Option Investor

Daily Newsletter, Wednesday, 10/4/2017

Table of Contents

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

Market Wrap

October Off To A Bullish Start

by Keene Little

Click here to email Keene Little
October has continued the uptrend from August and it has most feeling very bullish about the market. Oddly enough, the bulls would have a better chance for a bullish month if it had started in a downtrend. There's a lot that's conspiring against the bulls this month but most are not considering the risk.

Today's Market Stats

The day started a little weaker than most recent days by gapping down instead of up. But the little dip was immediately bought and the indexes were pushed to new highs. That was followed by a steeper pullback for the RUT and tech indexes but only a partial pullback for the blue chips. As can be seen in the table above, the volume was on the low side and market breadth was about as neutral as it can get.

Following a long run higher, today's price action is either a bullish consolidation day or it's part of a topping process, even if the top will only lead to a multi-day pullback before heading higher. As I'll get into, there are a few reasons why October might not be kind to all those who are expecting the rally to continue this month, but it's also clear it's not a good time to try catching rising knives. I think it's a good time for both sides to exercise some caution.

Before the bell we got the ADP Employment report and at +135K it came in weaker than expectations for 160K and less than the +228K in August (which was lowered from the initial report of +237K). There was virtually no reaction in the futures after the release of the report and the same thing might happen with the nonfarm payrolls report this Friday. The impact from the recent hurricanes will get the blame and therefore any number will likely be ignored.

But with a continuation decline in Federal tax receipts there's reason for worry about a slowing economy, regardless of any government employment numbers. And it seems there's still only one concern -- WWFD (What Will the Fed Do). Any signs of economic weakness, which is not good for the stock market, is trumped by a Fed that will be forced into remaining accommodative to the stock market, I mean economy.

The ISM Services report was released at 10:00 and showed an improvement to 59.8 from 55.3 in August. It was also better than the 55.3 that was expected. Again, no reaction from the market. Economic reports are simply being ignored right now.

It's a quiet time for the market as it waits for earnings season to kick off and in this quiet period it's been good to be a bull. Just keep buying the little dips (that's all we're getting) and stay long. We're entering a typically volatile month so staying long through larger price swings could be a challenge for some, especially if they're late buyers. Each trader/investor needs to know where you want your stop levels (or none if you believe in the longer-term bull market) and then be sure to honor them. Or buy some puts for downside protection and then hope you don't have to use them (like all insurance we buy, we hope we'll never have to use it but it's nice when it's needed).

We made it through August and September unscathed by the bears and now it seems most everyone is looking forward to a bullish conclusion to the year as we enter the typically bullish 7-month period (October-April). But in a year that has defied the typical seasonal patterns should we be careful about the next seasonal pattern? Perhaps we should be a little more careful than the bullish masses right now and keep checking our six (behind us) now and then to be sure a bear attack doesn't sneak up on us.

For one thing, Octobers in the years ending in 7 have a reputation as bull killers, not the normal bear killer associated with the month. For another, entering the month of October in an uptrend tends to end up being a bearish month. October is known for its volatility so we should at least be prepared for a little more price swings than we've seen since August. That alone could jar more than a few bulls who have come to expect nothing but up.

What should be worrisome to bulls right now is that they're not alone. From a contrarian perspective, there are simply too many bulls (and therefore likely already invested in the stock market) and not enough bears. Trading in the direction of the majority works well (the trend is your friend) but it's important to identify when that trend could be in trouble. In a volatile month a reversal of the trend could lead to a whipsaw move to the downside and the fast move would likely come from panic selling.

The CNN Fear & Greed index following yesterday's close hit 92, a high not seen since before 2015 (as far back as the chart goes). The index closed a point lower at 91 today.

To give a sense for where we are with this Fear & Greed index, the chart below shows the past 3 years and compares the F&G highs with highs for SPX. The last time it was this high (above 90) was in July 2016, which was followed by a decent pullback into November. But notice that the highs for the index tend to be a little early in indicating when a market top is found. This chart tells us we're in countdown mode into a market top, even if for just a larger pullback/consolidation.

The bulls would certainly like to see nothing more than a flat consolidation this month and then higher into the end of the year. But there are additional reasons why the bulls might not want to test that theory, as I'll discuss further below.

CNN Fear & Greed index vs. SPX, October 2015 - October 3, 2017

As I mentioned earlier, the month of October tends not to do well when it starts off in an uptrend. I read some interesting statistics from Paul Schatz, Heritage Capital, where he discussed October stats that are dependent upon how it starts. Overall the month of October averages +0.5% since 1950, so not bad. But as Schatz notes, the average doesn't tell the whole story, especially for a month with October's reputation for volatility (and we're entering the month with nearly record-low volatility, which means put protection is cheap). He notes that any month typically does well when it starts in an uptrend and it's above the 200-dma, but October tends to fight this trend.

Statistics can't be used solely for trading but they do offer some heads-up information for what to be aware of. When the S&P 500 begins October in an uptrend, here are the stats:

-- First 5 days average return +0.66%
-- Second 5 days average return -0.26%
-- Third 5 days average return -0.30%
-- Last 5 days average return -0.25%

As opposed to the above stats, October tends to perform very well when it starts in a downtrend, which is typically how October starts when following a weak September. That did not happen this year.

From this, what we should be aware of is weakness for this October after the first 5 days. We're into the 3rd trading day, with lower performance than the average, and the statistics show that following this week it could be a more challenging environment for the bulls.

Combining October's stats with the extreme greed indication from the Fear & Greed index has me thinking October could be a lot worse than most expect. Add in the fact that we're now in October in a year ending in 7 (think October 1987, 1997 [Asian crisis] and 2007), mix in the problem with passive investing through ETFs and we might find out how difficult a "normal" pullback might be this month. That's all speculation but I see a tremendous amount of risk in this market right now. And I realize I'm in the minority with my opinion and I'm quite OK with that.

I think it's worth reviewing again the similarity between this October and October 2007, which I showed in my weekend wrap, since I also now see similar price projections have been met. To review, the next two charts below focus on the price action for SPX between July and October. Flip back and forth between them to focus on the price patterns and their similarity.

S&P 500, July-January 2007, Daily chart

Following a 3-wave pullback correction, July-August, another rally for the bull market continued into the October high. What I'm focusing on is the wave count for the rally from August into that October high, which is labeled i-ii-iii-iv, etc. An impulsive count is 5 waves and then multiples of 4 thereafter and the completion of an impulsive count is when to expect at correction of the move, if not a reversal.

The rally into the October 11th high was the 7th wave (wave-vii on the chart) and the expectation was for a pullback (wave-viii) and then one more push higher to complete the 9th wave (wave-ix). That final little 9th wave (the 5th wave of the series) was a no-show and I find this to be a common occurrence after a long run.

Back then I was pounding the table for bulls to get defensive (like I am now) and for bears to get ready. This was based on a long-term EW count and a price projection at 1576 (tagged to the penny on October 11th) and a shorter-term price projection based on the wave pattern for the August-October rally. The shorter-term projection is shown at 1571.52, which is based on a 5-wave move up from the August 28th low (the first pullback following the jump up off the August 16th low).

Adding to my bearishness at the time was the rising wedge pattern for the August-October rally (common in the final wave of a rally). But notice there was no bearish divergence at the October high, which is an example of why you can't always use bearish divergence/no divergence as proof of a trend's continuance.

With both price projections having been met, at 1571 and 1576, along with the reputation for the final little 5th wave (wave-ix) being a no-show, the break of the uptrend line from August was a key trigger event since it was the first indication the rally had completed. Now review the present chart further below.

S&P 500, SPX, Daily chart

The 3-wave pullback from July into August, like in 2007, has been followed by a rally into October. The wave count for the rally is labeled like above and shows we're now into the 7th wave (wave-vii), which has reached the top of a rising wedge pattern for the rally. It's also at the top of a parallel up-channel from April and it has met the price projection at 2540. That price projection is again based on the wave pattern and is like the 1571 projection in 2007. It's where the 5th wave of the leg up from August 29th (the first pullback low following the bounce off the August 21st low) equals the 1st wave.

So far the pattern is just like it was into the 2007 high. Now we wait for the next pullback to see if it will lead to one more push higher (wave-ix) or if instead the final little wave higher will also be a no-show. The next pullback will provide the clues needed -- a choppy pullback that holds above the uptrend line from August, currently near 2515, should lead to another push higher. The upside projection would be close to 2550. But a sharp decline that breaks the uptrend line could be another trigger event like it was in 2007.

Given the statistics about this month, discussed above, which suggests the rest of this month will be negative, now is a good time to take advantage of cheap put protection. The risk for those long the market is that a move down could accelerate quickly and possibly start with big gaps to the downside. Any sharp decline would spike the VIX and the cost of puts. Just some food for thought as you evaluate your own risk profile. The bigger risk, as I see it, is for the start of the next bear market, like 2007-2009 but maybe worse.

Key Levels for SPX:
- bullish above 2540
- bearish below 2488

S&P 500, SPX, 60-min chart

A closer look at SPX, with the 60-min chart below, shows the 2540 price projection was met today. If the rally continues on Thursday (it's been a steady accumulation since the September 25th low) I see upside potential to the top of a parallel up-channel for the leg up from the end of August, which is now near 2550. This is a slightly different look than the rising wedge shown on the daily chart above. But the bottom of the wedge (the uptrend line from August 29th) and the bottom of the up-channel from September 5th are close, both near 2520.

A multi-day choppy sideways/down pullback (from wherever a top is made) would provide us a clue that another new high should be expected (not guaranteed). A sharp break below 2520 would be the first clue that a major high could be in place (as significant as the October 2007 high).

Dow Industrials, INDU, Daily chart

There's a rising wedge pattern for the Dow and the top of it, currently near today's high at 22685, was hit yesterday and today. It did a little throw-over above the line today but closed below it. That's a very short-term sell signal and we'll see if we'll now get at least a little larger pullback correction before heading higher (depicted with the bold green lines).

The bottom of the wedge is near 22500, as is the uptrend line from November 2016 - May 2017, and therefore that's an important level for the bulls to defend. A break below 22500 would be the first indication a major high could be in place. Better confirmation of that would be a drop below the August high at 22179. The Dow is clearly in an uptrend and that needs to be respected until proven otherwise.

Key Levels for DOW:
- bullish above 22,820
- bearish below 22,179

Nasdaq-100, NDX, Daily chart

NDX is also sporting a rising wedge pattern but much shallower than the blue chips. It's currently near the top of the wedge, at 6023, and while the NDX could rally much higher, it's a good place to watch for a reversal. The bearish divergence since July supports the bearish interpretation of the wedge. If the bulls can keep the rally going and NDX makes it above 6027, for two equal legs up from September 25th, maybe we'll see a melt-up to the trend line along the highs since November 2014, currently near 6140.

Key Levels for NDX:
- bullish above 6027
- bearish below 5840

Russell-2000, RUT, Daily chart

If you want to see what a melt-up looks like just looks at the RUT's rally from August. If you look at an intraday chart you'll see the uptrend lines have been getting steeper and only yesterday did it break its steepest uptrend line (from September 26th). It's now showing bearish divergence since the September 27th high (not on the daily chart) and with it up against the top of a steep and narrow up-channel it's looking ready for at least a consolidation.

For the bullish potential I show just a consolidation over to the bottom of its up-channel where it intersects the uptrend line from February-November 2016, near 1496 next Tuesday. From there (assuming it will chop its way over to there) another leg up into mid-October would give us a 5-wave move up from August. But will get the final 5th wave? A drop out of the up-channel and below 1485 would have me thinking a top is already in place.

Key Levels for RUT:
- bullish above 1485
- bearish below 1452

Biotechnology index, BTK, Weekly chart

I was looking through other indexes to see if any are providing clarity to what we should expect next. The banks are in a choppy pattern and not much help. The TRAN has reached the top of a parallel up-channel and looking ready for a rollover but no clear signals there either. I then noticed an interesting weekly pattern for the biotech index. The strength in this index (+40% this year) has helped the RUT and therefore is worthy of a look-see in order to help determine what could drive the RUT higher (or not).

Following a 3-wave pullback from July 2015 into its February 2016 low it now has a 3-wave rally (both the pullback and the rally are labeled a-b-c). The c-wave of the rally, which is the leg up from November 2016, is a rising wedge and the 5th wave of it looks like the leg up from August 21st. The c-wave would be 162% of the a-wave at 4348, which is not far from today's high at 4297. It's near the top of the wedge and if the rally fails from anywhere near here it's going to look like a double top.

The downside projection out of this pattern is well below the February 2016 low at 2575 since a big C-wave in the A-B-C pullback pattern off the July 2015 high is 162% of the A-wave. That projection is near 1304 and would result in a test of a longer-term uptrend line from 2002-2008 by mid-year next year. That would be a 3000-point drop from 4300 (70% decline). This is the kind of downside risk I see in the next bear market and the risk for the RUT is equally as severe. That's not so much a prediction as a warning about the risk for those who simply hang on during the next decline because "it always comes back." Maybe in two decades.

U.S. Dollar contract, DX, Weekly chart

The US$ might have bottomed and started a reversal back up. I thought it would make it down to 90 to hit the trend line along the lows since 2015 (the bottom of an expanding triangle), and it still might. It will be important to see what happens in the coming week since a continuation higher would be a clear breakout from its down-channel from April. It would leave a head-fake break below its 200-week MA in September and with the weekly oscillators turning back up we could soon see a stronger rally.

A stronger dollar, if it continues to rally from here, could hurt stocks, especially the large international companies. Also likely to get hurt would be commodity prices since most are priced in dollars. A higher dollar would also hurt emerging markets since many countries have debt priced in dollars and a higher dollar devalues their local currencies. So it's important what the dollar does from here.

Gold continuous contract, GC, Weekly chart

Gold is nearing a critical support level, which is the broken downtrend line from 2011-2016, currently near 1263. If gold is to remain bullish it will use a back-test of the trend line as support and then continue rallying. A drop below 1263 would be a heads up warning and then below its uptrend line from December 2016 and its 50-week MA, both near 1244, would a further bearish sign. We'll have to let price lead the way from here before we'll have more clues about the larger pattern. If silver is any indication, it's looking more likely gold will break down.

Oil continuous contract, CL, Daily chart

Oil looks ready to reverse back down, which supports the idea that the dollar is ready to rally stronger. Oil's weekly chart shows it bounced back up to its downtrend line from May 2015 - January 2017, its broken uptrend line from 1998-2008 and its broken uptrend line from April-November 2016, all of which were between 52 and 53 last week. Two equal legs up for the rally from June is near 54 and therefore a rally above 54 would be a bullish break of several layers of resistance. But until that happens I think there's a greater likelihood for oil to break down and head for the January-February 2016 lows near 26.

Economic reports

Thursday's economic reports will likely be ignored, especially if there are no surprises. Friday's nonfarm payrolls report could spark a little volatility but the bar has already been set low, with expectations for only +100K, so there likely will be little reaction to whatever the number is.


I've outlined my reasons for why I think we could be facing a major bear market following a high this month. I think the risk of it happening is a good reason for using some downside protection (puts, shorts, inverse ETFs, etc.). Or stop out on a breakdown and get into cash and wait for the next buying opportunity.

But many are calling for this rally to not just continue but to continue into a melt-up, similar to what was seen in the late 1990s. That's certainly a possibility, in which case our technical indicators essentially need to be thrown out the window. Just get long and hang on for the ride. It's a big reason why bears need to be super cautious here and be sure to honor stops if short and the market keeps rallying. Or buy some cheap call options for insurance. Another 100-200 points for SPX could happen quickly.

I lean bearish but I'm waiting for confirmation from price and right now we do not have any indication that a high is in place. I see the risk for a high in place here but stick with the trend (up) while leaving the exit door propped open for a quick exit before the crowd jams the doorway. I sense an early Halloween boo scare in the next few days. Stay on your toes!

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

New Option Plays

Professional Equipment

by Jim Brown

Click here to email Jim Brown

Editors Note:

That title probably brings up images of computers, large copiers or xray machines. Actually one of the most used items of professional equipment is the riding lawnmower.


TTC - Toro Co - Company Profile

The Toro Company designs, manufactures, and markets professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products worldwide. Its Professional segment offers turf and landscape equipment products, such as sports fields and grounds maintenance equipment, golf course mowing and maintenance equipment, landscape contractor mowing equipment, landscape creation and renovation equipment, rental and construction equipment, and other maintenance equipment; snowplows, salt and sand spreaders, and related parts and accessories; sprinkler heads, electric and hydraulic valves, controllers, computer irrigation central control systems, and micro-irrigation drip tape and hose products, as well as professionally installed lighting products. This segment markets its products to professional users engaged in maintaining golf courses, sports fields, municipal properties, agricultural fields, residential and commercial landscapes, and removing snow through a network of distributors and dealers, as well as directly to government customers, rental companies, and retailers. The company's Residential segment provides walk power mowers, riding mowers, snow throwers, replacement parts, and home solutions products, including trimmers, blowers, blower-vacuums, and underground and hose-end retail irrigation products. This segment sells its products to homeowners through a network of distributors and dealers; and an array of home centers, hardware retailers, and mass retailers, as well as through the Internet. The Toro Company was founded in 1914. Company description from FinViz.com.

Earnings Nov 23rd.

When people think about lawn mowers, the gasoline powered push version is the most common vision. However, you do not see people using those versions when grooming sports fields, apartment houses, city green spaces, golf courses, etc. This is Toro country. The large scale riding mower is the bread and butter for companies servicing those large open spaces.

For Q2, revenue rose 4.5% to $627.9 million and earnings rose 22% to 61 cents. That beat estimates for 57 cents. Revenue matched estimates. Toro's professional segment revenues rose 9.5% to $468.6 million.

However, residential revenues declined -9.3% because the company held its "Toro Days" sales promotion in April rather than May. The shift in timing of sales and revenues caused the decline. Shares were crushed despite the valid reason behind the shift in revenue.

Toro raised guidance for the full year from $2.35 to $2.38 and said revenue would rise "at least" 4.5% up from "about" 4.5%.

Shares are recovering from their post earnings crash and closed at a six-week high on Wednesday.

Buy Dec $65 call, currently $1.60, initial stop loss $60.35.


No New Bearish Plays

In Play Updates and Reviews

Touch and Go Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

It was a battle to close positive but the big cap indexes squeezed out a win. The end of quarter retirement cash flows faded and the market's gains faded with them. The S&P and Nasdaq only gained 3 points and the Dow almost finished in negative territory but ended with a minor gain.

The Russell 2000 lost 4 points, which was minimal considering the recent gains. The Russell was expected to be weak and it appears there is some reverse rotation underway with money flowing back to the big caps.

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

LOW - Lowes Companies
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


The EU is suing Ireland over failure to collect the right amount in taxes from Apple. This argument stems from a deal Apple struck with Ireland from 2003 to 2014 in exchange for putting some Apple offices in Ireland. The EU claims Apple owes $15 billion in back taxes. Ireland has been on the side of Apple but with the EU suit, there will probably be some eventual payments.

More rumors surfaced that suggested the X deliveries could be pushed out until December. There was also a tweet from a tech guru that claimed the display would not be as bright or clear as expected. He said instead of the expected 458 ppi, it could be as low as 326 ppi because of battery life and power consumption.

There are continuing claims about the batteries in the 8 swelling when charging and causing the case to break.

With all of these problems and the lack of forward motion, I am recommending we close this position.

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.

Update 10/3/17: Apple shares rose slightly after a RBC Capital Markets survey found that 28% of respondents were interested in buying the iPhone X. Only 17% were thinking about an iPhone 8 and 20% were interested in an iPhone 8+. Also, 57% of the people thinking about buying the X were planning on getting the more expensive 256 Gb model. Apparently, Apple faithful really want the X.

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 faded slightly with the weak Nasdaq.

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. Nice gain to a new closing high.

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. An analyst normally bearish on the sector said the decline in prices for used equipment seems to have slowed and inventory levels were shrinking. He said the US earth moving markets are recovering. Shares rallied to a new 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 continues to be under pressure for the Russian ad scandal plus the EU is now targeting them for more tax money and is concerned about what data FB collects and what the company shares with advertisers. Every day is a new headline. Shares failed at resistance and with the weak Nasdaq I am recommending we close this position.

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.

Update 10/2/17: 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.

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.

HRS - Harris Communications - Company Profile


No specific news. New closing high.

Original Trade Description: Oct 2nd.

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.

Update 10/3/17: Harris was awarded a $765 million contract to provide radios to the Navy for the next 5 years. Two months ago, they won a contract for $255 million to build radios for the US special operations forces. Last year they won part of a $12.7 billion 10-year contract to build radios for the Army.

Position 10/3/17:

Long Nov $135 call @ $2.40, see portfolio graphic for stop loss.

IIVI - II-VI Inc - Company Profile


No specific news. New high close on Monday.

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.

LOW - Lowes Companies - Company Profile


No specific news. Shares still fighting resistance at $81.50.

Original Trade Description: Oct 3rd.

Lowe's Companies, Inc. operates as a home improvement company in the United States, Canada, and Mexico. It offers a line of products for maintenance, repair, remodeling, and decorating. The company provides home improvement products in various categories, such as lumber and building materials, tools and hardware, appliances, fashion fixtures, rough plumbing and electrical, seasonal living, lawn and garden, paint, millwork, flooring, kitchens, outdoor power equipment, and home fashions. It also offers installation services through independent contractors in various product categories; extended protection plans; and in-warranty and out-of-warranty repair services. The company sells its national brand-name merchandise and private branded products to homeowners, renters, and professional customers; and retail customers comprising individual homeowners and renters. As of March 24, 2017, it operated 2,365 home improvement and hardware stores. The company also sells its products through online sites comprising Lowes.com and Lowesforpros.com; and through mobile applications. Company description from FinViz.com.

Earnings Nov 22nd.

Home Depot (HD) is setting new highs every day and it is too late to take a position in that stock. We already have one in the LEAPS newsletter. Lowes is in the same business and is on the verge of clearing resistance to make a four-month high. They will benefit as much as Home Depot in the post hurricane rebuilding boom.

Lowes reported earnings that missed expectations because of some unusual events and they provided weak sales guidance. This was the week before Hurricane Harvey. Shares fell 6% on the news. Credit Suisse said despite the earnings miss there were bright spots and the miss was also due to a calendar quirk that reduced sale days in the quarter. Earnings still rose 14%.

Credit Suisse reiterated an outperform rating and $95 price target. Again, this was before the hurricanes. Sales should be significantly higher for Q3.

Shares have rebounded to resistance at $81.50 and should continue to move higher as investors begin to look for underperforming stocks after the big market move higher. Rather than buy stocks at new highs after the big gains they will look for promising stocks with room to run.

Position 10/4/17:

Long Jan $85 call @ $1.89, see portfolio graphic for stop loss.

TER - Teradyne - Company Profile


No specific news. New closing high.

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 VIX has posted fractional gains for the last two days. Worries over end of quarter cash flows fading?

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.

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