Option Investor
Newsletter

Daily Newsletter, Saturday, 9/16/2017

Table of Contents

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

Market Wrap

Pivotal Week Ahead

by Jim Brown

Click here to email Jim Brown

The indexes had a good week with the Dow gaining 470 points.

Weekly Statistics

Friday Statistics

That big Dow gain coupled with the S&P closing exactly on round number psychological resistance at 2,500 set the stage for a pivotal week. The Dow has pulled far enough into new high territory that investors are being forced to bite the bullet and buy something. However, with the S&P closing right on 2,500, that will be the deciding factor for a continued rally. If the index pushes through that level at the open on Monday, we could be off to the races. If it fails at that level, investors would be happy to see a minor dip so they can reload at a lower level. Either way, that 2,500 level is going to be the key to the markets for the next week.

The missile launch over Japan tanked the futures on Thursday evening but S&P declined only about 2 points at the open and the dip was immediately bought. North Korea is now old news and short of a military conflict, the problem will be ignored by the markets.


Friday had minimal stock news but a busy economic calendar. The retail sales for August shocked everyone with a -0.2% decline compared to a +0.6% rise in July and consensus estimates for a +0.1% rise. August is back to school shopping season and a drop in sales almost never occurs. Analysts blamed it on Amazon's Prime Day in July pulling purchases forward. They also blamed Hurricane Harvey for shutting down coastal Texas for the last week of August. The hurricanes will impact retail sales for September as well and then we should get a boost in Oct/Nov as people replace everything in their house and buy tons of building supplies.

For August, sales excluding autos rose 0.2% so that somewhat weakens the Amazon/Hurricane argument. Motor vehicles and parts declined -1.6% and the largest hit to the headline number. However, gasoline stations rose 2.5% for the biggest lift. Nonstore retailers, as in internet retailers, declined -1.1% and that is where the Amazon argument gains traction. Building materials were down -0.5% but that number will rise sharply over the rest of the year.

The NY Empire Manufacturing Survey for September declined slightly from 25.2 to 24.4. New orders rose from 20.6 to 24.9 and inventories recovered from -3.1 to +6.5. Backorders rose from -4.7 to +8.9 and employment rose from 6.2 to 10.6. Almost every component posted gains so I do not understand why the headline number dropped a point. The only material decline was six-month expectations for business conditions falling from 45.2 to 39.3.


Industrial Production fell from +0.4% in July to -0.9% in August. This was the first decline in seven months and analysts blamed it on Harvey. Analysts are not too excited because the majority of the decline came from the utility sector with a -5.5% drop thanks to the mild summer weather. Motor vehicles rose 2.2% and the first gain in four months, high-tech equipment rose +1.4%. Non-durable goods fell -0.9%, business equipment -0.4% and mining/energy -0.8%. Overall production is still up +1.3% over the trailing 12 months.

Business Inventories rose +0.24% for July after a +0.49% rise in June. Manufacturing rose 0.22%, wholesale +0.62% and retail inventories fell -0.11%.

Consumer Sentiment for September declined from 96.8 to 95.3 for the first half of the month. The present conditions component rose from 110.9 to 113.9 but the expectations component declined from 87.7 to 83.4. Despite the minor decline, sentiment remains near 10-year highs. The present conditions component at 113.9 is the highest level since 2000. More than 81% of respondents said their financial conditions were better than the same period in 2016.


The calendar for this week will be dominated by the Fed announcement on Wednesday and Yellen's press conference. They are not expected to hike rates but there is a decent chance they will begin tapering QE purchases. It will be interesting to see how the market reacts to that change in policy. Whenever they have changed QE policy in the past it did not go over well.


The Philly Fed survey is the next most important followed by the Home Sales and new construction.


The Atlanta Fed real time GDPNow forecast imploded after Friday's economic reports. The forecast fell from 3.0% to 2.2% growth for Q3. The outlook for real consumer spending growth fell from 2.7% to 2.0% and the outlook for fixed investment growth fell from 2.6% to 1.4%.

Once the impact of the hurricanes becomes evident, we could see a drop of another 1% according to analysts.


In stock news, Carnival Corp (CCL) was downgraded from outperform to neutral by Credit Suisse on worries about losses from cancelled cruises and reduced demand for cruises for the rest of the season. Credit Suisse cut its profit estimates by 10% and price target by 10% to $70. CS cited the natural disasters around the world and the reluctance to travel because of terror attacks. Because of the damage in the Caribbean from Irma, bookings are expected to decline 24%. Cruises in the Eastern Mediterranean have seen bookings decline 60% since 2011 because of terrorist concerns. Terror attacks in Barcelona just caused another wave of cancellations.


Oracle (ORCL) reported earnings after the close on Thursday and crashed on Friday. They reported Q2 earnings of 62 cents that beat by 2 cents. Revenue of $9.21 billion beat estimates for $9.03 billion.

The problem came in the guidance. They guided for earnings of 64-68 cents and analysts were expecting 68 cents. They guided for total cloud revenue to increase 39%-43% and that was lower than the 51.5% growth in Q2. It is only natural for growth to slow as the business gets bigger because the percentages are taken off the larger enterprise. However, investors were not pleased and the stock fell hard.


American Airlines (AAL) and United Continental (UAL) were downgraded to neutral by JP Morgan and they upgraded Southwest (LUV) to overweight. The downgrades were based on higher fuel costs, domestic pricing weakness and excess capacity. The airlines lost millions in the disruptions caused by Harvey and Irma even though they brought in extra planes to allow Floridians to escape the storm. The analyst said Southwest had 22% upside from its current price. He called the airline a "flight to safety" candidate in the airline sector. Current consensus estimates for the sector appear "increasingly unachievable" at current fuel prices. The analyst also warned that tourism to Florida and the Caribbean would be depressed because of the storm damage.


Evercore ISI went all in on Nvidia and boosted their price target from $180 to $250. The company hosted some of Nvidia's senior executives and were very impressed with their outlook for the future. The analyst said Nvidia is "building the industry standard for artificial intelligence or AI." The analyst said the company had built a $10 billion moat around its GPU CUDA Core architecture that would be "nearly impossible to replicate" and will remain in place for the long-term. He said Wall Street's estimates for multiple business segments are looking very conservative. The consensus is for 9% growth in data center revenue and 6% in gaming. The analyst said AI sector is merely in its early stages and Nvidia is "creating THE AI computing industry standard." Shares exploded 6% higher to a new record close.

I am glad to see analysts are finally beginning to understand how far ahead Nvidia is from AMD and Intel. They are not even in the same league. Readers know I have been pounding the table on Nvidia for the last year.


Nvidia's gains helped lift the Semiconductor Index ($SOX) to a new 17-year high close. The chip sector was already rebounding and the Nvidia spike pushed it over the top. Everything you buy today has a chip of some kind.

Gartner Inc said there will be 8.4 billion "connected" devices by the end of 2017. By the end of 2020 there will be 20.4 billion. This includes computers, tablets, phones and the new IoT category of cameras, TVs, refrigerators, home devices like Alexa, Google Home, Apple TV, thermostats, etc. Everything has chips and memory. This is the only sector guaranteed to see exponential growth over the next decade.



Adient Plc (ADNT) previously Johnson Controls Automotive, was spun off from JCI in Oct 2016. Shares spiked 5% on Friday afternoon when a story broke that activist fund Blue Harbor had acquired a 6.2% stake in the company. Blue Harbor said they had acquired the stake, their largest position ever, because they believe Adient can dramatically improve its margins, boost share buybacks and restructure its network of joint ventures in China. The fund is now the third biggest shareholder in Adient. They disclosed a 3.7% stake in August but have ramped up buying to 6.2%.


Hurricane Jose has finally decided to quit wandering in the Atlantic and has taken aim at NJ, NY, CT and MA. There is still a chance it will veer eastward and miss those states with anything except for its outermost winds. Jose has been wandering in circles just north of Puerto Rico for the last week or more.

Jose

Behind Jose are Maria and Lee. Maria is expected to run right over Puerto Rico and the Dominican Republic before targeting the east coast of Florida. Lee has a slight northerly track that is still expected to brush Puerto Rico and the Dominican Republic but maybe not hit them dead center.

Maria

Lee

There has been a lot written over the last week about why there is a sudden flurry of hurricanes. The majority of it blames the sudden flurry on global warming because Florida has not had a hurricane in 12 years. Any actual weather expert knows the storms are formed by the wind blowing off the African desert and fed by ocean currents. If these storms were caused by global warming then what caused the other 119 storms that have hit Florida since 1850? You cannot blame those on global warming. Hurricanes have been hitting Florida since before Columbus discovered America. There are multiple graveyards of fleets of ships that were sunk by hurricanes in the Caribbean and off Florida since the area was discovered in the late 1400s. Global warming did not cause those storms.

Florida has been fortunate over the last 12 years and after this season it could be another 12 years before it is blasted again but storms will continue to form because that is the way the climate works.


If Jose, Maria and Lee make landfall it will be another tragedy but there is nothing we can do about it. Home Depot (HD) and Lowes (LOW) will be the big winners along with the hundred thousand jobs that will be created in the rebuilding effort. Other companies that should benefit would be Lumber Liquidators (LL), Eagle Materials (EXP), Weyerhauser (WY), USG Corp (USG), Boise Cascade (BCC), Generac Holdings (GNRC) and Beacon Roofing (BECN).


Crude prices rebounded back to $50 for multiple reasons. Saudi Arabia said they were going to cut October exports by another 350,000 bpd. The IEA raised demand growth estimates by 100,000 bpd to 1.6 million bpd for 2017. They based this on very strong demand from the OECD countries plus the impact from the hurricanes and the rebuilding effort. They are now projecting demand of 97.7 million bpd for 2017 and 99.1 million bpd for 2018. For the first quarter of 2017, demand rose 1.2 million bpd over the same period in 2016.

The IEA projects a demand drop in the US as a result of the hurricanes of 600,000-800,000 bpd for September but a rebound in Q4. European demand rose 650,000 bpd YoY for June, the last month were records are complete. Chinese demand rose 575,000 bpd in Q2 following a 700,000 bpd rise in Q1. The IEA said global supply declined 720,000 bpd in July as a result of problems in Libya, Nigeria but mostly maintenance and unplanned outages in non-OPEC countries. Unfortunately, global supplies remained unchanged in July at 3.016 billion barrels. Even with all the increased demand and decreased production there was no material decline in inventories.


Yellow = 8-week lows, green = 8-week highs

Active rig counts declined by 8 rigs for the week ended on Friday. Oil rigs fell -7 and gas rigs declined -1. As you can see on the chart, the direction of active rigs has taken a sharp downward trajectory.


Amazon is about to be blamed for another retail disaster. Toys-R-Us is reportedly planning to file bankruptcy. They are in the process of securing a loan to allow them to operate their 1,600 stores after a filing. Retail is hard and getting harder. Toys-R-Us was taken private in 2005 in a $6.5 billion deal by KKR, Bain Capital and Vornado Realty Trust. This saddled the company with billions in debt as we headed into the period where Amazon's growth exploded. Amazon is now responsible for 25% of online retail sales and they are branching out into brick and mortar.

Amazon announced earlier in the week Amazon Web Services had been granted approval by the Dept of Defense to host its Level 5 data. This is the Pentagon's and US Military's most classified information. Amazon is only the third civilian company approved to host data for the DoD. The other two are IBM and Microsoft. Amazon also has a $600 million contract with the CIA to host its data.

Amazon is also in talks with a number of small TV stations about being acquired. Amazon is looking to acquire access to their content to stream on Amazon Prime and there are rumors of an Amazon channel coming to cable, satellite systems. This would feature current events, news, talk shows, etc as well as Amazon ads.




Markets

As of Thursday, it has been exactly ten months since the S&P has declined 3%. That is the second longest streak since 1928 and beaten only by an 11-month streak that started in 1994. This is also the fourth longest period in the history of the S&P without a 5% decline. While all streaks will eventually be broken, they tend to self perpetuate longer than most people expect. The constant shorting at what is seen to be a top and then the short covering when that top is broken, tends to keep the streaks alive until some event appears that overcomes the dip buying mentality.

The S&P closed exactly at 2,500 on Friday and this is a huge psychological tipping point. Whichever direction the S&P takes from here could be with us for a while. If it punches through, it could start an entirely new leg higher on short covering and price chasing. If it fails here, we could be headed for a break of one of those streaks I mentioned earlier.

The wild card is the Fed announcement on Wednesday. While no trouble is expected, you never know how the market will react to the wording of the announcement, especially if the Fed begins to taper QE purchases. Anything is possible when the algorithmic computers parse those words and then act on their programming.

Other than the Fed there are no negative catalysts on the calendar. The political crisis events have been pushed out to December. There is nothing that should push the market lower other than normal portfolio restructuring in September. All dips continue to be bought and everyone appears to be afraid of missing out on a Q4 rally.


The Dow posted a decent gain on Friday and pulled away from the prior resistance high. The move came despite weekend event risk. By pulling away from resistance and congestion, the Dow appears to be ready to move significantly higher. One problem could be the 470-point gain for the week. That could generate some profit taking but I would expect it to be light.

Boeing continues to be the strongest Dow stock with a 94-point gain for the year, which equates to 644 Dow points or 26% of the Dow's 2,506-point gain for the year.

Apple rebounded slightly on Friday after declining about 6 points from Tuesday's high. Shares are normally choppy with a negative trend for about three weeks after a product announcement. That suggests there could be further weakness ahead.

Initial support for the Dow is about 22,100 followed by 21,735. Resistance is going to be around 22,500 and another big round number.



The Nasdaq Composite did not close at a new high. Resistance at 6,460 from July remains intact and the mixed numbers on the big cap tech stocks kept the Nasdaq from gaining the required momentum. The index did reach a new intraday high at 6,464 at 10:54 but could only hold it for a very short time with the decline beginning at 10:56.

The mixed results on the big cap techs is a minor warning sign. If Apple weakens again, it will probably contaminate the rest of the big caps and that could lead to further market weakness.

However, it was an expiration Friday with weekend event risk. It would be very hard to apply too much importance to the resistance failure and the mixed results. Next week is going to be the key with S&P 2,500 the signal light for the rest of the market.

Initial support on the Nasdaq is 6,425 followed by 6,350.




The Russell 2000 posted a minor gain on Friday but the index did break through resistance at 1,427. That sets up a run to the old resistance high at 1,450. The Russell is following the big caps rather than leading. I would expect that to continue the rest of September and early October.


The September wall of worry has collapsed and the bears have run out of reasons to be short. Sometimes a lack of obstacles is a negative, despite how strange that would seem. Typically, the markets are flat the day after an expiration and post decent gains the day before a Fed announcement. Since there could be some QE taper announcements on Wednesday, the Tuesday rally could be muted unless there are some positive headlines in advance of the event.

In theory, investors should welcome the taper because it means conditions are slowly returning to normal. However, the dual hurricane impacts with three more on the way, could cause the Fed to do nothing. I am not sure how the market would react since that implies a weaker economy. I would think investors would see it as bullish and assume there will be no changes until December or later. The market likes a dormant Fed.

I would recommend keeping some cash in your account just in case a buying opportunity appears.

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

subscribe now


Random Thoughts


Bullish sentiment exploded higher last week with a monster spike of 12%. The last time it was this high was January. This is only the second time in 35 weeks that bullish sentiment has been over its historical average of 38.5%. Bearish sentiment imploded with a -13.8% decline. These were major changes and suggest investors are ready to throw caution to the wind and chase prices higher.



Everyone is buzzing about the new iPhones but the Pixel 2 from Google is just a couple weeks away. According to the rumors, the normal sized Pixel 2 will be built by HTC, the same company that built the two existing models. The Pixel 2 XL or whatever they will call it, will have a larger 6.0 inch screen and be built by LG. The larger phone is rumored to have the OLED screen and be edge-to-edge like its competitors. The Pixel phones will be significantly faster than the iPhone because they will be using next generation Gigabit LTE networks. The iPhone is actually software limited to slower connect speeds because the phones use either a Qualcomm modem or a slower Intel modem. Apple is trying to move away from Qualcomm equipment. They limit the speeds on the Qualcomm modem to match the speed of the Intel modem so that people will not be trying to only buy the phones with Qualcomm inside. The Pixel 2 phone will be wide open and capable of 5-10 times current speeds as the carriers roll out the faster networks.

Most people are very happy that the phone will run the latest Android operating system, Oreo, which is the most powerful and cleanest of any prior OS. By cleanest, that means no bloatware, that carriers normally clutter the phone with when you buy it from a carrier. This phone will be pure Android and you add only the apps you want. You will not find a bunch of carrier supplied apps running in the background and sucking up memory and battery life.

The Pixel 2 launch is scheduled for Oct 4th. The XL is expected to retail for $849 with 32Gb and $949 with 128Gb.

The competition is the Samsung Galaxy S8 Plus 64Gb at $849 and Note 8 64Gb at $959.


Bitcoin had a rough week. JP Morgan CEO Jamie Dimon called it a fraud and said someone is going to get killed. Bitcoin lost -8.7% after his comments. Chinese authorities are rumored to be getting ready to shutdown several exchanges and ban projects that were planning on raising money in Bitcoin. Many so-called "initial coin offerings" or "ICOs" had been launched in recent months. Mohamed El-Erian warned that Bitcoin should be valued at half its current value. He said the current pricing assumes massive adoption that will not happen because governments will intervene to prevent money from leaving the country or to be used in illegal transactions. He said a reasonable price would be a third of its current value.

North Korean state sponsored hackers have an all out push to steal bitcoins as a way to evade the sanctions. North Korean hackers targeted at least three South Korean cryptocurrency exchanges according to FireEye.





 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The difference between who you are and who you want to be is what you do."

Bill Phillips


 


Index Wrap

Bullish Sentiment Rising

by Jim Brown

Click here to email Jim Brown
With bullish sentiment at the second highest level this year, could we go higher?

I wrote last week about the crumbling wall of worry and how normal markets like to climb a wall of obstacles rather than speed down an open highway with no roadblocks. The indexes had a good week with the Dow gaining 407 points thanks to several big gainers.

The S&P had one big gain on Monday and then traded sideways the rest of the week just below strong resistance at 2,500. Monday was a short squeeze relief rally that a war with North Korea did not break out over the weekend. The sideways trading was fear of 2,500. This is going to be a pivotal level for the market and the index closed exactly on that level on Friday.


What that chart is telling us is that there was significant fear of that resistance at 2,500 and portfolio managers and traders were exiting longs all week as we approached that level. On the positive side, there was no material decline. Thursday was negative about 3 points but that is hardly a problem.

The key for this week would be a breakout or breakdown from that level. If we did get a decent decline, I believe it would be bought. With the bullish sentiment exploding and the major indexes setting new highs, any pullback would be a gift for the dip buyers.

The A/D line on the S&P exploded higher despite the dead stop at 2,500 on the index. This is a case of the troops moving higher but the generals being sold at that level. This is a very bullish scenario. If the A/D continues to improve, the index will break out and there will be short covering on the big caps.



I was surprised the Nasdaq Composite did not close at a new high since the Semoconductor Index closed at a 17-year high. The chip stocks lead the Nasdaq and they should have led it to a new high. However, the big cap techs were weak as a result of contamination from Apple's decline and they held the Nasdaq back slightly. If the chips continue higher, the Nasdaq will follow.


The Nasdaq came to a dead stop over the last four days at the prior intraday high at 6,460. This level is the equivalent of the 2,500 level on the S&P. The Nasdaq did not set a new high on Friday. However, all the indicators are positive including a strong A/D line. In theory, a breakout should be imminent.

The challenge for the Nasdaq is the potential weakness in Apple. If we see further declines, I would expect mixed results from the rest of the big caps as they trade in sympathy.



The A/D line on the Dow also broke out to new highs suggesting the current rally has legs. However, as you can see in the A/D chart there were plenty of hiccups along the way. The Dow has been fortunate with a rebound in energy and financials and continued strength in Boeing. The financials will be at risk this week depending on the Fed decision on Wednesday. With a 407-point gain for the week, there is also the risk of some profit taking. I would expect it to be minor given the strong bullish sentiment.



The broadest market index of tradable stocks is the Russell 3000. The index closed at a new high on Friday. I do not have an A/D chart for the R3K but I do have the broad market internals for Friday. Bear in mind this was an expiration Friday with weekend event risk. There were 4,358 advancers and 2,793 decliners. There were 477 new highs and 76 new lows. The Russell 3000 internals would mimic those numbers.

This is a broad market rally and the S&P and Nasdaq "should" break out if those numbers continue. There are never any guarantees regardless of how bullish or bearish the conditions appear to be.


This could turn out to be a September to remember as long as we do not trip over some unexpected headline or monster sell program. September is the period when portfolio managers restructure their portfolios in normal years. They may be riding the wave higher but that does not mean they will not bail the instant the wave appears to be cresting.

As investors, we need to stay long until proven wrong. Keep your stops in place but allow for some minor volatility as the market trades around these critical resistance levels.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Hurricane Winner

by Jim Brown

Click here to email Jim Brown

Editors Note:

There are a dozen companies that will profit from the hurricanes. Stanley Black & decker is one of them. You need tools to build and SWK provides them.



NEW DIRECTIONAL CALL PLAYS

SWK - Stanley Black & Decker - Company Profile

Stanley Black & Decker, Inc. provides tools and storage, commercial electronic security, and engineered fastening systems worldwide. Its Tools & Storage segment provides corded and cordless electric power tools and equipment, including drills, wrenches and drivers, grinders, saws, routers, and sanders; pneumatic tools and fasteners, such as nail guns, nails, staples, and anchors; lawn and garden products comprising trimmers, mowers, edgers, and related accessories; home products, such as vacuums, paint tools, and cleaning appliances; power tool accessories that include drill and router bits, abrasives, and saw blades; measuring, leveling, and layout tools; planes, hammers, demolition tools, knives, saws, chisels, and industrial and automotive tools; and storage products, such as tool boxes, sawhorses, medical cabinets, and engineered storage products. The company's Security segment offers alarm monitoring, video surveillance, fire alarm monitoring, systems integration, and system maintenance services; markets asset tracking, infant protection, pediatric protection, patient protection, wander management, fall management, and emergency call products; sells automatic doors, commercial hardware, locking mechanisms, electronic keyless entry systems, keying systems, and tubular and mortise door locksets. Its Industrial segment sells fastening products and systems comprising stud welding systems, blind rivets and tools, blind inserts and tools, drawn arc weld studs, plastic and mechanical fasteners, self-piercing riveting systems, nut running systems, micro fasteners, high-strength structural fasteners, and hydraulic tools and accessories; sells and rents custom pipe handling, joint welding, and coating equipment; and provides pipeline inspection services. Company description from FinViz.com.

With two disasters already and three more hurricanes heading for U.S. shores, there is going to be a significant jump in the number of tools sold over the next quarter. Investors have already lifted SWK to a new high but shares are holding right at the breakout level. The three new hurricanes are likely to give it that additional lift and produce a breakout.

For Q2, the company reported earnings of $2.01 that beat estimates for $1.96. Revenue of $3.229 billion also beat estimates for $3.17 billion. For the full year they guided to earnings of $7.18-$7.38, up from prior guidance of $7.08-$7.28. This is before the hurricane demand so guidance should rise again with the next earnings. Organic revenue is expected to rise 10% to 13% for 2017.

Earnings Oct 26th.

I considered buying the short-term October $150 call for $1.95 with shares at $148. There are five weeks before expiration but without a strong rally, the premium could deflate quickly since it expires before earnings. I elected to go with the next available strike in January at $155. That is farther out of the money than I usually go but we will have an earnings premium in the option when we exit before earnings. That will keep premiums from deflating.

Buy Jan $155 call, currently $3.00, initial stop loss $143.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Extending Gains

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes closed at new highs and the Dow is extending its gains. The Dow rallied a whopping 470 points for the week and closed well over 22,200. However, the S&P closed at exactly 2,500 and strong round number resistance. Monday will be a decision point for investors. Are they going to bite the bullet and continue buying and push the S&P higher or will they cool their heels and wait for a pullback first?



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

A - Agilent Technologies - Company Profile

Comments:

No specific news. Decent gain and back to retest the high from Monday.

Original Trade Description: September 12th.

Agilent Technologies, Inc. provides application focused solutions to the life sciences, diagnostics, and applied chemical markets worldwide. Its Life Sciences and Applied Markets segment offers liquid chromatography systems and components; liquid chromatography mass spectrometry systems; gas chromatography systems and components; gas chromatography mass spectrometry systems; inductively coupled plasma mass spectrometry instruments; atomic absorption instruments; microwave plasma-atomic emission spectrometry instruments; inductively coupled plasma optical emission spectrometry instruments; laboratory software and informatics systems; laboratory automation and robotic systems; dissolution testing; vacuum pumps; and measurement technologies. The company's Diagnostics and Genomics segment provides reagents, instruments, software, and consumables; arrays for DNA mutation detection, genotyping, gene copy number determination, identification of gene rearrangements, DNA methylation profiling, and gene expression profiling, as well as sequencing target enrichment services; and equipment focused on production of synthesized oligonucleotides for use as active pharmaceutical ingredients. Its Agilent CrossLab segment offers GC and LC columns, sample preparation products, custom chemistries, and various laboratory instrument supplies; and startup, operational, training, and compliance support, as well as asset management and consultation services. The company markets and sells its products through direct sales, electronic commerce, resellers, manufacturers' representatives, and distributors. It has a collaboration agreement with University of Leuven to focus on detecting genetic abnormalities in cell-free DNA and embryo biopsies. Company description from FinViz.com.

Agilent reported earnings of 59 cents that rose 20.4% and beat estimates for 52 cents. Revenue of $1.11 billion rose 6.7% and beat estimates for $1.08 billion. They ended the quarter with $2.56 billion in cash and $1.8 billion in debt. Free cash flow was $228 million. They guided for revenues of $1.15-$1.17 billion for Q3 and earnings of 60-62 cents. Analysts were expecting $1.14 billion and 59 cents. The company raised guidance for the full year from $4.36-$4.38 billion to $4.435-$4.455 billion. Earnings guidance is now $2.29-$2.31, up from $2.15-$2.21. Analysts were expecting $2.22 and $4.39 billion.

Earnings expected on Nov 14th.

Shares spiked on the earnings and have been moving steadily higher. On Monday they gained $1 and closed at a new high. This stock may not be as "exciting" as Alibaba or Amazon but the options are cheap and they rarely decline.

Position 9/13/17:

Long Nov $67.50 call @ $1.70, see portfolio graphic for stop loss.


ALB - Albermarle - Company Profile

Comments:

Shares rose more than $1 on no news as the lithium trade continues to be a winner.

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 rebounded slightly to close at a 3-week high.

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. Shares posted another nice gain to close at a 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.

Update 9/13/17: In Tuesday's investor day meeting the new CEO said they were targeting $55 billion in revenue in 2018 with margins of 14%-17% compared to 12% in 2017. That would take them back to 2014 levels before the bear market in commodity/energy began. That is 28% above 2017 levels. He was careful not to call it a target but said that level was achievable if the current rebound in mining, energy and construction continued.

Position 8/30/17:

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


DVMT - Dell Technologies - Company Profile

Comments:

No specific news. Shares declined slightly from Thursday's high close.

Original Trade Description: Sept 13th.

Dell Technologies Inc. provides a range of technology solutions worldwide. It offers client computing devices, including desktop personal computers, notebooks, and tablets; rack, blade, tower, and hyperscale servers for enterprise customers; value tower servers for small organizations, networks, and remote offices; networking solutions; and storage solutions, including storage area networks, network-attached and direct-attached storage, and backup systems. It also sells peripherals, including monitors, printers, projectors, and other client and enterprise peripherals, as well as third-party software products. In addition, the company offers support and extended warranty, enterprise installation, and configuration services; and infrastructure and security managed, cloud computing and infrastructure consulting, and security consulting and threat intelligence services. Further, it provides application services, such as application development, maintenance, migration, management, and consulting, as well as package implementation, testing and quality assurance functions, business intelligence and data warehouse solutions; business process services comprising back office administration, call center management, and other technical and administration services; and system and information management, and security software services. Additionally, the company offers financial services, including originating, collecting, and servicing customer receivables primarily related to the purchase of its products. It serves corporate businesses; educational institutions, government, healthcare, and law enforcement agencies; small and medium-sized businesses; and consumers directly, as well as through retailers, third-party solution providers, system integrators, and third-party resellers. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Company description from FinViz.com.

Dell suffered from years of banner growth that set it up for years of disappointments when that growth slowed. Dell created a new market niche when it started in 1984 and but by the early 2000s there were dozens of copycat clones. The PC revolution had stalled by 2010 as tablets and smartphones stole market share. Michael Dell organized a buyout and took the company private. They eventually acquired EMC in August 2016 and by doing so returned to the public market as Dell Technologies. Shares closed at a new high on Wednesday.

In its first year as a new public company they paid down $9.5 billion in debt and completed three major divestitures. They created a $35 billion revenue channel and added 10,000 business customers for the year.

They recently signed a long term deal in partnership with GE that is one of the largest non-governmental contracts in Dell or EMC history. Under the agreement Dell becomes the sole source IT infrastructure supplier to GE. The Dell Technologies family of businesses includes Dell, Dell EMC, Pivotal, RSA, SecureWorks, Virtustream and VMware. It stands as a $74 billion market leader with the industry's most expansive portfolio from the edge to the data center to the cloud.

The Dell PowerEdge server is now the largest selling X86 server in the world and Dell is also number one in global workstation shipments and global monitor shipments.

For Q2, they reported adjusted earnings of $1.88 and revenue of $19.3 billion, up 48% from Q2-2016 and +8.3% from Q1-2017.

Expected earnings December 7th.

Shares rallied after earnings and then plateaued at $75 for over a week. They began moving up again this week to close at a new high. With business booming and Q3 normally a strong quarter, they could continue to move higher.

Position 9/14/17:

Long Dec $80 call @ $2.40, see portfolio graphic for stop loss.


TER - Teradyne - Company Profile

Comments:

No specific news. Shares exploded past resistance at $36 and this gain should stick.

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 declined sharply on profit taking after a new high on Thursday.

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:

The VIX declined .27 thanks to new highs on the indexes. Even the missile launch failed to cause a spike. Expectations for volatility in September are decreasing.

We still have plenty of time. North Korea is still a factor and could erupt at any time.

This is the fourth longest period in history of the markets without a 5% decline. While it does not look likely today, it could happen at any time.

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, see portfolio graphic for stop loss.


XRAY - Dentsply Sirona Inc - Company Profile

Comments:

No specific news. Shares rebounded to erase the loss from Thursday.

Original Trade Description: Sept 9th.

DENTSPLY SIRONA Inc. designs, develops, manufactures, and markets various dental and oral health products, and other consumable healthcare products primarily for the professional dental market worldwide. It operates through two segments, Dental and Healthcare Consumables; and Technologies. The company provides dental consumable products, including endodontic instruments and materials, dental anesthetics, prophylaxis pastes, dental sealants, impression materials, restorative materials, tooth whiteners, and topical fluoride products; and small equipment products comprising dental hand pieces, intraoral curing light systems, dental diagnostic systems, and ultrasonic scalers and polishers. It also offers dental laboratory products, such as dental prosthetics that include artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials. In addition, the company provides dental equipment, such as treatment centers, imaging equipment, and computer aided design and machining systems for dental practitioners and laboratories; and dental implants and related scanning equipment, treatment software, and orthodontic appliances for dental practitioners and specialists, and dental laboratories. Further, it offers healthcare consumable products, such as urology catheters, various surgical products, medical drills, and other non-medical products. DENTSPLY SIRONA Inc. markets and sells its dental products through distributors, dealers, and importers to dentists, dental hygienists, dental assistants, dental laboratories, and dental schools; and urology products directly to patients, as well as through distributors to urologists, urology nurses, and general practitioners. Company description from FinViz.com.

Dentsply reported Q2 earnings of 65 cents that missed estimates by a penny. Revenue of $992.7 million missed the estimate for 1,004 million. Sales in the U.S. fell 9.7% but sales in Europe rose 2.5%. They guided for the full year for earnings of $2.65-$2.75.

The stock was crushed on the miss with a $9 drop over the following week.

However, there was a reason for the miss. Effective September 1st, they moved from a single distributor to multiple distributors. The existing distributor slowed purchases in the quarter in order to reduce inventory before the change in the distribution model.

The CEO said "In September, we should begin to benefit from the expanded distribution of our equipment in North America which should drive growth in the back half of this year and beyond. As we work through the distribution transition and integration initiatives, we are strengthening our foundation for the future. We believe that this should translate into more consistent growth and strong double digit earnings growth in the back half of the year creating momentum exiting the year going into 2018."

Shares have begun to rebound and should return to their highs on the "double digit earnings growth" guidance.

Earnings Nov 8th.

There are no Nov/Dec options. I am using the January but just because we buy time does not mean we have to use it.

Position 9/11/17:

Long Jan $60 call @ $2.70, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

No Bearish Plays




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