Option Investor

Daily Newsletter, Saturday, 8/19/2017

Table of Contents

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

Market Wrap

Back to Back

by Jim Brown

Click here to email Jim Brown

The Dow posted major back-to-back declines for the first time in 2017.

Weekly Statistics

Friday Statistics

The major indexes were all headed lower in early trading but multiple events combined to lift the indexes off their lows. The Nasdaq Composite hit round number support at 6,200 and rebounded. The Russell 2000 hit support at 1,350 and rebounded. The Dow and S&P were still declining with the S&P hitting its low of 2,420 at 9:55 and the Dow reaching its low of -109 at 21,641 at 11:05. When the Bannon news arrived at 11:30 a short squeeze hit that lifted the Dow 152 points to gain +43 over a matter of just a few minutes. The peak was hit at 12:40.

However, I think the rebound on the Russell set the stage for the headline spike on the other indexes. The 2,420 level on the S&P was also a factor. Without the Bannon news those levels may not have made a lot of difference at the rate the Dow was declining but they provided support to the Dow recovery and sent traders scurrying to cover short positions. Unfortunately, weekend event risk weighed on the indexes at the close to produce back-to-back losses.

Consumer sentiment for August came in hot at 97.6 and the highest reading since January. This was a 4.2-point jump from the 93.4 in July. The present conditions component fell from 113.4 to 111.0 and the lowest since November but the expectations component soared from 80.5 to 89.0 and the highest level since January. Those respondents expecting business conditions to improve rose from 28% to 34%. Those expecting the economy to continue prospering over the next 12 months rose from 48% to 55% and the highest level of 2017.

The calendar for next week is short but has plenty of important events. The New Home Sales and Existing Home Sales will generate attention with both expected to post minor gains.

The biggest event is the Janet Yellen speech on "Financial Stability" on Friday and that will be a showstopper because she is expected to make the case for tapering QE purchases starting at the September FOMC meeting. All eyes will be glued to the event.

Mario Draghi, head of the ECB, will be in attendance but he will not speak. The ECB is trying to come up with plan of its own to reduce QE purchases.

With US inflation falling to 1.4% in the latest report and the Euro at 2-year highs, the Fed is going to find it tough to hike rates again this year. They may still squeeze one into the calendar but the justifications will be weak. If they are actually data dependent, the data does not support a hike.

The yield on the ten-year traded down to 2.163% at the open and very close to the 2.13% low for the year. The yield rebounded on the Bannon news on hopes the trade policy would not be as restrictive as Bannon wanted.

The outlook for the U.S. economy is looking better. The Atlanta Fed real time GDPNow for Q3 is predicting growth of 3.8%. The outlook started at 4.0% at the beginning of August and the forecast has managed to hold that stronger forecast. There are still a couple months of economic reports to digest before we know the final result. The Q2 forecast started at 4.3% and ended at 2.8% growth so plenty of time for changes. The actual Q2 GDP was 2.57% growth so very close to the GDPNow forecast.

The earnings calendar for next week is relatively uneventful with only a few highlights. Salesforce.com on Tuesday, Hewlett Packard on Wednesday and Broadcom on Thursday will lead the headlines. Lowes, Autodesk, Gamestop and Ulta Beauty will also attract attention.

In this Q2 cycle, 474 S&P companies have reported earnings and 73.8% have beaten estimates, well over the long-term average of 64%. More than 68.8% of companies have beaten on revenue and higher than the average of 59%. The projected earnings growth is currently 12.1%. Estimates for Q3 are now 6.7% with a rebound to 12.2% in Q4. There are 17 S&P companies reporting this week. All the Dow components have already reported.

Foot Locker (FL) was the biggest loser on Friday morning after reporting earnings of 62 cents compared to analyst estimates for 90 cents. Revenue of $1.7 billion missed estimates for $1.81 billion. Gross margin was down 300 basis points. Same store sales fell -6.6% compared to estimates for a 1% increase. The CEO warned that same store sales could be down 3-4% for the rest of the year. Guidance for 2H suggests earnings of $3.50-$3.75 compared to estimates for $5.43. Shares fell -28% on the news. Shares are now down more than 50% since May.

Hibbett Sports (HIBB) hit a 14-year low after reporting a loss of 15 cents that actually beat estimates for a 20-cent loss. However, revenue declined from $206.9 million to $188 million and missed estimates for $190.3 million. Same store sales fell -11.7% and worse than estimates for a -10.0% drop. The carnage in the stock price came after they cut full year guidance from $2.35-$2.55 to $1.25-$1.35 and same store sales guidance from flat to down mid to high single digits.

Deere & Company (DE) reported earnings of $1.97 that rose 27% and beat estimates for $1.93. However, revenue of $7.81 billion missed estimates for $7.9 billion. Agriculture & turf sales rose 13% to $5.34 billion but missed estimates for $5.42 billion. The company said equipment sales were expected to rise 24% in the current quarter. For the full year, they are projecting an 11% rise in revenue and net income of $2.075 billion. That minor revenue miss caused a 5% decline in the stock but given the positive guidance this could be a buying opportunity.

Estee Lauder (EL) reported adjusted earnings of 51 cents that beat estimates for 43 cents. Revenue of $2.89 billion beat estimates for $2.85 billion. They guided for the current quarter for earnings of 94 to 97 cents with analysts expecting 91 cents. Revenue is expected to rise 9-10%. Shares spiked 8% on the news.

There were mixed reasons given for the spike in WTI Friday afternoon but the one most likely was the impending futures expiration on Tuesday. When the market began rallying on Bannon's exit there may have been some urgency to cover shorts. Bannon was nationalistic and against free trade. With him out of the White House, trade deals are expected to be broader and probably not as harsh as some of the prior rhetoric had suggested. With only one day left to trade, those hoping to ride the futures a little lower before expiration, suddenly decided it was time to exit.

Earlier in the week, the EIA reported an 8.9 million barrel decline in inventories after a 6.5 million barrel decline the week before. In the last 7 weeks inventories have declined -42.7 million barrels. That pushed inventories down -13% for the year. However, prices did not rise on Wed/Thr because everyone knows driving demand is going to plummet the week after Labor Day.

Drillers are also cutting back on active rigs. They dropped 5 oil rigs last week and added one gas rig. Over the last six weeks, they have dropped a net of 6 rigs or 1 per week. Over the prior 25 weeks, they added 293 rigs or an average of 11.7 per week. The weakness in WTI down to $42-$44 in June/July was a serious reality check for drillers. If the normal summer demand cycle and 1.8 mmbpd in cuts by OPEC/non-OPEC producers could not raise prices then the long-term outlook was in trouble.


Volatility is increasing. The VIX did not spike on Friday but market volatility still increased. Whenever you have the Dow fall more than 100 points, rebound 152 points and then give back most of those gains, the volatility has increased. If you look back over the last week, a pattern has repeated.

The market was down sharply on Thr/Fri the prior week and then rebounded on Monday when the weekend event risk evaporated. The short squeeze held for three days then the indexes collapsed again to a 5-week low on the S&P. The S&P declined 55 points from Wednesday's high to Friday's low or a 2.2% drop. If we use the 2,480.91 closing high from August 7th that is just a 2.4% decline to Friday's low. It is unusual for 2017 but far from unusual in terms of normal markets that suffer a 3-5% decline several times a year.

Volatility is typically a sign of market tops and bottoms. Since the normal Aug/Sep weakness begins in option expiration week in August, we should not be surprised with the decline. Unfortunately, we are so accustomed to markets only going up and dips always being bought, some investors are learning there is actual risk in the market.

We have reached a point where the market is moving as we expected. That is scary since it rarely moves as expected. This could be the first historical trend that actually works this year.

In past years when we reached this point, I posed the question "Why buy?" Earnings are basically over. There is a strong chance for extreme volatility in September when lawmakers go back to work and begin attacking each other on the budget bill and debt ceiling hike. The Fed is going to begin reducing QE purchases in September and Q3 earnings are projected to be half of Q2. Portfolio managers typically take some chips off the table in Q3 and raise cash for the expected Q4 rebound. More often than not, we see a second half low in Sep/Oct.

I am not recommending investors sell stocks, only that they understand the risks of opening new long-term positions.

The recent increase in volatility suggests investors are considering all those possibilities and the decline into September has begun. There is no guarantee but the shrinking market breadth is the key indicator.

The S&P tested initial support at 2,420 on Friday and I expect it to retest the 2400-2410 level soon. This could be the first dip buy point for those traders still looking for a quick rebound. I plotted the percentage declines for each of the major support points.

The wild card for predicting a decline is the legislative battle in late September. The last time the government was shutdown was 2011 and we all remember the -246 point S&P decline over 11 trading days. While I do not expect a repeat, Goldman Sachs says there is a 50% chance of a shutdown this year. Just having those odds continually quoted in the market headlines, makes it more likely investors will take chips off the table ahead of the actual battle.

The Dow has multiple levels of support but it is hard to judge the potential effectiveness because of the 30 stock index. Any one or two stocks can cause a major move on any given day and punch through support levels. The key ones to watch are 21,500, 20,900 and 20,400.

Even though Friday's final loss was only 76 points, there were very few gainers. Recently, the winners and losers have been close to evenly split but as you can see in the table below, the breadth is fading.

The Nasdaq was relatively tame on Friday with a 60 point range and only a 5 point decline at the close. The big cap techs were mixed with TSLA posting the largest decline at -$4. Even the high dollar stocks like AMZN, PCLN and GOOGL were just barely negative. As long as the big caps can hold their current levels, the broader index is not likely to move significantly lower. Unfortunately, FB, NFLX, NVDA, GOOGL, AMZN, PCLN and TSLA all have negative trends. I am just going to post the Amazon chart but the rest are similar. They are right on the edge of a breakdown that could take the Nasdaq a lot lower.

After hours totals:

At this point, the odds are pretty good the Nasdaq will test 6,100 in the near future. That would be a 5% decline and where it goes after that test is the big question. If the legislative battle heats up early, I would not be surprised to see a retest of 5,800 and basically a 10% decline.

The Russell 2000 is the weakest index, now down -6.4% from its high. The initial support at 1,350 was tested on Friday and the critical level is 1,340. If we lose that lower support there is a tremendous amount of empty space to fill before the low at 1,156 from November. I am not saying we are going to the November lows but if 1,340 breaks, the decline could accelerate.

It appears that every weekend has turned into a high-risk event. Traders are willing to be long during the week but afraid to be long over the weekend. On Friday North Korea was warning the joint exercises between the US and South Korea would cause a "major catastrophe" if they were held on schedule. The US and South Korea hold annual joint exercises and Kim Jong Un routinely warns they are a rehearsal for an invasion of North Korea. They begin on Monday.

The rapidly changing political landscape is also a risk. With two of President Trumps executive committees being disbanded last week, a panel advising the president on cultural issues resigning in mass on Friday and chief advisor Steve Bannon being asked to leave, there is considerable political risk. All week traders worried over who would be the next cabinet member to exit with worries multiple members could resign over the Charlottesville comments. Presidents in stress tend to do bigger things to distract from the little things. Ramping up geopolitical issues is a favorite target to distract from issues at home.

With people leaving at a rapid pace and verbal warfare against people in his own party, the outlook for Trump's agenda is looking grim, including tax reform and infrastructure spending. The market has sustained a 9-month rally on hopes for good things from a business friendly president. Once the market begins to believe those reforms are not coming, the direction could change.

The Bannon exit was seen by the market as a positive event because it would suggest less restrictive trade policies. However, Bannon has gone right back to Breitbart News where he is likely to become a very high profile attacker of the more moderate people still in the administration. He has a very large pulpit from which to launch attacks if that is his desire.

Over the weekend he said, "The Trump presidency we campaigned and fought for and won is over. We still have a huge movement, and we will make something of this Trump presidency. But that presidency is over. It will be something else. And there will be all kinds of fights, and there will be good days and bad days, but that presidency is over. I just think his ability to get anything done, particularly the bigger things, like the wall, the bigger, broader things that we fought for, it's just going to be that much harder." That statement is obviously a clue about his plans. On the plus side, Bannon said Trump's current advisors will try to "moderate him and make him more conventional." That would actually be good for the market if there was less drama and volatility in the White House.

The bottom line is that the market has event risk and not just weekend event risk. Given the place on the calendar, the Fed and the legislative events in September, I would be very surprised if we did not see some lower lows in the weeks ahead.

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Random Thoughts

This survey ended on Wednesday just before the Thursday decline. There were no major changes. Everyone is pretty confident in their positions. 66% still believe the market is not going higher.

Goldman Sachs said there was a 50% chance of a government shutdown "due to President Trump's declining poll ratings." The president's approval ratings fell another point to 37% in the last weekly poll. That is the lowest of any first-term president at this point in his term. According to Goldman, "Low approval ratings raise legislative risk." The debt ceiling must be raised by September 29th and failure to do this would force a shutdown. "We believe it would be brief." Goldman said the odds of a shutdown are "fairly high" because Democratic support for the spending bill will be required, which will force Republicans in Congress to make some difficult concessions.

Goldman said, "We continue to believe a tax cut is slightly more likely than not, but our conviction is low, as there has been little progress to date. If tangible progress has not been made by October, after these fiscal deadlines have passed, tax legislation will start to look less likely, in our view."

Art Cashin warned on Friday the Dow would drop up to 500 points or more if multiple Trump advisors were to resign. That would not happen in one day but over time. Cashin said traders were worried that a Gary Cohn departure could result in the exit of Wilbur Ross and others. There were a lot of rumors about a Cohn departure earlier in the week but the White House eventually squashed them saying there was no truth to the speculation.

After the close on Friday Carl Icahn resigned from his role as special advisor to the president on regulation. He said he discussed it with the president and the decision was made with Trump's blessing. Icahn said he wanted to avoid "partisan bickering" and scrutiny regarding his role. Some Democrats had asked regulators to look into Icahn, a major investor in energy and equities, to see if he had engaged in any improper behavior. In his resignation letter Icahn stressed he had never had any access to non-public information or profited from his advisory position.

A new study found that raising a child from birth through age 17 costs about $233,610 or roughly $13,000 a year on average. Higher income families spend significantly more, around $372,210 and lower income families averaged $174,690. A household earning $200,000 a year could expect to spend $52,000 in just the first year of a child's life according to NerdWallet. If you elect to cover college you can spend $20,090 per year for average instate tuition and $34,220 for out of state or private institutions. Yes, kids are expensive but worth it.

As I typed those numbers, I wondered how my generation survived when our parents had a single wage earner, mother at home and average income of less than $5,000 a year. (1950s) Of course the average house cost $22,000, a Ford $2,000, milk 92 cents, bread 18 cents, gasoline 23 cents and sirloin steak 69 cents lb. Fifties Prices


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


Those who expect to reap the blessings of freedom, must, like men, undergo the fatigue of supporting it.

Thomas Paine


Index Wrap

Was It Real or Memorex?

by Jim Brown

Click here to email Jim Brown
Memorex used to have a commercial where a glass was broken by a high musical note.

The point to the commercial was it a real live singer or a recording on Memorex cassette tape. In this case was Thursday's decline the beginning of the real Aug/Sep decline or was it just a temporary imitation? The accurate answer to that question is worth a lot of money.

To answer that question I am going to refer back to the A/D line on the S&P, which closed at a new 5-week low. If this is not the real deal, it is a very good imitation. Actually, the S&P and the Dow A/D lines, while negative, are significantly better than the Nasdaq and Small Cap lines.

The Nasdaq and S&P-600 are significantly more bearish and note that they both peaked in late July while the Dow and S&P peaked in August. The large cap generals retained their strength while the troops were deserting in large numbers.

Note the MACD on all the charts is very bearish.

The percentage of S&P stocks above their 50-day average fell to 41.6% and a TEN-MONTH low. If this were a stock chart would you buy it? I seriously doubt it since the broken support at 45% suggests it could go into freefall.

The percentage over their 200-day average fell to 63.8% and an 8-month low.

The broadest general market index, the Russell 3000, came within 3 points of critical support at 1,425 on Friday and closed right on the100-day average. The index has not closed under that average since October. This confirms it is a broad market decline rather than just a couple of sectors or just small caps or just the big cap techs. This is a broad based market decline and that suggests it will continue.

There are some significant support levels on the R3K, Dow and S&P that could be tested this coming week and that will determine if the decline will continue unabated or take time out for a short squeeze.

The S&P dipped almost to the 100-day at 2,417 with multiple support levels in play. Those are 2,420, 2,417, 2,410 and 2,400. If the 2,400 level breaks, it could be a fast drop to 2340-2350.

The Dow remains the strongest index with support about 175 points lower at 21,500. The index is not even close to its 200-day average. The surge by several stocks in late July, early August added 500 Dow points and they are resisting the urge for profit taking. Boeing is holding up very well with a 56-point gain since early July. That added roughly 300 points to the Dow. Initial support on the Dow is 21,500 and it should produce at least a temporary rebound.

The Nasdaq is the second weakest index behind the Russell 2000. With support at 6,100 the line in the sand has been drawn. A breakdown there should target 5,800.

The Russell 2000 is in danger of breaking below the 7-month post election consolidation pattern with support at 1,340. That is 110 points below its recent high and could be just the start of a larger decline. That 1,340 level needs to hold or it could drag the rest of the market lower.

It is all about market breadth and it is shrinking daily. The big cap techs can move the Nasdaq around on any given day but if the majority of the other 2,000 Nasdaq stocks are negative the eventual index direction will be lower.

The same goes for the Russell 2000. The financials are currently about 15% of the index and they can determine short-term direction but it is the majority of the stocks that determine long-term direction. The small cap market breadth has turned significantly negative.

There may be another relief rally short squeeze on Monday but I expect the market to eventually turn lower. The market lows for the second half are typically set in late September and early October. That is a long way off with a lot of minefields in our path.

Unless you are a short-term trader, the risks of holding long-term positions over the next 8 weeks are very high. If you have them, hold them but I would not add any new ones until we see a buying opportunity.

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

Good Company, Bad Sector

by Jim Brown

Click here to email Jim Brown

Editors Note:

The energy sector is getting no relief as summer driving demand ends. Dril-Quip may have a debt free balance sheet but metrics are plunging.


No New Bullish Plays


DRQ - Dril-Quip - Company Profile

Dril-Quip, Inc., together with its subsidiaries, designs, manufactures, sells, and services offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. It operates through three segments: Western Hemisphere, Eastern Hemisphere, and Asia-Pacific. The company's principal products include subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipes, drilling and production riser systems, liner hangers, wellhead connectors, and diverters, as well as consumable downhole products. It also provides technical advisory services, and rework and reconditioning services, as well as rental and purchase of running tools for use in the installation and retrieval of the its products. The company's products are used to explore for oil and gas from offshore drilling rigs, such as floating rigs and jack-up rigs; and for drilling and production of oil and gas wells on offshore platforms, tension leg platforms, and Spars, as well as moored vessels, such as floating production, storage, and offloading monohull moored vessels. Company description from FinViz.com.

The company reported earnings of 9 cents compared to estimates for 1 cent. On the surface, that is a huge beat. Unfortunately it was down from a 64 cent profit in the year ago quarter. Revenue of $127.9 million declined from $142.2 million but still beat estimates for $102 million. So far, so good.

Selling, G&A expenses rose from $5.8 million to a whopping $31.2 million. Total expenses rose from $97.2 million to $129 million. On an operating basis they lost $1.1 million compared to net income of $45.2 million in the year ago quarter. Order backlogs fell from $296 million to $235 million.

While earnings and revenue beat significantly lowered estimates, they were dramatically below year ago levels. Everything is working against Dril-Quip because offshore drilling is rapidly shrinking because of the low cost of oil. It is not profitable to produce oil at $75-$85 a barrel when it is selling for less than $50. Offshore oil rigs in the U.S. have fallen from more than 50 to only 16.

Dril-Quip is actually a good company but the offshore sector is in serious pain. Their benefitting from the various gas wells being drilled overseas where multiple giant gas fields have been discovered. It will be enough to keep the bills paid but long-term, oil prices will have to rebound before DRQ can return to hero status.

With the summer driving season almost over, crude prices are likely to move lower than higher over the next couple of months.

Expected earnings Oct 26th.

Buy Dec $35 put, currently $1.65, no initial stop loss.

In Play Updates and Reviews

History Being Made

by Jim Brown

Click here to email Jim Brown

Editors Note:

We have not had major declines back to back in 2017 until now. The Dow declined -109 points in the morning to 21,641 before rebounding 152 points intraday to gain +43 points on the Bannon news. The afternoon decline was -119 points to end the day with a 76-point loss. This is very market negative. When the rebound did not hold, that shows traders were afraid of weekend event risk or the normal late August weakness or both.

The Dow and S&P are nearing their first major support levels at 25,100 and 2,410. How the indexes react when those levels are reached will be the guide for the next two weeks. That is the obvious place for traders to buy the dips to I would expect at least a minimal rebound.

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

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BULLISH Play Updates

AAPL - Apple Inc - Company Profile


No specific news. Shares closed down slightly after being up intraday.

Original Trade Description: Aug 12th.

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

Earnings Oct 31st.

We exited a position on Apple just prior to earnings. The report was strong and shares spiked $9 at the open the following day. After 9 days of trading they have been higher and lower but they refuse to give up their gains. Shares were up $2 on Friday when the rest of the big cap market was flat.

The reason Apple may have less risk than the rest of the market is the expected production announcement in September. They are expected to announce 2 new iPhone 7s and the iPhone 8/Pro plus some other upgrades. This is going to be a major product announcement that could propel Apple to $200 over the next six months. We know Apple shares normally ramp into an announcement and then decline shortly thereafter on a sell the news event. We will decide a couple days ahead of the announcement if we want to hold over.

I am using the November strikes because that is after earnings and the options should hold their value more in case of market volatility than an option that expires before earnings. Just because we buy more time does not mean we have to use it. I am recommending a spread because of high option premiums.

Update 8/14/17: BlueFin Research, as reported in Barrons, claims the production ramp for iPhones in Q3 is at record levels with 53 million phones expected. They will be split between the 7s, 7s Plus and the iPhone 8/Pro with the iPhone 8 only 5-6 million of that total. That will change in Q4 to 44 million of the model 8 with 30 million a quarter for the rest of 2018. They did not disclose sources but it is believed they are basing their estimates on the component quantities being shipped to manufacturers.

Aetna (AET) and Apple held talks last week with Aetna wanting to offer the Apple Watch either free or discounted to all 23 million of its members. They currently offer the watch to their 50,000 employees as part of a fitness program.

Another news story said that Google is paying Apple a license fee of up to $3 billion for 2017 to remain the default search engine on Apple devices. That would equate to 5% of Apple's total annual profit and 25% of their earnings growth. That is the largest contributor to the growth in service revenues. Bernstein said Google pays a fee to Apple of 34% of whatever it earns from ads delivered to Apple users. That is huge!

Position 8/14:

Long Nov $160 call @ $8.05, see portfolio graphic for stop loss.
Short Nov $175 call @ $2.72, see portfolio graphic for stop loss.
Net debit $5.33.

MMM - 3M Co - Company Profile


No specific news. Shares down with the market.

Original Trade Description: Aug 9th.

3M Company operates as a diversified technology company worldwide. The company's Industrial segment offers tapes; coated, non-woven, and bonded abrasives; adhesives; advanced ceramics; sealants; specialty materials; separation and purification products; closure systems for personal hygiene products; acoustic systems products; automotive components; and abrasion-resistant films, and paint finishing and detailing products. Its Safety and Graphics Business segment provides personal protection products, traffic safety and security products, commercial graphics systems, commercial cleaning and protection products, floor matting, roofing granules for asphalt shingles, and fall protection products. The company's Health Care segment offers medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, dental and orthodontic products, health information systems, and food safety products. Its Electronics and Energy segment provides optical films; packaging and interconnection devices; insulating and splicing solutions; touch screens and touch monitors; renewable energy component solutions; and infrastructure protection products. The company's Consumer segment offers sponges, scouring pads, high-performance cloths, repositionable notes, indexing systems, home improvement and care products, protective materials, and consumer and office tapes and adhesives. Company description from FinViz.com.

On July 25th, 3M reported earnings of $2.58 that missed estimates for $2.59. Revenue of $7.81 billion missed estimates for $7.88 billion. The company guided for full-year earnings of $8.80-$9.05. Traders were in knee-jerk mode and the stock fell $14 on the news.

The miss was minimal and the company did increase earnings 22.6% for the quarter. They reported organic growth of 3.5% and reaffirmed their full year estimate for 3-5% organic growth. There is nothing wrong with this company.

Expected earnings Oct 24th.

Shares have recovered half of their post earnings losses and the dip over the last couple of days has weakened the option premiums to allow us to enter. Resistance is $212.

Bear in mind that the market is struggling and it would not be a surprise to see further declines in the Dow. Today's rebound from the opening drop was encouraging enough for me to take a chance on 3M because MMM shares have already been hit. They could look like a safe port in the coming storm.

If the market does extend its rebound, 3M could be a Dow leader again.

Position 8/10/17:

Long Oct $210 call @ $2.91, see portfolio graphic for stop loss.

VAR - Varian Medical Systems - Company Profile


No specific news. Varian was an outperformer on Friday with a big $1.24 gain on no news in a weak market.

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


The VIX was up in the morning but rolled over when the Bannon rebound began.

Plenty of time with our November option. We still have to get past the budget battle and the debt ceiling fight.

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 $20 to exit.

BEARISH Play Updates (Alpha by Symbol)

CAH - Cardinal Health - Company Profile


No specific news. The market helped to accelerate the decline to close at a 3-year low.

Original Trade Description: July 29th.

Cardinal Health, Inc. operates as a healthcare services and products company worldwide. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, over-the-counter healthcare, specialty pharmaceutical, and consumer products to retailers, hospitals, and other healthcare providers. It offers distribution, inventory management, data reporting, new product launch support, and contract pricing and chargeback administration services to pharmaceutical manufacturers; pharmacy and medication therapy management, and patient outcomes services to hospitals, other healthcare providers, and payers; consulting, patient support, and other services to pharmaceutical manufacturers and healthcare providers. This segment also operates nuclear pharmacies and cyclotron facilities that manufacture, prepare, and deliver radiopharmaceuticals, as well as operates direct-to-patient specialty pharmacies; offers logistics, marketing, and other services; and repackages generic pharmaceuticals and over-the-counter healthcare products. The company's Medical segment distributes a range of medical, surgical, and laboratory products and services to hospitals, ambulatory surgery centers, clinical laboratories, and other healthcare providers, as well as to patients in the home. This segment also develops, manufactures, and sources medical and surgical products comprising surgical drapes, and gowns and apparel; exam and surgical gloves; fluid suction and collection systems; cardiovascular and endovascular products; and wound care and orthopedic products, as well as assembles and offers sterile and non-sterile procedure kits. In addition, it offers supply chain services, including spend, distribution, and inventory management services to healthcare providers; and post-acute care management, and transition services and software to hospitals, other healthcare providers, and payers. Company description from FinViz.com.

Cardinal reported earnings of $1.31 that beat estimates for $1.24. Revenue of $33.0 billion beat estimates for $32.7 billion. While the company may be winning some market share from McKesson, the cost of the wins means lower margins.

The company said generic deflation and competition was depressing margins. They had previously guided lower for 2018 in April and did it again with earnings. For fiscal 2018 they guided for earnings of $4.85 to $5.10 and analysts were expecting $5.25. They also said earnings would be impacted by some "company discrete items" that could result in a profit decline for the drug business. They reemphasized that in the recent earnings report saying these actions will be detrimental in the short term but improve our trajectory in 2019.

Investors like it when companies build for the future but in the case of CAH, the short term including the rest of 2017 and 2018 is actually long term for traders. They bailed on the stock and it is still falling.

President Trump tweeted about lowering drug prices this morning and it is a good bet it will eventually happen in some form. Just talking about it is going to pressure CAH.

Expected earnings Nov 1st.

Position 8/15/17:

Long Sept $65 put @ 77 cents, no initial stop loss.

DIA - Dow ETF - ETF Profile


Another big decline suggests the August weakness has definitely begun. The long put is not escalating in value as expected. I lowered the exit target by $1 to put us in the money at the exit. Given the follow on decline on Friday, I am more confident we are going to test that support.

I am recommending we target 214.50 for an exit.

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.

IBM - International Business Machines - ETF Profile


No specific news. Shares declined with the Dow to an 18-month closing low. The next material support level is $120.

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.

Update 8/5/17: 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.

Update 8/7/17: A judge in Indiana ruled IBM must pay the state $78 million for failing to complete the automation of much of the state's welfare services system. The court case came after the state cancelled the $1.3 billion automation contract because of numerous complaints about long wait times, lost documents and improper rejections. An appeals court found that IBM had committed a material breach of its contract by failing to deliver improvements to the welfare system.

Position 7/31/17:

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

SPY - S&P-500 ETF - ETF Profile


Back to back declines and a new 5-week low. The next support level is $240.50.

I am recommending we target $241 for an exit.

August has been down 5 of the last 7 years and up only 5 of the last 20 years.

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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