Option Investor

Daily Newsletter, Saturday, 10/7/2017

Table of Contents

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

Market Wrap

Holding the Gains

by Jim Brown

Click here to email Jim Brown

The markets traded sideways on Friday but that was bullish given the recent gains.

Weekly Statistics

Friday Statistics

The Dow ended a seven-day winning streak and came within 1.7 points of making it eight days. The S&P ended a six-day streak of gains with a 2.7-point loss. The Nasdaq stretched its winning streak to nine days with a 5 point gain. The Russell 2000 only gained five points from Monday's close to Friday's close but that came on top of a 162-point rebound so any gain was unexpected.

There are a lot of events in our future and that could have produced some event risk selling on Friday but it was so light it was not material. A Russian official just back from North Korea said the country was preparing for another missile launch in the days ahead. October 10th is the expected date. President Trump is expected to cancel the Iranian nuclear deal next week and recommend new sanctions. After a meeting with his military advisors on Thursday, Trump asked reporters if they knew what the meeting represented. He then said, "Maybe it is the calm before the storm." When asked about the comment later he winked and said, "You will find out soon." Those comments had people running in circles on Friday. On top of that, it was rumored that Secretary of State Tillerson was going to be replaced as early as this weekend.

Given those worries and the big drop in job numbers, it was bullish to see the Nasdaq extend its streak to nine days and support the market.

The big economic report for Friday was of course the Nonfarm Payrolls. Estimates were in the 75,000-100,000 range with 156,000 added in August. The headline number for September showed a loss of -33,000 jobs because of the impact of the multiple hurricanes. The prior two months were revised lower by a total of -38,000 jobs with July dropping -51,000 while August rose by 13,000.

The biggest hit to September was a decline of 111,000 jobs in the leisure/hospitality sector. Analysts theorize this was due to restaurants/bars being closed in Texas and Florida. Transportation and warehousing saw a gain of 22,000 jobs and government gained 7,000 jobs. Insurance gained 11,000 because of the surge in claims processing.

More than 2.9 million people were working only part time because of the weather while 1.5 million had jobs but were not working because of the weather.

The unemployment rate declined from 4.4% to 4.2% and the labor force increased by 575,000. The labor force participation rate rose from 62.9% to 63.1%. That is the first time over 63% since early 2014. Average hourly earnings rose 0.5% and now up 2.9% for the last 12 months.

Despite the negative headline number, analysts said this report showed the strength in the economy with huge numbers of people entering the job market and the sharp uptick in the wages. They said the Fed is likely to see enough strength here to hike rates in December. The dollar and the yield on the ten-year both shot higher on the news but faded back to flat by the close.

The drop in the payroll numbers caused the expectations for consumer spending to decline from 2.5% growth to 2.2% and changed the Atlanta Fed real time GDPNow forecast for Q3 from 2.8% to 2.5%.

Wholesale inventories for August rose 0.9% and matched analyst estimates. The prior three months all showed a 0.6% gain. Sales of durable goods rose 2% with nondurable goods rising 1.5%. The report was ignored.

The economic calendar for next week will be focused on the PPI and CPI and their impact on inflation. With the Fed unsure about a December rate hike, they will be focused on the price indexes for the next three reports. They would love to see 2% inflation to justify their rate hike.

The FOMC minutes on Wednesday are always important, especially when the various Fed speakers are out spinning different views on the future of rates. On Thursday, Harker was ready to hike under the scenario of hike now to be ahead of inflation growth. On Friday, Kaplan was in favor of holding off on the decision until additional data was available. The minutes are a look into the meeting to see what the group was thinking.

The first signs of Q3 earnings appear later this week with the bank stocks the first to report. JPM will be the first Dow component to report on Thursday but there will be 22 others reporting over the next two weeks.

To date, 23 S&P companies have reported for Q3 and 87% have beaten earnings estimates while 78.3% have beaten on revenue. For the quarter, earnings are expected to rise 4.9% and revenue expectations are for 4.3%. However, over the last four years, Q3 estimates have averaged about 4% below the final number. If the trend holds, that would give us about 8.3% for the quarter. The next three quarters are expected to average about 10% with Q4 at roughly 12% earnings growth. There have been 77 guidance warnings for Q3 with 48 positive guidance revisions. The current forward PE for the S&P is 18.0.

The big earnings disaster for Friday was Costco (COST). The earnings were great but the reaction was terrible. The company reported earnings of $2.08 that rose 17.5% and beat estimates for $2.02. Revenue of $42.3 billion rose 15.8% and beat estimates for $41.74 billion. That compares to $1.77 and $36.56 billion in the year ago quarter. Membership fees rose 13% to $943 million.

Same store sales were up 6.5% in the US and 5.7% globally. Analysts were expecting 5.2%. E-commerce sales rose 21%.

For the 5-week period ending Sept 30th. US same store sales were up 9.0%, Canada 9.4%, international 8.2% and total company 8.9%. E-commerce sales were up 30%. No weakness here!

Analysts and the talking heads on stock TV keep talking about the impact of Amazon dragging down Costco. Show me in the numbers above where Costco sales and earnings are dragging. In a recent survey by BMO Capital, they found that Costco consistently had lower prices and faster shipping than Amazon. They surveyed 16 categories and Costco was an average of 7% cheaper than Amazon. Shipping took an average of 4.5 days from Costco compared to 5.5 days from Amazon. Wal-Mart and Jet.com had prices that were 18% higher than Amazon and average shipping was 9.8 days.

Costco now has free 2 day shipping from 355 of its 741 stores through CostcoGrocery and faster shipping in as little as 2 hours is available with partner Instacart. Costco is not just sitting around waiting for Amazon to catch up. They are actively investing in the e-commerce platform and expanding it to their other stores. With a Costco or two in every major population center, they have an edge on Amazon because the products are already local for most people and that makes shipping faster. Amazon does have a larger number of items but that is not a negative for Costco. They have always had a variety of items based on buying opportunities and they may not have the same exact items on every visit. This allows Costco to buy cheaper and pass the savings on to the customer.

Costco also has its own private label brand in the Kirkland label. Last year Kirkland was the largest selling grocery brand on Amazon. Yes, on Amazon.

Unfortunately, for the stock, perception is reality. If enough talking heads say Amazon is killing Costco then that becomes the perceived reality and shares tank. That is what happened on Friday with COST down $10 after earnings.

Morgan Stanley downgraded from overweight to equal weight and $165 target. Goldman Sachs downgraded from conviction buy to hold. Shares fell to $157 and the $150 level is strong support. I would probably not buy it on Monday because the post earnings drop last time lasted several days. The Goldman downgrade could be persistent. I would be a buyer once a rebound begins. I would rather buy it a couple dollars higher than buy it too soon and be a couple dollars early.

Netflix (NFLX) continued to explode higher after they announced a price hike on Thursday. The middle plan will rise from $9.99 to $10.99, top tier 4K plan will rise from $11.99 to $13.99 and the basic plan remained at $7.99. Most analysts believe Netflix is priced well below the value of its service and these minor increases are not expected to create subscriber flight. RBC Capital said the content, not the subscription price is creating the subscriber churn. Netflix has dropped a lot of the older shows in order to concentrate on new original content. They are planning on spending $6 billion in 2017 and negative cash flow will be $2.0-$2.5 billion.

UBS raised its price target to $225 from $190 saying the company will probably post Q3 subscriber growth numbers that will blow away estimates. The analyst said the Q2 growth number probably persisted or even accelerated as advertising and word of mouth spreads in the 190 countries where they are now streaming. I think the UBS estimates are low. The analyst expects only 100,000 new US subs and 300,000 internationally. Earnings are Oct 16th.

Yum China (YUMC) reported earnings of 52 cents but analysts were expecting 56 cents. However, same store sales rose 6% and double expectations. The company said "food quality investments" led to lower margins and earnings. Bernstein cut estimates for the full year based on the declining margins. Labor inflation is also a factor with wages in China rising sharply over the last two years. The current CEO, Micky Pant said he was being replaced by Joey Wat, the COO since February. The switch will occur in March. Shares rose slightly despite the earnings miss.

Amazon (AMZN) is about to become the biggest drug dealer in the world. The decision could come soon as Jeff Bezos has been in talks with just about everyone involved in the industry. Amazon was an original investor in Drugstore.com with Bezos on the board. Walgreens purchased the site and shut it down in order to attract more people to Walgreens.com. There is almost no chance Amazon will not enter the business simply because of the monster profits, inflated pricing and multiple middlemen. Amazon has the power to go direct and it is going to be painful for companies like CVS (CVS), Rite Aid (RAD) and Walgreens (WBA). All of those stocks crashed on Friday.

Amazon now has 105 fulfillment centers with 35 new ones in the planning stages. Recently, Amazon has been buying up defunct shopping malls. They typically have a lot of acreage, good electric power and utilities and they are in population centers with a large labor pool. This allows faster delivery of merchandise since the malls are in large cities. Amazon increases its merchandise volume by 40% or more every year. That means they have to double their capacity every two years. In 2014, Amazon had over 10,000 operational robots. They are now thought to have more than 80,000 robots in those centers. Since more than 400 malls have shutdown over the last couple of years, there is plenty of opportunity for Amazon's growth.

The company is now developing a new delivery system called Seller Flex. It will allow Amazon to take control of the "last mile" in the delivery chain. That is currently handled by UPS, FedEx and the post office. Amazon already has 40 cargo jets and more than 5,000 semi trailers that deliver packages from fulfillment centers to UPS, FDX and US mail hubs. Instead of those carriers hauling packages all across the country, they only have to carry them from the local hub to the local consumer. Amazon gets a huge discount in rates for this service. It is not clear how Amazon is going to handle the last mile delivery and it will not happen overnight. It could take years, but the company is moving in that direction.

Hurricane Nate made landfall in Louisiana as a category 1 storm with winds of 90 mph. The path took it through a large portion of the oil patch just south of New Orleans. As of Friday evening 71% of oil production had been shutdown. That is roughly 1.25 million bpd. Over 53% of gas production had also been shuttered. Oil companies have been working for four days to shutdown the platforms and evacuate the workers to land. Nate is a fast moving storm and should be well out of the Gulf by early Sunday.

The platforms are built to sustain 90 mph winds but that does not mean there will not be damage. It could take a week or more to repopulate the platforms and additional days to repair any damage. Analysts believe US inventories could decline by 10-15 million barrels or more depending on the damage and the time out of service.

Crude prices fell sharply on Friday with a $1.50 drop. Despite the expected drop in gulf production, there are continued worries over a prolonged global glut. Even with Iran, Turkey and Iraq planning to shutdown production from Kurdistan, the prices are still falling. With Kurdistan planning to seek independence, those three countries are going to try and starve it into submission by cutting off their exports of 600,000 bpd. If they can shut these pipelines that would do wonders for reducing global inventories because it could be a long-term situation.

The US problem is the lack of demand. The driving season is over and the heating oil season has not yet begun. October is typically a low demand period and prices normally decline until around Thanksgiving.

Saudi Arabia's King Salman visited Russia last week. They talked about oil production cuts and a Russian official said the cuts could be extended until the end of 2018. Russia also agreed to sell military equipment to Saudi Arabia. Oil has been kind to the Saudi royal family. King Salman brought an entourage of 1,500 people with him to Moscow. They booked the entire Four Seasons and Ritz Carlton hotels. Even people who live permanently in those facilities were forced to leave for the duration of the King's visit. He brought his own furniture, his own carpets, his own cooks, his own hotel staff and his own food. Each day a Saudi plane arrives with roughly 2,000 pounds of fresh food for the group. The king had his special gold escalator flown to Moscow just so he could exit his personal 747 in style. Unfortunately, it stopped halfway down and the king had to walk the final few steps. He then walked on a painted red path across the tarmac, resembling a red carpet, until he reached his motorcade. Even at $50 oil, Saudi Arabia is still doing well financially.


The markets are proceeding contrary to the normal trend for this time of year but there are multiple reasons the rally could continue. Positive earnings projections could reach 9% growth for Q3 and average 10% growth for the next three quarters. The Fed is in accommodative mode and even if they did hike in December and the expected three times in 2018 that would only put them at 2.25% at the end of 2018. The winding down of the balance sheet has begun at a snail's pace that will take them years to reduce it significantly. The economy is accelerating except for the hiccup we are going to see for Q3 because of the storms. Manufacturing activity is at a 13-year high. Services activity is at a 12-year high. Intermodal rail traffic is at a record high. Semi truck sales are up 62% over the last 12 months. Air travel is at a record high. Tax reform of some kind will likely be enacted over the next six months. More than likely it will be favorable to corporations and that will increase earnings. For every 1% decrease in corporate taxes, S&P earnings will rise by $2. All of these factors are positive for the market.

While those fundamental factors will be positive for the market long term, there can always be periods of weakness. It has been 461 days since the S&P had a 5% retracement. The average is twice a year. The markets do react to headlines but they do not need an external reason for profit taking.

The recent dips have been shallower and shorter each time. Portfolio managers and investors who were expecting the normal Sep/Oct volatility were left behind and they are eagerly buying every minor decline.

The next potential hurdle could be the budget and debt ceiling deadlines in early December. The reason we did not have volatility in September is because those were pushed out 90 days until December. If the market continues higher until December, we could see some significant profit taking if those events begin to generate ugly headlines. With only a few weeks left in the year, there would be no reason to risk existing profits and the potential for a government shutdown.

All of those events above are long term. For next week, we could see the rally continue even if some profit taking appears. The economic put is in and we need to keep buying the dip until proven wrong.

The AAII sentiment survey showed some neutral investors picking a side. A few turned bullish with the market at new highs BUT more turned bearish, suggesting they do not believe the rally will continue. Just remember, the herd is normally wrong. In this case all three camps are nearly equal so there is little to be learned from the survey this week.

The Volatility Index set a new 24-year low at 9.19 on Thursday. This extended period of low volatility could last if the market continues higher but historically, long periods of low volatility are normally followed by periods of high volatility. This is a trailing indicator rather than a predictor of future market moves. It is a flashing warning sign.

The S&P is in breakout mode and well over uptrend resistance. It is over extended and a drop back to that uptrend line around 2,525 could be expected without damaging the uptrend. A dip to 2,500 would be a little more detrimental but that would only be a 2% decline and represent another buying opportunity. With Q3 earnings kicking off with the banks next Thursday, I do not expect a significant decline to appear.

The Dow almost recovered enough on Friday to close positive and extend its streak for another day but could not push through that final 2 points. Actually, this is a good thing. Without the pressure of a long streak that keeps traders on the sidelines until it breaks, the buyers can now appear.

The Dow components were almost evenly divided between advancers and decliners but the $1.50 drop in crude prices put Chevron and Exxon in the loser column with Chevron erasing 10 Dow points.

The acceleration on the Dow over the last several days has put the index into overbought status and support is well back at about 22,500 or even 22,275. That would be a major blow to short-term market sentiment but not to the long-term rally. It would be another dip to buy. Only one Dow stock reports earnings this week but 20 will report over the next two weeks. That earnings lure should keep investors interested in the Dow stocks.

The Nasdaq has rebounded 237 points since the September 25th low. The index has broken out thanks to a resurgence of the big cap stocks. Once the rotation into small caps faded, the big cap techs began to see investors returning.

The initial resistance of about 6,650 with longer-term resistance around 6,800. The same earnings lure should keep the Nasdaq on an upward path even if there are some pauses along the way. The 6,460 level that was strong resistance for two months, should now be support if a material decline appears.

In the dictionary under the word "overextended" is a picture of the Russell 2000 chart. The index is holding its gains of roughly 162 points since the August 21st low but it is struggling. The last four days have been touch and go but it closed on Friday only 2 points off its record high. Needless to say, there could be some retracement ahead. However, if the Russell were to continue higher there would be additional short covering and it would be good for market sentiment.

I believe the markets will continue to stair step higher. I do not expect uninterrupted streaks to continue because once we do get into earnings there will be disappointments. The key will be to pick your entry points and save some cash back in case a real buying opportunity appears.

Tuesday is rocket man day but unless he actually fires one over Japan and explodes a nuke in the Pacific, I would expect very little market reaction. North Korea is old news now. There is the potential for a single cruise missile to explode on the NK launch pad as a message. This could be the storm President Trump was alluding to last week. The market would react very negatively to an event like that. However, Kim Jong-Un could react unpredictably and that makes a missile strike a very low probability.

Just focus on the market and continue buying the dips.

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

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Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws."



Index Wrap

Let the Good Times Roll!

by Jim Brown

Click here to email Jim Brown
Despite being overbought, the major indexes continued to pack on the points.

The Dow managed to add 368 points for the week, S&P 29 and Nasdaq 94. Even the Russell 2000 added another 19 points to finish only 2 points below its recent high. The Dow and S&P broke their consecutive streaks but the Nasdaq stretched its winning streak to nine days.

The week started out with three days of quarter end cash flows fueling the rise and then shifted into a rotation back into large caps with the Nasdaq closing at a new high.

The internals were negative on Friday despite the minor losses on the Dow and S&P. Decliners of 4,197 beat advancers of 2,880. Declining volume was 3:2 over advancing. New highs dropped from 1,019 on Thursday to 571 on Friday. Three days last week had more than 1,000 new highs with Tuesday the winner at 1,140. Those are very strong numbers and the most since June 2nd at 1,108.

Despite a minor setback on Friday, the advance/decline line on the S&P is still strong. This is our unofficial sentiment indicator for the market. As long as the A/D line is rising the market will continue to rise as well. The S&P has been seeing a lot of buying even when the Russell was leading the market higher. Note that over the last two weeks the A/D line was unbroken until Friday's minor dip. The positive expectations for earnings are lifting all stocks.

The S&P blew through the uptrend resistance at 2,525 but stalled at 2,550. That level is decent resistance because numerous analysts had pegged it as the year end closing level along with 2,500. Over the last two weeks we have seen some estimates as high as 2,650 and 2,700 so analysts are seeing green shoots everywhere and upping their numbers.

The oscillators are still positive and there is no sign of an impending decline. We will probably see some profit taking at some point this week but it should be minor. With Q3 earnings launching on Thursday with the banks, investors should be placing their bets rather than taking chips off the table.

The Bullish Percent Index on the S&P has risen since mid August but it is approaching resistance at 73%. This is the percentage of S&P stocks with a current buy signal on a Point and Figure chart. Basically this is a combination of 500 charts to show a sentiment trend.

The Russell 2000 has rebounded 162 points from the August 21st low but it is showing no indications of an impending sell off. The rally stalled at 1,510 and the index spent the last four days consolidating its gains without any material declines. This is remarkable. It does not mean there will not be a decline but investors have jumped on every minor dip and there is no reason for that to end ahead of earnings.

Note that the A/D line for the small caps faltered last week just like the index itself. The A/D did not decline but the steady rise did come to a halt.

The Dow only missed a new high on Friday by less than 2 points. When you consider the weekend event risk and the 386 points gained for the week, that is bullish. It means that even in the face of negative headlines, investors were not willing to sell. If it were not for the $1.50 drop in crude prices, it would have been a positive close.

The banks begin reporting Q3 earnings this week with JPM before the bell on Thursday. They are expected to beat estimates but the conference call will be the key. With rate expectations rising, the bank should have positive guidance. JPM rarely moves the market but along with Citigroup on Thursday, they will definitely move the financial sector, which is already at post crisis highs. That would impact other Dow components including TRV, V and AXP.

The Dow is well over uptrend resistance and support is well below. Any material dip will likely establish a higher support level rather than fall back to the September level at 22,250. That would be a 500-point drop to get to that level and without North Korea launching a nuke into the Pacific, I do not see it happening this week.

The rotation back into the big cap tech stocks helped lift the Nasdaq to new highs. Near term resistance is around 6,650 and prior resistance at 6,460 should now be support. The big cap tech stocks being reporting on the 16th with Netflix and the top ten tech stocks do move the market when they report. With the Nasdaq extended over prior resistance it may be susceptible to some profit taking if we have some earnings disappointments.

The Nasdaq A/D line has also been almost unbroken for the last seven weeks and that streak will eventually end. There is no comparison to the prior four months.

The semiconductor correlation with the Nasdaq remains intact with a perfect match over the last two weeks. The chip stocks are making new highs but they are at the top of their recent trend and extended well above the 100-day average as support. I do not see them declining that much because everything you buy is full of chips. Eventually profit taking will appear and it could come after earnings.

There are no major events on the horizon that should knock the market lower next week other than some stupid move by North Korea on Tuesday. The economic reports are not market movers and everyone should be expecting further gains rather than a sudden decline. However, the market does not care what we expect and the algorithmic computers could disrupt it at any time. I would continue to buy the dips until proven wrong.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Bucking the Trend

by Jim Brown

Click here to email Jim Brown

Editors Note:

Hertz Global is bucking the analyst trend and setting new highs. Blame it on the shorts or on rising car values.


HTZ - Hertz Global - Company Profile

Hertz Global Holdings, Inc., an airport general use vehicle rental company, engages in the vehicle rental business in North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East, and New Zealand. The company operates in three segments: U.S. RAC, International RAC, and All Other Operations. It offers vehicle rental services approximately from 1,600 airport rental locations and 2,600 off airport locations in the United States; and 1,400 airport rental locations and 4,100 off airport rental locations internationally to business and leisure customers. The company operates the Hertz, Dollar, and Thrifty vehicle rental brands in approximately 9,700 corporate and franchisee locations; and sells ancillary products and services. It also owns the vehicle leasing and fleet management business that operates the Firefly and Hertz 24/7 car sharing rental business in international markets; and sells vehicles through its Hertz Car Sales. As of December 31, 2016, the company operated a rental fleet of approximately 515,900 vehicles in the United States and 196,600 vehicles in international operations. Company description from FinViz.com.

Not only are used cars in short supply but the rental car business is hot in Texas and Florida because of all the insurance agents and construction crews that were imported from all over the country. Carpenters, electricians, home repair people of all types have migrated to the disaster areas. Consumers waiting on insurance proceeds need a way to get around town. Rental cars are scarce.

Not everyone is feeling the love for Hertz. Morgan Stanley recently downgraded the stock to underweight, which was good for a $4 drop but the rebound was quick and the stock closed at a ten-month high on Friday. The investing public sees the demand and they are picking up shares in expectations of good earnings.

Earnings Nov 7th.

I have to reach out to January to get the right option strike. There is no $27.50 for November. Just because we buy time, does not mean we have to use it.

Buy Jan $27.50 call, currently $2.75, initial stop loss $21.50.


No New Bearish Plays

In Play Updates and Reviews

Pause to Reload

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes were flat on Friday as traders paused to reload. It was a good week for the markets and there was no reason for traders to add to positions on Friday ahead of the weekend event risk. President Trump warned we were in the calm before the storm after talking to his military leaders. North Korea is expected to act again next week. The Iranian nuclear deal could be cancelled next week. A lot of potential risk ahead and there was no reason to add additional risk in the market.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

No Changes

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BULLISH Play Updates

ADBE - Adobe Systems - Company Profile


No specific news. Nice steady gain to a two-week high.

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. Holding at Thursday's 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. 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.

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. Minor rebound from prior resistance.

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. Company is hiring 200 associates in Houston this weekend.

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 resistance at $38 is holding.

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.

TTC - Toro Co - Company Profile


No specific news. Slight rebound back over resistance.

Original Trade Description: October 4th.

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.

Position 10/5/17:

Long Dec $65 call @ $1.65, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


I said if we did not get a spike in volatility by the 6th I would close the position. With President Trump meeting with his military leaders on Thursday and commenting we were "seeing the calm before the storm" I am going to keep the position open at least one more week. Closing it now at 24-year lows would be pure capitulation. If I were not in a volatility position I would be buying it here at what would normally be a huge buying opportunity.

We still have plenty of time. The president is expected to cancel the Iranian nuclear deal next week and call for more sanctions. North Korea is expected to do something stupid again on the 10th or the 18th.

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. It has been 461 days since a 5% decline.

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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