Option Investor

Daily Newsletter, Monday, 10/2/2017

Table of Contents

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

Market Wrap

Fourth Quarter Starts On Somber Note

by Thomas Hughes

Click here to email Thomas Hughes


A resilient market sets new all time highs. Even so, trading was overshadowed by last nights events in Las Vegas.

Market action was broad. Advancers led decliners nearly 2 to 1 with 253 NYSE listed stocks making new highs versus less than 20 making new lows. Action was supported by today's economic data although there are new signs of inflation within the manufacturing PMI data.

Asian indices were mostly higher as news from Japan shows business confidence in the country has improved. The Tankan Survey, administered by the BOJ, shows that confidence among the largest manufacturers has risen over the past three months sending the Nikkei up by 0.22%. Indices in China and elsewhere were closed for a holiday. European indices cheered the news from Asia and were later buoyed by US bullishness although news at home and abroad put a damper on gains. A referendum on independence in the Spanish region of Catalonia was met by government crackdown on what they said was an illegal vote.

Market Statistics

Futures trading was positive all morning despite the news from Spain and Las Vegas. The indices were set to open with small gains going into the release of data and firmed a bit afterward. PMI, both Markitt and official, shows expansion in manufacturing with the red flag of rising input prices. The open was as expected, the SPX began the day with a gain of 2 points and then began to move higher from there. The first 45 minutes of trading saw steady buying which drove the broad market, blue chips and techs to new all time highs. The middle part of the day saw the indices trade within narrow ranges just below the newly set highs. By late afternoon the indices were testing the early highs where they remained into the close of trading.

Economic Calendar

The Economy

Economic data starts off with Markitt's final read on manufacturing PMI. According to them US PMI gained 0.3% in the last month to hit 53.1 showing further improvement within the economy. This gain is driven by increases in production, new orders and employment. On the employment front this month's read is a 9 month high, on the inflation front this month's read shows the fastest pace of input price growth in 5 years.

The ISM Manufacturing Index was released at 10AM and echoes data within the Markitt PMI. The ISM Index rose to 60.8%, well ahead of the expected 58.1% and at a +10 year high. Within the report new orders, backlogs and employment all grew and are driven by increased demand. The one red flag is rising prices, the prices paid index gained 9 points to hit 71.5%.

Construction spending was also released at 10AM and rose by 0.5%. This is slightly ahead of the 0.4% expected by economists and up 2.5% over this time last year. Gains were made primarily in resisdential construction, up 0.5% for the month and 11.3% over the past year. Non-residential construction spending is also up 0.5% this month but down more than -3% over last year.

Moody's Survey of Business Confidence fell -1.2% to hit 29.6%. This is the lowest level since late November last year. Mr. Zandi says the index shows no signs of wavering and that sentiment is strong and stable although I beg to differ. The definition in Websters says "to sway to and fro" and it looks to me like there is some swaying in the data. It has been a little erratic over the past year, appears to have peaked and is now sitting at levels not seen since just after the 2016 elections. Regardless, the index is still showing high levels of confidence relative to historical trends and consistent with economic expansion.

Third quarter earnings continue to trickle in. We've now seen 16 of the 500 S&P 500 reports and of those 13 have beaten revenue estimates and 13 have beaten earnings estimates. The blended rate of earnings growth is 4.2%, unchanged from last week. We are still expecting to see 8 of the 11 sectors post growth, led by energy, although estimates for 9 of the 11 are lower now than they were at the start of the quarter.

Full year 2017 estimates have held steady over the last week at 9.6% but forward outlook has firmed. Fourth quarter 2017 and first quarter 2018 estimates both increased by a tenth to 11.2% and 10.4% while second quarter estimate rose by 0.2% to 10.3%. Full year 2018 also gained a tenth to hit 11.1%. This is the third week of gains for 2018 earnings outlook.

The Dollar Index

The Dollar Index gained about a half percent on today's news. The rise in manufacturer's input prices is a warning sign to FOMC doves that the economy is expanding and maybe the Fed did indeed get inflation wrong. The CME's Fed Watch Tool strengthened on the news, showing a near 80% chance for rate hike by December. Today's move in the dollar tested resistance at $93.50 and looks like it could break through. This would be bullish in the near term with potentially long term implications should the Fed ramp up the tightening time line. A break above the down trend line near $94 would be more bullish with the possibility of full reversal in the dollar.

The Gold Index

Gold prices fell to a new low on dollar strength, the Trump Tax Plan and firming FOMC outlook. The spot price shed a little more than -0.50% to trade below $1,280 near $1,277. Now that gold had fallen below the $1,280 mark it could easily fall further. There are few catalysts on the calendar for the metal this week save the NFP which I think will support the dollar more so than gold. First target for support is near $1,275, a break below that level could take gold down to $1,250.

The Gold Miners ETF fell at the open but regained the loss and close with a small gain. Even so the ETF met resistance at the long term moving average and looks set to trend lower within its range. The indicators are both bearish and pointing lower in support of lower prices with first target just above $22.50 near the top of my down trend line. This line has provided resistance 4 times over the past year as the ETF trends within its range and will likely produce support on the way down. A break below the line and/or $22.50 would be bearish with target near the bottom of the range at $18.50.

The Oil Index

Oil prices fell more than -2% on signs of rising production. An increase in US rig counts coupled with news OPEC production rose last month sent prices down to test support near $50. Near term, prices are supported by hopes OPEC will extend the production cut along a small increase in demand expectation. This may keep prices above $50. The caveat is that higher prices will bring more supply onto the market and cap gains so it looks like oil will remain range bound whatever it does next. A drop below $50 would be bearish with the chance of moving down to $45, a bounce would be bullish with a chance of moving up to test $55.

The Oil Index fell in early trading, gapping down at the open, but there appears to be support just above 1,250. The index moved up from the open after a quick dip lower and created a long green bodied candle closing near recently set highs. Price action has been bullish over the past few weeks as oil prices have been on the rise, today's dip in prices offered up an entry point the market seemed to like. The indicators remain bullish although there is some sign of near term weakness consistent with a test of support within an uptrend. Near term support is just above 1,250, a break below there would be bearish with a possible target near the short term moving average. A bounce from this level would be bullish and in line with the near term trend with first target for resistance near 1,220. A break above that level may confirm continuation with target near 1,300 and a 1 year high.

In The News, Story Stocks and Earnings

Shares of gun companies rose on today's news but the move looks limited. American Outdoor Brands, formerly Smith & Wesson, gained close to 6% intraday but met resistance and formed a red candle. Today's action appears to confirm resistance at the short term moving average and top of a recently opened window. The indicators are bullish but have already begun to roll over in confirmation of resistance so a move higher doesn't look very likely. A break above today's high would be bullish but face additional resistance near $17.25. A fall from this level would be bearish and trend following with target near $13.25.

Ruger made a similar move. The stock jumped on the Las Vegas news as traders expect to see a rise in gun sales in response to fears of gun-right crack downs. Today's candle has formed a small doji confirming resistance at the midpoint of a recently opened window and the long term moving average. The indicators are a bit mixed in that they have ticked higher in response to today's move but also consistent with resistance at today's highs. Resistance is near $55 and the long term moving average, a break above which would be bullish. Support is near $50 and the short term moving average.

The VIX held relatively steady in today's trade with hardly a move in either direction. The index created a small red bodied candle to the side of Friday's candle and touching the low set then. The indicators persist in bearishness although momentum has subsided to near zero, perhaps in anticipation of upcoming earnings. Stochastic looks more bearish, firing a fairly strong bearish crossover low in the range and at the lower signal line. A move lower would be nice for us bulls but necessary for rally. At current levels the index is consistent with bull market conditions and new all time highs in the SPX. Resistance is near 10.50 and the short term moving average, a break above there would be bullish for fear in the near term.

The Indices

The indices proved resilient in the face of national crisis. Even the Dow Jones Transportation Average, which had been down more than -0.75% in early trading, was able to close with barely a loss. The index created a small doji candle testing near term support and may have entered into a pre-earnings season consolidation. The indicators remain bullish and consistent with an index in uptrend. Support is just below today's low near 9,800 with resistance just above today's high near 9,900. A move higher would be trend following with near term target in the range of 10,100, a move lower may find support near 9,600 and the short term moving average.

The Dow Jones Industrial Average gained nearly 0.70% to close at the high of the day and at a new all time high. The blue chips created a medium sized green bodied candle moving up from a trend line bounce and supported by the indicators. The indicators are a bit mixed but consistent with a move higher in line with the prevailing trend. Stochastic is the one area weakness having fired only a weak trend following signal (%D is still pointing lower). Upside target is near 23,000 near term.

The S&P 500 posted the 2nd largest gain, 0.34%, and closed at the highs of the day. The index created a small green bodied candle moving up to new all time highs in line with the prevailing trend. The indicators are both bullish having fired trend following bullish crossovers with the caveat the signal is still a bit weak. That being said there is little to stand in its way short of geopolitical news, Trump Agenda developments and economic data. Upside target is near 2,580 near term.

The NASDAQ Composite brings up the rear with a gain of 0.31% but is showing the most bullish signals. The indicators are in support of today's new high firing strong trend following bullish crossovers. Upside target is near 6,800 near to short term.

The markets are moving higher and nothing seems able to stop them. The good news is that these moves are supported by trends, current data and expectations which leads me to think there is room for the rally to run. I am bullish for the near, short and long term with an eye on earnings season. Better than expected earnings are virtually guaranteed, low estimates ensure that, it will be the guidance that truly moves the market. If the forward guidance remains stable the bull market should be fine. If the forward outlook improves we could see news highs persist into the end of the year.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Buy Defense

by Jim Brown

Click here to email Jim Brown

Editors Note:

In our increasingly complicated world, defense stocks are powering higher. Harris closed at a new high on Monday.


HRS - Harris Communications - Company Profile

Harris Corporation provides technology-based solutions that solve government and commercial customers' mission-critical challenges in the United States and internationally. The company operates in three segments: Communication Systems, Electronic Systems, and Space and Intelligence Systems. It designs, develops, and manufactures radio communications products and systems, including single channel ground and airborne radio systems, 2-channel vehicular radio systems, multiband manpack and handheld radios, multi-channel manpack and airborne radios, and single-channel airborne radios, as well as wideband rifleman team, ground, and high frequency manpack radios. The company also offers secure communications systems and equipment, including Internet protocol based voice and data communications systems, as well as single-band land mobile radio terminals and multiband radios comprising a handheld radio and a full-spectrum mobile radio for vehicles. In addition, it provides earth observation, environmental, exploration, geospatial, space protection, and intelligence solutions, such as sensors and payloads, as well as ground processing and information analytics for security, defense, civil, and commercial customers; and positioning, navigation, and timing products, systems, and solutions. Further, the company offers electronic warfare, avionics, surveillance and reconnaissance, command, control, communications, computers and intelligence, and undersea systems and solutions for aviation, defense, and maritime applications. Additionally, it provides managed services that support air traffic management; engineering support and sustainment for ground-based systems; and information technology and engineering managed services to government and commercial customers. The company was founded in 1895. Company description from FinViz.com.

Harris is a very strong defense company. As the description above states, they are very active in defense communications. This is a rapidly growing sector because of eavesdropping, jamming, spoofing or hacking into military communications as a clandestine attack in preparations for times of war. With the advent of drones this is becoming an even bigger area of trouble because a hacked drone can be stolen or even worse, used against friendly forces or population centers. Harris has 17,000 employees and nearly 8,000 engineers and scientists.

Harris shares exploded higher starting on the 14th and topped at $131 on the 20th. The stock is Dow reactive. When the Dow began to dip last week, Harris moved sideways. Shares broke out of consolidation on Monday to close at a new high. With North Korea stirring the pot, defense stocks are being bid higher.

Earnings Oct 31st.

I would not normally recommend a stock with this kind of short-term gain but the new high breakout could be the start of a new leg higher.

Buy Nov $135 call, currently $2.40, initial stop loss $129.35.


No New Bearish Plays

In Play Updates and Reviews

End of Quarter Cash

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow exploded higher as end of quarter cash inflows hit the market. Only 5 Dow components closed with a loss and there were plenty that posted gains. Financials and industrials posted gains while energy and Apple were the big losers.

This was more than likely end of quarter retirement funds hitting the market. The Nasdaq indexes were weak with the NDX barely closing positive. Half of the Nasdaq big cap stocks posted losses. There is still rotation underway into the small caps with the Russell up another 18 points to close well over 1,500.

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

ADI - Analog Devices
The long call position was entered at the open.

XRAY - Dentsply Sirona
The long call position was stopped at $57.25.

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


Continued headlines about problems with the iPhone 8 falling apart weighed on the stock despite a strong market. Also, analysts are cutting sales estimates for the iPhone X because of low yields on components. Manufacturers are reportedly way behind on orders.

I am going to put a tight stop on the position in case the rebound fails.

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 gave back half of the $2.35 gain from Friday. Seven of the 13 large cap tech stocks declined.

Original Trade Description: Sept 27th.

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

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

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

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

Expected earnings Dec 19th.

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

Position 9/28/17:

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

ADI - Analog Devices - Company Profile


No specific news. Shares down with the weak Nasdaq 100.

Original Trade Description: Sept 30th.

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

Expected earnings Nov 29th.

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

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

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

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

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

Position 10/2/17:

Long Dec $90 call @ $1.95, see portfolio graphic for stop loss.

CAT - Caterpillar - Company Profile


No specific news. No material gain after 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


Facebook turned over the 3,000 Russian ads to congress and Zuckerberg asked for forgiveness in letting Facebook increase the divisiveness in the country. He said he will try to make Facebook more neutral in the future. Previously, they were very liberal and suppressed conservative articles and news.

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.

Update 9/30/17: 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.

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


No specific news. Shares made another new high.

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.

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


Big Dow rally pushed the VIX close to its 9.36 24-yr closing low.

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


After closing at a new 6-week high on Friday, shares crashed today on a news headline. The Chairman, CEO and COO all resigned. The company said the resignations were not related to any issues at the company or any disagreements with policy. The company said the resignations were the result of the boards attempt "to better position the company to achieve its potential." We were stopped out at the open.

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:

Closed 10/02: Long Jan $60 call @ $2.70, exit $1.35, -1.35 loss

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