Option Investor
Newsletter

Daily Newsletter, Thursday, 10/5/2017

Table of Contents

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

Market Wrap

New All Time Highs, Again

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

As often as it's been happening it's still not old saying it. The market has hit new all time highs. The buzz on the street now is melt-up, as in the opposite of melt-down. The move is unexpected in the sense that September is quite often a volatile and directionless month, it is not unexpected in the sense that economic data, earnings and technical signals have been leading us here for some time. Among today's headlines is plug for tax reform from Philadelphia Federal Reserve President Patrick Harker and the first positive step toward achievement. He said in early morning statements we'll be stuck at 2% growth until tax reform happens, later in the day the House passed Trump's $4.1 million dollar budget.

Asian trading was a bit muted as holidays in China, South Korea and Hong Kong have some markets closed. The Nikkei closed with nearly no movement at +0.01% while the Australian ASX fell -0.01% on a surprise decline in retail sales. European indices were muted as well on developments out of Catalonia. The region continues to buck Spanish sovereignty and is planning to declare independence on Monday. The DAX shed -0.02% while most other indices gained in the range of 0.25% to 0.50%

Market Statistics

Futures trading was slightly negative in the wee hours of the early session but later gained strength on economic data. The open was slightly positive and without incident leading to a slow and steady rally lasting most of the day. By 12:30 some resistance was hit, near 0.05% for the SPX, but it was caused by profit taking and turnover, not major selling. The next few hours saw the indices trend sideways just below the new high and testing it several times along the way. By late afternoon it was clear the market wanted to move higher and it did, breaking through resistance to set new all time highs by the close.

Economic Calendar

The Economy

Today's data starts off with the Challenger Gray & Christmas report on planned lay-offs and from what I see the data is good. According to them the number of planned lay-off's fell -4.4% from the previous month to 32,346 (this includes storm affects). On a year over year basis the September read is down -27% from September of 2016. The September addition leaves the 3rd quarter total down -6.2% from the 2nd quarter of this year and -22.5% from the 3rd quarter of last year. Finally, the year-to-date total for 2017 is down -26.7% from last year showing a sharp decline in job cuts as employers seek to hang on to those they have. The best part of the report though is the number of planned hirings. According to Challenger data the number of planned hirings year-to-date is up nearly 70% over last year at this time and already exceeds 2016 full year hiring.


Initial jobless claims fell -12,000 to 260,000 from last weeks unrevised figure. The four week moving average of claims fell -9,500 to 268,250. On a not adjusted basis claims fell -3.9% versus an expected gain of 0.5% but are still up by 3% YOY. This week's data is still elevated from the impacts of 3 recent storms but quickly falling back to normalized levels. Looking forward I would expect to see this figure continue to fall into the coming weeks.


Continuing claims rose a modest 2,000 to hit 1.938 million and has yet to show any real impact from the hurricanes, if it ever will. The four week moving average of continuing claims fell -3,250 to 1.947 million and is also not showing affects from storm caused work interruptions.

The total number of claims for unemployment assistance fell -90,765 to 1.674 million. This is a new seasonal and long term low, in line with prevailing trend. It also shows little to no long term impact from the hurricanes although it'll be a few more week's before I can say that definitively. On a year over year basis claims are down -6.7% and well on the way toward reaching my target near 1.500 million.


The ISM Services PMI shows continued expansion following last month's surprise gains. It also echoes signs of upward inflationary pressures adding to expectations of a December rate hike. The headline index came in at 59.8, up 4.5% from the previous month with all sub indices showing gains. The activity index rose to 61.3, new orders to 63 and employment to 56.8 while prices paid jumped 8.4% to hit 66.3% and the highest level since February 2012. The data is good, not too hot, but does indicate inflation creeping into the economy.


The Dollar Index

The Dollar Index gained another half percent today on signs of economic health and growing chances of a December rate hike. The CME's Fed Watch Tool now shows an 88% chance for at least 1 hike in December. Today's action created a medium sized green bodied candle moving up from a resistance-turned-support line to break through my down trend line. The indicators are bullish in confirmation of this move and suggest higher prices to come. The break is bullish but may indicate a new trading range rather than full reversal. The next target for resistance is near $94.


The Gold Index

Gold prices tried to move higher in early trading but were later weighed down by economic data, FOMC outlook and the dollar. With no geopolitical news to support it prices had no choice but to fall. Spot prices fell roughly -0.50% to trade near $1,270 and look like they will continue to fall. Tomorrow's NFP is more likely to support the idea of economic stability than deterioration even if job gains are curbed by the storms. The expected increase in average hourly earnings is 0.3% and enough to support the idea of tight labor markets and at least the possibility of rising inflation. A break below $1,270 will be bearish for the near term with targets near $1,250 and $1,260.

The Gold Miners ETF GDX fell in response to golds decline, shedding about a half percent in the process. The ETF moved down to sit on support at the long term moving average, pressured lower by resistance at the short term moving average. The indicators are iffy, suggestive of support within a trading range but also set up to fire a bearish signal should support break. A move below the long term moving average, near $23.20, would be bearish while a bounce would be bullish. Short to long term the ETF remains within a range with little hope of breaking out.


The Oil Index

Oil prices bounced from the $50 support level in response to renewed hope of an extension to OPEC's production cap. The move was sparked by news that Russia and Saudi Arabia are expected to agree to the deal very soon. On the flipside, rising US production and the resumption of production at Libya's Sharara field continue to cap gains. In a sidebar, a Saudi minister has been quoted saying that Russia "breathed life back into OPEC", a statement that leads me to think the cartel was/is on even shakier footing than I thought. Regardless, prices are elevated on hopes the cut will be extended and continue to aid market rebalancing and this may continue in the near to short term.

The Oil Index added another 0.35% to its nearly 2 month rally. The index and sector are being driven higher on rising oil prices, forward earnings outlook and rising forward earnings outlook driven by rising oil prices and appears to be in full reversal. That being said the indicators continue to weaken even as price action begins to cool off, suggesting a pull back/correction may be forthcoming. If so I will view that as an entry for short and long term positions. First target for support on such a move is $1,220 or -1.66% from today's close. A move below that may go as low as the short term moving average near 1,175 or -4% from today's close.


In The News, Story Stocks and Earnings

Constellation Brands reported earnings before the opening bell and served up a treat for investors. The maker of adult beverages beat on the top and bottom lines on business that allowed management to raise full year guidance. Revenue of $2.08 billion beat by 3%, earnings of $2.47 beat by 14% as pricing, margins and volume combine to deliver bottom line results. Beer and wine are both up double digits, led by beer, while gross margin increases to near 51%. Shares of the stock jumped more than 5% in premarket trading to gap up at the open and trade at a new all time high.


Shares of both Fed Ex and UPS fell on news that Amazon is testing its own deliver service to rival the two shipping giants. I'm not surprised to hear this news, a little surprised that Amazon didn't choose to purchase existing infrastructure. I guess they think they can do things better. The plan, being tested now in high density areas, is intended to increase the number of items available for 2 day shipping by delivering direct from the warehouse. Shares of both Fed Ex and UPS were hit although UPS was hit hardest. The stock fell more than -1.5% in premarket trading to open with a gap lower, just below the short term moving average. This was seized as a buying opportunity by some, driving the price back up to close with a loss of only -0.67%.


Costco reported after the bell and beat on the top and bottom line. Revenue of $42.3 billion is up nearly 16% over last year and beat expectations by 1.8%. EPS came in $0.06 ahead of expectation or +3%. Sales for the full fiscal 2016 grew by 8.7% with the caveat that the 4th quarter and full year had one more week than the comparable period in 2016. Shares of the stock responded positively nonetheless rising more than 0.5% in the post market session.


The Indices

The indices marched higher today in steady action. The indices, save one, made new all time highs as well. The one laggard is the Dow Jones Transportation Average with a loss of -0.12%. The index extended a fall begun yesterday but confirmed near term support in the process. Today's candle is small but green bodied with visible lower shadow indicative of buyers. That being said both price action and the indicators suggest a peak has been reached with the possibility of consolidation and continuation. Near term support is near 9,850, a break of which could be bearish for the near term. A bounce from this level would be bullish and trend following with the caveat of resistance at the all time high.


The NASDAQ Composite posted the largest gain, 0.77%. The index created a medium sized green candle moving up and in line with prevailing trends. The move is supported by earnings and economic outlook along with bullish indicators. Both MACD and stochastic are moving higher following trend confirming bullish crossovers and suggestive of strengthening within the market. Upside targets are 6,600 and then 6,800.


The broad market S&P 500 made the 2nd largest gain, 0.56%, and created a medium sized green bodied candle moving up to a new all time high. This move is confirmed by the indicators which are both moving higher following bullish trend following crossovers. Today's move exceeds near term targets at 2,550 which brings the next target of 2,580 into play.


The Dow Jones Industrial Average brings up the rear in terms of gainers. The blue chips added 0.50% in today's action and created a medium sized green candle. The indicators are both bullish in confirmation of the move to new highs and suggest that more new highs may follow. Next target is 23,000 and may be reached before peak earnings season.


The indices are moving higher whether you want to call it a rally, a melt-up or whatever else you may want to name it. If there is a lack of sellers it's because we're still in a period of growth with positive forward expectations. Yes, there are still areas of weakness and underperformance within the economy and the market but the general trends are positive and strengthening. The jobs report tomorrow is likely to show some weakness as well but this due to the recent storms, there is as yet no signs of long term or long lasting damage to the economy and I do not expect there to be any. I am bullish in the near, short and long term and greatly anticipating earnings season. I sure hope it doesn't disappoint.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Overbought

by Jim Brown

Click here to email Jim Brown

Editors Note:

After an eight-day rally, we are now in overbought territory. We can always become more overbought as diehard shorts are forced to cover and portfolio managers are forced to chase prices, but there is no reason for us to add to the portfolio on a Friday morning. There is always the weekend event risk and the potential for traders to take some money off the table ahead of the weekend.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Budget Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

The House passed a $4.5 trillion budget bill and the market rallied higher. The senate still has to approve its version and a conference committee blend the two bills together for a final vote. However, the passage of the House bill was the first step to tax reform. Once the budget bill is signed, congress can use the "reconciliation" process to pass tax reform with a simple majority. A survey announced today showed as many as 18 democrats likely to support a tax cut. The combination of those two items powered the markets to new highs.



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


TTC - Toro CO
The long call position was entered at the open.

AAPL - Apple Inc
The long position was closed at the open.

FB - Facebook
The long position was closed at the open.



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:

We exited the position at the open for lack of movement and lots of negative rumors. Of course today the stock gained +$1.91 on news India was considering some concessions to let Apple build iPhones in India.

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.

Update 10/3/17: Apple shares rose slightly after a RBC Capital Markets survey found that 28% of respondents were interested in buying the iPhone X. Only 17% were thinking about an iPhone 8 and 20% were interested in an iPhone 8+. Also, 57% of the people thinking about buying the X were planning on getting the more expensive 256 Gb model. Apparently, Apple faithful really want the X.

Update 10/4/17: The EU is suing Ireland over failure to collect the right amount in taxes from Apple. This argument stems from a deal Apple struck with Ireland from 2003 to 2014 in exchange for putting some Apple offices in Ireland. The EU claims Apple owes $15 billion in back taxes. Ireland has been on the side of Apple but with the EU suit, there will probably be some eventual payments.

More rumors surfaced that suggested the X deliveries could be pushed out until December. There was also a tweet from a tech guru that claimed the display would not be as bright or clear as expected. He said instead of the expected 458 ppi, it could be as low as 326 ppi because of battery life and power consumption.

There are continuing claims about the batteries in the 8 swelling when charging and causing the case to break.

Position 9/25/17:

Closed 10/5: Long Nov $155 call @ $3.65, exit $4.70, +1.05 gain.
Closed 10/5: Short Nov $165 call @ $1.27, exit $1.50, -.23 loss.
Net gain 82 cents.


ADBE - Adobe Systems - Company Profile

Comments:

No specific news. Monster $2.30 gain in a strong Nasdaq.

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.


ADI - Analog Devices - Company Profile

Comments:

No specific news. Nice gain to a new closing high.

Original Trade Description: Sept 30th.

Analog Devices, Inc. designs, manufactures, and markets a portfolio of solutions that leverage analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems. It offers data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; high-performance amplifiers to condition analog signals; and radio frequency ICs to support cellular infrastructure. The company also provides MEMS technology solutions, including accelerometers used to sense acceleration, gyroscopes to sense rotation, and inertial measurement units to sense multiple degrees of freedom. In addition, it offers isolators for various applications, such as universal serial bus isolation in patient monitors; and smart metering and satellite applications. Further, the company provides power management and reference products; and digital signal processing products for high-speed numeric calculations. Its products are used in electronic equipment, including industrial process control systems, medical imaging equipment, factory automation systems, patient monitoring devices, instrumentation and measurement systems, wireless infrastructure equipment, energy management systems, networking equipment, aerospace and defense electronics, optical systems, automobiles, and portable electronic devices. The company serves clients in industrial, automotive, consumer, and communications markets through a direct sales force, third-party distributors, and independent sales representatives in the United States, rest of North/South America, Europe, Japan, China, and rest of Asia, as well as through its Website. It has a collaboration with TriLumina Corp. to provide illuminator modules for automotive flash LiDAR systems. Analog Devices, Inc. was founded in 1965. Company description from FinViz.com.

Expected earnings Nov 29th.

ADI is a 52-year-old chip company. Yes, they had chips in 1965. The company is doing great and tends to make chips nobody else is making and that gives them an edge. They reported Q2 earnings of $1.26, which rose 54% snf beat analyst estimates at $1.15. Revenue of $1.43 billion rose 65% and beat estimates for $1.40 billion.

They guided for the current quarter for earnings of $1.29-$1.43 and analysts were only expecting $1.25. Revenue guidance was $1.45-$1.55 billion and analysts were expecting $1.46 billion.

Shares gapped up on the late August earnings then worked through the post earnings depression cycle before moving higher. They closed at a new high on Friday.

Last week IBD raised their composite rating from 93 to 96, which means ADI is outperforming 96% of all stocks in terms of fundamental and technical stock ranking criteria. The stock has an EPS rating of 97 with moderate institutional buying over the last several weeks.

I believe the breakout will continue and we could see $90+ before earnings in November. Options are still cheap because ADI is not a high profile stock.

Position 10/2/17:

Long Dec $90 call @ $1.95, see portfolio graphic for stop loss.


CAT - Caterpillar - Company Profile

Comments:

No specific news. Minor decline after Wednesday's new high.

Original Trade Description: Aug 29th.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. Company description from FinViz.com.

CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.

The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.

In December they guided for full year 2017 revenues of $38 billion "as a reasonable midpoint expectation." Analyst estimates for earnings of $3.25 were "too optimistic" according to CAT.

In January they guided for $36-$39 billion in revenue and $2.90 in earnings.

In April they guided for $38-$41 billion in revenue and $3.75 in earnings.

In July they guided for $42-$44 billion in revenue and $5 in earnings.

In April they guided for revenue from construction at flat to 5%. In July they guided for 10% to 15% growth.

In April they guided for revenue from mining at 10% to 15%. In July they guided for 20% to 25% growth.

In April they guided for energy revenue at flat to 5%. In July they raised it to 5% to 10%.

After the devastation in Houston, there were new estimates from analysts today for 17% or higher revenue growth in construction equipment.

Shares spiked at the open to a new high before fading slightly with the market. I believe revenue estimates will continue to rise because they are running out of year and their conservative guidance will have to become more accurate.

Earnings October 24th.

CAT is reactive to Dow movement but shares have ignored the recent Dow weakness. Today's close at $116.01 is a record high.

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:

We closed this position at the open and FB posted its biggest gain in weeks thanks to the strong Nasdaq. Sometimes if you do not have bad luck, you would have no luck at all.

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.

Update 9/30/17: Deutsche Bank reiterated a buy rating and raised their price target from $215 to $220. The analyst said Facebook is the new IBM from decades ago when IBM was dominant in the computer sector. Facebook has the best in class ad systems including targeting, creative and attribution and a massive audience of more than 2 billion consumers. The analyst said conversations with advertising agency executives showed that not only are advertisers sticking with Facebook, they are planning on increasing spending in the future.

Update 10/2/17: Facebook turned over the 3,000 Russian ads to congress and Zuckerberg asked for forgiveness in letting Facebook increase the divisiveness in the country. He said he will try to make Facebook more neutral in the future.

Position 9/27/17:
Closed 10/5: Long Dec $170 call @ $6.17, exit $7.56, +1.39 gain.
Closed 10/5: Short Dec $185 call @ $1.79, exit $2.24, -.45 loss.
Net gain 94 cents.


HRS - Harris Communications - Company Profile

Comments:

No specific news. New closing high.

Original Trade Description: Oct 2nd.

Harris Corporation provides technology-based solutions that solve government and commercial customers' mission-critical challenges in the United States and internationally. The company operates in three segments: Communication Systems, Electronic Systems, and Space and Intelligence Systems. It designs, develops, and manufactures radio communications products and systems, including single channel ground and airborne radio systems, 2-channel vehicular radio systems, multiband manpack and handheld radios, multi-channel manpack and airborne radios, and single-channel airborne radios, as well as wideband rifleman team, ground, and high frequency manpack radios. The company also offers secure communications systems and equipment, including Internet protocol based voice and data communications systems, as well as single-band land mobile radio terminals and multiband radios comprising a handheld radio and a full-spectrum mobile radio for vehicles. In addition, it provides earth observation, environmental, exploration, geospatial, space protection, and intelligence solutions, such as sensors and payloads, as well as ground processing and information analytics for security, defense, civil, and commercial customers; and positioning, navigation, and timing products, systems, and solutions. Further, the company offers electronic warfare, avionics, surveillance and reconnaissance, command, control, communications, computers and intelligence, and undersea systems and solutions for aviation, defense, and maritime applications. Additionally, it provides managed services that support air traffic management; engineering support and sustainment for ground-based systems; and information technology and engineering managed services to government and commercial customers. The company was founded in 1895. Company description from FinViz.com.

Harris is a very strong defense company. As the description above states, they are very active in defense communications. This is a rapidly growing sector because of eavesdropping, jamming, spoofing or hacking into military communications as a clandestine attack in preparations for times of war. With the advent of drones this is becoming an even bigger area of trouble because a hacked drone can be stolen or even worse, used against friendly forces or population centers. Harris has 17,000 employees and nearly 8,000 engineers and scientists.

Harris shares exploded higher starting on the 14th and topped at $131 on the 20th. The stock is Dow reactive. When the Dow began to dip last week, Harris moved sideways. Shares broke out of consolidation on Monday to close at a new high. With North Korea stirring the pot, defense stocks are being bid higher.

Earnings Oct 31st.

I would not normally recommend a stock with this kind of short-term gain but the new high breakout could be the start of a new leg higher.

Update 10/3/17: Harris was awarded a $765 million contract to provide radios to the Navy for the next 5 years. Two months ago, they won a contract for $255 million to build radios for the US special operations forces. Last year they won part of a $12.7 billion 10-year contract to build radios for the Army.

Position 10/3/17:

Long Nov $135 call @ $2.40, see portfolio graphic for stop loss.


IIVI - II-VI Inc - Company Profile

Comments:

No specific news. Shares declined $1 and fell back to prior resistance.

Original Trade Description: Sept 28th.

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.

Position 9/29:

Long Nov $45 call @ $1.25, see portfolio graphic for stop loss.


LOW - Lowes Companies - Company Profile

Comments:

No specific news. Shares broke over resistance at $81.50. Next target should be $86.

Original Trade Description: Oct 3rd.

Lowe's Companies, Inc. operates as a home improvement company in the United States, Canada, and Mexico. It offers a line of products for maintenance, repair, remodeling, and decorating. The company provides home improvement products in various categories, such as lumber and building materials, tools and hardware, appliances, fashion fixtures, rough plumbing and electrical, seasonal living, lawn and garden, paint, millwork, flooring, kitchens, outdoor power equipment, and home fashions. It also offers installation services through independent contractors in various product categories; extended protection plans; and in-warranty and out-of-warranty repair services. The company sells its national brand-name merchandise and private branded products to homeowners, renters, and professional customers; and retail customers comprising individual homeowners and renters. As of March 24, 2017, it operated 2,365 home improvement and hardware stores. The company also sells its products through online sites comprising Lowes.com and Lowesforpros.com; and through mobile applications. Company description from FinViz.com.

Earnings Nov 22nd.

Home Depot (HD) is setting new highs every day and it is too late to take a position in that stock. We already have one in the LEAPS newsletter. Lowes is in the same business and is on the verge of clearing resistance to make a four-month high. They will benefit as much as Home Depot in the post hurricane rebuilding boom.

Lowes reported earnings that missed expectations because of some unusual events and they provided weak sales guidance. This was the week before Hurricane Harvey. Shares fell 6% on the news. Credit Suisse said despite the earnings miss there were bright spots and the miss was also due to a calendar quirk that reduced sale days in the quarter. Earnings still rose 14%.

Credit Suisse reiterated an outperform rating and $95 price target. Again, this was before the hurricanes. Sales should be significantly higher for Q3.

Shares have rebounded to resistance at $81.50 and should continue to move higher as investors begin to look for underperforming stocks after the big market move higher. Rather than buy stocks at new highs after the big gains they will look for promising stocks with room to run.

Position 10/4/17:

Long Jan $85 call @ $1.89, see portfolio graphic for stop loss.


TER - Teradyne - Company Profile

Comments:

No specific news. New resistance has appeared at $38.

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.


TTC - Toro Co - Company Profile

Comments:

No specific news. Minor decline to start this position.

Original Trade Description: October 4th.

The Toro Company designs, manufactures, and markets professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products worldwide. Its Professional segment offers turf and landscape equipment products, such as sports fields and grounds maintenance equipment, golf course mowing and maintenance equipment, landscape contractor mowing equipment, landscape creation and renovation equipment, rental and construction equipment, and other maintenance equipment; snowplows, salt and sand spreaders, and related parts and accessories; sprinkler heads, electric and hydraulic valves, controllers, computer irrigation central control systems, and micro-irrigation drip tape and hose products, as well as professionally installed lighting products. This segment markets its products to professional users engaged in maintaining golf courses, sports fields, municipal properties, agricultural fields, residential and commercial landscapes, and removing snow through a network of distributors and dealers, as well as directly to government customers, rental companies, and retailers. The company's Residential segment provides walk power mowers, riding mowers, snow throwers, replacement parts, and home solutions products, including trimmers, blowers, blower-vacuums, and underground and hose-end retail irrigation products. This segment sells its products to homeowners through a network of distributors and dealers; and an array of home centers, hardware retailers, and mass retailers, as well as through the Internet. The Toro Company was founded in 1914. Company description from FinViz.com.

Earnings Nov 23rd.

When people think about lawn mowers, the gasoline powered push version is the most common vision. However, you do not see people using those versions when grooming sports fields, apartment houses, city green spaces, golf courses, etc. This is Toro country. The large scale riding mower is the bread and butter for companies servicing those large open spaces.

For Q2, revenue rose 4.5% to $627.9 million and earnings rose 22% to 61 cents. That beat estimates for 57 cents. Revenue matched estimates. Toro's professional segment revenues rose 9.5% to $468.6 million.

However, residential revenues declined -9.3% because the company held its "Toro Days" sales promotion in April rather than May. The shift in timing of sales and revenues caused the decline. Shares were crushed despite the valid reason behind the shift in revenue.

Toro raised guidance for the full year from $2.35 to $2.38 and said revenue would rise "at least" 4.5% up from "about" 4.5%.

Shares are recovering from their post earnings crash and closed at a six-week high on Wednesday.

Position 10/5/17:

Long Dec $65 call @ $1.65, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

New 24-year closing low at 9.19.

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.



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