Option Investor

Daily Newsletter, Saturday, 8/5/2017

Table of Contents

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

Market Wrap

Winner and Sinners

by Jim Brown

Click here to email Jim Brown

The Dow was the clear winner for the week and the Nasdaq was the sinner.

Weekly Statistics

Friday Statistics

The Dow gained over 250 points for the second consecutive week and has now closed up for 9 consecutive days with 8 consecutive record highs. Every day saw a different group of stocks leading the charge while the others rested. This was textbook rotation but this scenario cannot last forever. Streaks of consecutive anything are always broken and the August weakness typically begins in the second week of the month.

The Nasdaq did finish positive on Friday thanks to some weekend short covering but the index is still poised for disaster. The Nasdaq is holding over support at 6,335 but the pattern of lower highs and daily support tests suggests there could be a failure soon and the 6,100 level will be the next target.

The FAANG stocks were leading to the downside with the exception of Apple. Amazon lost -3.2% for the week, Facebook -2.2%, Netflix -2.6%, Alphabet/Google -1.9% and Apple gained 4.1% on their earnings.

The markets moved up at the open after the Nonfarm Payrolls for July came in above estimates. The headline number was a gain of 209,000 compared to estimates for 183,000 and 231,000 in June. The prior two months were revised with a net gain of only 2,000. Private employment rose 205,000 and the unemployment rate dropped one tenth to 4.3% (6.981 million) and a 16-year low. The larger U6 unemployment rate was unchanged at 8.6% (13.962 million).

Goods producing industries gained 22,000 jobs, manufacturing employment rose 16,000, service industries rose 187,000. Professional services rose 49,000, education and healthcare 54,000, leisure and hospitality gained 62,000. The government sector posted only a minor gain of 4,000 after a big jump of 37,000 in June. Average hourly earnings rose 0.3%. Another 349,000 people joined the workforce after a big addition of 361,000 in June. The labor force participation rate rose one tenth to 62.9%. The separate household survey showed a gain of 345,000 jobs.

With job growth averaging just under 200,000 per month and about twice the number required to absorb new immigrants and graduates, the country is on pace for sub 4.0% unemployment in 2018.

The strong jobs numbers will allow the Fed to remain on its path for policy normalization. They are more than likely going to announce the beginning of QE tapering and the reduction of the balance sheet. There is currently only a 1.4% chance of a rate hike at the next meeting in September. That jumps to only a 48% chance of a hike at the December meeting.

The trade deficit declined slightly from the -$46.4 billion in May to -$43.6 billion in June. Exports rose $2.4 billion and imports declined -$400 million. Automotive imports rose 2.9% after a 4.9% rise in May. Exports of food and beverages rose 5.9%. This is a lagging report for June and it was ignored.

The Dollar rebounded from a 12-month low on the strength of the jobs report. The declining dollar was good for the market because it would raise earnings for companies doing business overseas. The losses for currency conversion would decline and U.S. products would be cheaper overseas. This is more than likely a temporary bounce.

Treasuries sold off on expectations for higher rates as a result of Fed policy changes.

The calendar for next week is devoid of any market moving events. The Producer and Consumer price indexes will be the most watched of the group because of the inflation considerations. We are still three weeks away from the Fed's Jackson Hole conference and Yellen's keynote speech where she is likely to set the stage for the QE taper announcement at the September FOMC meeting. That speech could be a market mover depending on the tone and terminology but it is too soon to worry about it.

The earnings calendar will again take precedence but the number of high profile reporters is dwindling fast. During the coming week only 32 S&P 500 companies report and one Dow component (DIS). More than 420 S&P companies have reported. The current projection for Q2 earnings is a rise of 12.0%. Of those 420 companies, 72.9% have beaten on earnings and 68.5% have beaten on revenue. That is above the long-term averages of 64% and 56% respectively. There have been 44 guidance warnings and 33 positive guidance upgrades. The 12 month forward PE is currently 17.9 and slightly elevated. The Shiller cyclically adjusted PE or CAPE 10 is now 30.29 and the second highest level in history.

The highlights for next week are Priceline, Nvidia and Jack in the Box. Also of interest are Blue Apron and Snap Inc. They are both poorly performing IPOs for 2017 and earnings could be ugly. This is the first quarterly earnings for Blue Apron since coming public in late June. Snap has reported once since they went public in March and it was not good.

Blue Apron announced on Friday they were cutting 1,270 jobs only a month after their IPO. There was an initial furor in the market over how a company could go public as a high growth enterprise and then cut 20% of their staff a month later. However, it was later learned they were closing a plant in New Jersey at Jersey City and consolidating into a new fulfillment center in Linden, NJ about 15 miles away. Of the 1,270 jobs being eliminated, about 800 workers have agreed to move to the Linden location leaving only 470 job losses. They employ about 5,100 in total. Shares fell 6.3% on the news. They have fallen nearly 50% from their IPO high at $11.

Back on July 27th, Automatic Data Processing (ADP) shares spiked from $103 to $121 over three days after news broke that Bill Ackman was adding a stake. On Friday, news broke that Ackman had accumulated more than 8% and was still adding to that stake as of Friday morning. He said he was going to ask for 5 board seats, out of the existing 10 and would push the company to cut costs and improve returns. He also wants to oust the current CEO, Carlos Rodriquez. Later in the day, Ackman said he was willing to work with current management OR a new external CEO. Ackman must nominate his slate of directors by August 10th or wait until the 2018 shareholder meeting.

Shares declined because ADP came out in full support of Rodriquez with a strong anti-Ackman position. Ackman said he had accumulated the stake using derivatives (options) and that means ADP can cause him a lot of grief if they can delay any actions for 12-18 months.

Cigna (CI) reported earnings of $2.91 that rose 47% and beat estimates for $2.48. Revenue of $10.3 billion rose 4% and beat estimates for $9.98 billion. Company medical enrollments rose from 15.1 million to 15.7 million. Their company benefit programs provided the majority of their earnings growth. They guided for the full year to earnings of $9.75-$10.05, up from $9.35-$9.85. The company said it had $7-$14 billion in capital it could use in 2017 on mergers and acquisitions, including Medicare Advantage for older people. Shares declined -$3.50 despite the good earnings and guidance.

Medicare and Medicaid provider WellCare Health Plans (WCG) reported earnings of $2.52 compared to estimates for $2.23. Revenue of $4.31 billion beat estimates for $4.27 billion. They guided for the full year for earnings of $6.75-$6.95. Earnings were boosted by higher enrollments in those health programs. Memberships in the government backed Medicaid plans increased 16.6% to 2.83 million as of June 1st. Membership in WellCare's Medicare business rose 46% and 10.3% in their Medicare prescription drug plans. The company paid out 86.8% of every dollar received for Medicaid and 86.4% for Medicare. Despite the good earnings, shares crashed $9.31.

Yelp (YELP) shares spiked 28% after the company said it was selling its Eat24 business to Grubhub (GRUB) for $287.5 million in cash. They also said they would use $200 million of the proceeds to buy back stock. In addition, Yelp is partnering with Grubhub in a long-term strategic partnership which would integrate online ordering from restaurants on Grubhub's website.

Yelp reported earnings of 9 cents on a 20% rise in revenue to $209 million. Analysts were expecting a loss of 8 cents and revenue of $205 million. They guided for Q3 to revenue of $217-$222 million and analysts were expecting $219.67 million.

A company rarely mentioned in the news, Aerojet Rocketdyne (AJRD), reported earnings of 32 cents that beat estimates for 14 cents. Revenue of $459.6 million beat estimates for $426.5 million. Aerojet makes the booster motors for the THAAD missile interceptor and the Exoatmospheric Kill Vehicle used in the latest interception. They were also selected by Boeing as the main propulsion provider for the new XS-1 experimental space plane. Order backlogs are now $2.1 billion. Shares spiked 14% on the earnings.

Arista Networks (ANET) shares spiked 19.4% on better than expected earnings. The company reported earnings of $1.34 compared to estimates for 95 cents. Revenue rose 50.8% to $405 million and analysts were expecting $361 million. They guided for the current quarter for revenue of $405-$420 million and analysts expected $378 million. Their gross profit margin rose to 64.4%.

Crude prices were flat for the week and held just under $50. Declining inventories, falling rig counts and the Saudi sleight of hand on cutting exports by 1.0 mmbpd, kept prices from falling. The $50 level is likely to be a top since we only have four weeks left in the summer driving season. Oil demand will fall off a cliff the week after Labor Day and inventories will begin to rebuild again.

Active rigs appear to be peaking, which matched what Halliburton said a couple weeks ago about a rig plateau unless prices rose well above $50 a barrel. Active onshore rigs declined -4 last week with oil down -1 and gas -3. However, the big news was the giant 7-rig drop in the offshore category to 17 rigs. I do not have a historical chart on offshore rigs but that is the lowest since the same week in 2016.


Three weeks ago on July 20th, the S&P closed at 2,476 and that is where it closed on Friday as well. While the Dow is benefitting from spikes in individual stocks, the S&P is suffering from the early stages of post earnings depression. There is no trend other than sideways consolidation but there has not been any serious attempt at profit taking either. The low volume, averaging about 6.3 billion shares for the week, is evenly divided with daily gains and losses of 3-5 points. There is no conviction by the sellers but traders are buying every minor dip. They are just not chasing prices higher.

Everyone appears to be waiting to see if the typical August weakness is going to appear next week. The Aug/Sep weakness normally begins in the second week of August. However, the market has completely ignored every seasonal trend in 2017. With the lack of sellers on the S&P, this may be another departure from normal.

The S&P has been down in August on 5 of the last 7 years. The S&P has only risen in August in 5 of the last 20 years. The historical odds are pretty convincing for a decline but there is never a guarantee.

Current support is around 2,465 with resistance solid at 2,483. That is an 18-point range and the S&P has used every bit of it over the last three weeks but closed right in the middle on Friday.

You cannot tell by looking at the chart but the S&P closed exactly 1 point from a new high. On July 26th, the close was 2,477.83. The August 2nd close was 2,477.57 and Friday's close was 2,476.83. Despite the sideways trend, the S&P continues to hold right below breakout levels.

The Dow benefitted from a surge in Goldman Sachs to add 39 points to the index with Home Depot and JP Morgan providing the assist. There are 30 components in the Dow and over the last two weeks, we have seen 2-3 rotate to the top of the leader board every day. It is not the same ones back to back but a clear rotation pattern that could continue. The Dow has posted 9 consecutive days of gains and 8 consecutive record highs. Strings will be broken but that does not mean the break will instantly drop 500 points.

The index is severely overbought but you may remember back in February the index closed up for 14 out of 18 days and those 4 declining days were only minimal declines. If the August weakness does not appear, the Dow could break its streak with a minor decline and continue higher. While I do not expect that, it is entirely possible.

The Nasdaq Composite is the weakest big cap index. The tech index is poised right on the edge of a 250-point cliff. If the current support at 6,335-6,350 breaks on a closing basis, there could be a significant drop to the 6,100 level. The FAANG stocks are already weak but they could weaken even further. If an index rallies on the backs of a few stocks on the way up, those same stocks can take it lower just as easily. Priceline, Nvidia and Jack in the Box report this week and they could be critical for the daily sentiment and movement.

The Russell 2000 retraced -3.3% since the prior Wednesday high at 1,452 and rebounded only 0.5% on Friday. That was a lackluster performance and powered by the financials with the sector up 1% intraday on Friday. Critical support is 1,400 and the index dipped to 1,402 on Thursday. If the index falls below that level it would be a major blow to market sentiment. I am surprised the 3% decline has not had a larger impact on the market already.

Unless you owned one of a dozen Dow stocks, you probably had a frustrating week. With the other indexes either flat or declining, the majority of normal stocks were flat to down. I cannot tell you that is going to change next week. If the typical August weakness arrives on schedule, then we could be having a different discussion next weekend. However, if the Dow leaders continue to rotate and the S&P closes at a new high, there could be another round of short covering and price chasing.

What I can tell you is that there is no reason to jump into the market. Be patient and see if a new trend develops. Buying stocks just because one index is in rally mode is not a strategy. Watch the Nasdaq for a support break and watch the S&P to see if it picks a vertical direction.

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Random Thoughts

There was a big change last week despite a tame market. Bearish sentiment shot up nearly 8% and neutral sentiment crashed -9.4%. The bulls managed to convert a couple percent to their side but the direction was clearly bearish. 64% still believe the market is not going higher.

Bank of America chief investment strategist, Michael Hartnett, is dead set on letting everyone know of his market call. It seems like every other week for the last six weeks he has warned of an impending market correction but the market continues to move higher. To be fair, he is not expecting it until the September-October period. Unfortunately, in his best imitation of Chicken Little, he is losing credibility with each refresh of the warning. Obviously, if he turns out to be right, he will get the credit and he can say for years that he made the big call when the market was going higher.

Hartnett believes the markets are going to correct and "correct quiet meaningfully." He said his warning about an "Icarus"-like run up in stocks this year and then a letdown appears ready to play out. He bases this on the bank's Bull and Bear sentiment indicator. It is currently flashing a 7.6 on a scale of 0-10 where 10 is extremely bullish. Reaching the 8 level triggers a sell call for risk assets. He said the indicator has hit the sell signal 11 times since 2002. The last time there was a buy signal was February 2016 when it went to zero. That was the end of the last correction. The indicator is made up of 18 components.

He warns this will not be an "average correction" but something a little more meaningful. He is not calling for a new bear market, because there is no recession in sight. He expects a 10% to 15% decline in equities.

He is the first to admit that nobody believes him and his warning. "Everybody has gone to Goldilocks mode rather than Humpty Dumpty." He warned a change in QE or monetary policy could be the trigger.

Paul Singer, CEO of Elliott Management, said passive investing is "destructive to the growth-creating and consensus-building prospects of free market capitalism." Global ETFs now have more than $1 trillion more in assets than hedge funds. Approximately $2.2 trillion is indexed to the S&P-500 alone. Not counting index funds there are $4.17 trillion in ETFs. It should be noted that Elliott manages $32.8 billion.

"In a passive investing world, small shareholders have little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no (repeat, no) skin in the game so long as the money manager does not underperform the index."

In 2016, passive funds saw inflows of $504.8 billion while actively managed funds saw outflows of $340.1 billion. We are seeing similar money trends in 2017.

The S&P has gone for 72 sessions without a gain of 1% or more. That is the longest streak since early 2007. The CBOE's Russell Rhoads, said this is the least volatile market since the 1960s. The trend for the last 18 months has been declining volatility. There will be an eventual eruption.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong."

Thomas Sowell


Index Wrap

Decision Time

by Jim Brown

Click here to email Jim Brown
The normal Q3 market decline begins in the second week of August.

So far only the Nasdaq and the Russell 2000 have shown any indications of weakness and the potential for an August drop. The Nasdaq is right on the edge of a 250 point cliff and a break of support at 6,335 could trigger a move to 6,100 over the coming weeks.

Meanwhile the S&P is only 1 point away from a new high and the Dow has made 8 consecutive record high closes. It is decision time for investors. Are they going to hang on to existing positions in hopes of higher highs over a normally weak period or will they decide to avoid the risk and move to the sidelines?

Until we see the S&P move below support at 2,465 nothing has changed in the market. The S&P is the broader big cap index and the true market indicator, behind the Russell 3000. The various stock TV channels and the online news sites do not report on the broader R3K so normal retail investors going about their day need to focus on the S&P.

Despite the close near the high the MACD has turned negative and suggests the conviction is fading. The MACD is not yet in full retreat and the CCI is still bullish. That means there is still a decent chance, we could see a new high but resistance is strong. The key is whether or not the normal August weakness appears on schedule. The S&P has been down 5 of the last 7 years and it has only been up 5 of the last 20 years in August.

The market breadth on the S&P actually held last week. The A/D line did not move higher but it also did not roll over. This is positive for sentiment and could suggest more bullish conviction on the part of investors. There is no conviction from the sellers as evidenced by the lack of a decline.

The Dow chart is exactly the opposite. The MACD on the Dow is strongly positive and the index has closed at a new high for 8 consecutive days. Streaks always break and the key thing to watch on the Dow is the severity of the break. If we only decline 30-50 points and then rebound then investors have prevailed and the shorts will have to cover. There is no material support above 21,500 and that is a long drop from here. The Dow is living on borrowed time before we have a decent bout of profit taking.

The Nasdaq is the weakest big cap index. The support at 6335-6350 has held but there is a pattern of lower highs that appears to be headed for a new leg lower. If we get a significant close below support, we could be looking at 6,100 as the new target. The MACD is bearish and worsening and the big cap tech stocks, with the exception of Apple, all traded down for the week.

The semiconductor sector was another big factor in the Nasdaq weakness. The $SOX closed at a three week low and investors are looking at the Nvidia earnings on Thursday as a possible life preserver that keeps the SOX from sinking further.

The small cap Russell 2000 lost -3.3% over the prior 7 days and rebounded only 0.5% on Friday. That was a lackluster rebound. Support is 1,400 and the intraday dip on Thursday was to 1,402. This is a critical support level with a potential drop to 1,355 if it fails. That would be damaging to market sentiment if it occurs. The MACD and CCI are both bearish.

The Russell 3000 is an identical chart to the S&P. This IS the market. The record high close on the 25th was 1,469.20 and the close on Friday was 1,464.70, less than 5 points away from a record high. The market is not showing any signs of an impending collapse. Support is roughly 1,460.

Another factor impacting the market is the price of oil. When oil prices were rising the market was positive. However, with only four weeks left in the driving season, oil prices are poised to retreat in September. You can tell how weak oil is because the oil/dollar relationship has completely broken. Up until Q4 of last year, oil and the dollar always moved in opposite directions. Cheaper dollars means it takes more dollars to buy the same barrel of oil. The supply glut today is not allowing the price of oil to rise against the falling dollar and that will be a cloud over the market in September.

The market has ignored every seasonal trend so far this year. Time will tell us if it is going to ignore the normal Aug-Sep weakness this year. The more analysts calling for a correction, the less likely we are to see one.

If you have money you are planning on putting to work in the market, it would be worthwhile to wait a week until we see if the market is going to change directions.

There is always another day to trade if you have money in your account.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Ignore the Minor Miss

by Jim Brown

Click here to email Jim Brown

Editors Note:

ITW beat on earnings but posted a minor revenue miss and shares were crushed. Their dividend increase to 78 cents lifted them out of their stupor.


ITW - Illinois Tool Works - Company Profile

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The Automotive OEM segment produces plastic and metal components, fasteners, and assemblies for automotive-related applications. The Test & Measurement and Electronics segment provides equipment, consumables, and related software for testing and measuring of materials and structures. This segment also offers equipment and consumables used in the production of electronic subassemblies and microelectronics. The Food Equipment segment provides commercial food processing, warewashing, cooking, and refrigeration equipment; and kitchen exhaust, ventilation, and pollution control systems, as well as related services. The Polymers & Fluids segment produces adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. The Welding segment produces arc welding equipment, consumables, and accessories; and metal jacketing and other insulation products for various industrial and commercial applications. The Construction Products segment produces engineered fastening systems and solutions. The Specialty Products segment provides beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Company description from FinViz.com.

ITW reported earnings of $1.69 that beat estimates for $1.63. Revenue of $3.6 billion missed estimates for $3.62 billion. Shares fell from $147 to $139 and traded sideways for two weeks. They guided for Q3 for earnings of $1.57-$1.67 and analysts were expecting $1.68. For the full year they expect earnings of $6.32 to $6.52. Shares had risen 20% in 2017 and the minor miss caused some profit taking.

The company said on the earnings call that revenue was driven by the automotive sector plus some cyclical areas like welding, test and measurement. Organic revenue rose 2.6%. GAAP earnings rose 16%.

They guided for full year organic growth of 2%-4%, up from 1.5%-3.5% in January. They did guide for slower growth in Q3 because of the slowdown in the automotive sector. Vehicle sales have plateaued the last several months and there is always a pause in August while the manufacturers retool the plants for the next model year vehicles. ITW expects a 6% decline in auto builds in Q3 and a 2% decline in Q4. However, even with that decline, ITW is still predicting the 2% to 4% organic growth rate for the full year with a 1% to 3% growth rate in Q3.

Earnings expected on Oct 23rd.

On Friday, they announced a regular quarterly dividend of 78 cents payable Oct 10th to holders on September 29th. Shares rose $1.45 on the news to close at a two week high.

I am recommending ITW because it has already reported earnings, was punished for the revenue miss and was starting to tick higher before the dividend announcement. This is a good company and even with the auto slowdown, will continue to grow. The dip and the low cost of the option gives us a little insurance against a market decline. Support is $140.

Buy Dec $145 call, currently $4.10, initial stop loss $139.35.


No New Bearish Plays

In Play Updates and Reviews

Eight Consecutive Records

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow has now posted a gain for 9 consecutive days and 8 consecutive record highs. Everybody knows this will not last but until it doesn't the new highs will continue. New shorts are being blown out on a daily basis.

The other indexes got caught up in the short covering before the weekend and they all closed positive. The Nasdaq chart is still bearish and appears to be ready to make a new leg down at any time.

After being stopped out of our profitable longs last week, we currently have a bearish bias but the market is not cooperating. Typically, the August decline begins in the second week.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

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

Credit spreads and naked puts = OptionWriter

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Long and short equity trades = Premier Investor

BULLISH Play Updates

VAR - Varian Medical Systems - Company Profile


No specific news for 3 days. Shares declined again with a potential retest of support at $95. .

Original Trade Description: Aug 2nd.

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.

Expected earnings October 26th.

On July 26th, Varian reported earnings of $1.04 that beat estimates for 95 cents. Revenue of $662.4 million just barely missed estimates for $663.2 million due in part to currency translation issues. They sell their high dollar imaging systems all over the world.

The guided for the current quarter for earnings of $1.15-$1.23 and analysts were expecting $1.18. This should have been positive but the stock fell $6 because of the minor revenue miss.

If the market is going to be historically weak in August, shares that have already been beaten up will fare better than the rest of the market. I am choosing the $105 strike instead of the $100 strike for reduced cost/risk going into August.

Position 8/3/17:

Long Nov $105 call @ $1.75, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


With all indexes in the green on Friday, the VIX fell back under 10 intraday. Plenty of time with our November option.

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. Target $22 to exit.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow ETF - ETF Profile


The Dow posted another positive close thanks to gains in GS and HD. The index has been fortunate that some new stock or two has rotated into the leadership role every day for the last couple weeks. The Dow has been up 9 consecutive days and has made a new high on 8 consecutive days. There will be a retracement soon.

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.

Position 7/28/17:

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.

FTNT - Fortinet - ETF Profile


No specific news. Prior support at $37 is now resistance and that is exactly where the rebound stopped today. All the indexes were positive and that triggered some short covering across the board.

Original Trade Description: July 29th.

Fortinet, Inc. provides cybersecurity solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which offers a single point of network log data collection. It also provides FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; FortiDDos and FortiDB database security appliances; and FortiSIEM family of products to provide a cloud-ready security information and event management (SIEM) solution for enterprises and service providers. Further, it offers security subscription, technical support, training, and professional services.Company description from FinViz.com.

Expected earnings October 25th.

The company reported Q2 earnings of 14 cents that beat estimates for 8 cents. Revenue of $363.5 million also beat estimates for $361 million. All the normal metrics were good to great but their guidance failed to impress. Full year guidance was higher but Q3 guidance disappointed.

They guided for revenues in the $367-$373 million range and analysts were expecting $372 million. Earnings guidance for 22 cents matched estimates. Investors normally do not want a match, they want a raise. The lower level on the revenues is also a caution. Shares fell $3 over the last three days and are right on the verge of breaking through support.

The entire cybersecurity sector has been weak despite the recent attacks. This is another weight on FTNT.

Position 8/1/17:

Long Sept $36 put @ $.90, see portfolio graphic for stop loss.

IBM - International Business Machines - ETF Profile


No specific news. Wedbush initiated coverage with a neutral rating saying IBM is going to face "structural headwinds" and free cash flow will continue to be consumed by "aggressive M&A." The analyst said the world has moved away from the labor intensive model of IT services with cloud computing and cloud software replacing those IT consultants. Legacy IT services contracts are going to see margins decline due to "pricing resets" and an industry wide "skills mismatch." He said IBM's lack of transparency about its current business models suggests they are lagging the evolution curve.

IBM is trading sideways only because the Dow is rising. Once that changes, the drop could be swift.

Original Trade Description: July 29th.

International Business Machines Corporation provides information technology (IT) products and services worldwide. Its Cognitive Solutions segment includes Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. The company's Cognitive Solutions segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system for z systems. It has a strategic collaboration with ABB Ltd to develop industrial artificial intelligence solutions. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. Company description from FinViz.com.

Expected earnings October 17th.

IBM reported revenue of $19.29 billion, down -5% annually and the 21st consecutive quarterly decline. Analysts were expecting $19.49 billion and that was already on the low side. Earnings were $2.97 and beat estimates for $2.74 thanks to a lower tax rate of 9.2%. Full year guidance was reiterated for "at least" $13.80. Several years ago, they made a big deal out of forecasting $20 a year in earnings. That is not likely to happen in this decade. All five of IBM's reporting segments posted revenue declines.

The problem with IBM is the lack of a light at the end of the tunnel. There is no way out of this problem without major changes which could include splitting the company up or going on an acquisition spree. Shares hit $182.50 in February but hopes have now been dashed twice with Q1 and Q2 earnings. The outlook is dim.

If the market were to roll over and the Dow decline materially, IBM would be a leader in that decline. It has been losing ground even when the Dow is setting new highs.

With earnings Oct 17th we can use the Oct options which expire on the 20th. They should hold their premium well.

Position 7/31/17:

Long Oct $140 put @ $3.10, see portfolio graphic for stop loss.

SPY - S&P-500 ETF - ETF Profile


Only a minor gain of 4 points on the S&P but the index remains near its recent highs. August has been down 5 of the last 7 years and up only 5 of the last 20 years. If the historical trend is going to appear, I wish it would hurry. Next week is typically the start of the August decline.

Original Trade Description: July 24th.

• 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.

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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