Option Investor
Newsletter

Daily Newsletter, Thursday, 9/28/2017

Table of Contents

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

Market Wrap

Market Holding Up Into End-of-Week/Month/Quarter

by Keene Little

Click here to email Keene Little
We've had a choppy pattern for this week's rally/bounce, which has the appearance of an attempt to hold the market up this week. But the larger price pattern supports new highs and it's still a good time to stick with the trend until the market tells us otherwise.

Today's Market Stats

The RUT has had a strong week but the others have not been able to put in the same performance. The energy and banking stocks have helped lift the small caps and there's probably been an effort to swing some money into these more volatile stocks this week to help improve the "performance" of funds as they get ready to close the books on September and the 3rd quarter. We'll have to see if there will be any unwinding of this effort next week. But even we get a decent pullback next week it's not looking like the market has seen its highs yet. Bears need to stay in their caves for at least a little longer.

This morning the market started with a gap down but that was just another dip-buying opportunity for all the dipsters out there. Between those who just looking for any dip to buy and those fund managers wanting to prevent any kind of selling this week, the bears have had nothing to do all month. The modest pullback (-3% for SPX) in August and the -1.4% pullback on September 5th are all the bears have had to play with. The rest of the time it's been better to simply stay long and add to positions with every pullback, as small as they have been. At some point that will stop working but ride it while you can.

As I'll get into with the charts, there is the possibility for a brief spike down early next week but it should be another good buying opportunity but perhaps only for one more leg up to complete the rally. Calling tops in this market has been an exercise in frustration (not that that will stop me, wink) and I'm not about to call one here. However, I'm seeing enough signs to tell me not to get complacent about the upside while not shorting it either. Building up a cash position is a good idea as we head into October. I believe this October, like previous ones in years ending in 7, will be a bull killer and not the bear killer that is October's reputation. There are no bears to kill here.

When trying to decipher the market, the king of all indicators is of course price. All else doesn't matter but it doesn't mean we shouldn't be looking for signs that prices are stretched. One indication of the strength of a market's move is market breadth, for which there are many components.

One market breadth indicator that has worked out well in the past, as far as indicating when the bulls should start to worry, is the cumulative advance-decline line. When it starts to show negative divergence with price (the a-d line makes a lower high while price makes a higher high) we should start to worry about the rally being on its last legs and to button up stops. At the moment there is no negative divergence and this has kept up the chatter about why bulls don't need to worry about this rally.

The cumulative a-d line for SPX has been shown before and shows a tight correlation with SPX over the past 5 years. As I noted on the chart, it's practically a 1:1 correlation and as correlations go, it doesn't get much better than this. But it's looking more like a coincident indicator and that's not terribly helpful. As I'll show further below, there are some things that tell us we might need to look elsewhere for clues now that some fundamental things have changed in the market.

Correlation between SPX Cumulative Advance-Decline line and SPX

Trading volume is one indicator of the strength behind a market move. We've often heard volume can be supportive of a move, up or down, and when volume is waning it means the move is losing its support. It's common for tops to be formed simply because most buyers are already in the pool and waiting for others to continue the buying so that prices keep heading higher.

Many look for a catalyst to start the selling but oftentimes it occurs simply because sellers start to overwhelm buyers (and it's the reason many market tops are rounding affairs, as opposed to v-bottoms). As I'll point out later on the SPX weekly chart, we're seeing bearish divergence at the new price highs since March and we're seeing a similar divergence in volume, which has been slowing since the rally off the February 2016 low began, as can be seen on the NYSE chart below.

In last week's market wrap I had shown a chart of corporate buybacks vs. SPX and pointed out the slowdown in buybacks since mid-2016 and this slowdown could be part of reason for the overall slowdown in volume. But whatever the reason, the declining volume is an indication the rally could run out of gas soon.

At the moment the slowing volume is just another indication that the rally is long in the tooth but not necessarily ending. However, the slowing volume in a rising wedge pattern is a reason to be cautious about the upside (rising wedges break down fast when they break).

NYSE and its trading volume

There's another problem with the current market, which could be related to the declining volume seen above. The chart below compares the equal weighted SPX index with the "normal" cap-weighted SPX index that we normally watch. Currently there's a large divergence between the two, which is larger than anything seen in the past decade. This tells us the rally has been on the backs of the large caps while the smaller stocks are participating less.

This is more evidence of the shift to passive investing (buying ETFs like SPY) vs. active investing and the consequence is that when the selling starts in the ETFs there is going to be a much larger decline in the indexes than might otherwise have occurred. The ETFs will simply go begging for buyers and selling the ETFs will mean selling all the stocks in those ETFs, regardless of the quality of some individual stocks. It's the reverse of what's happening now with a lack of price discovery. All stocks in the ETF, regardless of whether or not they're worth buying, get bought together. When the selling starts we'll see the baby getting thrown out with the bath water.

S&P 500 Equal-Weighted index vs. S&P 500 Cap-Weighted index

Getting back to the cumulative advance-decline line (the 2nd chart above), it is probably not as useful a breadth indicator that it once was. Many are calling for the market to continue rallying and that we shouldn't worry about a top because the a-d line is so strong. As Bill Fleckenstein mentioned recently, we are in a different kind of trading environment, which he described with the following formula and statement: "QE + ETFs + algos = new era, until it isn't. Then chaos."

Backing up Fleckenstein's formula, Doug Kass, a big name in hedge fund management, recently said "Be alert, consider the contrary and think about sitting out some of the market's dances, perhaps before your legs are chopped off." His concern about the market comes from the fact that he thinks too many are looking at the market the same way, or as he calls it, "group stink." As he says, "Group stink is a powerful force in the markets, especially when the machines and algorithms and the ever-constant inflows into popular passive funds and ETFs dominate the investment backdrop."

In Kass's opinion there is too much group stink right now and there's a near-universal view that stocks will just keep heading higher from here and that any dip is just another opportunity to buy more. We all know what happens in group stink situations where everyone runs over to one side of the boat.

Don't be caught with the crowd too long

OK, warnings out of the way, I [group] stink we'll see higher prices in the coming week(s) but I also believe this market is dangerously close to a major high. I say dangerous because part of the group stink is that we should all sit tight and not let a market decline shake us out of our positions. But by the time these same people recognize there's a problem you will have already lost at least 20% of your portfolio value and you're not going to get it back for a long time. Why live through a large decline when you can get into cash and be a buyer at lower prices? Hence the reason to raise cash levels. IMHO, the upside potential is dwarfed by downside risk.


S&P 500, SPX, Weekly chart

SPX, like the NYSE shown above (with the volume discussion), is wedging up tighter into the tip of its rising wedge for the rally from January 2016. At the same time it's showing bearish divergence on the momo oscillators since March, which fits well with the 5th wave of the rally. Yesterday's high near 2512 is only 4 points away from the 2516 projection for the 5th wave (the rally from January 2016), where it would equal the 1st wave of the rally.

If the rally can make it a little higher than 2516 it would run into the top of its rising wedge and the midline of the up-channel for the rally from 2010-2011, both near 2550 in another two weeks. It takes a drop below the August 21st low near 2417 to tell us a top is in place but an early warning would be a drop below the uptrend line from February 2016, currently near 2473.


S&P 500, SPX, Daily chart

If SPX stair-steps higher in the coming week, as depicted in bold green on the daily chart, we could see the rally finish near 2525, which is where it would run into the trend line along the highs from March-May. The shorter-term pattern, which is shown more clearly on the 30-min chart further below, suggests we could see a sharp pullback into early next week and then the resumption of the rally. Only a sharp break below the uptrend line from February-November 2016 (the bottom of the rising wedge on the weekly chart) would convince me that we've seen the top. So the bears need to see SPX below 2480 before turning aggressive.

Key Levels for SPX:
- bullish above 2516
- bearish below 2480


S&P 500, SPX, 30-min chart

Because the pattern for this week's bounce off Monday's low is so choppy it's either an ending pattern to the upside or part of what will become a larger 3-wave pullback from September 20th. A sharp pullback that stays above the uptrend line from February-November 2016 would be a buying opportunity since it should lead to another (and final) high in October. Regardless of how this rally finishes (stair-step higher like that shown on the daily chart above or a sharp decline and then back up), it's looking like we could be setting up once again for an October surprise in the year ending in 7.


Dow Industrials, INDU, Daily chart

Since Monday, when the Dow dropped back below its uptrend line from November 2016 - May 2017, it has been banging its head on the trend line with its bounce attempts but it hasn't been able to climb back above the line, which will be near 22420 on Friday. Like SPX, I show the potential for the Dow to stair-step higher into next week to complete its rally. But because of the choppy bounce pattern this week we could instead get a sharp pullback into Monday/Tuesday and then another rally leg. In either case it's looking like we should expect higher prices before a top looks more likely.

Key Levels for DOW:
- stay bullish above 22,179
- bearish below 22,038


Nasdaq-100, NDX, Daily chart

The techs have been weaker than the other indexes, largely thanks to the FAANG stocks. These few stocks led the tech indexes higher when they were rallying but now they've been a drag as they lose their momentum to the upside. As an example, last week I showed the H&S topping pattern for AMZN. Its neckline is near 938.60 and it was tested on Monday and Tuesday. It predictably bounced off that neckline support but any further decline below Tuesday's low at 931.75 would suggest the H&S pattern will play out (which points down to 785 for an objective).

AAPL's weekly chart showed the start of a break of its uptrend line from November 2016 (the bottom of its up-channel), currently near 159, and it indeed broke with last week's close at 151.89. It could bounce back up for a back-test of the bottom of the up-channel but at the moment it's looking like it could simply continue lower from here. This is not a stock I'd be looking to buy until it reaches its 50-week MA, currently near 138. That should be good for a bounce but with the longer-term pattern looking like a major top is in place I think there will be better places to invest. AAPL is done (imho).

FB is bouncing back up to its broken 50-dma, which it broke on Monday, currently near 169.55 (today's high was 169.07) and we'll have to see if it can recover. Otherwise a back-test followed by a bearish kiss goodbye would suggest the top for FB is in place.

Last week NFLX tested its July high and Monday's strong decline leaves a double top with bearish divergence. GOOGL looks like it could press higher. So 4 out of 5 of the FAANG stocks look like they're in trouble (not confirmed yet but looking like a failure waiting to happen). The tech indexes are strongly dependent on these 5 stocks so they bear watching closely.

As for NDX, it looks like it could be in the final leg of a shallow rising wedge. The choppy pattern and the Fib projections for the legs of the wedge fit and the expectation from this pattern is that NDX will finish near 6025 next week. If the bulls can rally NDX above 6050 it would point higher to the trend line along the highs from November 2014, near 6150 in the 2nd week of October. In this case I would expect to see a strong recovery in the FAANG stocks. With the choppy price structure it's hard to tell what kind of larger pattern is playing out but what I've depicted on the NDX chart (a little more upside and then a selloff) is my best guess at the moment. I reserve the right to change my mind when the market tells me to. ;-)

Key Levels for NDX:
- bullish above 6050
- bearish below 5839


Russell-2000, RUT, Daily chart

The RUT has had a strong rally from its August 18th low and it got a strong pop once it cleared resistance at its trend line along the highs from 2007-2015. Today it added marginally to the rally but short term it's looking ready for a pullback. At this point I'm looking only for a pullback before heading higher again. I show strong upside potential to about 1525 by October opex 9the 20th). That is of course just speculation at the moment but I think it's important to see the upside potential so that you know what kind of risk:reward you have when evaluating a trade. Only after a pullback (assuming we'll get one, unless they've been outlawed) will we start to get some upside targets for the final leg (5th wave) of the rally.

Key Levels for RUT:
- bullish above 1458, cautious below 1452
- bearish below 1414


10-year Yield, TNX, Weekly chart

With what looks like a bull flag pattern for the pullback from December, TNX could soon break out if it makes it a little higher. Today's high at 2.34 was a test of the top of the down-channel and if it breaks above July 2016 high near 2.4 it would be a bullish move. There's still the downtrend line from 1988-2007 it would have to deal with later, near 2.47, but breaking out of the bull flag pattern would likely be an indication we'll get another leg up at least equal to the July-December 2016 rally, which points to 3.32%. Otherwise a turn back down from here and a drop below the September 7th low near 2.03 would likely lead to a strong decline.


U.S. Dollar contract, DX, Daily chart

The US$ has broken out of its down-channel from May and is now back above its 20- and 50-dma's. It's looking like smooth sailing to higher prices, maybe. The dollar is currently back-testing both price-level S/R, near 93.30, and the bottom of its previous down-channel from January (from which it broke down in July), currently near 93.15. It's possible that's all we'll see for this bounce and now down to the $90 area before setting up a stronger rally. But if the dollar rallies a little further and breaks above 94 it would strengthen the dollar bull's case that it's ready now for a stronger rally.


Gold continuous contract, GC, Daily chart

Gold lost price-level support this week at 1300, as well as dropping back below its 50-dma, currently climbing up toward the 1300 level. Gold bulls would look to be in better shape back above 1300 and especially if it can get back above Tuesday's bounce high at 1317. Otherwise it's looking like gold should head lower and the next downside target would be a test of its broken downtrend line from 2011-2016, near 1267.


Oil continuous contract, CL, Daily chart

Oil tried to climb above its downtrend line from 2015-2017 and its broken uptrend line from 2016, both of which crossed on Wednesday near 51.90. If that was the top, which is the setup here (but not confirmed), we'll see oil head back down and drop below its June low at 42.05. The first thing oil bears need to do is get oil back below the September 6th high at 49.42 to leave a confirmed 3-wave bounce up from the August 31st low. If the oil bulls prevail here we should see at least a test of the January-February highs near 55.


Economic reports

This morning's reports were not market movers, especially since there were no surprises. The 3rd estimate for GDP came in at the expected 3%. Friday morning's reports include personal income and spending, with a slight drop expected for both. We'll also get PCE prices, watched closely by the Fed, and they're expected to show a little higher inflation than we've been seeing. Chicago PMI and Michigan Sentiment after the open should not be market movers.


Conclusion

There are enough differences between the price patterns of the major indexes to keep us guessing who's in charge. Clearly the RUT is in charge to the upside since its August 18th low but it's a volatile index and who knows how long this will last. There was a lot of wringing of hands and gnashing of teeth when the RUT was in its strong decline into the August low. Now everyone has turned bullish with the small caps rallying hard. If oil turns back down and takes the oil stocks with it we could see a rapid reversal in the RUT. But right now the RUT is our leader to the upside.

The techs have been hurt recently by the selling in the FAANG stocks and as discussed above, 4 out of the 5 FAANG stocks look vulnerable to stronger selling. A strong RUT and weak tech indexes leaves us guessing which way the wind will blow next. In the middle we have the blue chips and the choppy move up this week does not look bullish. If they continue to chop their way higher it will be a sign of an ending pattern to the upside. But a top does not look to be in place yet and if we get a sharp pullback into early next week I think it will lead to another, and likely final, leg up to a new high. The same can be said for the RUT.

As it looks now, which is obviously subject to change as the price pattern dictates, we should see the market make final highs in October. I think we're looking at a strong possibility for this October to be a bull killer, opposite to its normal bear-killer status. Octobers in years ending in 7, for whatever reason, have been times for bulls to lay in their stops and get out of the way of a coming decline. Otherwise there will be much more pain than most are thinking likely right now. Don't be a complacent bull. And if you're a bear I think you'll need to stay in your cave a little longer until the coast is clear.

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

Keene H. Little, CMT


New Option Plays

Laser Player

by Jim Brown

Click here to email Jim Brown

Editors Note:

II-VI manufacturers laser components for networking, manufacturing, 3D sensing and directed energy weapons.



NEW DIRECTIONAL CALL PLAYS

IIVI - II-VI Inc - Company Profile

II-VI Incorporated develops, manufactures, and markets engineered materials, and optoelectronic components and devices worldwide. The company's II-VI Laser Solutions segment provides optical and electro-optical components and materials for use in high-power CO2 lasers, and fiber-delivered beam delivery systems and processing tools, as well as offers direct diode lasers for industrial lasers under the II-VI HIGHYAG and II-VI Laser Enterprise brands; compound semiconductor epitaxial wafers for optical components, wireless devices, and high-speed communication systems applications; and 6-inch gallium arsenide wafers for use in production of high performance lasers and integrated circuits under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brands. Its II-VI Photonics segment provides crystal materials, optics, microchip lasers, and optoelectronic modules for use in optical communication networks, and other various consumer and commercial applications. This segment also offers pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers for terrestrial and submarine applications. The company's II-VI Performance Products segment provides infrared optical components and high-precision optical assemblies for military, medical, and commercial laser imaging applications; and engineered materials for thermoelectric and silicon carbide applications. It serves OEMs, laser end-users, system integrators of high-power lasers, manufacturers of equipment and devices for the industrial, optical communications, military, semiconductor, medical and life science markets, consumers, U.S. government prime contractors, various U.S. Government agencies, and thermoelectric integrators. Company description from FinViz.com.

Expected earnings Nov 6th.

In their recent earnings II-VI reported 50 cents that more than doubled and beat estimates for 35 cents. Revenue rose 13% to $273.7 million and beat estimates for $250 million. More importantly, order backlogs rose to more than $1 billion for the first time. Bookings rose more than 50%. The company guidance was also higher.

Lasers are being used for more applications every day from etching chips in the manufacturing process, producing faster communications in data centers, 3D sensing for autonomous driving and of course Star Wars like directed energy weapons.

Shares closed at a new high on Thursday after a double top in Feb/Jul. With the strong earnings, this breakout to new highs should continue.

Buy Nov $45 call, currently $1.20, initial stop loss $37.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Positive Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes all closed positive but some only fractionally higher. The Dow gapped lower at the open but recovered to move slightly above prior short term resistance at 22,360. The index is still short of a new high. The Nasdaq Composite gained only 0.19 of a point and failed to retest resistance at 6,460.

The S&P gained 3 points to edge just slightly over short-term resistance at 2,508. The Russell 2000 added 4 points to the whopping 28 point gain from Wednesday. It was a good day in the market but there were plenty of cross currents.

Yesterday we were stopped out of AbbVie. Today the stock gained 5% on the delay in a generic Humira clone that was a key point in the recommendation. Sometimes you win, sometimes you lose.



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


ADBE - Adobe Systems
The long call position was entered at the open.

MNK - Mallinckrodt
The long put position was stopped at $36.25.



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

Apple shares faded slightly as the stories about production delays continued to make headlines.

Original Trade Description: Sept 23rd.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. Company description from FinViz.com.

Earnings October 31st.

Apple shares have fallen $13 since the September 1st high and $12 since the product announcement on September 12th. The shares have fallen into a cluster of converging support levels and the post announcement decline should be "about" over. Nobody will know for sure until the rebound begins.

After the product announcement Apple reaffirmed its guidance saying we planned for the recent event surrounding the production and release of the new products when giving the prior guidance. Apple rarely misses guidance. Knowing they were having production problems and staggered release they probably low-balled the number.

They are expected to sell 85 million phones in Q4. More than 66% of iPhone users have phones older than 2 years. They will have five active models for sale in Q4. They have the 7, 7+, 8, 8+ and the X plus they still have some of the older, cheaper models they are selling overseas in places like India. The new Watch could be the model that actually turns the Watch into its own revenue category instead of being lumped into the "other" category.

I have been negative on Apple for the last three weeks and the decline is going as expected. I believe the stock has reached a level where buyers will appear. There could still be several dollars of decline but the rebound could be just as quick once it appears to have bottomed.

I am recommending a November spread to reduce our risk and depending on the stock price before earnings, we might hold over the event. That is where they will give sales numbers and Q4 guidance and they could be strong.

Update 9/26/17: Raymond James raised their price target to $180 and increased expectations for gross margins and average selling price. The analyst does not expect this to boost earnings until Q2-2018. The analyst said the decline was a buying opportunity.

Position 9/25/17:

Long Nov $155 call @ $3.65, see portfolio graphic for stop loss.
Short Nov $165 call @ $1.27, see portfolio graphic for stop loss.
Net debit $2.38.


ADBE - Adobe Systems - Company Profile

Comments:

No specific news. Shares posted a minor gain to open the position.

Original Trade Description: Sept 27th.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.

Adobe reported earnings of $1.10, up 47%, on record revenue growth of $1.84 billion, up 26%. Analysts were expecting $1.01 and $1.82 billion. The company said they added a record number of new subscribers for Creative Cloud during the quarter. Deferred revenue rose to a record $2.2 billion.

The stock was up 52% for the year prior to earnings. Shares were crushed because they had the audacity to guide for the current quarter for revenue of $1.95 billion which matched analyst estimates.

Keybanc reiterated their buy rating and $174 price target. Canaccord Genuity reiterated a buy rating and raised the price target to $170.

Expected earnings Dec 19th.

Shares have begun to rebound from the $144 post earnings low. They were $156 before earnings. The risk here should be minimal.

Position 9/28/17:

Long Nov $150 call @ $2.89, see portfolio graphic for stop loss.


CAT - Caterpillar - Company Profile

Comments:

No specific news. New closing 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.

Update 9/18/17: UBS upgraded CAT from neutral to buy and raised the price target from $116 to $140. The analyst said the growing cash position, rising earnings and revenue projections were all bullish. CAT is expected to produce $10 billion in free cash flow over the next two years and return most of that to investors. UBS said a survey of 50 mining companies found that 60% expected to hike new equipment budgets in 2018 and 50% expect to rebuild their entire fleet.

Update 9/21/17: CAT reported a global increase in machine sales of 11% for August, down 1% from July. Total sales in Asia and the Pacific surged 44%, down 1% from July. Despite the minor declines, the business is very strong.

Position 8/30/17:

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


FB - Facebook - Company Profile

Comments:

No specific news but shares gained another buck as it approaches resistance at $170.

Original Trade Description: Sept 26th.

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook fell hard on Monday with a nearly $8 drop. That knocked the stock back to $161.56 or a -6.88% decline from its highs. On Tuesday Facebook announced they had signed a long-term deal with the NFL to broadcast 10 min recaps of all 256 MFL games this season. The broadcast will be on Facebook's Watch channel and will be a major draw to that site. A lot of people follow multiple teams but they probably only get highlights on their local team on local TV. In this format they can get a comprehensive recap of every game every week.

Earnings are expected Nov 1st.

Facebook has been posting strong earnings beats and growing demographics. I expect that again in the Q3 report.

I am recommending the December options because in a spread format they are actually cheaper. The close to the money November options are expensive but options slightly out of the money are very cheap. The OTM December options have significant value that makes the spread work.

A $170 Nov call is $4.50. The Dec $170-$185 spread is $4.16 and we have an extra month of time if we decide to use it. The longer dated options will rise faster and retain their value better than the short term November strikes.

Because of the market weakness I am recommending an entry trigger at $165.50.

Update 9/27/17: Facebook gapped open to $165.90 and above our entry trigger at $165.50. Citigroup said Q3 ad revenue will rise 47%. Citi said one agency that manages $1 billion in spending on social platforms said combined spending on Facebook and Instagram rose 88% in July and 73% in August. Another agency said Facebook spending continued to rise because of higher prices and more dynamic ad units. In addition the percentage of video ads continues to increase.

Position 9/27/17:
Long Dec $170 call @ $6.17, see portfolio graphic for stop loss.
Short Dec $185 call @ $1.79, see portfolio graphic for stop loss.
Net debit $4.38.


TER - Teradyne - Company Profile

Comments:

No specific news. Shares rallied to a new closing high and saw a solid close over $36.

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.


VIX - Volatility Index - Index Profile

Comments:

Another interesting day with the Dow gapping lower but moving higher while the Nasdaq was flat. There is definitely some rotation in progress.

If we do not get any volatility by Oct 6th, I am going to close the position. This week and the next two weeks are typically the most volatile of the year.

We still have plenty of time. North Korea, Iran and Venezuela are 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 hit a new 6-week intraday high but faded at the close.

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)

MNK - Mallinckrodt - Company Profile

Comments:

No specific news. Shares spiked at the open to stop us out.

Original Trade Description: August 19th.

Mallinckrodt public limited company develops, manufactures, markets, and distributes branded and generic specialty pharmaceutical products and therapies in the United States, Europe, the Middle East, Africa, and internationally. The company's Specialty Brands segment markets branded pharmaceutical products for autoimmune and rare diseases, including the specialty areas of neurology, rheumatology, nephrology, ophthalmology, and pulmonology; and immunotherapy and neonatal respiratory critical care therapies, as well as analgesics and hemostasis products, and central nervous system drugs. This segment offers Acthar, an injectable drug for various indications, such as neurology, rheumatology, nephrology, and pulmonology; Ofirmev, an intravenous formulation of acetaminophen for pain management; Inomax for inhalation; Therakos, an immunotherapy treatment platform; and Exalgo, a form of hydromorphone. It is also developing StrataGraft, a full-thickness product for severe burns and other complex skin defects. Its Specialty Generics segment provides specialty generic pharmaceuticals and active pharmaceutical ingredients (APIs) consisting of hydrocodone and hydrocodone-containing tablets; oxycodone and oxycodone-containing tablets; methylphenidate HCl extended-release tablets; and other controlled substances, including acetaminophen products. The company markets its branded products to physicians, pharmacists, pharmacy buyers, hospital procurement departments, ambulatory surgical centers, and specialty pharmacies. It distributes its branded and generic products through independent channels, including wholesale drug distributors, specialty pharmaceutical distributors, retail pharmacy chains, hospital networks, ambulatory surgical centers, and governmental agencies; and APIs directly or through distributors to other pharmaceutical companies. Company description from FinViz.com.

MNK is in trouble from multiple angles. Early this month a District Court invalidated 11 patents for the drug Inomax as competing companies prepare to launch generic copies. MNK said they planned to appeal but the patents expire anyway next October so it is only about 12 months before the onslaught of generic copies. Inomax represents 15% of revenue for MNK. The next generic challenge for MNK is the drug Acthar, which accounts for more than 50% of their revenue.

MNK is also under investigation on its marketing of opioid medications. States are becoming stricter about how companies sell these drugs off label. For instance, if a drug is approved for post surgical pain and the company also markets it for back pain or arthritis that is called off label. It is an effort to convert an entirely new class of patients into addicts.

Nobody knows if MNK is guilty of anything but the Missouri Atty General is expanding their probe.

Earnings Nov 7th.

Shares have been declining for months but they accelerated after the court ruling on Sept 1st. They closed at a historic low on Monday.

The November options just appeared today and the premiums are high and wide. I am going to reach out to the January puts. Just because we are buying time does not mean we have to use it.

Position 9/19/17:

Closed 9/28: Long Jan $30 put @ $2.30, exit $1.23, -1.07 loss.




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