Option Investor

Daily Newsletter, Thursday, 10/12/2017

Table of Contents

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

Market Wrap


by Thomas Hughes

Click here to email Thomas Hughes


Earnings season has started with most beating top and bottom line expectations, and the market was nonplussed. In some cases the beats weren't quite as much as expected, in others internals within the reports gave cause for concerns. Regardless, the market was able to hold steady at all time highs while the market digest the news. Remember, it's just the first day of peak season, there is still a long way to go until this cycle is in the bag.

International markets were steady as well. Asian indices posted small gains in the wake of the FOMC minutes and new all time highs in the US. European indices were also mostly higher in a day of tepid trading as news of deadlock emerge from Brexit negotiations. The EU's chief negotiator has let slip talks are at an impasse and the UK is unwilling/unready to specify terms for fines and fees upon exit.

Market Statistics

Futures trading was tepid from the start this morning as traders were waiting on important earnings news from JP Morgan, Citigroup and others. The news was great on the headline but details within the reports, particularly in the cases of JPMorgan and Citigroup, left traders in doubt. At that point futures weakened to indicated a marginally lower open and held steady at that level into the opening bell. The opening bell was a bit hectic but not too bad, the SPX opened with a loss near -2 points and extended that to the days low of -5 points within the first 15 minutes of trading. This low turned out to be intraday bottom, the indices rallied back to recoup the days losses and by 12:15 was trending sideways just below the all time high. The rest of the day was much the same, tests of support and resistance within the range which left the indices sideways for the day.

Economic Calendar

The Economy

Weekly jobless claims show that there is little to no long-term and/or lingering impact from the recent storms. Initial claims fell by -15,000 to 243,000, the previous week's figure was revised lower. The 4 week moving average of claims fell by -9,500 to 257,000, the previous week's figure was also revised lower. On a not adjusted basis claims rose 11.4% versus an expectation of rising 18.1%. Not adjusted claims have also fallen back below last years level and are now down -4% YOY.

Continuing claims fell by -32,000 to hit 1.889 million and a new low dating back to December of 1973. The previous week's figure was revised lower, as was the 4 week moving average. If there were lingering effect from storm damage it surely would show up here. This data shows that not only are those displaced by storms back to work but an improvement in the overall employment situation.

The total number of claims fell by -1,390 to hit 1.652 million. This is a new seasonal and long term low consistent with ongoing improvement in the labor market. On a year over year basis total claims are down -7% and expected lower over the next couple of weeks. This figure should bottom by the end of October with an expected uptrend lasting into the end of the year.

The Producer Price Index was also released this morning and it supports slowly increasing inflation and a December rate hike. The headline came in as expected at 0.4% with a 2.6% increase YOY. This is well above the Fed's target rate and not surprising given the unexpected strength shown in the past month's ISM data. The 2.6% YOY increase is also the fastest pace of inflation since February 2012. Core prices are up only 0.2% MOM but rose to 2.1% YOY.

The Dollar Index

The Fed Minutes did little to strengthen inflation outlook, rate hike outlook or the dollar but remember this; the last Fed meeting was before the most recent round of ISM, NFP and today's PPI. Those reports show surprising increases in prices paid by manufacturers and service business, a surprise increase in hourly wages and core producer level inflation running at the 2% target. Based on this I would expect to see some changes in their next statement which is due in about 3 weeks. The Fed Watch Tool has barely budged all week and still holding steady at 88% for December rate hike.

The Dollar Index trend sideways from yesterday's candle in today's move. The index is below the short term moving average after having fallen from the short term down trend earlier this week. This fall was precipitated by stronger than expected trade data from Europe that has increased expectation for ECB policy tightening. The indicators are consistent with a bearish trend following entry with downside target at the recent lows near long term support in the range of $91.50. Tomorrow's CPI data is the next potential mover for the dollar and expected to be hot at 0.6%.

The Gold Index

Gold prices rose to a 2 week high on yesterday's FOMC minutes and a slightly weakened dollar. The metal gained about 0.75% in today's trading to settle near $1,297. Spot price is now approaching potential resistance at the $1,300 level. A break above this level would be bullish for the near term with target near $1,318. A failure to break above $1,300 would help confirm the September reversal with downside target near $1,275.

The Gold Miners ETF GDX trend sideways from yesterday's candle and just beneath resistance targets. The ETF is supported by firming gold prices but remains range bound over the short to long term. A break above current resistance a $23.90 would be bullish near term with upside target near the top of the long term trading range at $25. The indicators are bullish at the moment suggesting that current support will be tested at least.

The Oil Index

Oil prices fell more than -1% on new signs of oversupply. The latest news is a report from the IEA stating that sluggish demand and high production would continue to weigh on prices into next year. This report was echoed by another from Goldman Sachs saying stock draws have peaked this year and Brent would average $58 in 2108. The caveat is that the IEA report lends strength to the idea that OPEC will extend production cuts to further offset supply imbalances.

The Oil Index continues to trend sideways within the near term consolidation range. The indicators persist in bearishness and suggest support will be tested further, so long as the index remains above support this action is consistent with consolidation and potential continuation of the existing trend. Support is just above 1,200, resistance at the current high near 1,225. This range may hold into the near term up to and until earnings releases from major players in the sector and/or a significant move in oil prices occurs.

In The News, Story Stocks and Earnings

The big banks began reporting today and the news is mixed. The headline is that both JP Morgan and Citigroup beat top and bottom line expectations smartly. Both companies beat revenue outlook by roughly a billion dollars, 5% for Citi and 4% for JPM, and similarly on the earnings end. The mixed part is that trading volumes were down far more than expected and that charge-off's related to consumer credit were on the rise. The mitigating factors are that trading volume is offset by core business and credit charge-off's are likely related to the recent storms. Shares of both companies fell, led by Citigroups decline of -2.6%. The XLF Financial Sector SDPR fell a little more than -0.5% and looks like it could drift lower in the near term. Bank of American and Wells Fargo are on deck for tomorrow morning.

Domino's Pizza beat on the top and bottom lines but also failed to please investors. Revenue grew more than 13.5% YOY, beat expectations by 2.5% and delivered comps of 8.5% but it still wasn't enough. Shares fell more than 3.5% to test support at the short term moving average and support was there. This may be because the company is still increasing stores domestically and abroad, is experiencing continued organic and comp store growth in both segments and expected to continue producing positive results.

Rumors have emerged that GM will be idling its Detroit Hamtramck facility to due sluggish demand. The plant is GM's most sophisticated in NA and produces a number of car models. It is expected to close for 6 weeks beginning in mid-November and, when the plant reopens, it is expected to produce 20% less cars than before. Meanwhile, the company is threatening a Canadian autoworkers union with a plant shut down if they don't call off an expected strike. The company will instead shift production of the Equinox to Mexico. Shares of GM fell -3% on the news to test support at $44.

The Indices

The indices hit a hiccup today as earnings season begins to heat up; the broad market, industrials and techs all posted small losses on earnings seasons jitters. The transports however broke out to new all time highs as economics point to continued expansion. The Dow Jones Transportation Average gained 0.62% in a move creating a medium sized green candle breaking through the 10,000 level. The indicators are still weak but consistent with a trend following entry so I would expect to see higher prices in the near term. Tomorrow earnings from JB Hunt, one of North American's largest truckers, could drive it higher.

The NASDAQ Composite posted the largest loss, -0.18%, but set a new all time intraday high while doing so. The index created a small doji candle to the side of yesterday's small candle and the 6th such small candle in a row. It is consolidating at all time highs and setting up for its next move, the past week's action is beginning to look like a flag. The indicators have begun to roll over in confirmation of resistance but do not indicate bearishness. If the index were to fall support target is near 6,475 and the short term moving average. If not, a break to new highs will be bullish with upside target near 6,800.

The S&P 500 made the 2nd largest decline, -0.17%, and created a small red bodied candle just below the current all time high. The index is drifting higher but showing signs of pause within the trend. The indicators remain strong but have begun to roll over in confirmation of resistance. A fall from this level may find support at the short term moving average, near 2,515. A break to new highs would be trend following and bullish with upside target in the range of 2,580 to 2,600.

The Dow Jones Industrial Average made the smallest decline, only -0.14%, created a small doji candle and set a new all time intraday high. Price action was calm, quiet and otherwise positive in light of today's earnings releases and the start of peak season. The indicators are consistent with resistance and/or pause within an uptrend so this sideways action and chances of pullback may persist into the near term. A fall from this level may find support near 22,415 consistent with a long term uptrend line and the short term moving average. A consolidation at this level and/or move higher would be bullish and trend following with upside target near 23,400.

The markets have moved up in anticipation of earnings season and begun to consolidate. Now that earnings season is at hand this consolidation is likely to see some shake up, either in a break to new highs or volatility within near term ranges, depending on how the reports come in. If forward outlook remains positive but dims we may see come corrective action, if forward outlook remains positive and improves I'd expect to see some more rally. In either case the long term bull market remains intact and I firmly bullish for that time frame. Nearer term I am bullish but cautious with new money due to the signals.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Avoid Unnecessary Risk

by Jim Brown

Click here to email Jim Brown

Editors Note:

Bank earnings provided disappointments today with more to come on Friday. JPM and Citi both disappointed on Thursday and the weakness in the financial sector weighed on the market. On Friday four additional major banks, BAC, WFC, PNC and FHN report before the open. If they report weakness in consumer loans and rising defaults, this could cause cascade selling in the financial sector and possibly damage sentiment for the overall market. Investors do not want to hear that consumers are suddenly defaulting on debt because that suggests the job market and the economy is weaker than we thought. There is no reason to add risk ahead of the weekend. North Korea still has a missile on the launch pad and The White House has let a few more crumbs slip about a possible military event. There is too much weekend event risk to add additional positions.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Sell the News

by Jim Brown

Click here to email Jim Brown

Editors Note:

JPM and Citigroup both traded down after earnings in a sell the news event. With expectations high, investors were not happy to hear that both banks had set aside more money to cover rising losses from consumer credit loans and credit card defaults. Provisions for losses at JPM rose 14%, with most of that credit card defaults. Citi raised reserves 15%. Citi shares fell 3.4% on the news and JPM about 1%.

Unfortunately, the disappointments and the weakening consumer damaged market sentiment. With several other major banks reporting on Friday, similar results could cause a cascade of selling in financials.

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

FMC - FMC Corp
The long call position was entered at the open.

LOW - Lowe's Co
The long call position was stopped at $80.25.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

ADBE - Adobe Systems - Company Profile


Adobe said it was going to revolutionize the ad business by requiring all ad tech companies to disclose every fee for advertising or they would not do business with them. Buying internet advertising is a lot like getting a phone line. There is one charge for the line and 15 charges for other things like use charges, taxes, public utility fees, etc. A $20 phone line could cost you $35 a month in some cities.

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. 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. New closing high with a $1.39 gain.

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.

Update 10/11/17: CAT announced a quarterly cash dividend of 78 cents, payable Nov 20th to holders on Oct 23rd. This was the same rate as last quarter. They have paid higher annual dividends for the last 24 years and have paid a dividend every year since they were founded in 1933.

Position 8/30/17:

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

FMC - FMC Corp - Company Profile


No specific news. New closing high but not over resistance yet.

Original Trade Description: October 11th.

FMC Corporation, a diversified chemical company, provides solutions, applications, and products for the agricultural, consumer, and industrial markets worldwide. The company operates through three segments: FMC Agricultural Solutions, FMC Health and Nutrition, and FMC Lithium. The FMC Agricultural Solutions segment develops, manufactures, and sells crop protection chemicals, such as insecticides, herbicides, and fungicides that are used in agriculture to enhance crop yield and by controlling a range of insects, weeds, and diseases, as well as in non-agricultural markets for pest control. The FMC Health and Nutrition segment offers microcrystalline cellulose for use in drug dry tablet binders and disintegrants, and food ingredients; carrageenan for use in food ingredients for thickening and stabilizing, pharmaceutical, and nutraceutical encapsulates; alginates for food ingredients, pharmaceutical excipients, healthcare, and industrial uses; natural colorants for use in foods, pharmaceutical, and cosmetics; and omega-3 EPA/DHA for nutraceutical and pharmaceutical uses. The FMC Lithium segment offers lithium for use in batteries, polymers, pharmaceuticals, greases and lubricants, glass and ceramics, and other industrial uses. FMC Corporation was founded in 1884 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com.

Expected earnings Nov 6th, unconfirmed.

FMC is riding the lithium wave. The once ignored mineral is now becoming a very important part of FMC's future. In the first half of 2017, lithium accounted for 11% of total revenue and 20% of earnings. The rush to find more lithium so companies like Tesla can produce 500,000 battery operated cars a year, has turned the mining of this material into a race to the future. FMC is in the process of tripling capacity from 2016-2019 and that may not be enough to satisfy battery demand by 2020. Because of the fast growth in this segment, FMC is planning on spinning off FMC Lithium at some point in the future.

Also, around November 1st, FMC is expected to get approvals to buy the crop protection assets from DuPont. Dow and DuPont were forced to sell some of those agricultural assets as terms for their merger approvals. Once the sale to FMC is approved, FMC will become the fifth largest crop=protection chemical company in the world. With global food demand skyrocketing, the demand for fertilizer and weed/pest killer is also ramping higher.

The business being bought from DuPont generates $1.4 billion in annual revenue and the segment will jump to $3.8 billion after the acquisition. Also a part of the deal, DuPont will acquire FMC's Health & Nutrition business.

Shares have rebounded from the late September dip and should breakout to a new high in the days ahead.

Position 10/12/17:

Long Nov $95.00 call @ $2.25, 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.

HTZ - Hertz Global - Company Profile


No specific news. Still holding at Tuesday's 10-month closing high.

Original Trade Description: Oct 7th.

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.

Position 10/9/17:

Long Jan $27.50 call @ $2.90, see portfolio graphic for stop loss.

IIVI - II-VI Inc - Company Profile


No specific news. Still cannot break free 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. Shares dropped $1.50 at the open to stop us out of the position for a minor loss.

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 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:

Closed 10/12/17: Long Jan $85 call @ $1.89, exit $1.50, -.39 loss.

MU - Micron Technology - Company Profile


Micron priced its $1.2 billion, upsized secondary, at $41 after the close on Wednesday. Shares had closed at $41.61 and dipped today to close at $40.50. Barclay's boosted their target price from $40 to $60 saying DRAM demand looks good through 2018. Demand should remain high and supply should remain tight. Needham, Rajvinda Gill has a price target of $76. Let's hope he is right.

Original Trade Description: October 9th.

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.

Micron is on a roll. Analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.

For Q2, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.

For the current quarter, analysts are expecting $2.14 in earnings on a 60% increase in revenue. They are likely to beat those estimates.

Despite the strong earnings and forecasts, the company trades at a PE of 8.7 when the S&P is trading at 18.0. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.

Shares spiked on earnings and ran up to $40.50. There was a three-day decline of about $1 to consolidate those gains and the stock surged again to close at a new high on Monday. I was hoping for a deeper pullback to buy but it never happened. If we do not buy this breakout, we could still be waiting after it runs up another $5.

I am using January options to capture the earnings expectations in December.

Update 10/10/17: Shares of Micron rallied more than $1 in the regular session bur fell $2 in afterhours. The company announced a $1 billion secondary offering after the close. The proceeds will be used to pay off debt including $476 million of 7.5% secured notes and various other notes and credit lines. This should be positive for Micron because interest costs will decline but it will add approximately 25 million shares to the float.

Update 10/11/17: Shares rebounded from the $2 selloff in afterhours to close down only 37 cents. Summit Redstone said buy the dip because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Instinet reiterated a buy rating and $45 target. Wells Fargo reiterated a buy rating and $45 target. Credit Suisse reiterated an outperform rating and $50 target.

Position 10/10/17:

Long Jan $43 call @ $3.05, see portfolio graphic for stop loss.

TER - Teradyne - Company Profile


No specific news. This is an October option and there is zero time premium. As long as TER keeps moving higher, I am going to keep it open but the stop loss is going to be very tight. We may get lucky and see a semiconductor rally break out.

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


No material movement with equities only marginally negative.

We still have plenty of time. The president is expected to cancel the Iranian nuclear deal this week and call for more sanctions. North Korea is expected to do something stupid again by 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 466 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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