buy plywood, nails and supplies, it is already there in surplus quantities. As the storm nears landfall, the center guages severity, potential impact and they pre stage a number of preloaded trucks just out of the danger areas ready to rush in once the storm passes.

On a moderately strong hurricane, Home Depot can see a boost in revenue from $150 to $350 million over a three month period.

HD shares were hit with a post earnings decline not because the earnings were bad but because analysts were worried the home building boom would end soon. Home Depot beat on earnings, revenue and issued higher guidance.

If there is a port in the coming volatility storm, it should be Home Depot as they provide the supplies to rebuild the Texas coast.

Buy Nov $155 call, currently $2.39, initial stop loss $144.25.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Gap and Crap

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow gapped up 123 points at the open but faded to close at the low for the day. The S&P gapped up 15 points but fell back to a gain of only 4 and close at the low for the day. The Nasdaq spiked 37 points at the open but faded to close negative by 6 points.

It was a summer Friday before a low volume holiday week. Nobody is trading in any volume. This is just portfolio adjustments and passing time until after Labor Day.



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 - IBM Inc
The long put was stopped at $143.75.



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 removed all the Iranian apps from the app store in order to comply with the most recent round of sanction. Iranian users were outraged because it impacted civilians and not the government. Apple devices have an 11% market share in Iran.

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!

Update 8/24: Apple announced it was building a $1.3 billion data center in Iowa that would create 10,000 jobs during construction and 550 permanent jobs when completed. They received $208 million in tax breaks from the State of Iowa. The center will be in Waukee, which is close to Des Moines. The center will be powered entirely by renewable energy. Apple users better hope for lots of sun if they are using Siri, iMessage, Apple Music and other Apple services that will operate from this center. Construction will begin in 2018 and the center will open in 2020.

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.


ALB - Albermarle - Company Profile

Comments:

No specific news. Shares have stalled at $115 for 4 days in a weak market.

Original Trade Description: Aug 21st.

Albemarle Corporation develops, manufactures, and markets engineered specialty chemicals worldwide. The company offers lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and lithium specialties and reagents for applications in lithium batteries, high performance greases, thermoplastic elastomers for car tires, rubber soles and plastic bottles, catalysts for chemical reactions, organic synthesis processes, life science, pharmaceutical, and other markets; cesium products for the chemical and pharmaceutical industries; and zirconium, barium, and titanium products for pyrotechnical applications. It also manufactures cesium products for the chemical and pharmaceutical industries; and zirconium, barium, and titanium products for various pyrotechnical applications, including airbag igniters; and performance catalyst solutions, such as polymer catalysts, curatives, organometallics, and electronic materials for polyolefin polymers, packaging, non-packaging, films, injection molding, alpha-olefins, electronic materials, solar cells, polyurethanes, epoxies, and other engineered resins markets. In addition, the company offers bromine and bromine-based solutions for fire safety, chemical synthesis, mercury control, water purification, beef and poultry processing, and various other industrial applications, as well as for the oil and gas well drilling, and completion fluids applications. Further, Albemarle Corporation provides clean fuels technologies, which is primarily composed of hydroprocessing catalysts; and heavy oil upgrading, which is primarily composed of fluidized catalytic cracking catalysts and additives for application in the refining industry. It serves petroleum refining, consumer electronics, energy storage, construction, automotive, lubricants, pharmaceuticals, crop protection, food safety, and custom chemistry services markets. Company description from FinViz.com.

With production of electric cars exploding with more than 1 million expected to be manufactured in 2018, the demand for Lithium-ion (Li-ion) rechargeable batteries is also exploding. When Tesla's Gigafactory reaches full production in 2020 of 35 gigawatt-hours, that will be more battery capacity than the entire world produced in 2014. Tesla has blamed the battery shortage for misses in auto production and they are already planning on building a second Gigafactory. The demand for lithium is suddenly huge and Albemarle is already responsible for 35% of global production.

They reported Q2 earnings of $1.13, up 22%, that beat estimates for $1.11. However, revenue of $737.3 million missed estimates for $740.6 million. They guided for full year earnings of $4.20-$4.40, a 21% rise and revenue of $2.90-$3.05 billion. The revenue miss was due to a divestiture of a specialty chemicals business and currency exchange issues. They repurchased $250 million in stock in the first 6-months of 2017 and paid dividends of $69.8 million.

Next earnings Nov 6th.

Shares declined after the revenue miss but rebounded exactly from long-term uptrend support.

Position 8/22:

Long Oct $120 call @ $1.75, see portfolio graphic for stop loss.


MMM - 3M Co - Company Profile

Comments:

No specific news. They spiked sharply at the open the last three days but could not hold their gains with a weak market.

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. Still struggling higher despite the 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 25th.

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:

Big drop on opening gains in the market. September is just ahead.

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)

DIA - Dow ETF - ETF Profile

Comments:

Spike at the open but well off the highs to close at the low for the day.

I am recommending we target 213.25 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.


DRQ - Dril-Quip - Company Profile

Comments:

No specific news. Decent 2% rebound from the new 8-yr low.

Original Trade Description: August 19th.

Dril-Quip, Inc., together with its subsidiaries, designs, manufactures, sells, and services offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. It operates through three segments: Western Hemisphere, Eastern Hemisphere, and Asia-Pacific. The company's principal products include subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipes, drilling and production riser systems, liner hangers, wellhead connectors, and diverters, as well as consumable downhole products. It also provides technical advisory services, and rework and reconditioning services, as well as rental and purchase of running tools for use in the installation and retrieval of the its products. The company's products are used to explore for oil and gas from offshore drilling rigs, such as floating rigs and jack-up rigs; and for drilling and production of oil and gas wells on offshore platforms, tension leg platforms, and Spars, as well as moored vessels, such as floating production, storage, and offloading monohull moored vessels. Company description from FinViz.com.

The company reported earnings of 9 cents compared to estimates for 1 cent. On the surface, that is a huge beat. Unfortunately it was down from a 64 cent profit in the year ago quarter. Revenue of $127.9 million declined from $142.2 million but still beat estimates for $102 million. So far, so good.

Selling, G&A expenses rose from $5.8 million to a whopping $31.2 million. Total expenses rose from $97.2 million to $129 million. On an operating basis they lost $1.1 million compared to net income of $45.2 million in the year ago quarter. Order backlogs fell from $296 million to $235 million.

While earnings and revenue beat significantly lowered estimates, they were dramatically below year ago levels. Everything is working against Dril-Quip because offshore drilling is rapidly shrinking because of the low cost of oil. It is not profitable to produce oil at $75-$85 a barrel when it is selling for less than $50. Offshore oil rigs in the U.S. have fallen from more than 50 to only 16.

Dril-Quip is actually a good company but the offshore sector is in serious pain. Their benefitting from the various gas wells being drilled overseas where multiple giant gas fields have been discovered. It will be enough to keep the bills paid but long-term, oil prices will have to rebound before DRQ can return to hero status.

With the summer driving season almost over, crude prices are likely to move lower than higher over the next couple of months.

Expected earnings Oct 26th.

Position 8/21/17:

Long Dec $35 put @ $1.65, see portfolio graphic for stop loss.


IBM - International Business Machines - ETF Profile

Comments:

Shares posted another decent gain to stop us out. The downtrend reversed with the Morgan Stanley upgrade on Wednesday.

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:

Closed 8/25/17: Long Oct $140 put @ $3.10, exit $2.26, -.84 loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

The morning spike was sold and the S&P closed near the lows for the day.

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.




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

subscribe now