Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/11/2017

Table of Contents

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

Market Wrap

Bullish Consolidation

by Keene Little

Click here to email Keene Little
The stock market has made very little headway in the past week as it has chopped mostly sideways. But the choppy consolidation fits as a bullish continuation pattern and while there might not be much more to the upside before a larger correction it remains a bullish market.

Today's Market Stats

Today was more of the same as we've seen over the past week. Neither side is showing much conviction and trading volume has been lighter than normal. But a choppy consolidation with low volume keeps things aligned for the bulls and we should see another leg up for the rally, potentially into next week (opex). It could be the last of the rally from August but for now that's speculative and the bulls remain in control of the tape.

Not much happened in news today and economic reports were slim. The market appeared to be worried about some geopolitical news (like N. Korea launching a missile or having a missile launched at its launch pad) but remained hopeful that today's FOMC report would provide a catalyst to get things moving again. While this afternoon's FOMC minutes didn't provide much for the market to act on there was at least a positive reaction (or perhaps stated more accurately, there wasn't a negative reaction and that keeps things looking bullish).

The market gyrated a little around the release of the minutes at 14:00 before climbing a little more and making new highs for the day (except the weaker RUT but it did get a bounce off its afternoon low). The new highs today, wait for it, meant more new all-time highs for the blue chips (a whopping penny above yesterday's high for the S&P 500). The tech indexes came close to new highs above yesterday morning's but they'll need another bump up to accomplish the "new all-time highs."

The FOMC minutes did not provide new information and reinforced what we already knew. Some Fed heads were uncomfortable raising rates any further in light of inflation running below their 2% target (although it's easily argued that inflation is actually significantly higher). Other Fed members argued they were more worried about not getting ahead of an overheated economy (I'm not sure where they're looking), which in turn could heat up inflation.

Some Fed members are worried that last week's wage numbers show they should be worried about wage inflation turning into inflation for the general economy. The nonfarm payrolls report showed an increase in wages earned and an unemployment rate that dropped. But at the same time employment shrank by 33K and something doesn't compute. I think it's much more likely that the hurricanes caused a loss of jobs for lower-paid service workers, which in turn boosted the average wages for the remaining workers. As for the unemployment rate, I'll be kind and say it doesn't reflect reality.

If the Fed is worried about wage inflation I think they're once again not looking at the right metrics. We know their economic models are highly inaccurate (it's why they've never been able to issue an accurate forecast for the economy). One of these days the Fed will finally get the boot and it can't come soon enough. I now relinquish my soap box to the next speaker.

So the Fed is still intent on raising rates, likely in December (although the minutes show that it's not assured since they remain data dependent), and then more next year if their measurements of the economy continues to support further rate increases. They of course would like higher rates so that they have room to lower them again during the next recession. While they're raising rates they've also begun their AQE (anti-QE) by not renewing the first $10B of bonds that matured last week.

In the bigger picture of liquidity $10B is a mere drop in the punch bowl but between rate increases and taking a small step to remove the punch bowl it's surprising the market hasn't started to react more negatively. That's certainly indicative of bullish enthusiasm for this market, regardless of what's going on behind the scenes or under the surface (clue the sound track from "Jaws").

The bulls continue to draw in additional support while bears remain mostly absent in the market, although there are some early signs of a crack in the foundation the bulls are standing on. The latest Investors Intelligence report showed bulls back above 60% while bears have dropped to 15%, which gives us a difference of 45%. This spread has been a reliable indicator in the past that the market is peaking. It doesn't mean the market will turn back down from here but the risk is high and it's a good time for bulls to shed their coat of complacency and tread carefully.

Along with a historically low VIX I've been watching the CNN Fear & Greed (F&G) index for sentiment clues. Last Wednesday I showed the FNG chart with SPX to point out the warning from an uber-high reading of 92, which climbed to 95 on Thursday, and how it's generally a little early in identifying the top to a market. This makes sense since a market high is often created when the market simply runs out of buyers buying the highs, which is also a reason for concern about the declining volume during the rally (shown further below with the QQQ chart).

The F&G index has now dropped back down a little (83 today) and I've updated last week's chart to show the turn back down, which is the warning sign. As you can see on the chart, when the F&G index turns down from an Extreme Greed reading, tops are generally found soon thereafter. There is of course the potential for a turn down in the F&G index to be followed by another turn up to a higher reading but interestingly, the move up from August shows a 5-wave move and suggests a top for the F&G index is now in place.

To reiterate the problem for bulls here, the F&G index is coming off a high not seen in the past 3 years (as far back as the chart goes) and that means the coming correction could be worse than we've seen in a while. October's volatility still awaits us.

SPX vs. CNN Fear & Greed index

Another warning sign comes from the declining trading volume since the August rally began. The low volume during the consolidation over the past week is bullish but a rally needs volume to show support for the move. As you can see on the QQQ chart below, Declining volume with a drop in the F&G is a double warning sign that tells us the rally is running out of fuel.

QQQ daily chart

Adding to the bull's woes is the fact that new 52-week highs have dropped off sharply since the rally has continued this month. Even with the almost-daily new all-time highs (or near new highs for the tech indexes) we're seeing less participation of the stocks in the indexes, always a warning sign. At the same time the new 52-week lows are starting to tick higher.

While we have plenty of warning signs that this bullish run since August could soon complete, the short-term pattern supports the likelihood for another push higher, either into the end of this week or into next week if we see the consolidation continue into the end of this week. We might even see a sharp pullback on Thursday/Friday to set up the rally into opex. It's been common to see a head-fake move down at the end of the week before opex. It's been a favorite way for big hedge funds to suck in the shorts (for short-covering fuel into opex) while loading up on call options and selling puts). Watch for that possibility on Thursday/Friday of this week. And with that I'll jump into the chart review of the indexes.


S&P 500, SPX, Weekly chart

Last week SPX made it back up to the trend line along the highs since April 2016 (ignoring the poke above the line in February 2017), which is now also crossing the midline of the up-channel for price action from 2010-2011. This week's tiny candle is on the line. In the big rally from 2009 the rally from February 2016 is the 5th wave and it's typical for the 5th wave to finish at/near the midline of the channel and we wait to see if the rally will continue or start a reversal back down.

With SPX getting pinched in a rising wedge for the rally from 2016 we're soon going to find out whether or not we'll see a continuation of the rally in a stronger blow-off move or if instead the rally (from February, and in turn from 2009, is coming to an end. If SPX can successfully climb above 2580 I'd be more inclined to believe the bullish scenario but let's just say I'm not a believer in that potential.


S&P 500, SPX, Daily chart

The 5th wave of the leg up from January/February 2016 is the leg up from April and the 5th wave of the rally from April is the leg up from August. From an EW perspective we're running out of waves for this bull market and it's the reason I've become so bearish -- the coming correction is going to be huge and complacency is going to hurt a lot of buy-and-holders. That's of course just my opinion but I see a greater risk for bulls now than I did in October 2007, fwiw.

Looking at the leg up from August, it's not a clear wave pattern but as I had pointed out in previous wraps, I'm waiting to see if we'll get a full 9-wave (impulsive) move up or if the 9th wave will be missing, like it was at the October 2007 high. Ideally we'll get a little larger corrective pattern off the October 5th high, as depicted on bold green, and then a final push higher into next week. But if it continues to chop marginally higher from here we could see a top get put in place sooner rather than later. As indicated on the chart, SPX stays bullish inside the up-channel from August, so above 2535, which also means we'd have a bearish heads up below 2535.

Key Levels for SPX:
- bullish above 2535
- bearish below 2488


S&P 500, SPX, 60-min chart

The parallel up-channel for the rally from August is shown on the 60-min chart below and you can it's been riding up the midline of the channel the past two days. It's been a weak effort to get to new highs this week and if continues to work its way slowly higher it might not be able to make it up to the top of the channel, which will be near 2580 by the end of the day Friday. That would actually be a bearish setup for opex.

It's been common to see a head-fake move down at the end of the week prior to opex and it's one reason why I'm thinking we could see a spike down as early as Thursday morning to then set up the rally into next week. As long as the up-channel holds a pullback I'd be a buyer of the dip for a trade (only one more leg up so don't hang on too long).


Dow Industrials, INDU, Daily chart

The has been nudging higher against a trend line along the highs for it rally from August and against an uptrend line from November 2016 - May 2017. Both trend lines are approaching the top of a parallel up-channel for the rally from April, currently near 22910. It's a similar position as SPX, which means we could see a quick pullback and then higher into next week or the rally could literally finish any day now. Unless we see a strong break through these trend lines, with volume, I think upside potential is significantly dwarfed by downside risk. Playing defense and protecting profits on long positions seems to me to be the smarter play right now.

Key Levels for DOW:
- bullish above 23,100
- bearish below 22,420


Nasdaq-100, NDX, Daily chart

The pattern for the tech indexes is not clear enough for me to make price projections but there a few trend lines to keep an eye on. Since last Thursday it has not been able to get above the broken uptrend line from June-November 2016 (green line) and only a little higher is the top of a parallel up-channel for its rally from August, currently near 6118. Two equal legs up from August is at 6099, all of which says NDX could have strong resistance from about 6090 to 6120. If it can get through that area it would then have to soon deal with its trend line along the highs since November 2014, currently near 6155. It stays bullish for now but I don't see enough upside potential (famous last words) to think about new long positions.

Key Levels for NDX:
- bullish above 6130
- bearish below 5840


Russell-2000, RUT, Daily chart

The RUT has been consolidating in a bull flag pattern off last Thursday's high. It has worked its way over to the bottom of its up-channel for the rally from August. The consolidation fits as the 4th wave correction in the rally and that calls for one more leg up to complete the 5th wave. If another leg up completes near the midline of the up-channel we could see a high around 1530 as early as next Monday. If it stays bullish all next week we could see the RUT make it back up to the top of its up-channel, which will be near 1570 by opex. The final 5th wave of a long-term rally is the most unreliable and could fail anywhere, including a truncation (no new high) and therefore I'd be very careful chasing the RUT higher -- have good stop management.

Key Levels for RUT:
- bullish above 1515
- bearish below 1452


30-year Yield, TNX, Daily chart

The pattern for Treasury yields since the December 2016 high looks like a bull flag pattern but I'm not convinced yet that we're going to see a bullish breakout. The first bullish move for the 30-year yield (TYX) would be a climb above its broken 50- and 200-week MAs, currently crossing at 2.93. Its 200-dma is at 2.92 and all were tested with Monday's high at 2.933.

There's price-level support near 2.85 and as long as that holds as support and TYX can break above 2.93 I'd be more bullish. It would need to punch through some more resistance and get above its December 2016 high near 3.2 before I'd turn more bullish but that's certainly the potential from here. Otherwise a drop back below support at 2.85 could lead to another leg lower.

The big question in my mind is what Treasuries will do if the stock market falls on hard times. Will there be a flight to safety in Treasuries, driving prices higher and yields lower? That would be a typical scenario but I readily admit this is not a normal market.


KBW Bank index, BKX, Weekly chart

The banks have been strong off September 7th low and as can be seen on the weekly chart of BKX, it rallied from another back-test of its broken trend line along the highs from 2010-2015 and now is back up to the top of its parallel up-channel from 2009. Even though it has made a minor new high above its February 2017 high it's showing bearish divergence at the new high. As with the major indexes, I see the potential for at least a little higher into next week but this is looking ready for a top and it's likely to be a major one.


U.S. Dollar contract, DX, Daily chart

The US$ has a 3-wave bounce off its September 8th low into last Friday's high and the 2nd leg of the bounce achieved 162% of the 1st leg at 93.92 with the high at 94.10. It was a good setup for a reversal back down if there's to be one more new low near 90 before it will be ready for a stronger rally. But at the moment it has pulled back to support at the bottom of its original down-channel from January and its recovered 20- and 50-dma's, all of which are now crossing near 92.75.

If 92.75 holds as support we could see another push higher and create an impulsive move up from September. That would in turn tell us a bottom is likely in place. But if it drops below 92.75 it would increase the odds in favor of a drop to 90. In any case I think the dollar is close, if not already there, to a bottom that should lead to a rally into next year.


Gold continuous contract, GC, Daily chart

With the small pullback in the dollar we've seen a bounce for gold and it's now up against resistance at its broken 20-dma near 1293. Only slightly higher is its broken 50-dma, near 1301, and price-level S/R near 1300. If gold can get through this resistance it will look more bullish, especially since it's coming off a back-test of its broken downtrend line from 2011-2016. If the dollar does continue to drop down towards 90 we should see gold break through resistance (and just the opposite if the dollar continues higher).


Oil continuous contract, CL, Daily chart

Last Friday and again on Monday oil used its 50-dma as support and got a good bounce back up on Tuesday. It consolidated today, which could be bullish but until oil can get above its September 28th high at 52.86 I think there's a good chance oil will be heading lower from here. Better confirmation of a move lower would be a drop back below its broken downtrend line from February, currently near 48.30, although a drop below last Friday's low at 49.10 would be an indication that it will drop back below the trend line.


Economic reports

Thursday morning's economic reports include unemployment claims data and Fed-watched PPI numbers, which are expected to have ticked higher from August. This will likely be written off by the Fed as "transient" because of higher gas and oil prices following the hurricane-related shutdowns.


Conclusion

The major indexes look like they could work their way higher from here but it would look better if we see a further pullback and then higher next week. The EW price pattern would look better that way and it would fit well for new highs into opex. If we do get another rally into opex I suspect it's going to be the last hurrah for this bull market, which means the bears could be on deck here. We'll have time to evaluate that potential a week from now.

With the excessive number of bulls vs. bears, waning momentum and volume, a price pattern that looks near complete and resistance levels not far away I think it's a very risky time to chase any move higher from here. Having said that, a jab to the downside on Thursday/Friday could be a good setup to trade the long side into opex. But if it in fact will be the final 5th wave of the rally it's important to keep in mind how unreliable this wave can be (anywhere from missing or truncated to extending much higher in a blow-off move).

Trading on the long side from here is subject to higher-than-normal risk since a big move back down could start with a scary gap down some morning, trapping a lot of bulls and getting bears chasing the move lower. We have the risk of no buyers showing up if everyone starts to dump their ETF positions en masse.

We're at the point where I think you'll need to sell into a decline if we see a strong decline at any time (something more than a couple hundred points for the Dow) since there will likely be very few and only small bounce attempts. This is why I think downside risk dwarfs upside potential. But we're not there yet and the bulls continue to control the tape. Keep respecting the upside as long as the bulls maintain their grip.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Charging Up

by Jim Brown

Click here to email Jim Brown

Editors Note:

FMC is rising ahead of an important event on November 1st. Who knew in 1884 that electric cars would power 50% of the company's earnings in 2020?



NEW DIRECTIONAL CALL PLAYS

FMC - FMC Corporation- Company Profile

FMC Corporation, a diversified chemical company, provides solutions, applications, and products for the agricultural, consumer, and industrial markets worldwide. The company operates through three segments: FMC Agricultural Solutions, FMC Health and Nutrition, and FMC Lithium. The FMC Agricultural Solutions segment develops, manufactures, and sells crop protection chemicals, such as insecticides, herbicides, and fungicides that are used in agriculture to enhance crop yield and by controlling a range of insects, weeds, and diseases, as well as in non-agricultural markets for pest control. The FMC Health and Nutrition segment offers microcrystalline cellulose for use in drug dry tablet binders and disintegrants, and food ingredients; carrageenan for use in food ingredients for thickening and stabilizing, pharmaceutical, and nutraceutical encapsulates; alginates for food ingredients, pharmaceutical excipients, healthcare, and industrial uses; natural colorants for use in foods, pharmaceutical, and cosmetics; and omega-3 EPA/DHA for nutraceutical and pharmaceutical uses. The FMC Lithium segment offers lithium for use in batteries, polymers, pharmaceuticals, greases and lubricants, glass and ceramics, and other industrial uses. FMC Corporation was founded in 1884 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com.

Expected earnings Nov 6th, unconfirmed.

FMC is riding the lithium wave. The once ignored mineral is now becoming a very important part of FMC's future. In the first half of 2017, lithium accounted for 11% of total revenue and 20% of earnings. The rush to find more lithium so companies like Tesla can produce 500,000 battery operated cars a year, has turned the mining of this material into a race to the future. FMC is in the process of tripling capacity from 2016-2019 and that may not be enough to satisfy battery demand by 2020. Because of the fast growth in this segment, FMC is planning on spinning off FMC Lithium at some point in the future.

Also, around November 1st, FMC is expected to get approvals to buy the crop protection assets from DuPont. Dow and DuPont were forced to sell some of those agricultural assets as terms for their merger approvals. Once the sale to FMC is approved, FMC will become the fifth largest crop=protection chemical company in the world. With global food demand skyrocketing, the demand for fertilizer and weed/pest killer is also ramping higher.

The business being bought from DuPont generates $1.4 billion in annual revenue and the segment will jump to $3.8 billion after the acquisition. Also a part of the deal, DuPont will acquire FMC's Health & Nutrition business.

Shares have rebounded from the late September dip and should breakout to a new high in the days ahead.

Buy Nov $95.00 call, currently $1.80, initial stop loss $89.25.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

FOMC Hiking?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes rallied after the FOMC minutes despite the chances for a December hike. The FOMC minutes suggested a December hike was likely despite some dissension in the ranks. The market took that to mean there was still a chance for no hike depending on what the economic reports said over the next two months. Investors want to believe rates will not change because of hurricane impacts to the economy. Time will tell.

The indexes posted minor gains but the Nasdaq did pick up the pace slightly with strong gains by GOOGL, AMZN, AVGO and NVDA.



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 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

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Long and short equity trades = Premier Investor



BULLISH Play Updates

ADBE - Adobe Systems - Company Profile

Comments:

No specific news. Shares posted a nice $1.50 gain to puch through resistance at $152. The next resistance is $157.

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. 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:

CAT announced a quarterly cash dividend of 78 cents, payable Nov 20th to holders on Oct 23rd. This was the same rate as last quarter. They have paid higher annual dividends for the last 24 years and have paid a dividend every year since they were founded in 1933.

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.


HRS - Harris Communications - Company Profile

Comments:

No specific news. Minor decline from Tuesday's 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.


HTZ - Hertz Global - Company Profile

Comments:

No specific news. Minor decline from Tuesday's 10-month closing high.

Original Trade Description: Oct 7th.

Hertz Global Holdings, Inc., an airport general use vehicle rental company, engages in the vehicle rental business in North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East, and New Zealand. The company operates in three segments: U.S. RAC, International RAC, and All Other Operations. It offers vehicle rental services approximately from 1,600 airport rental locations and 2,600 off airport locations in the United States; and 1,400 airport rental locations and 4,100 off airport rental locations internationally to business and leisure customers. The company operates the Hertz, Dollar, and Thrifty vehicle rental brands in approximately 9,700 corporate and franchisee locations; and sells ancillary products and services. It also owns the vehicle leasing and fleet management business that operates the Firefly and Hertz 24/7 car sharing rental business in international markets; and sells vehicles through its Hertz Car Sales. As of December 31, 2016, the company operated a rental fleet of approximately 515,900 vehicles in the United States and 196,600 vehicles in international operations. Company description from FinViz.com.

Not only are used cars in short supply but the rental car business is hot in Texas and Florida because of all the insurance agents and construction crews that were imported from all over the country. Carpenters, electricians, home repair people of all types have migrated to the disaster areas. Consumers waiting on insurance proceeds need a way to get around town. Rental cars are scarce.

Not everyone is feeling the love for Hertz. Morgan Stanley recently downgraded the stock to underweight, which was good for a $4 drop but the rebound was quick and the stock closed at a ten-month high on Friday. The investing public sees the demand and they are picking up shares in expectations of good earnings.

Earnings Nov 7th.

I have to reach out to January to get the right option strike. There is no $27.50 for November. Just because we buy time, does not mean we have to use it.

Position 10/9/17:

Long Jan $27.50 call @ $2.90, see portfolio graphic for stop loss.


IIVI - II-VI Inc - Company Profile

Comments:

No specific news. Still cannot break free from 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 weak with a lack of hurricanes in the forecast.

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 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.


MU - Micron Technology - Company Profile

Comments:

Shares rebounded from the $2 selloff in afterhours to close down only 37 cents. Summit Redstone said buy the dip because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Instinet reiterated a buy rating and $45 target. Wells Fargo reiterated a buy rating and $45 target. Credit Suisse reiterated an outperform rating and $50 target.

Original Trade Description: October 9th.

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.

Micron is on a roll. Analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.

For Q2, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.

For the current quarter, analysts are expecting $2.14 in earnings on a 60% increase in revenue. They are likely to beat those estimates.

Despite the strong earnings and forecasts, the company trades at a PE of 8.7 when the S&P is trading at 18.0. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.

Shares spiked on earnings and ran up to $40.50. There was a three-day decline of about $1 to consolidate those gains and the stock surged again to close at a new high on Monday. I was hoping for a deeper pullback to buy but it never happened. If we do not buy this breakout, we could still be waiting after it runs up another $5.

I am using January options to capture the earnings expectations in December.

Update 10/10/17: Shares of Micron rallied more than $1 in the regular session bur fell $2 in afterhours. The company announced a $1 billion secondary offering after the close. The proceeds will be used to pay off debt including $476 million of 7.5% secured notes and various other notes and credit lines. This should be positive for Micron because interest costs will decline but it will add approximately 25 million shares to the float.

Position 10/10/17:

Long Jan $43 call @ $3.05, see portfolio graphic for stop loss.


TER - Teradyne - Company Profile

Comments:

No specific news. The breakout over $38 is continuing with a new high close.

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. We closed the position at the open.

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:

Closed 10/11/17: Long Dec $65 call @ $1.65, exit $1.10, -.55 loss.


VIX - Volatility Index - Index Profile

Comments:

Amazingly small decline in a positive market.

We still have plenty of time. The president is expected to cancel the Iranian nuclear deal this week and call for more sanctions. North Korea is expected to do something stupid again by the 18th.

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. It has been 466 days since a 5% decline.

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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