The Nasdaq declined again thanks to a sharp decline in Amazon and Starbucks. The damage would have been worse but there was a $900 million buy program just before the close. The Dow manages to add another 33 points and pull within 170 points of 22,000.
End of month retirement cash flows should support the indexes for a several more days with the normal August volatility not expected until the second week of August. The Nasdaq crash on Thursday cleaned out the portfolio but most were August options and we would have exited those over the next week or two anyway. The forced exits caused us to lose some of our gains. That is normal for the market.
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.
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
DIA - Dow ETF
The long put position was entered at the open.
THO - Thor Industries
The long call position was stopped at $104.85.
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BULLISH Play Updates
COST - Costco - Company Profile
WR Baird reiterated an outperform rating with a $200 price target. They see the 15% decline a major buying opportunity and expect revenue to grow 4% to 5% in the current quarter. They see Costco as the leader in the retail sector.
Original Trade Description: July 26th.
Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.
Costco shares were knocked for a $32 loss on the news that Amazon was buying Whole Foods. There was panic that Amazon was getting into the grocery business and would decimate the sector. Nothing could be further from the truth. Even if it was it would cause the most trouble for chains like Kroger, Safeway, Sprouts Farmers Market, etc.
If the acquisition goes through, and there is growing doubt, I do not foresee Whole Foods selling big screen TVs, winter parkas, cameras, caskets, cruises or ketchup and toilet paper by the case. The two stores are not compatible.
Furthermore, 45% of Costco members are already Amazon Prime members we as well based on a Morgan Stanley survey. Members of both services are looking for deals.
Costco makes the majority of its money from memberships (75%) and very little margin on its products. Amazon and Whole Foods are not going to undercut Costco on prices. Costco had 48.3 million members at the end of last quarter, up from 47.9 million. There were 37.4 Gold Star members and 18.3 million executive memberships. Total cardholders rose from 88.1 million to 88.9 million. Whole Foods has 350 stores and only about 12 million estimated repeat shoppers.
Did you know that Costco sells its products on Amazon. Costco's private label brand, "Kirkland" makes up about 20% of Costco's sales in the stores and those same products are available on Amazon. Actually, sales of the Kirkland products on Amazon are higher than in the stores.
Earnings August 24th.
Costco shares are starting to recover from the decline. Shares appear to have bottomed at support at $1.50. I expect them to rise as we get closer to earnings. Any remaining shorts will not want to hold over an earnings report that is likely to be strong. It the market decides to weaken in August, Costco is insurance since it has already sold off. Investors will be looking to buy the beaten down stocks as a safety play.
Long Sept $155 Call @ $2.40, see portfolio graphic for stop loss.
THO - Thor Industries - Company Profile
No specific news. The choppy market finally took its toll and stopped us out of Thor.
Original Trade Description: July 15th.
Thor Industries, Inc., through its subsidiaries, designs, manufactures, and sells recreational vehicles, and related parts and accessories primarily in the United States and Canada. It operates through Towable Recreational Vehicles and Motorized Recreational Vehicles segments. The company offers travel trailers under the Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer trade names, as well as Interstate and Autobahn Class B motorhomes; gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Chateau, Challenger, Tuscany, Axis, Vegas, Palazzo, Synergy, Quantum, Compass, Gemini, A.C.E, Alante, Precept, Greyhawk, and Redhawk trade names; and fifth wheels under the Redwood and DRV Mobile Suites trade names. It also provides conventional travel trailers and fifth wheels under the Montana, Springdale, Hideout, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Cameo, Cruiser, ReZerve, Sunset Trail, Zinger, Landmark, Bighorn, Sundance, Elkridge, Trail Runner, North Trail, Cyclone, Torque, Prowler, Wilderness, Shadow Cruiser, Fun Finder, Stryker, Sportsmen, Spree, Venom, Durango, SportTrek, Connect, Sportster, Sonic, Jay Flight, Jay Feather, Eagle, Pinnacle, Seismic, AR-One, Launch, Autumn Ridge, Travel Star, Highlander, Roamer, and Open Range trade names. In addition, the company offers equestrian recreational vehicle products with living quarters under the Premiere, Silverado, Ranger, Laredo, Trail Boss, and Trail Hand trade names; lightweight travel trailers and specialty products under the Camplite and Quicksilver trade names; and Class A motorhomes under the Insignia, Aspire, Anthem, and Cornerstone trade names, as well as provides aluminum extrusions and specialized component products. Company description from FinViz.com
In a weak economy, Thor is kicking butt. The company reported earnings of $2.11 which rose 41.6% compared to estimates for $1.87. Revenue of $2.02 billion rose 57% beat estimates for $1.96 billion. Operating cash flow rose 26.2% and gross profits rose 45.5%.
Sales of towable travel trailers rose 52.6% and sales of motorized RVs rose 78.7%. There was no bad news in the Thor report.
Estimated earnings date September 4th.
With the company posting record earnings the stock spiked from $94 to $104 on June 6th. When the market dipped, shares only pulled back to $102. In late June they rebounded to $110. During the market volatility over the last three weeks they dipped back to $102 and found support there once again. Now that the market has turned positive shares are rebounding.
I am using the September strike because of the September earnings date. We will exit well before then but that date will keep the premiums inflated.
Closed 7/28: Long Sept $110 call @ $3.00, exit $1.86, -1.14 loss.
VIX - Volatility Index - Index Profile
The VIX rebounded again at the open but faded as the Dow moved farther into positive territory. Next week could be really interesting.
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.
Long Nov $15 call @ $1.85, no stop loss. Target $22 to exit.
BEARISH Play Updates (Alpha by Symbol)
DIA - Dow ETF - ETF Profile
The Dow posted another positive close thanks to the spike in oil prices and Chevron. Goldman and UnitedHealth were also lifting the index. Next week could be really interesting.
Original Trade Description: July 27th.
The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average (the "Index"). The Dow Jones Industrial Average (DJIA) is composed of 30 "blue-chip" U.S. stocks. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity. The DJIA is a price-weighted index of 30 component common stocks.
The Dow closed at a new high in an ugly market solely because of big gains in Boeing, Disney and Verizon. If the rest of the market continues lower, the Dow will eventually crater as well. I am recommending we enter a put position on the Dow ETF at the current high.
Long Oct $215 put @ $3.33, see portfolio graphic for stop loss.
Short Oct $205 put @ $1.29, see portfolio graphic for stop loss.
Net debit $2.04.
SPY - S&P-500 ETF - ETF Profile
End of month retirement cash inflows kept the indexes from any material declines but next week could be interesting as earnings begin to fade.
Original Trade Description: July 24th.
â€¢ The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index (the "Index") The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.
The S&P is marching slowly towards a date with destiny and 2,500. Since the median estimate by the top 16 analysts was a 2,450 yearend price target on the S&P, the arrival at 2,500 could be a tripwire that triggers an August correction. We have not had a 5% drop in a year and it has been 9 months since a 3.5% decline. With earnings rapidly playing out and most of the high profile companies will finish reporting by next Wednesday, I am going to recommend a bearish position for August/September.
I am going to set an entry trigger for a SPY put with the S&P at 2,495. Since aggressive traders normally want to anticipate a particular number, I want to enter the position just before we reach that level.
Update 7/26/17: The Dow was up +100 points, Nasdaq +10, Nasdaq 100 +20 and the S&P only gained 70 cents. The Russell 2000 lost -6 and the S&P-400 lost -15. We may not get to that 2,495 level. I am going to add another trigger/strike in case we get a failure from this level.
The upside entry trigger has been cancelled.
Position 7/27/17 with a S&P trade at 2,465:
Long Oct $243 put @ $3.65, see portfolio graphic for stop loss.
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