Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/6/2017

Table of Contents

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

Market Wrap

Whippy Prices Beating Up Both Sides

by Keene Little

Click here to email Keene Little
You can tell the market is nervous since every little news item causes a knee-jerk reaction that then gets reversed a day or two later. Both sides have been frustrated by not getting a trade to stick and stops are getting hit before many have an opportunity to take profits. Welcome to September.

Today's Market Stats

It was a relatively quiet day for the stock market today, especially considering the number of whipsaw moves we've seen since the August highs for the indexes. Today finished with a doji and as an inside day (mostly inside Tuesday's wider range). All of this points to an indecision day as traders try to figure out which way is up or down.

It was also quiet for economic reports this morning. The trading day started with a gap up, thanks to an overnight rally in the futures, but immediately sold off following the gap up. The selling didn't stick and the market rallied to new intraday highs before pulling back in the afternoon session. Equity futures have dropped back this evening and completed a round trip off this morning's lows.

Sticking a wet finger up into the wind I think the market will head lower before possibly setting up another rally into the end of the year but with all the choppy price action it's a challenge trying to get a bead on this market. All the jinking and jiving is making it difficult for traders and it could get more volatile this month. Even the VIX is jumping all over the place. It's certainly time for a little more caution than usual.

This afternoon's Fed Beige report was followed by a little more rally in the market but that was given up in the final 30 minutes. The report was basically neutral for the market since it didn't shed any new information. The language was the same -- "moderate growth" and wage pressures are "moderate." Inflation is less than their 2% target and they're not sure why wage pressures, and therefore inflation, isn't higher.

The Fed is stuck in their old thinking (e.g., Philips Curve) and they're essentially baffled by this economy. If they raise rates at their September meeting it will be because they're simply desperate to get rates higher in order to provide a cushion (to lower rates again) for the next recession. And if they raise rates and we soon get confirmation of a recession they'll get the blame. Couldn't happen to a finer group of people (wink).

Instead of worrying about wage pressures (and inflation) perhaps the Fed should pay attention to a rather simple indicator that shows tax receipts from wages. The chart below shows year-over-year growth in payroll tax receipts and the message is not supporting the Fed's concerns about wage pressure.

If employment is growing we should see an increase in payroll tax receipts but since May there has been a reduction in the growth in receipts. The employment numbers have been questionable over the years and while they've been showing growth in employment we have actual tax receipt data that suggests otherwise. If employment has reversed it means trouble ahead for our economy and therefore the stock market.

Payroll Tax Receipts, July 2016 - August 2017, chart courtesy Michael Carr, Peak Velocity Trader

Moving to the charts, the techs have been the strong indexes recently and are the only ones to have made new all-time highs this month. So I'll start tonight's chart review to see where NDX might be headed next.


Nasdaq-100, NDX, Weekly chart

After a brief dip below its uptrend line from June-November 2016 NDX popped back above it last week. Currently near 5862 I think it's an important trend line for the bulls to defend. Another break probably won't recover. The other important trend line is the one along the highs since November 2014, which stopped the rallies into the June and July highs. It's currently near 6077 and is upside potential if the rally keeps going.

If that upper trend line is tagged again we'd then have a 3-drives-to-a-high setup for a top. Whether or not NDX rallies that high is currently a big question mark since there are lower possible targets, as explained below, but if NDX does push higher from here I think we could see a top anywhere between a test of last Friday's high near 6010 and the upper trend line, which will be closer to 6100 by the end of next week.


Nasdaq-100, NDX, Daily chart

Unlike the blue chip indexes, the pullback from last Friday into Tuesday's low for NDX did not result in an overlap of its August 22nd high and therefore it could still be in what will become a 5-wave move up from August 21st. We could therefore see another push higher to at least 6019 where the 5th wave would equal the 1st wave. There's higher potential to the trend line along the highs since November 2014, currently near 6077 but it's important to keep in mind that we could get just a minor new high and then a reversal back down.

There is also still the potential for the bounce off Tuesday's low to be just a correction to the decline and will be followed by a resumption of selling on Thursday. It could go either way but I see upside as limited while downside risk is significant.

Key Levels for NDX:
- bullish above 6010
- bearish below 5890


Nasdaq-100, NDX, 60-min chart

The bounce off Tuesday's low is a 3-wave move with the 2nd leg being the recovery off this morning's low. Two equal legs up points to 5979 so watch for that possibility Thursday morning. But the minimum expectations for an a-b-c bounce correction off Tuesday's low has now been met and therefore there is the potential for more selling to kick into gear right away Thursday morning. The bulls would be in better position, even if only for a rally to a minor new high (6019) if NDX makes it above 5980.


S&P 500, SPX, Daily chart

At the moment SPX has a 3-wave move down from August 8-21 and a 3-wave move back up from August 21st. That leaves us hanging as far as what direction the next big move will be. I think the higher-probability move will be down but we'll need additional price action to verify which way this is going to go next. If the bulls keep control we could see SPX rally up to the trend line along the highs from March 1 - July 27, which will be near 2514 by the end of next week (currently near 2509).

If there's going to be at least another leg down to create a larger 3-wave pullback we should see SPX drop down to at 2407 where it would achieve two equal legs down and test price-level support, also near 2407. More bearish potential is down to a price projection at 2361, possibly slightly above that where it would test its 200-dma, something it hasn't done since the November 2016 low.

Key Levels for SPX:
- bullish above 2481
- bearish below 2428


S&P 500, SPX, 60-min chart

While NDX did not drop below its August 22nd high, thereby keeping alive a possible 5-wave move up from August 21st, SPX (and the Dow) did drop below its August 22nd high at 2454.77 and by doing so it negated the bullish 5-wave count. It leaves a 3-wave bounce in its wake and that turns things more bearish. We could have some kind of complex wave structure that will take us higher but at the moment I think the higher-odds play is to short the current bounce with a stop just above last Friday's high at 2480. The bounce could make it a little higher before turning back down but it's not required.


Dow Industrials, INDU, Daily chart

The Dow has the same pattern as SPX and if anything it looks a little more bearish. Friday's high was a back-test of its broken uptrend line from November 4 - May 18 and Tuesday's selloff was the bearish kiss goodbye. It is therefore bearish against last Friday's high at 22039. Tuesday's low found support at its 50-dma, currently near 21740, which is also the location of the bottom of a parallel up-channel for price action since the April low.

The Dow could find support slightly lower at price-level S/R near 21680 but a break of that would be bearish and below 21600 would be confirmation that another leg down is in progress. At that point I'd watch to see if the Dow finds support near 21449 where it would achieve two equal legs down from August 8th. Below that is minor support near 21300 and then a price projection for a larger decline at 21091, possibly down to price-level support near 21000.

Key Levels for DOW:
- bullish above 22,039
- bearish below 21,600


Russell-2000, RUT, Daily chart

The RUT has had the more bearish price pattern since its July 25th high (it peaked before the others, which was a bearish warning sign). The move down into its August 18th low counts well as a 5-wave move, which sets the trend (unless it was the completion of a larger sideways consolidation). The sharp bounce into Tuesday morning's high is a 3-wave bounce correction and it should lead to another leg down.

Tuesday's reversal from the 62% retracement of its decline, near 1413, should be the start of the next leg down and short against Tuesday's high near 1415 looks like a good play from here. Another leg down equal to the July-August decline gives us a downside target at 1311 and there's price-level support only slightly lower at 1296 (its June 2015 high).

Key Levels for RUT:
- bullish above 1415
- bearish below 1385


10-year Yield, TNX, Daily chart

The banks got hit hard with Tuesday's selling because there's concern that the Fed does not have as much economic support as they want in order to justify another rate increase. They'll probably do it anyway in this month's meeting but they really don't have the numbers backing that decision. It doesn't really matter anyway since the bond market is a lot smarter than the Fed and if large institutional fund managers see a lower probability for inflation and evidence of a slowing economy they're going to be investing more in the safer bonds instead of riskier stocks.

Banks do better in a higher interest rate environment (it helps their spreads between money lent vs. paid on deposits) and yesterday's steep decline in yields (TNX dropped 4%) sent shivers down the spines of the big banks. TNX has dropped out of its bullish descending wedge that it was in since its July 6th high and that's bearish. Since a failed pattern tends to fail hard we could see bond yields tumble lower from here and head quickly for a downside target zone (for now) at roughly 1.95%-2.00%. The bearish potential would be at least in question if TNX gets back above last Friday's high at 2.167%.

If TNX does drop down to support near 2.0% it will be interesting to see what the Fed decides.


KBW Bank index, BKX, Daily chart

The banks are slightly behind the decline in yields since BKX made a slightly higher high in August whereas TNX made a lower high at that time. Like TNX we can see a bullish descending wedge for the decline from the high on August 8th but so far there isn't the confirming bullish divergence I like to see before depending on this pattern. It's looking more likely we'll see a drop below the wedge and that would leave another failed pattern.

Tuesday's strong decline dropped BKX to the bottom of its descending wedge, which was again tested with today's midday low. So support is still holding but at the moment it's looking like it will drop below the wedge and then watch for a back-test to confirm a larger decline is in progress (or not if there's a recovery back inside the wedge, since a throw-under followed by a climb back inside the wedge is actually a good buy signal).


Transportation Index, TRAN, Daily chart

The battle of the trend lines and moving averages -- that's how I'd label the TRAN daily chart. The August 24th low was a test of support at its uptrend line from January-June 2016. Last Friday's high was a test of resistance at its broken uptrend line from June 2016 - May 2017 after it broke through its short-term downtrend line from its July 14th high.

Tuesday, and again this morning, the TRAN then back-tested that short-term downtrend line and it held as support. It also back-tested its 200-dma following the rejection at its 50-dma last Friday. Today's bounce brought the TRAN back up to price-level S/R at 9310, which held as resistance. For now it's just ping-ponging between support and resistance and it's a tough call as to which way this will resolve. At the moment I think it's going to head lower but I could easily argue for a higher bounce back up to resistance near 9490 before turning back down. As an economic indicator this is an important index to watch.


U.S. Dollar contract, DX, Daily chart

After falling out of its down-channel from January, in mid-July, the US$ has back-tested the bottom of the channel as well as the top of a steeper down-channel from May. It is now below price-level support near 93 and looks like its vulnerable to the trend line along the lows since February 2015, near 90.20, and then the bottom of its steeper down-channel, which will be near 89.80 by the end of next week.

Since the dollar rolled over from its January high I've been looking for a drop down to the trend line along the lows and it's the reason I've been projecting a decline to the $90 area. We're starting to see bullish divergence and that's supporting the idea that the dollar will find support between here and 90. A rally above 94 would tell us a low is in place.


Gold continuous contract, GC, Daily chart

The N. Korean scare tactics are working for gold bulls as they seek a safe haven investment. The dollar's decline is also helping drive gold higher and it's looking like we could see gold reach a price projection at 1377 for two equal legs up from December 2016. This would also be a test of the July 2016 high at 1377.50.

I'm still looking at the 3-wave bounce as a correction to the 2011-2016 decline and not something more bullish but it would start to look more bullish if it gets above its March 2014 high at 1393. A 38% retracement of the 2011-2016 decline is near 1381, making the 1377-1393 area a good upside target as well as strong resistance. But a drop below 1300 would likely bring out the sellers sooner rather than later.


Oil continuous contract, CL, Daily chart

Oil has rallied up to its downtrend line from February and its broken 200-dma, both near 49.50. It would obviously be more bullish above this resistance, in which case we could be looking for a rally to about 54 where it would achieve two equal legs up from June and back-test its broken uptrend line from April-August-November 2016 later this month. In order to accomplish that though it would first have to break its downtrend line form May 2015 - January 2017, near 52.30. I think the higher-odds pattern calls for the decline to continue from here.


Economic reports

Thursday's economic reports include the unemployment data and a few others but nothing market moving. The market will be left to react to overseas news.


Conclusion

The stock market is looking vulnerable to more selling following the bounce off Tuesday's low. That picture would change if the indexes rally above last Friday's highs, in which case we could be looking for the rally to extend into at least mid-September (opex Friday is the 15th). That would likely get SPX above 2500 but as long as the current bounce stays below last Friday's high (2480) I think we'll see 2400 before we see 2500. Below 2400 would likely trigger stronger selling.

The longer-term pattern from here is up for grabs. I could just as easily argue we've seen THE high for the stock market as I could for another rally to new highs following a larger pullback into September. Short-term I lean bearish from here but another week of strong selling would then turn me more cautious until I can see whether or not some strong support levels start breaking. Play it short term until we get some longer-term clarity.

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

Keene H. Little, CMT


New Option Plays

Risky Business

by Jim Brown

Click here to email Jim Brown

Editors Note:

Going long in September is risky but Splunk is ignoring declines. S&P futures are down more than -5 points so this could be a risky day to buy.



NEW DIRECTIONAL CALL PLAYS

SPLK - Splunk - Company Profile

Splunk Inc. provides software solutions that enable organizations to gain real-time operational intelligence in the United States and internationally. The company's products enable users to collect, index, search, explore, monitor, and analyze data regardless of format or source. It offers Splunk Enterprise, a machine data platform with collection, indexing, search, reporting, analysis, alerting, monitoring, and data management capabilities; and Splunk Cloud service. The company also provides Splunk Light, which offers log search and analysis for small IT environments; and Splunk Analytics for Hadoop, a software for exploring, analyzing, and visualizing data stored in Hadoop and Amazon S3. In addition, it offers Splunk Enterprise Security, which addresses emerging security threats; Splunk User Behavior Analytics that detects cyber-attacks and insider threats; and Splunk IT Service Intelligence, which monitors health and key performance indicators of critical IT services, as well as Splunk App for AWS to ensure cloud security and compliance; Splunk Stream to capture, analyze, and correlate network wire data; and DB Connect to get enterprise context; Palo Alto Networks App for Splunk to gain visibility to Palo Alto Networks firewalls; and Splunk App for Salesforce. Further, the company operates Splunkbase and Splunk Answers Websites, which provide an environment to share apps, collaborate on the use of its software, and provide community-based support, as well as offers application programming interfaces and software development kits. Additionally, it offers maintenance and customer support, training, and consulting and implementation services. The company serves cloud and online services, education, financial services, government, healthcare/pharmaceuticals, industrials/manufacturing, media/entertainment, retail/ecommerce, technology, and telecommunications industries. Company description from FinViz.com.

Splunk reported earnings on August 24th of 8 cents that beat estimates for 6 cents. Revenue of $280 million beat estimates for $268.8 million. The company guided for the full year for revenue of $1.21-$1.22 billion, up from prior guidance of $1.19 billion. Analysts were expecting $1.2 billion. Billings are projected to be $1.450 billion, up from $1.425 billion in prior guidance.

Revenue rose 31.8% and "billings" rose 32% to $303.4 million. For the current quarter, they guided for revenue of $307-$309 million and analysts were expecting $306.8 million. They added 500 customers in the quarter to bring the base to more than 14,000.

The company has finally caught fire with the corporate sector and 32% sales growth is huge. The CEO said sales in Europe, Middle East and Africa were surging.

Earnings Nov 23rd.

Shares spiked to $66 on the news and faded $2 on post earnings depression for about three days before rising again. They closed at a three month high on Wednesday and are very close to a historic high.

Most importantly, they did NOT decline on Tuesday and showed great relative strength.

Buy Nov $70 call, currently $2.80, initial stop loss $63.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Political Compromise

by Jim Brown

Click here to email Jim Brown

Editors Note:

The biggest cloud over the September market could evaporate before the weekend. There are signs of political compromise in Washington that would push the debt ceiling and the budget process 90 days into the future and eliminate the threat of a government shutdown in September. President Trump is supporting a move by democrat leaders to tie those together with hurricane relief and buy 3 additional months of negotiating time before the risk of a shutdown. The republicans are furious so it remains to be seen if the measures will pass. If they were passed, it would remove all the political drama from September and that would be bullish for the market. North Korea still exists and they are expected to test another missile on Saturday.



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


No Changes



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

ALB - Albermarle - Company Profile

Comments:

No specific news. Nice $2 rebound and back testing resistance at $120 once again.

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. Shares continue to rebound from the post earnings drop.

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. Big drop on no news. Shares were up $6 over the last two weeks so profit taking is not a surprise.

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 has already sent 300 truckloads of supplies to Florida ahead of Hurricane Irma. They sent prepositioned generators, plywood, batteries, water, building materials, plastic tarps and hundreds of other items that experience has shown will be needed before and after a storm. CNBC had a reporter in a Home Depot store in Florida and there was a steady stream of customers rolling carts of supplies out the door. Irma and Harvey in the same quarter are going to cause a monster boost to sales and Q4 could be off the charts.

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. Opening dip followed by afternoon rebound.

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. Shares pushed over resistance at $106 to close at a new high.

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 faded after President Trump agreed to support a democrat proposal to tie the debt ceiling increase to hurricane relief. 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 spiked at the open on a democrat proposal to tie the hurricane relief to the debt ceiling on a short term basis. The index traded flat the rest of the day but closed near its lows.

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 posted a minor gain after spiking at the open. A political compromise in Washington lifted it slightly in the afternoon.

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.




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

subscribe now