Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/5/2017

Table of Contents

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

Market Wrap

Welcome to September

by Jim Brown

Click here to email Jim Brown

September is known as the most volatile month of the year.

Market Statistics

September is certainly off to a good start if it is going to live up to its reputation. The North Korean H-bomb test tanked the markets for the second Tuesday in a row and this time there was no immediate rebound back to positive territory. This particular test is more troubling than the missile over Japan because it ratchets up the complexity level for possible responses. Add in the expected ICBM test for next Saturday and it is clear North Korea is not going to stop on its drive to be a nuclear power with long distance reach until somebody stops them. That is the biggest worry. If they are not stopped now before they have a fully capable delivery system and inventory of armed missiles, stopping them later will be a lot more dangerous for everyone.

Countries without a missile aimed at their cities are not as excited about the entire Korean threat scenario so support from the UN and other allies is weak. That means the U.S. may have to go it alone with only South Korea and Japan in their corner.

The market tanked on the potential for a future event rather than the H-bomb test on Sunday. That potential will only increase as the country continues to test bigger missiles and bigger bombs.

The Nasdaq and S&P rebounded from their lows but the Dow struggled to hold the 21,750 level all afternoon. There was no material rebound in the Dow. The Dow was down -281 at its lows and closed with a -234 point loss.


The economic reports did not provide any support for the market. The ISM-NY declined from 62.8 to 56.6 for August. The only good news in the report was a sharp jump in the employment component from 37.8 to 56.4 and the highest level in 18 months. The overall report still suggested NY economic activity was still growing although at a slower pace.

Factory Orders fell -3.3% for July after a 3.2% gain in June. That was the largest monthly drop in almost three years. Nondurable goods orders rose 0.4% but durable goods fell -6.8%. The biggest hit to orders came from the transportation sector where orders declined -19.2% from May. A decline in auto manufacturing continued with the banks restricting auto loans to everyone except the best credits. Despite the negativity in June, orders are still up 4% over June of 2016.

On Wednesday, the ISM Nonmanufacturing Index and the Fed Beige Book will be the top attention getters. The Fed will probably say activity in most Fed regions is "moderate" and their word of choice for the last year. That means the economy is trudging along without any particular growth spurts.


There is a lot of Fedspeak this week and Fed Governor Lael Brainard warned today that the Fed should be cautious about raising rates because inflation is "well short" of Fed targets. She said the Fed should wait until there is confirmation of the direction of inflation and solid expectations the targets will be achieved.

Currently inflation is 1.4% on a trailing 12-month basis and the Fed target is 2.0%. She said the Fed should be clear it is comfortable with inflation moving over 2% before they begin to hike rates again. She is a permanent voting member of the FOMC. She warned that Hurricane Harvey raises uncertainties for the economy this year and will likely have a "notable" impact on growth in Q3.

Given Brainard's comments on rates and the flight to safety from the H-bomb test, the yield on the 10-year closed at a 10-month low and is threatening to move under 2%.


In stock news, Rockwell Collins (COL) agreed to be acquired by United Technologies (UTX) for $140 a share or roughly $30 billion including debt. Collins shareholders will receive $93.33 in cash and the rest in UTX shares. Collins shares only gained 39 cents to close at $131 suggesting there is serious doubt the deal will be approved by regulators. That was even more apparent after Boeing said it would use the power granted by its contracts with those companies and its influence on regulators to "protect our interests." Airbus also raised an alarm over the potential deal. UTX may be forced to sell numerous non-core assets to get the deal approved and to raise cash to fund the acquisition. United will borrow $15 billion and will assume $7 billion in Collins debt. They are projecting a closing in Q3-2018.


UTX shares took a major hit since about one-third of the acquisition price is new UTX shares. Moody's and S&P both put UTX ratings on review for a downgrade. UTX said it would halt share buybacks for at least the next three years. They have $2 billion remaining on a prior authorization.


In the same sector, Boeing (BA) received a favorable ruling from the WTO that reversed a ruling from the EU that the company had received prohibited support for the 777X jet. The EU ruling had banned support from the state of Washington that allowed Boeing to build a $1 billion plant to design and build the world's largest carbon composite wings for the 777X. The EU ruled that the state reduced its business and occupation taxes for Boeing in return for the company building the plant in Washington. Boeing shares fell $3 with the market.


Disney (DIS) managed to close positive after Wells Fargo upgraded the company from market perform to outperform. The analyst said investors should focus attention on companies with streaming strategies and move away from those companies without a plan. Viacom was one company mentioned and downgraded from outperform to market perform.

I understand the upgrade but investors are not paying attention. They are too focused on the cord cutting aspects surrounding ESPN and future loss of revenue. Shares closed positive today but the mouse house is right on the verge of breaking through $100 to the downside. A weak summer movie season has hurt them as well as other companies.



After the close, Hewlett Packard Enterprise (HPE) reported earnings of 30 cents on revenue of $8.2 billion. Analysts were expecting 26 cents and $7.5 billion. The company guided for the current quarter for earnings of 26-30 cents but analysts were expecting 40 cents. For the full year they lowered earnings guidance from $1.46-$1.56 to $1.36-$1.40. The cut in forecast was due to the spinoff last week of its software business into a merger with Micro Focus International. HPE was not penalized for the guidance cut because of the spinoff. Shares rallied 5% in afterhours.


Shares of Dave and Busters (PLAY) declined 5% in afterhours after the company reported earnings of 59 cents compared to estimates for 55 cents. Revenue of $280.8 million rose 14.9% but missed estimates for $282 million. Same store sales rose 1.1% but they guided for a 1-2% rise for the full year, down from prior guidance of 2-3%. They lowered full year EBITDA guidance from $276-$282 million to $270-$276 million.


MGM Resorts (MGM) announced a $1 billion buyback and said it would sell the real estate belonging to the MGM National Harbor Casino to MGM Growth Properties for $1.19 billion. The casino will continue to be operated by MGM. Shares rallied about 1% in afterhours.

Retailer Duluth Holdings (DLTH) reported earnings of 13 cents that beat estimates for 10 cents. Revenue of $86.2 million beat estimates for $82.8 million. They guided for the full year for earnings of 66-71 cents with revenue from $455-$465 million. Shares rose sharply in afterhours.


Storm season is definitely upon us. September 10th is normally the peak in hurricane activity but they can still form until November 1st. Currently there are three storms on the map. Irma is a category 5 hurricane with 185 mph winds that will more than likely hit Puerto Rico, the Dominican Republic and Cuba a glancing blow before running down the west coast of Florida. This is going to be a major storm and our only hope is that it loses some strength in its brush with Cuba. Analysts believe it could decline to a category 4 but still dangerous.

Jose is following Irma with 45 mph winds and rising. It is still classed as a tropical storm but it is increasing in intensity. It is expected to turn north before it gets to Florida and could make landfall further up the east coast.

Tropical storm 13 is forming in the western Gulf and could move up the coast to Houston. Analysts are split on whether it will strengthen significantly since it is so close to land. If it moves further offshore, it could develop into a named storm and become additional trouble for the Houston area.


Category 5 Hurricane Irma



Markets

The markets are showing a little more weakness on this dip than the prior North Korean headline. Knowing there is another ICBM test likely on Saturday could be a hindrance. Is it possible a cruise missile could appear just before the launch to set back the missile program? I would not bet against it. Since this launch is so well telegraphed, the target is well known. Even if nothing appears to stop it, there is the possibility they could launch it in the general direction of Guam or even California just to further agitate the US. This is a wild card for the markets this week.

The S&P dropped 30 points intraday but rebounded to lose only 19. That is a critical point since the 2,450 support level was broken intraday but rescued by the close. At this point, there is no obvious direction and even in normal years, September is known for being the most volatile month of the year.

The political battles have begun over the debt ceiling, budget approval and the hurricane relief funding. It is going to be a rocky few weeks.



The Dow remains the weakest index and the 50-point rebound from the lows was definitely lackluster. Home Depot and Wal-Mart rescued the Dow from a deeper loss because they were expected to benefit from Hurricane Irma sales.

Goldman Sachs was hit with the falling interest rate problem and Brainard's warning the Fed should not be in a hurry to hike rates. Goldman knocked 55 points off the Dow. United erased 46 points on the Rockwell Collins acquisition news.

Support on the Dow is 21,600, 21,500 and 21,300.



The Nasdaq Composite did not sell off as much as expected given the recent gains. The index rebounded 41 points from its lows to end with a loss of 59 points. That rebound from -100 to -59 was material. The Nasdaq rebounded 207 points from last Tuesday's lows and was at risk to give half of that back. The recovery today was impressive even though it did not make it back to positive territory.

Netflix and Microsoft posted only fractional declines and Apple was expected to decline this week ahead of the product announcement. Apple's decline could have been worse. Google is facing the potential for a monster anti-competitive fine from the EU in multiple billions of dollars on Android search practices. This could be announced in the weeks ahead so Google shares are likely to remain weak.

If the Nasdaq remains the strongest index there is a chance for continued market gains but it is slim. The September volatility is going to be a challenge for the entire market.




The Russell 2000 had a streak of 7 consecutive gains at the close on Friday. That streak ended today with a 1% decline but it could have been worse. The index held on support at 1,400 and that is somewhat bullish.


I would be hesitant to add long positions this week. Now that we are in September and volatility is expected to increase in normal years, the North Korean problem, the probable Saturday missile launch, the political battles over the debt ceiling, annual budget and hurricane funding are likely to fuel that volatility in the weeks ahead. September normally provides a buying opportunity but normally late in the month.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Buying Opportunity

by Jim Brown

Click here to email Jim Brown

Editors Note:

September is known for producing buying opportunities. However, today is not likely that opportunity. September is the most volatile month and the buying opportunities normally come at the end of the month. With the long list of negative catalysts ahead and zero positive catalysts, the market has a monster wall of worry to climb if it is going to move higher. I recommend we keep new plays to a minimum this week until we see what happens next weekend and the expected North Korean missile launch. If the U.S. were to interfere with that launch, it could be a major event.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Headlines Matter

by Jim Brown

Click here to email Jim Brown

Editors Note:

The North Korean H-test headline did matter to the market but only temporarily. The major indexes were down hard intraday but also rebounded well off their lows. The S&P rebounded 11 points from its intraday low. That significantly reduced volatility as yet another dip was bought. Not everybody was a believer and that is why the markets ended with big losses.

I was very happy with the performance of the portfolio today. There were only two large losses and we knew Apple was due for a decline this week. HD, VAR and BBY all had nice gains in a weak market.



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


AAPL - Apple Inc
The long call position was stopped at $163.25.



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BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

We were finally stopped out on the Apple position. Since we were expecting a decline several days before the Sept 12th product announcement, our stop was really tight and we did not suffer from the market meltdown this morning.

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:

Closed 9/5: Long Nov $160 call @ $8.05, exit $9.42, +1.37 gain.
Closed 9/5: Short Nov $175 call @ $2.72, exit $3.00, -.28 loss.
Net gain $1.09.


ALB - Albermarle - Company Profile

Comments:

No specific news. Down with the market. Gave back the majority of the $2.30 gain from Friday.

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.


BBY - Best Buy - Company Profile

Comments:

No specific news. Amazing relative strength with a nice 78 cent gain in a weak market.

Original Trade Description: Sept 2nd.

Best Buy Co., Inc. operates as a retailer of technology products, services, and solutions in the United States, Canada, and Mexico. The company operates through two reportable segments, Domestic and International. Its stores provide consumer electronics, such as home theater, home automation, digital imaging, health and fitness, and portable audio products; computing and mobile phones, including computing and peripherals, networking, tablets, smart watches, and e-readers, as well as mobile phones comprising related mobile network carrier commissions; and entertainment products, such as gaming hardware and software, movie, music, technology toy, and other software products. The company's stores also offer appliances, which include refrigeration and laundry appliances, dishwashers, ovens, coffee makers, blenders, etc.; and other products comprising snacks, beverages, and other sundry items. In addition, it provides services, such as consultation, design, delivery, installation, set-up, protection plan, repair, technical support, and educational services. The company offers its products through stores and Websites under the Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater, Pacific Kitchen and Home, bestbuy.com.ca, and bestbuy.com.mx brand names, as well as through call centers. It has approximately 1,200 large-format and 400 small-format stores. Company description from FinViz.com.

On August 29th, Best Buy reported earnings of 69 cents that beat estimates for 63 cents. Revenue of $8.9 billion also beat estimates for $8.7 billion. Same store sales rose 5.4%. They raised full year guidance for revenue to rise 4% compared to prior guidance for 2.5%. Operating income is expected to rise 4.0-9.0% compared to prior guidance of 3.5-8.5%. Shares were crushed for a $9 loss on the news.

There was no specific reason except that Best Buy had been doing so well and the stock was trading at a record high. Analysts came out after the crash saying the selloff was overdone because the Apple product announcement in mid September would create additional store traffic the rest of the year and likely boost earnings.

Sometimes events cause unexpected reactions. Given their earnings beat, strong comps and raised guidance, I think we should buy the dip. Support has appeared at $54 and the next move should be positive as saner investors realize this is a bargain.

Earnings Nov 24th.

Position 9/5/17:

Long Dec $57.50 call @ $2.59, see portfolio graphic for stop loss.


CAT - Caterpillar - Company Profile

Comments:

No specific news. Only a 2 cent gain but a new closing high in a weak market.

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:

Bank of America said the outlook for home improvement stocks was favorable in the current environment. Add in Harvey and Irma and HD could see more than $1 billion in additional sales. Nice $2.15 gain in a weak market.

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 still fighting resistance at $36. Only a minor decline in a weak market.

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. Excellent relative strength in a weak market. Resistance at $106 is being tested.

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:

Volatility spiked to 14 but quickly declined despite lower indexes in the afternoon. September, the most volatile month of the year.

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:

The Dow came to a dead stop at downtrend resistance and then crashed hard on the Korean bomb test. I am raising the exit target. I have lost confidence that the Dow will trade below 214.50. Every dip is bought.

I am recommending we target 215.50 for an exit.

Original Trade Description: July 27th.

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average (the "Index"). The Dow Jones Industrial Average (DJIA) is composed of 30 "blue-chip" U.S. stocks. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity. The DJIA is a price-weighted index of 30 component common stocks.

The Dow closed at a new high in an ugly market solely because of big gains in Boeing, Disney and Verizon. If the rest of the market continues lower, the Dow will eventually crater as well. I am recommending we enter a put position on the Dow ETF at the current high.

Position 7/28/17:

Long Oct $215 put @ $3.33, see portfolio graphic for stop loss.
Short Oct $205 put @ $1.29, see portfolio graphic for stop loss.
Net debit $2.04.


SPY - S&P-500 ETF - ETF Profile

Comments:

The S&P dropped below support at 2,450 in late morning but rebounded to close at 2,458. I am raising the exit target because every dip is being bought. I am not confident we will see a dip below 2,420.

I am recommending we target $242.75 for an exit.

September is the most volatile month of the year.

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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