Option Investor

Daily Newsletter, Saturday, 9/30/2017

Table of Contents

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

Market Wrap

First Time in 20 Years

by Jim Brown

Click here to email Jim Brown

The Dow has posted an 8-quarter winning streak for the first time in 20 years.

Weekly Statistics

Friday Statistics

The Dow is getting all the headlines for its performance for the quarter but it only gained 4.7% for the entire quarter. However, the Russell 2000 is up 9.9% just since the August 21st lows. The small caps are the real performers and helped boost sentiment so that the big cap indexes could reach those new highs.

All the major indexes, except for the Dow, closed at new highs on Friday. The Dow missed a new high by 7 points. This was the first time since 2013 that the market posted gains in September. The Dow gained 4.7%, S&P 3.8%, Nasdaq 5.7% and Russell 5.4%.

Friday's economic reports were ignored just like all the prior week's reports. Investors are not concerned with economics because we are growing very slowly and the numbers lack any enthusiasm. The hurricanes are another reason the economic numbers will be ignored until 2018. The next three months will have choppy data that does not relate to the normal trend and skewed by the storms.

Personal Income for August rose +0.2% after a revised +0.3% gain in July. Personal Spending declined -0.1% after a +0.2% rise in July. This was the first decline since January and analysts blamed it on the hurricanes.

The final revision for the September Consumer Sentiment showed a -1.7 point drop to 95.1. This is still strong but the first half excitement is fading. The present conditions component rose fractionally from 110.9 to 111.7. The expectations component declined from 87.7 to 84.4. Rising gasoline prices because of Hurricane Harvey were a big hit to current sentiment.

We have an active economic calendar for next week with the payroll reports, ISM reports and another 12 speeches from Fed officials including Janet Yellen on Wednesday. We learned on Friday that President Trump had interviewed four people for the job of Fed chairman and he said he would announce his decision in 2-3 weeks. Personally, I believe Trump's type A personality does not jive with Yellen's meek, laid back, nerdy economist style. He surrounds himself with strong individuals. He has met with Kevin Warsh, a former Fed governor, about the position and he would be a perfect candidate for Trump, assuming Gary Cohn did not rehabilitate his standing before the president made a decision.

Picture from CNBC

The payroll reports are expected to show declines as a result of the storms. Business stopped in Houston and Florida after the hurricanes hit. Many businesses were closed for weeks with quite a few still closed. Temporary cleanup jobs may inflate the numbers slightly but whatever the numbers are, they will be ignored.

There are very few earnings on tap for next week with Costco the highlight on Thursday. I expect Costco to beat expectations and raise guidance and end all the Amazon/Whole Foods worries.

Yum China and Constellation Brands also report on Thursday. The pace of earnings does not accelerate until the second week of October.

KB Homes (KBH) reported earnings of 51 cents that beat estimates for 47 cents. Revenue of $1.14 billion beat estimates for $1.12 billion. The builder said damage from Harvey and Irma was minimal but they expected closings to be delayed by the storms and the impact on closings of homes buyers were selling in order to buy a KBH home.

Lennar (LEN) reports earnings on Tuesday and they said the storms had delayed deliveries on about 700 homes from the current fiscal quarter into next quarter. Harvey impacted about 120 new orders and will delay 130 deliveries in Q4.

Tyson Foods (TSN) raised its guidance and announced a restructuring that includes layoffs. The company raised earnings guidance for fiscal 2017 from $4.95-$5.05 to $5.20-$5.30 per share. They guided for fiscal 2018 for earnings of $5.70-$5.85, which would be the 7th consecutive year of record earnings. They are cutting 450 jobs with most positions coming from within the corporate office. They will take a charge of $140-$150 million this year but they plan to save $1.2 billion over the next three years. They credited the increased 2017 earnings to strong beef segment performance.

Nearly two million people watched at least a portion of the Amazon live stream of Thursday Night Football. There was a pregame show with Amazon products advertised and there were some streaming issues including slow feeds and buffer issues. Obviously, Amazon has the capability to fix the bandwidth issues by next week. Analysts said it appeared to be a successful first test. Actual viewers averaged about 372,000 for the duration of the game. Amazon said there were viewers from 149 countries.

Whole Foods said customer card information had been stolen from its restaurants, taprooms and other venues in its stores but not from the regular grocery checkout process. The onsite services businesses use a different point of sale system than the regular store system. More than 40 Whole Foods stores sell beer on tap. None of the Amazon related systems were involved.

The WSJ said Amazon sold $1.6 million in Whole Foods branded products on the Amazon website in just the first month. They would have sold more but most products sold out.

The Whole Foods CEO, John Mackey, said Amazon saved them from the "whole paycheck" trap. That was the nickname for Whole Foods because of their high prices. Mackey said, "We were in that trap and I couldn't quite figure out how to get out of it." Within two weeks of the closing, prices fell 25% to 43% over a broad range of products. "I feel like Houdini now that I have escaped the trap." Bernstein said Amazon's next big push will be into the retail pharmacy industry. The analyst, Lance Williams, said Amazon is already in talks with distributors and could easily buy or partner with a pharmacy benefit manager (PBM) to drive volume growth. The addressable market for Amazon in this sector would be in the $300 billion range. Williams said it would be simple for Amazon to gain significant market share in the sector because an estimated 70% of subscriptions are already heading to online fulfillment. The risk is to CVS, WBA and RAD.

Jefferies said Amazon is going to control the toy market this holiday season. With Toys-R-Us in bankruptcy, Amazon is going to have less price competition. In the last two months of 2016 Amazon sold about $2 billion in toys compared to $4.66 billion by Toys-R-Us. Those numbers could reverse in 2017. Toys-R-Us owes more than $500 million to the top 20 toy makers. The odds are good they are not going to be getting more toys on credit.

Apple said it received a record number of national security requests for data in the first half of 2017. They received more than 13,250 requests on more than 9,000 accounts. They are prohibited from giving the exact numbers. In the same period in 2016, they received over 5,750 requests. Google said it received up to 500 requests affecting more than 1,000 accounts over the same period. These companies do not have to respond to the National Security Letters (NSLs) and requests from the Foreign Intelligence Surveillance Act (FISA) but they do because they do not want the headache of picking a fight with the government when the odds are good they would lose.

There are multiple reports that the iPhone 8 has a battery problem. When charging the batteries swell and push the fronts off the phone. On some of their phones, Apple uses Samsung batteries, the same company that made the exploding batteries on the Note 7. Apple has confirmed that it is looking into the problem.

Every day there are more headlines about slow sales of the iPhone 8. Several analysts have tried to decide just how bad it is and found out that sales are conforming almost exactly to Apple guidance. The guidance suggests sales of the 8 and X are expected to be about 50:50 and most buyers are waiting for the X before they decide which phone they are going to buy. That means November sales could be dramatic "if" Apple can deliver enough model X phones. Apple reports earnings on Oct 31st, just a few days after orders open for the model X and before the phone actually begins delivering. Guidance will be super critical.

Digitimes reported that Apple told its suppliers last week to ship only 40% of the original iPhone X components and hold the rest until released by Apple. Reportedly, Apple wants to see how many orders it receives on Oct 27th before moving forward with additional production.

Apple shares fell after the product announcement as expected. The 8.3% decline was a little more than the normal 4-6% because of the staggered delivery and worries over production problems. Normally the decline lasts about 3-4 weeks.

Susquehanna Financial said on Friday they believe the reports that British retailer Sports Direct is in talks to buy Finish Line are accurate. Sports Direct has been building a position which rose to 8% in mid August. Overall Susquehanna believes the company has acquired as much as 21% through "contracts for differences" or CFDs, which is a type of derivative, with ETX Capital acting as the counterparty. Sports Direct operates 468 stores in the UK and 289 internationally. Finish Line has 950 stores in US malls.

In late August, Finish Line adopted a poison pill intended to thwart a takeover attempt by Sports Direct. The UK retailer recently completed a US acquisition in June of 50 Bob's Stores and Eastern Mountain Sports adventure schools. Wedbush said in mid September the poison pill was to force conversation with Sports Direct and prevent an outright change of control through share accumulation. The pill becomes effective if anyone acquires more than 12.5% ownership in the shares. The board has the right to cancel the poison pill at any time as long as the trigger threshold has not been reached.

Zogenix (ZGNX) said an experimental treatment for a rare form of epilepsy met the goals in a late-stage study. The drug was being tested against a placebo in children having Dravet syndrome, a genetic dysfunction in the brain that leads to potentially fatal, long-lasting, fever-related seizures that do not respond to standard treatment. The drug ZX008 demonstrated statistically significant improvements including clinically meaningful reductions in seizure frequency and seizure free intervals. The number of seizures declined 63.9% to 72.4% in various groups and dosages. Shares spiked 172% on the news.

Albemarle (ALB) shares rose $4 after Chile said there was no reason not to approve the company's request to increase annual lithium production from 80,000 tonnes to 125,000 tonnes. ALB recently said it had discovered a new technology that would allow them to produce more lithium without using more brine from the Atacama salt flat in northern Chile. ALB said they would invest $1 billion in Chile over the next five years if the request were approved. The rapid advance in electric car production is creating high demand for lithium batteries.

Conn's (CONN) spiked 7% at the open after Oppenheimer raised their rating to outperform and set a $40 price target. The analyst said the outlook for their credit business had improved. The business is now under the direction of a new CEO, Norm Miller, and a freshly assembled team of senior leaders. The analyst said, "The market appears to meaningfully under appreciate the nearer and longer-term EPS power of a better functioning business model." Shares spiked 10% for the day.

Crude prices declined slightly after trading as high as $52.86 on Thursday. The $52 level is seen as strong resistance. There is no fundamental reason for the rise in prices other than miscellaneous headlines and speculation. US production rose to 9.547 million bpd and just shy of the 2015 peak at 9.61 million bpd.

The rise in crude prices prompted the activation of six additional oil rigs for the week ended on Friday. As long as prices remain over $50, we should see additional rigs added. The $50 level is the magic number. Cost to produce a barrel in the Permian, Eagle Ford and the SCOOP is between $24-$27. Prices over $50 allow producers a profit after allowing for transportation and discounts for the ultralight shale oil. It also allows them to hedge future production for a profit and continue to maintain an active drilling program in the months ahead.


Analyst Ryan Detrick pointed out that the S&P has only moved a daily average of 0.4% in September but hit a record high after being up 10% for the year. This has only happened 12 times since 1950 and 92% of the time the S&P gained 6% in Q4. That works out to 11 of those 12 times. Since Q4 is normally strong, it is even stronger when there is strength in September and throughout the year leading up to it. Detrick said the S&P could rally an additional 6% in Q4.

It has been 455 days since the S&P had a 5% decline. The average is twice a year. This is the fourth longest period in history without a 5% decline. That means there are a lot of investors still waiting on the sidelines for a buying opportunity. As evidenced by the Russell spike last week, a few portfolio managers gave up on waiting and started chasing stocks.

Friday was the nine-year anniversary of the worst point decline ever on the Dow after the House of Representatives rejected the $700 billion bailout plan in September 2008. The Dow declined -777 points on the news.

The changes in sentiment never seem to be what I expect. With the market setting new highs, bullish sentiment declined nearly 7%. This does end on Wednesday and the Dow was negative the first three days of the week and that was probably the cause for the sentiment decline. Next week's survey will be interesting.

Volatility is evaporating from the market on a daily basis. The VIX has now traded below 10 for 47 days in 2017. The 24-year closing low is 9.36 and we came close on Friday at 9.51.

One analyst explained it this way. In 2002, there were 110 ETFs. Today there are more than 1,800 ETFs. In 1995 the Vanguard S&P-500 ETF had $12 billion in assets. Today it is nearly $600 billion and takes in roughly $25 billion a month. More than 38% of the money invested in the market is in index ETFs. Investors have changed to a passive investment strategy rather than picking stocks. This is probably due in part to the aging of the baby boomer generation. They are moving their portfolios into ETFs and bonds rather than personal investments.

This does not mean volatility will not return. I am very confident we will see volatility back over 30 at some point in the future. Historically, periods of low volatility are always followed by periods of high volatility. Some event(s) arrive that rock investors and everyone runs to the exits at once. Numerous analysts have warned that the shift to ETF investing will eventually create higher volatility because a significant event could create a wave of selling and there will not be any buyers. We saw this in the flash crash several years ago when bids for ETFs disappeared and they went into free fall.

Fortunately, there are no expectations for this in the short term. There are no obvious events on the horizon that should produce significant volatility until early December when the budget battle and debt ceiling come back to haunt us.

The S&P surged to 2,519 at the close and well over the prior resistance at 2,508. This is a clear breakout and we could see additional gains as end of quarter retirement funds hit accounts on Monday. Friday's surge was probably window dressing for those quarter end statements.

Helping to keep investors in the market is the beginning of Q3 earnings two weeks from now. Everyone is placing their bets for the earnings cycle. Q3 is not going to be as strong as the rest of the year but it is still positive earnings growth. Earnings for the year are listed below. Q3 is expected to fade slightly but rebound in Q4.

Q1 15.3%
Q2 12.3%
Q3 6.2% est
Q4 12.2% est

If we were to actually get a tax reform package where corporate earnings were slashed, it would be very positive for the 2018 market. Every 1% decline in corporate taxes is expected to add $2 a year in S&P earnings. For 2017, the S&P-500 is expected to earn $131. For 2018 that rises to $140. The current PE ratio is 17.8 so that $9 rise is worth 160 additional S&P points in 2018. If taxes were cut by 5% that would add $10 to earnings and at the current PE ratio of 17.8 it would add another 178 points to the S&P. That is 338 points total. Obviously, the rise in the S&P based on earnings expectations is easy to calculate but nearly impossible to actually occur. There are far too many variables but 338 is a potential possibility based on pure math.

For next week, we just want to see the S&P add a few more points and stay above the red uptrend resistance line on the chart below.

The Dow has now posted eight quarters of consecutive gains and that has not happened in the last 20 years. That means we have another streak that will eventually fail. This is like watching a roulette ball fall on a red number for 8 consecutive spins. Everybody will be piling up money on black. I have seen a lot of money lost on that strategy. In Reno I saw 21 straight red numbers. Thousands and thousands of dollars were lost betting on black for the last 15 rolls. By the time black finally appeared, all those betters were broke. A roulette ball has no memory. Where it falls is truly up to chance.

In the market, investors have a memory. That means streaks matter and investors will be more cautious betting on a continued streak higher. Fortunately, a quarter is an eternity in the market and memories tend to fade as investors see the dollar signs increase. Investors already believe the market cannot decline and every miniscule dip is bought. Eventually reality will return.

The big cap tech stocks were positive on Friday but only the high dollar stocks (PCLN, GOOGL, AMZN) posted a decent gain. The move was broad based with Nasdaq advancing volume 1.2 billion to declining volume of 505 million shares. Advancers of 1,560 beat decliners of 1,179. It was nice to see the leadership broaden out but there is still plenty of room for improvement with nearly 1,200 decliners.

The index surged at the open to reach its intraday high about 1:PM and then held those gains the rest of the day. I firmly believe this was related to quarter end window dressing in an already positive market.

Resistance is well above at 6600-6650 with support well back at 6,350 and Monday's lows.

If there was ever a chart that demonstrated short covering and price chasing this is it. The big rebound from the August 21st lows barely stuttered when it hit resistance at 1,450 and when there was no selling, the shorts raced for the exits as portfolio managers chased prices as they window dressed for the end of the quarter. With big caps relatively weak since Monday it appears there was a lot of rotation underway with managers exiting those big cap stocks and loading up on small caps for the Q3 earnings and best six months of the year, which starts on Nov 1st.

This was the best monthly gain for the Russell since Nov 2011.

It may appear that any worries over profit taking or the impact of various headlines have disappeared. Unfortunately, that is not the case. In the news this weekend, we have North Korea moving fighters with anti-air missiles and extended range fuel tanks to the eastern coast where US planes flew a mission last week. With Kim saying war has been declared and we can shoot down US planes wherever we find them, this positioning of long-range fighters has ominous repercussions.

Secondly, it was reported on Friday that several long-range missiles have been moved from the development facility and have disappeared from satellite tracking. On October 10th, North Korea celebrates becoming a communist country and there are big celebrations and Kim likes to do something provocative just to prove he can. If he does not do it on the 10th then Oct 18th is a big celebration in China and he has done missile launches and bomb tests during that celebration to show he is not afraid of China.

If he just launches another missile, the market will ignore it. If he tries to shoot down US or South Korean planes, it will not be ignored. If by chance he follows through with his threat to launch an H-bomb over Japan and explode it in the Pacific, the market is likely to react badly. There are also reports that Russia and China are massing troops on the North Korean border.

There is always a geopolitical event somewhere in our future. The expected events will be ignored. It is the unexpected events that cause trouble in the market.

The fundamental market outlook is strong. Earnings are good, the economy is growing, the Fed is on hold until December and tax reform is in the wind. It may be in the wind until 2018 but at least the constant headlines will keep investors interested in the market.

Monday and Tuesday should be positive from inflows of end of quarter retirement cash. Yellen's speech on Wednesday could be a hiccup if she feels she needs to clarify her confusing comments in last Wednesday's speech where she was both hawkish, dovish and confused in the same speech.

With the Russell gaining 9.9% in just over a month, there is a very good chance we will see some profit taking. The Dow is lagging the rest of the market and until it breaks out again, there is always risk.

I would make a list of stocks you would like to buy at cheaper prices and set some money aside just in case a buying opportunity appears. The market does not need a reason to take profits. Sometimes it just appears. Until then, the trend is our friend.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The attitude that you have a parent is what your kids will learn from you, more than what you tell them. They do not remember what you try to teach them. They remember what you are."

Jim Henson


Index Wrap

Window Dressing Rally

by Jim Brown

Click here to email Jim Brown
The markets moved higher last week on a strong dose of end of quarter window dressing.

Add in some big cap, small cap rotation and a blowout rally appeared. The Russell 2000 was the leader with a monster 9.9% rally from the August 21st lows. The nearly 30 point gain on Wednesday was pure short covering as resistance at 1,452 failed and portfolio managers began chasing stocks higher for their end of quarter statements. They were able to keep the Russell positive on Thr/Fri with minor gains to protect their investment from Wednesday. Next week begins a new quarter and window undressing could appear.

Monday and Tuesday could be positive as end of quarter retirement cash hits the market. After Tuesday, we may need another catalyst to keep the markets moving.

I do believe the approaching Q3 earnings will be the carrot that keeps the markets positive but early October is typically very volatile. None of the normal historical trends have worked in 2017 but that does not mean we should just ignore them in the future. We always need to be aware of the potential market moves.

With the monster gains in the Russell it should be no surprise that the A/D line for the small caps exploded to the top of the charts. Small cap volume on Wednesday was more than three times normal. It should also be obvious that this trend cannot continue. When you compare the last three weeks to the rest of the chart there is no comparison. The Russell is now very oversold and is due for a rest.

The Russell broke through the horizontal resistance at 1,452 and the uptrend resistance at 1,472. The index is flirting with the 1,500 level after consolidating for 9 months after the election. Any other time this would be an amazing show of market strength but we need to see if it can hold the gains over the next 2-3 weeks.

The Russell 2000 is two-thirds of the Russell 3000 and the larger index closed at a new high but the gains were significantly less because the large cap stocks in the R3K were undergoing some selling as portfolio managers rotated into the small caps. The R3K just barely edged over uptrend resistance on Thr/Fri but it was still a good week. The R3K shows us the breadth of the rally and suggests it may have some staying power. Note that the R3K is also flirting with 1,500. This round number resistance on this index and the R2K could be tough to cross.

To emphasize the big cap to small cap rotation theory, the Dow struggled all week while the small caps were surging. The Dow failed to close at a new high and failed to even return to resistance. The 22,500 level is looking tough given the Dow's recent weakness. Note the MACD is very close to a bearish signal.

The S&P surged on Friday to break convincingly over prior resistance at 2,508 and post an excellent end of quarter close. Given the lack of participation for the past two weeks, this was obviously end of quarter window dressing. The S&P now has resistance at 2,525. That reminds me of the 1969 Zager and Evans song, "In the Year 2525." That song gives you an idea of how old I am.

The S&P is only slightly more bullish than the Dow because it has more components to overcome the small cap rotation problem. Financials helped lift the S&P after President Trump said he had interviewed 4 candidates for replacing Janet Yellen. The candidates named would be more hawkish than Yellen and rates spiked higher on the news.

The A/D line on the S&P shows us the rally was broad based and showing no signs of weakness. This is amazing since 128 of the S&P stocks are 15% or more below their 52-week highs. On Friday there were 294 advancers and 158 decliners on the S&P with advancing volume 2:1 over declining.

The big cap tech stocks were struggling most of the week and the Nasdaq was fighting resistance at 6,460 for the last three weeks. On Friday, all the big cap techs were positive and the lack of drag allowed the Nasdaq to post a strong breakout almost to 6,500. Note the MACD was negative for the last week.

If the Nasdaq can maintain its gains it would held significantly to ease any pain of profit taking and window undressing on the Russell 2000. The Nasdaq needs to remain over that 6,460 level on any decline.

Notice how the FANG stocks lost their continuity since the July peak. They are all over the map and their correlation has dissipated. This has caused the Nasdaq to struggle up until Friday.

The correlation between the Nasdaq and the semiconductor sector is 100%. They have been in lock step the last week. As long as the chip stocks continue to rally the Nasdaq will follow.

In theory, the markets should continue higher with the Q3 earnings being the Pied Piper's magic tune that keeps stocks moving forward. Unfortunately, as Yogi Berra is credited with saying, "theory never works in practice." We will get to test that theory next week once the end of quarter retirement inflows evaporate on Wednesday.

The Q3 earnings do not begin to appear in volume until the third week in October but there are some notable stocks in week two to keep investors attention.

November 1st begins the best six month period for the markets. We just need the market to remain positive until then. The trend is our friend until it ends.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

New High Close

by Jim Brown

Click here to email Jim Brown

Editors Note:

The chip sector has been hot with the Semiconductor Index closing at a new high on Friday.


ADI - Analog Devices - Company Profile

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

Expected earnings Nov 29th.

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

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

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

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

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

Buy Dec $90 call, currently $1.80, initial stop loss $81.35.


No New Bearish Plays

In Play Updates and Reviews

Out with a Bang

by Jim Brown

Click here to email Jim Brown

Editors Note:

September closed with a bang with the Nasdaq, S&P and Russell 2000 all closing at new highs. The Dow closed only 7 points below its record high but did post a gain for the 8th consecutive quarter, a streak not seen in 20 years.

The S&P blew past prior resistance and the Nasdaq surged 35 points above resistance at 6,460. It was a good week and a good month for the market.

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

The long call position was entered at the open.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AAPL - Apple Inc - Company Profile


Apple shares recovered Thursday's minor loss. Some analysts believe the stories on lower iPhone 8 sales and production delays are fake news. Some analysts believe sales between the 8 and X will be split 50:50 and consumers will wait to see the X before making up their minds.

Original Trade Description: Sept 23rd.

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

Earnings October 31st.

Apple shares have fallen $13 since the September 1st high and $12 since the product announcement on September 12th. The shares have fallen into a cluster of converging support levels and the post announcement decline should be "about" over. Nobody will know for sure until the rebound begins.

After the product announcement Apple reaffirmed its guidance saying we planned for the recent event surrounding the production and release of the new products when giving the prior guidance. Apple rarely misses guidance. Knowing they were having production problems and staggered release they probably low-balled the number.

They are expected to sell 85 million phones in Q4. More than 66% of iPhone users have phones older than 2 years. They will have five active models for sale in Q4. They have the 7, 7+, 8, 8+ and the X plus they still have some of the older, cheaper models they are selling overseas in places like India. The new Watch could be the model that actually turns the Watch into its own revenue category instead of being lumped into the "other" category.

I have been negative on Apple for the last three weeks and the decline is going as expected. I believe the stock has reached a level where buyers will appear. There could still be several dollars of decline but the rebound could be just as quick once it appears to have bottomed.

I am recommending a November spread to reduce our risk and depending on the stock price before earnings, we might hold over the event. That is where they will give sales numbers and Q4 guidance and they could be strong.

Update 9/26/17: Raymond James raised their price target to $180 and increased expectations for gross margins and average selling price. The analyst does not expect this to boost earnings until Q2-2018. The analyst said the decline was a buying opportunity.

Position 9/25/17:

Long Nov $155 call @ $3.65, see portfolio graphic for stop loss.
Short Nov $165 call @ $1.27, see portfolio graphic for stop loss.
Net debit $2.38.

ADBE - Adobe Systems - Company Profile


No specific news. Shares rebounded strongly with a $2.35 gain.

Original Trade Description: Sept 27th.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.

Adobe reported earnings of $1.10, up 47%, on record revenue growth of $1.84 billion, up 26%. Analysts were expecting $1.01 and $1.82 billion. The company said they added a record number of new subscribers for Creative Cloud during the quarter. Deferred revenue rose to a record $2.2 billion.

The stock was up 52% for the year prior to earnings. Shares were crushed because they had the audacity to guide for the current quarter for revenue of $1.95 billion which matched analyst estimates.

Keybanc reiterated their buy rating and $174 price target. Canaccord Genuity reiterated a buy rating and raised the price target to $170.

Expected earnings Dec 19th.

Shares have begun to rebound from the $144 post earnings low. They were $156 before earnings. The risk here should be minimal.

Position 9/28/17:

Long Nov $150 call @ $2.89, see portfolio graphic for stop loss.

CAT - Caterpillar - Company Profile


No specific news. Minor decline from the new closing high.

Original Trade Description: Aug 29th.

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

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

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

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

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

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

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

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

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

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

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

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

Earnings October 24th.

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

Update 9/13/17: In Tuesday's investor day meeting the new CEO said they were targeting $55 billion in revenue in 2018 with margins of 14%-17% compared to 12% in 2017. That would take them back to 2014 levels before the bear market in commodity/energy began. That is 28% above 2017 levels. He was careful not to call it a target but said that level was achievable if the current rebound in mining, energy and construction continued.

Update 9/18/17: UBS upgraded CAT from neutral to buy and raised the price target from $116 to $140. The analyst said the growing cash position, rising earnings and revenue projections were all bullish. CAT is expected to produce $10 billion in free cash flow over the next two years and return most of that to investors. UBS said a survey of 50 mining companies found that 60% expected to hike new equipment budgets in 2018 and 50% expect to rebuild their entire fleet.

Update 9/21/17: CAT reported a global increase in machine sales of 11% for August, down 1% from July. Total sales in Asia and the Pacific surged 44%, down 1% from July. Despite the minor declines, the business is very strong.

Position 8/30/17:

Long Nov $120 call @ $2.75, see portfolio graphic for stop loss.

FB - Facebook - Company Profile


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

Original Trade Description: Sept 26th.

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook fell hard on Monday with a nearly $8 drop. That knocked the stock back to $161.56 or a -6.88% decline from its highs. On Tuesday Facebook announced they had signed a long-term deal with the NFL to broadcast 10 min recaps of all 256 MFL games this season. The broadcast will be on Facebook's Watch channel and will be a major draw to that site. A lot of people follow multiple teams but they probably only get highlights on their local team on local TV. In this format they can get a comprehensive recap of every game every week.

Earnings are expected Nov 1st.

Facebook has been posting strong earnings beats and growing demographics. I expect that again in the Q3 report.

I am recommending the December options because in a spread format they are actually cheaper. The close to the money November options are expensive but options slightly out of the money are very cheap. The OTM December options have significant value that makes the spread work.

A $170 Nov call is $4.50. The Dec $170-$185 spread is $4.16 and we have an extra month of time if we decide to use it. The longer dated options will rise faster and retain their value better than the short term November strikes.

Because of the market weakness I am recommending an entry trigger at $165.50.

Update 9/27/17: Facebook gapped open to $165.90 and above our entry trigger at $165.50. Citigroup said Q3 ad revenue will rise 47%. Citi said one agency that manages $1 billion in spending on social platforms said combined spending on Facebook and Instagram rose 88% in July and 73% in August. Another agency said Facebook spending continued to rise because of higher prices and more dynamic ad units. In addition the percentage of video ads continues to increase.

Position 9/27/17:
Long Dec $170 call @ $6.17, see portfolio graphic for stop loss.
Short Dec $185 call @ $1.79, see portfolio graphic for stop loss.
Net debit $4.38.

IIVI - II-VI Inc - Company Profile


Investors Business Daily raised their composite rating on IIVI from 94 to 96. This typically signals a new move ahead since investors favor stocks with a rating of 95 or above.

Original Trade Description: Sept 28th.

II-VI Incorporated develops, manufactures, and markets engineered materials, and optoelectronic components and devices worldwide. The company's II-VI Laser Solutions segment provides optical and electro-optical components and materials for use in high-power CO2 lasers, and fiber-delivered beam delivery systems and processing tools, as well as offers direct diode lasers for industrial lasers under the II-VI HIGHYAG and II-VI Laser Enterprise brands; compound semiconductor epitaxial wafers for optical components, wireless devices, and high-speed communication systems applications; and 6-inch gallium arsenide wafers for use in production of high performance lasers and integrated circuits under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brands. Its II-VI Photonics segment provides crystal materials, optics, microchip lasers, and optoelectronic modules for use in optical communication networks, and other various consumer and commercial applications. This segment also offers pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers for terrestrial and submarine applications. The company's II-VI Performance Products segment provides infrared optical components and high-precision optical assemblies for military, medical, and commercial laser imaging applications; and engineered materials for thermoelectric and silicon carbide applications. It serves OEMs, laser end-users, system integrators of high-power lasers, manufacturers of equipment and devices for the industrial, optical communications, military, semiconductor, medical and life science markets, consumers, U.S. government prime contractors, various U.S. Government agencies, and thermoelectric integrators. Company description from FinViz.com.

Expected earnings Nov 6th.

In their recent earnings II-VI reported 50 cents that more than doubled and beat estimates for 35 cents. Revenue rose 13% to $273.7 million and beat estimates for $250 million. More importantly, order backlogs rose to more than $1 billion for the first time. Bookings rose more than 50%. The company guidance was also higher.

Lasers are being used for more applications every day from etching chips in the manufacturing process, producing faster communications in data centers, 3D sensing for autonomous driving and of course Star Wars like directed energy weapons.

Shares closed at a new high on Thursday after a double top in Feb/Jul. With the strong earnings, this breakout to new highs should continue.

Position 9/29:

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

TER - Teradyne - Company Profile


No specific news. Shares posted a new closing high and extended their breakout over $36.

Original Trade Description: Aug 30th.

Teradyne is a leading supplier of automation equipment for test and industrial applications. Teradyne Automatic Test Equipment (ATE) is used to test semiconductors, wireless products, data storage and complex electronic systems which serve consumer, communications, industrial and government customers. Our Industrial Automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality and increase manufacturing efficiency. In 2016, Teradyne had revenue of $1.75 billion and currently employs approximately 4,400 people worldwide. Company description from Teradyne.

For Q2 they reported earnings of 90 cents compared to estimates for 86 cents. Revenue of $696.9 million beat estimates for $684.2 million. They raised revenue guidance to $455-$485 million and analysts were expecting $445 million.

In just the last 30 days analyst estimates for Q3 have risen from 38 cents to 43 cents. Full year estimates have risen from $1.88 t $1.97 per share. Zacks rates the Electronics Testing Equipment sector as #6 out of 250 industry sectors. Every new electronic device manufactured needs a new set of testing equipment.

Earnings October 26th.

Shares have been stuck under resistance at $35 for six weeks and broke out today. Analysts believe they will continue higher and make new highs. The $36 level is the next resistance.

Position 8/31/17:

Long Oct $37 call @ .90, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


The Dow traded negative most of the day but surged at the close.

If we do not get any volatility by Oct 6th, I am going to close the position. This week and the next two weeks are typically the most volatile of the year.

We still have plenty of time. North Korea, Iran and Venezuela are still a factor and could erupt at any time.

This is the fourth longest period in history of the markets without a 5% decline. While it does not look likely today, it could happen at any time.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss, see portfolio graphic for stop loss.

XRAY - Dentsply Sirona Inc - Company Profile


No specific news. Shares closed at a new 6-week high.

Original Trade Description: Sept 9th.

DENTSPLY SIRONA Inc. designs, develops, manufactures, and markets various dental and oral health products, and other consumable healthcare products primarily for the professional dental market worldwide. It operates through two segments, Dental and Healthcare Consumables; and Technologies. The company provides dental consumable products, including endodontic instruments and materials, dental anesthetics, prophylaxis pastes, dental sealants, impression materials, restorative materials, tooth whiteners, and topical fluoride products; and small equipment products comprising dental hand pieces, intraoral curing light systems, dental diagnostic systems, and ultrasonic scalers and polishers. It also offers dental laboratory products, such as dental prosthetics that include artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials. In addition, the company provides dental equipment, such as treatment centers, imaging equipment, and computer aided design and machining systems for dental practitioners and laboratories; and dental implants and related scanning equipment, treatment software, and orthodontic appliances for dental practitioners and specialists, and dental laboratories. Further, it offers healthcare consumable products, such as urology catheters, various surgical products, medical drills, and other non-medical products. DENTSPLY SIRONA Inc. markets and sells its dental products through distributors, dealers, and importers to dentists, dental hygienists, dental assistants, dental laboratories, and dental schools; and urology products directly to patients, as well as through distributors to urologists, urology nurses, and general practitioners. Company description from FinViz.com.

Dentsply reported Q2 earnings of 65 cents that missed estimates by a penny. Revenue of $992.7 million missed the estimate for 1,004 million. Sales in the U.S. fell 9.7% but sales in Europe rose 2.5%. They guided for the full year for earnings of $2.65-$2.75.

The stock was crushed on the miss with a $9 drop over the following week.

However, there was a reason for the miss. Effective September 1st, they moved from a single distributor to multiple distributors. The existing distributor slowed purchases in the quarter in order to reduce inventory before the change in the distribution model.

The CEO said "In September, we should begin to benefit from the expanded distribution of our equipment in North America which should drive growth in the back half of this year and beyond. As we work through the distribution transition and integration initiatives, we are strengthening our foundation for the future. We believe that this should translate into more consistent growth and strong double digit earnings growth in the back half of the year creating momentum exiting the year going into 2018."

Shares have begun to rebound and should return to their highs on the "double digit earnings growth" guidance.

Earnings Nov 8th.

There are no Nov/Dec options. I am using the January but just because we buy time does not mean we have to use it.

Position 9/11/17:

Long Jan $60 call @ $2.70, see portfolio graphic for stop loss.

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