Option Investor
Newsletter

Daily Newsletter, Thursday, 8/31/2017

Table of Contents

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

Market Wrap

Data, Data And More Data

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The data driven Fed should be in hog heaven, we got a load of it today. From labor to spending, real estate and manufacturing all the bases were touched. The underlying theme remains the same; labor markets are tight and continue to tighten, wages and spending continue to rise, inflation continues to trend well below the FOMC target 2% rate. This combination is Goldilocks for the market, supporting growth with little to no interest rate hike expectation, and the indices responded with small gains.

Asian markets were mixed. The news of the day was Chinese PMI. The official manufacturing PMI came in positive and above expectations at 51.7 while the services index fell more than expected to 53.4. The news is at once positive but positive with the dark cloud of slowing in the services sector. Chinese markets fell marginally, led by the small cap Shang Hai index, while Japan rose more than 0.75%. European indices were firmly higher following the release Eurozone inflation data. The release shows inflation rising more than expected at 1.5% and the highest level in four months.

Market Statistics

Futures were positive all morning, starting with small gains and gradually rising to indicate an open near to 0.35% following the release of today's data. The open was a little intense but not too bad, the SPX gapped up by about 5 points and extended that to about +12 points by 10:30AM. This turned out to be an early top and the intraday high until late in the afternoon. Between 10:30AM and late afternoon the indices trend sideways within a narrow range just below the early high. Late afternoon the indices moved up to test the early high and broke through to close with a gain greater than 0.5% (SPX).

Economic Calendar

The Economy

It's been a while since we had a Thursday so full of data. Starting with the Challenger report on planned lay offs none are too exiting but all support long term trends and improvements within the economy. Challenger says plans for job cuts rose 19.4% from last month to 33825. This is 5% above the August 2016 level but leaves the YTD total down -26.1%. Retail led the charge in slashing employees from the roles. Looking to the hiring portion of the report plans for hiring rose 69% on a year over year basis and are up 435% on a year to date basis putting 2017 on pace to be the strongest hiring year since the recession. Looking ahead, based on trends, we can expect to see job gains grow to near 500K next month.


Initial jobless claims gained 1,000 on top of a revision of +1,000 for a net gain of 2,000. The four week moving average of claims fell by -1250 to hit 236,750. On a not adjusted basis claims rose by 0.5% versus an expectation of falling -0.2%. Not adjusted claims are down -9.1% year over year despite this week's gains. While it seems that the down trend in initial claims may have ended the figure continues to trend near the historic low, consistent with labor market health.


The continuing claims figure fell by -12,000 from last week's not revised figure to hit 1.942. The four week moving average of claims fell -6,250 to hit 1.951 million. The two figures are edging lower while trending near the long term historic low, consistent with labor market health.

The total number of claims fell -4,225 to hit 1.916 million. This is as expected, consistent with seasonal trends and in line with long term trends. On a year over year basis the total claims figure is down -8.75% and consistent with ongoing improvement in labor and employment. Based on this, the Challenger and the ADP reports I would be very surprised if the NFP was a miss and a little surprised if it is not a positive surprise.


Personal Income and Spending were both above expectations with the silver lining of cooling inflation. Personal income rose by 0.4%, spending by 0.3%. Within the report the all important PCE prices and PCE core prices both remain below the FOMC's target rate of 2%, and have declined from the previous month. Both PCE prices and PCE Core prices came in at 1.4%, down a tenth from the previous month.


Chicago PMI came in at 58.9 in August, unchanged from the previous month. This is the 18th month of positive readings, all components of the index except employment are up on a YOY and YTD basis indicative of strong and steady growth in the manufacturing sector. Gains in production and demand were offset by declines in employment and backlogs resulting in this months unchanged figure. Adding to the negative spin on employment is the fact it fell below 50 and into contractionary territory. Regardless, with production and demand on the rise we can expect to see employment levels hold steady and possibly rebound in the coming months.


Pending home sales rounds out today's data deluge, and on a bit of a sour note. The pending home sales figure fell -0.8% and has been negative 4 of the past 5 months. The index fell from a downwardly revised 110 to 109.8 and is down -1.3% YOY. The only bright spot in this report is that the declines are due to low inventory and a lack of response from the home builders. Economist at the NAR say that inventory is being gobbled up at an alarming rate compared to the number of new homes coming onto the market. Personally, the ridiculous prices homes are going for in my neighborhood make me want to sell, but then what would I buy?

The Dollar Index

The Dollar Index firmed on the day's data but gains were capped. While the data helps firm forward economic and FOMC outlook the same was happening in Europe with the Euro, undermining and offsetting gains in the dollar. The index closed with a loss near -0.25% after pushing up to test resistance at $93.00. The index remains in down trend but a continuation of that trend is in question. Tomorrow's NFP could answer that question, if the data is strong enough it could bring the bid back to the dollar. A break below support, just below today's close near $92.00, would be bearish. A move above $93 would be bullish but still face additional resistance near $93.70 and $94.


The Gold Index

Gold gave the market the old head fake, first dipping on today's data and then shooting higher when the dollar hit resistance and reversed the days gains. Spot gold closed the session up $13.00 and 1% from yesterday and is now above the $1,320 resistance target. This move is driven by expectations for a weaker dollar and supported by global political tensions, although those have eased a bit since earlier in the week. The risk is that tomorrow's NFP will positively surprise the market and send the dollar moving back higher.

The Gold Miners ETF GDX got a bid on the move in gold, gaining about 0.5% on the move to test resistance at $24.70 and the 38.2% retracement level. Today's candle is a medium sized green one that could be a continuation signal if only it had closed at a new high and above resistance. The indicators are bullish and pointing higher suggesting resistance will be tested and maybe broken with a couple of caveats. The ETF is still within a trading range and stochastic is indicating overbought at current prices, below a resistance level, while MACD momentum remain weak. A move up could come, possibly sparked by tomorrow's NFP, but caution is due until then. Even with a break above $24.70 the ETF is still within a trading range with target near $26.00.


The Oil Index

Oil prices caught a bid as OPEC worries fade and traders focus on Hurricane Harvey, the effects on energy infrastructure and a new storm brewing off the leeward islands and aiming for Puerto Rico. So far there have been several major shut-downs, today's news includes the largest refinery and a portion of Colonial Pipeline servicing about 40% of the Southeast. WTI gained nearly 2.5% to trade above $47.00. RBOB gasoline rose more than 13%.

The Oil Index gained a little more than 0.5% to trade just below the long term moving average. The index is moving up from long term support levels but still below major resistance with indications that resistance will be tested. The silver lining to the storm could be a drawdown of US supplies. A drawdown of US supplies of gas, diesel and oil would held tilt the supply/demand imbalance back in favor of demand and in turn help support prices. If so, this could be the turning point in the energy sector I was trying to target earlier in the summer but it's a wee bit early to tell. Regardless, energy stocks are trading near 18 month lows with a semi-stable outlook for oil and positive earnings expections and so of interest to me.


In The News, Story Stocks and Earnings

Wells Fargo made big headlines today. The company revealed that the fake account scam resulted in nearly 2X the number of false sign-ups as previously thought. The reaction on the street and from Capitol Hill was not good, both calling for the board to be removed with possible legal actions to boot. Bottom line, the news reveals a culture of fraud that spanned the company and so hard to believe those in charge had no idea it was going on. Shares of the stock fell a half percent to set a 9 month closing low.


Campbell Soup reported a -1.8% decline in earnings, missing expectations for revenue and earnings. Company CEO says that the packaged foods business is challenging as disruptors invade the market and consumer tastes shift toward the fresh category. The results led management to lower forward full year guidance to a range below the current range, sparking a decline in food stocks across the segment. Shares of Campbell's fell more than -8% and look like they are heading lower.


Lululemon reported after the bell and beat on all measures. The company reported revenues and earnings above estimates driven by 2% same store sales comps and a 30% rise in online sales. The results caused management to raise guidance above current consensus and sent the stock up more than 7.5% in after hours trading.


The Indices

The indices moved up today, driven by positive economic outlook. Leading the move was the tech heavy NASDAQ Composite with a gain of 0.94%. The index created a medium sized green candle moving up from the short term moving average, approaching the current all time high and supported by the indicators. Both indicators are moving higher following trend following bullish crossovers and indicative of higher prices. Resistance is at the all time high, a break above that would be bullish.


The S&P 500 closed with a gain of 0.56% coming in second for the day. The broad market index created a small to medium sized green bodied candle moving up from the short term moving average and supported by the indicators. The indicators are both pointing higher following bullish trend following crossovers and suggest higher prices are on the way. The current all time high is next resistance target, a break above that would be bullish.


The Dow Jones Industrial Average closed with a gain of 0.25%. The blue chips created a small green bodied candle, just above the short term moving average and the long term up trend lines. The indicators are in line with a trend following signal but it has not confirmed. Stochastic has fired a strong signal, MACD has yet to make its zero line crossover in support of the move. A move up from this level would be bullish and trend following with the caveat of resistance at the all time high. A break above there would be more bullish.


The Dow Jones Transportation Average brings up the rear with a gain of only 0.09%. The transports created a small shooting star doji at a resistance level but indicated higher nonetheless. Today's move did meet resistance but is and extension of a trend following bounce, and supported by the indicators. Both MACD and stochastic are pointing higher following bullish trend following crossovers and suggestive of higher prices. A move higher would face resistance near 9,400, a move lower would find potential support at the short and long term moving averages and the long term up trend line.


At the risk of sounding fickle my suspicions of correction are dissipating. The indices are finding or have found support at long term trend lines, are bouncing higher from moving averages and supported by trend following signals. I've been bullish for the long term, waiting for the next good signal. This may not turn out to be a good signal but it bears all the hallmarks. I am bullish near term, a bit cautious with resistance levels still in play, but looking to see those levels broken. The risk is of course tomorrow's data which we will get before the market opens.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Questioning Reality

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets are out of character for this time of year. August and September are the two weakest months of the year and the Nasdaq closed at a new high. The Dow is lagging with a close 170 points below its prior high. We are either setting up for a contrarian blowout in September or reality is going to return next week with a double top in the indexes.

With these gains on low volume and contrary to the seasonal norms, I have to question whether they will stick. Friday's volume should be the lowest for the week and given the three day rally there could be some fear of holiday weekend event risk. There is no rush to add positions until we see what happens at this critical level.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Not Expecting This

by Jim Brown

Click here to email Jim Brown

Editors Note:

I seriously doubt that anyone was expecting a new high on the Nasdaq in late August. This is supposed to be a seasonally weak period but like every other seasonal trend this year, the markets are ignoring the calendar. The Nasdaq closed at a new high by 6 points after rebounding strongly from the Tuesday morning dip to 6,228. The index has rebounded 200 points in only three days.

This is proof once again that past performance is no guarantee of future results.

The key now is to see if the Nasdaq can extend its gains and whether the other indexes are going to follow suit. The S&P is still 10 points below its high and the Dow is 170 points below its high. There is always the potential for a double top as we head into the normally more volatile September period.



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


TER - Teradyne
The long call position was entered at the open.

DRQ - Drill Quip
The long put position was stopped at $37.85.



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 finally sent out invitations to the September 12th product announcement. Shares closed at another new high.

I am going to tighten the stop loss again. The stock normally fades a couple days before the announcement and we want to exit on any weakness.

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. Another nice gain to ease just over resistance at $116.

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.


CAT - Caterpillar - Company Profile

Comments:

No specific news and only a 6-cent decline from Wednesday's new high.

Original Trade Description: Aug 29th.

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.

Position 8/30/17:

Long Nov $120 call @ $2.75, see portfolio graphic for stop loss.


HD - Home Depot - Company Profile

Comments:

Home Depot and Lowes both confirmed they have delivered more than 700 truckloads each of relief-rebuilding supplies to the Houston area. HD had been forced to close 40 stores around Houston but as of Thursday had reopened all but 4.

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.


TER - Teradyne - Company Profile

Comments:

No specific news. Shares spiked at the open to test resistance at $36 then faded when sellers appeared at that target level.

Original Trade Description: Aug 30th.

Teradyne is a leading supplier of automation equipment for test and industrial applications. Teradyne Automatic Test Equipment (ATE) is used to test semiconductors, wireless products, data storage and complex electronic systems which serve consumer, communications, industrial and government customers. Our Industrial Automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality and increase manufacturing efficiency. In 2016, Teradyne had revenue of $1.75 billion and currently employs approximately 4,400 people worldwide. Company description from Teradyne.

For Q2 they reported earnings of 90 cents compared to estimates for 86 cents. Revenue of $696.9 million beat estimates for $684.2 million. They raised revenue guidance to $455-$485 million and analysts were expecting $445 million.

In just the last 30 days analyst estimates for Q3 have risen from 38 cents to 43 cents. Full year estimates have risen from $1.88 t $1.97 per share. Zacks rates the Electronics Testing Equipment sector as #6 out of 250 industry sectors. Every new electronic device manufactured needs a new set of testing equipment.

Earnings October 26th.

Shares have been stuck under resistance at $35 for six weeks and broke out today. Analysts believe they will continue higher and make new highs. The $36 level is the next resistance.

Position 8/31/17:

Long Oct $37 call @ .90, see portfolio graphic for stop loss.


VAR - Varian Medical Systems - Company Profile

Comments:

No specific news. Monster gain and new closing high. I would expect some sellers to appear over the next couple days. I am going to tighten the stop loss but try to give it some breathing room.

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:

6% decline with the Nasdaq making a new high. 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:

Another minor gain over resistance but the Dow is lagging the other indexes.

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. The sharp rebound in crude prices lifted the energy sector and this position was stopped out for a minor 35 cent loss.

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:

Closed 8/31: Long Dec $35 put @ $1.65, exit $1.30, -.35 loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

Strong gain but dead stop on resistance at 248. This will be an inflection point where it either fails or surges to new highs. The SPY is significantly outperforming the S&P. The SPY traded within 10 cents of a new high while the S&P is 10 points below the high.

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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