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Newsletter

Daily Newsletter, Tuesday, 8/29/2017

Table of Contents

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

Market Wrap

Unexpected Surprise

by Jim Brown

Click here to email Jim Brown

The strong buy the dip rebound in the markets was very positive for the near term outlook.

Market Statistics

I was worried yesterday evening that a knee jerk reaction to the North Korean missile launch would push the markets below recent support levels and trigger another round of selling from stop losses and investor frustration. I wrote last night that it would test the conviction of those still buying dips. Apparently, their conviction is in good shape given the strong rebound in the markets.

This was one more opportunity for sellers to take control of market direction and they were unable to do it. The strong rebound suggests a lack of sellers as we close out August and move into the normally more volatile September.

While political events and geopolitical headlines may still cause volatility in September, it would probably take a government shutdown to cause any real market damage. Strong earnings, a Fed on hold and the constant chatter about potential tax reform, appear to be the right mix for holding stocks near their recent highs.

The Dow fell -132 points at the open to break just below 21,700 before rebounding to nearly 21,900 before end of day profit taking slowed the gains. The Dow traded in a 206-point range and closed near the highs. That 21,900 level has been decent resistance for the last week.


The S&P Case Shiller Home Price Indexes for June showed a 5.7% rise year over year and flat with May. The Black Knight Home Price Index showed a rise of 6.2% over the same period and a 0.1% increase from May. Both reports were ignored.

Consumer Confidence for August rose from 120.0 to 122.9 and the second highest level since 2000. The highest was 124.9 in March. The present conditions component rose from 145.4 to 151.2 and the highest level since 2001. The expectations component rose from 103.0 to 104.0.

Those respondents planning on buying a car declined from 13.6% to 12.6%. That may change dramatically in a couple months after 500,000 cars were destroyed in Hurricane Harvey. Prospective homebuyers declined from 6.7% to 6.4%. Potential appliance buyers rose from 47.7% to 50.2%.

Confidence could also decline in September because of the hurricane. That is going to be very costly and result in thousands of job losses from destroyed businesses. Eventually, the rebuilding boom will hire thousands of workers but that will take months to get started because the insurance checks will have to arrive first. Analysts believe up to 80% of the people in Houston did not have flood insurance and that means no checks to repair the tens of thousands of dollars in damage to each home.


After the bell, the API crude inventory report showed a decline of 5.78 million barrels of oil compared to estimates for a 1.75 million barrel decline. Gasoline inventories rose 476,000 barrels for the week ended August 25th.

More than 26% of U.S. refining capacity is now offline in the Houston area. That is roughly 5 million barrels per day. That means crude inventories are going to rocket higher over the next several weeks until those refineries can restart operations.

WTI prices have declined sharply over the last couple days because of the potential for inventories to rise. WTI briefly traded under $46 today but the decline is probably not over.

More than 11% of Gulf production was offline in advance of Harvey. Most of that production is being restarted now that Harvey is fading. Several producers in the Eagle Ford halted operations as Harvey made landfall and they will be restarting as soon as water levels decline.


This is a map of the road closures in the Houston area as of this afternoon. Galveston Island was still being pounded by torrential rains but they are expected to dissipate by Wednesday morning. It could take a couple weeks to reopen all the roads in Houston because once the water drains, the stalled cars will have to be towed and all the debris removed from the hurricane winds. If you live in the Houston area, you are probably not going to be driving a lot in the near future. KHOU real time road closure map.


This is payroll week but unless there is a major miss in either direction, the market should not care. The Fed is on cruise control and is not expected to hike rates again until the August 2018 meeting based on the Fed Funds Futures. According to the futures, there is a zero chance of a rate hike at the September meeting.


The ISM Manufacturing Index on Friday is the next most important report compared to the payroll reports. It is expected to decline slightly and it would take a major drop to get anybody excited.


The few earnings reports we have left will generate more interest than the economic reports. The biggest one to watch would be the Costco earnings on Thursday. I am very tempted to place a long trade before that report even though we do not normally hold over earnings reports. All of the furor over the Amazon/Whole Foods deal is vastly overdone. The two stores are not even in the same category and Whole Foods is not going to impact Costco.


Ciena, Palo Alto Networks and Lululemon should also attract some investor interest. After this week, 498 S&P 500 companies will have reported and the Q2 cycle is over for all practical purposes.


The dollar fell at the open to a low of 91.62 on the Dollar Index. This is the lowest level since January 2015. The index rebounded with the market but it is still at 31-month lows.


The yield on the ten-year note fell to 2.091% at the open and rebounded to 2.136% at the close. That is a ten-month closing low on a flight to safety trade. The problem with North Korea is not over and it will only get worse in the months ahead until somebody finally responds with military force. North Korea is the most heavily sanctioned country in the world and they are still ignoring all the UN resolutions against them. As current UN ambassador Nikki Haley said today, "enough is enough." The UN Security Council held a meeting this evening to consider what to do about North Korea. The toothless Security Council ended the meeting with only a strongly worded statement demanding North Korea cease all missile and weapons research and development. I am sure Kim Jong-Un is feeling appropriately censured and will give the orders immediately.


United Technology (UTX) is reportedly in a deal to buy Rockwell Collins (COL) for more than $20 billion. The two companies have discussed a share price for COL around $140. That would be about $9 over today's close. Rockwell just closed its acquisition of B/E Aerospace this year. Rockwell makes cockpit and communication systems and UTX makes Pratt & Whitney jet engines, among other things. Investors clearly like the combination because UTX shares rose 3% on the news.



Apple shares are well on their way to their pre-announcement ramp. Cleveland Research upgraded them today to buy with a $197 price target. The iPhone 8 leaks are breaking out everywhere complete with pictures. This means production has begun and people are taking phones and parts to leak on the internet. The general disappointment has been over the wireless charging feature. Apple has reportedly gone with a 7.5-watt base unit rather than the global standard for a 15-watt unit. Researchers claim the iPhone will not work with the chargers already in the market. That means users will have to buy Apple licensed chargers if they want one in multiple locations. That insures another revenue stream for Apple.

CEO Tim Cook collected $89.6 million in stock as part of a ten-year deal he signed when he became CEO in 2011. He was able to sell 560,000 of his restricted shares, which he did last week. Half of the shares vested because of his length of time on the job and the other half because Apple delivered returns in the top one-third of the S&P 500 index over the last three years. Apple sold another 291,000 shares for $46.4 million to pay Cook's taxes on his sales. He still has options on 2.94 million shares worth $479 million at today's price. He will receive 560,000 shares of stock annually from August 2018 through August 2020. His final payment under his ten-year contract will be 1.26 million shares in August 2021. It is a good gig if you can get it.


The disaster for the day was Best Buy (BBY). The company reported adjusted earnings of 69 cents that beat estimates for 63 cents. Revenue of $8.94 billion also beat estimates for $8.66 billion. Same store sales of 5.4% beat estimates for 2.2%. They guided for the current quarter to earnings of 75-80 cents and revenue of $9.3-$9.4 billion. Analysts were expecting 65 cents and $8.99 billion. Shares fell 12% on the news.

The problem came when the CEO developed foot in mouth disease. Hubert Joly cautioned analysts on the conference call saying the company may not be able to sustain the mid single digit same store sales. He said, "We do not believe that mid-single-digit comps are a new normal" but positive comps are achievable. Even after giving the positive comps warning, he guided for 5% same store sales in Q3. They are expecting stronger phone sales because of the new Samsung Note 8 and the iPhone 7, 7s and 8.

"Positive" comps are a long way from the 5.4% reported in these earnings. The company guided to full year revenue growth of 4%, up from prior guidance of 2.5%. Analysts said they were picking up business from the closing of Sears and Kmart stores along with the bankruptcy of HH Gregg.

Multiple analysts suggested the decline was a buying opportunity since the actual earnings and guidance were strong. Best Buy is known for being cautious and analysts expect them to beat in Q3. Support is $53 and I would be a buyer of a rebound from that level.


Finish Line (FINL) warned that Q2 sales declined -3.3% to $469.4 million thanks to a -4.6% drop in same store sales. That should equate to earnings of 8-12 cents and analysts were expecting 38 cents on revenue of $477.2 million. The CEO said, "The marketplace for athletic footwear became much more promotional as our second quarter progressed resulting in challenging sales and gross margin trends." The company guided to full year comps of -3% to -5%, down from prior guidance of "low single digit growth." The new outlook suggests full year earnings of 50-60 cents compared to prior guidance for $1.12-$1.23.

The company also said the board adopted a poison pill to prevent the "likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics that the board determines are not in the best interest of the company and shareholders." Analysts said the pill was put in place to prevent a takeover attempt by UK based Sports Direct, which currently owns 8% of Finish Line and has wanted to expand in the USA.


Drug technology company Catalent (CTLT) reported adjusted net income of $185 million that rose 21.1%. EBITDA of $450 million rose 12.1%. Revenue for the full year rose 12% to $2.07 billion. They guided for 2018 for revenue of $2.16-$2.24 billion, with 6% to 10% EBITDA growth and net income growth of up to 14.6%. Shares spiked 14% on the news.


After the bell, Berkshire Hathaway (BRK.B) announced it was exercising warrants to acquire 700 million shares of Bank of America at a steep discount. Six years ago as the bank was recovering from the financial crisis, Berkshire made a large investment to shore up confidence in the bank. The execution price on the warrants of $7.14 and BAC shares closed today at $23.58. That roughly triples the investment he made in 2011 and makes Berkshire the largest shareholder at 6.6%. To pay for the shares Berkshire traded $5 billion in Bank of America preferred shares purchased in 2011. The new shares are worth about $16.5 billion. Berkshire was collecting $300 million a year in the preferred dividends and will now earn $336 million a year in dividends on the common stock. That is like winning Powerball every year.




Markets

The strong rebound in the markets is a very positive event despite the major indexes closing at resistance once again. The opening drop could have triggered an even larger sell off and it did not happen. That is short term bullish. Even with the 206 point Dow rebound, the volume remained lethargic at only 5.3 billion shares. There was no panic selling on the decline and no rush to buy on the way back up.

The broad market advance decline line was almost dead even with 3,489 advancers to 3,568 decliners. Given the market volatility, it was good to finish nearly even.

While the rebound was encouraging, resistance at 2,450 remained rock solid. That could change at any time since market sentiment probably improved on today's rebound. The morning dip did not even come close to initial support at 2,420 so traders are likely to assume there is little risk in the near term market. That could be a bad assumption once we get into September but at least it should work for this week. The 11 S&P sectors were split between positive and negative.



The Dow did not reach resistance at 21,900 but came within 21 points before stalling. It was still a good effort. United and Boeing were the biggest gainers and added nearly 40 points to the Dow. Nike was the biggest loser on the Finish Line guidance warning.

The Dow is well above support levels at 21,600, 21,500 and 21,300. We could dip to the lowest one and it still would not be a major market drop. The Dow is holding within 2% of its recent high despite all the headline volatility.



I was most worried about the big cap tech stocks breaking critical support levels but my worries were misplaced at least for today. The opening drop did break support but traders rushed into the gap and they all rebounded back into safe territory with the exception of Nvidia, which closed fractionally negative.

If today's support break did not create the cascade selling, then traders are now going to see those support levels as buying opportunities rather than threat levels.

The Nasdaq is still in danger is retesting support at 6,100 in September. Resistance at 6,300 remains solid and now we need to see if investors can tack on another day of gains and move above that resistance. That would be very bullish given our point on the calendar.




The Russell managed to add to its recent rebound gains but it is finally reaching resistance at 1388-1400. This will be the real test of investor sentiment.


I was impressed with the market rebound. I did not expect a material gain after the sharp drop in the futures on Monday night. However, North Korea is a paper tiger and as long as nobody takes military action against him the situation is not likely to flare up into a real event. Kim is predictable. He wants attention and he is not embarrassed by constantly launching rockets that fail. He wants to protect himself against being removed from power by using his nuclear bluff until it turns into a reality. Standing up to the rest of the world endears him to the misled citizens in his country. There will be future headlines but the world is powerless to stop him short of blockading the entire country, which will never happen.

When President Trump did not respond to the missile over Japan with a couple cruise missiles aimed at his missile facilities, the event became just another throw away headline on North Korea.

The strong earnings and weak expectations for Fed action have set the stage for another rally once the budget battle and debt ceiling issues are resolved in late September. The best six months of the year begin on November 1st and many investors are hoping for a normal buying opportunity in September or early October. After today's rebound, they may be disappointed unless there is an actual government shutdown. The odds of a material correction are declining with every day that passes.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Rising Guidance

by Jim Brown

Click here to email Jim Brown

Editors Note:

Guidance is rising steadily for this unloved stock. There are plenty of Caterpillar haters but the stock is moving higher on rising guidance.



NEW DIRECTIONAL CALL PLAYS

CAT - Caterpillar - Company Profile

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. Company description from FinViz.com.

CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.

The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.

In December they guided for full year 2017 revenues of $38 billion "as a reasonable midpoint expectation." Analyst estimates for earnings of $3.25 were "too optimistic" according to CAT.

In January they guided for $36-$39 billion in revenue and $2.90 in earnings.

In April they guided for $38-$41 billion in revenue and $3.75 in earnings.

In July they guided for $42-$44 billion in revenue and $5 in earnings.

In April they guided for revenue from construction at flat to 5%. In July they guided for 10% to 15% growth.

In April they guided for revenue from mining at 10% to 15%. In July they guided for 20% to 25% growth.

In April they guided for energy revenue at flat to 5%. In July they raised it to 5% to 10%.

After the devastation in Houston, there were new estimates from analysts today for 17% or higher revenue growth in construction equipment.

Shares spiked at the open to a new high before fading slightly with the market. I believe revenue estimates will continue to rise because they are running out of year and their conservative guidance will have to become more accurate.

Earnings October 24th.

CAT is reactive to Dow movement but shares have ignored the recent Dow weakness. Today's close at $116.01 is a record high.

Buy Nov $120 call, currently $2.68, initial stop loss $111.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Major Surprise

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market rebound back from the opening lows was a major surprise. The big cap tech stocks broke below support but rebounded to post decent gains. That was the biggest surprise of all. I expected a support break on the FANG stocks would cause additional selling.

The dip was bought with conviction and that suggests the rest of the week and early next week could be positive despite the light volume, assuming there are no other geopolitical headlines.



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


MMM - 3M Co
The long call position was stopped at the open.



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

Apple is reportedly in a battle with movie and TV studios over the price of 4K movies. Apple is expected to announce a 4K TV either at the Sept 12th product announcement event or shortly thereafter. Apple wants to charge customers $20 for a 4K movie and producers want to charge $25 or higher. 4K movies are available in the Google Play Store for $30 and more.

Cleveland Research upgraded Apple shares to a buy with a $197 price target. Shares closed at a record high of $162.91.

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.

Update 8/28: Apple said it was holding a new product launch event on Tuesday September 12th. The company is expected to announce three new phones. They will be the iPhone 7, 7s and iPhone 8/Pro. They could also announce a new watch and a 4K Apple TV.

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. Big drop with the market at the open but failed to rebound all the way back.

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.


HD - Home Depot - Company Profile

Comments:

No specific news. Shares dropped with the retail sector after Best Buy posted good numbers but weak guidance. HD gave back their post hurricane spike from Monday.

Original Trade Description: Aug 26th.

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.

Position 8/28/17:

Long Nov $155 call @ $2.87, see portfolio graphic for stop loss.


MMM - 3M Co - Company Profile

Comments:

No specific news. 3M shares dropped with the Dow at the open to stop us out of the position.

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:

Closed 8/29: Long Oct $210 call @ $2.91, exit $1.15, -1.76 loss.


VAR - Varian Medical Systems - Company Profile

Comments:

No specific news. Dropped with the market at the open but recovered its losses.

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:

Spiked with the opening drop and the collapsed with the market rebound. 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:

Recovered from the opening drop but resistance is still holding.

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. No gain.

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.


SPY - S&P-500 ETF - ETF Profile

Comments:

The morning dip was recovered but resistance at 245 remains solid.

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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