Option Investor

Daily Newsletter, Saturday, 10/14/2017

Table of Contents

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

Market Wrap

Lethargic Week

by Jim Brown

Click here to email Jim Brown

The major indexes posted gains for the week but they were minimal.

Weekly Statistics

Friday Statistics

The S&P only gained 1.5 points since the 2,552 close six days ago on October 5th. The Dow set three record highs but gained only 98 points for the week. The Nasdaq managed to close at a record high on Friday but gained only 15 points for the week. The Russell 2000, Biotech Index, Dow Transports and the S&P-600 all lost ground for the week.

The prior week sported a strong gain on the indexes ahead of the big bank earnings. Early this week everyone was nervously awaiting the reports and there was a little sell the news decline on everyone but Bank of America. The banks had rallied for four weeks into the numbers so it was only logical for traders to take profits on disappointing results. This held the markets to minimal gains for the week.

The economic reports were mixed and that added another layer of confusion for investors. Retail sales for September exploded higher by 1.6% and the largest gain since March 2015. Pushing the headline number up was a monster 5.8% rise in sales at gasoline stations as gas prices shot up in the aftermath of Hurricane Harvey. Vehicle sales surged 2.1% as people replaced cars destroyed by the storm. Building supply store sales rose 2.1% as consumers rushed in to buy items to repair their homes.

The only sectors declining were sporting goods -0.2%, electronics and appliances -1.1% and furniture -0.4%.

To show how much the gasoline sales impacted the headline number, if you exclude service stations and cars, sales only rose 0.5%.

Obviously, this sales surge will fade since it is storm related but it will take months for conditions to return to normal.

The spike in sales caused the Atlanta Fed's real time GDPNow forecast for Q3 to rise slightly to 2.7% growth.

The Consumer Price Index (CPI) rose +0.5% for September but this was also impacted by storms. The energy component rose 6.1% with gasoline up 13.1%. The core rate, excluding food and energy, rose only +0.1% and remains below the rate the Fed is hoping to see in order to hike rates again in December. Inflation year over year is 1.7% and it has been flat at that level since May. The tame inflation numbers actually reduced the chance of a December hike to 81.7%.

Consumer Sentiment for October surged to 101.1 from 95.1 and the highest level since January 2004. This was only the second time over 100 since Y2K. The present conditions component rose from 111.7 to 116.4 and the highest reading since the year 2000. The six-month expectations component rose from 84.4 to 91.3 and the highest level since 2004. The percentage of people expecting the economy to improve over the next 12 months rose 8% to 55%. With the stock market at record highs, daily headlines about tax cuts and a strong job market, the average consumer is happy today.

The economic calendar for this week will key on home sales and manufacturing. The Fed Beige Book on Wednesday will summarize the economic conditions in each of the Fed districts. It is normally neutral for the market. The Fed has been going to a lot of trouble to figure out how to use the word "moderate" in describing the activity in the various districts. The market will ignore the report unless something has changed dramatically and we have not seen any indications in the normal weekly reports.

On Wednesday, China launched its 19th National Congress of the Communist Party, which is held every five years. The China event is not noteworthy for the US except that Kim Jong-Un is reportedly preparing to launch a barrage of short and long-range missiles on that day. He does it to remind China they do not control him. On Friday, Kim again threatened to launch missiles against Guam so trouble may be brewing.

President Trump has one carrier battle group on station off South Korea and he has dispatched a second Nimitz class carrier, the Theodore Roosevelt, complete with a 7,500 man Marine detachment, which should arrive there soon. The pressure on North Korea is building. Wednesday could be the trigger point.

Any shooting between North Korea and the US would be very market negative because of the potential ramifications.

The earnings calendar went from about 10 companies last week to about 125 this week. The big dog on Monday will be Netflix (NFLX). There are nine Dow components reporting this week (pink) and they will move the market. Goldman Sachs and IBM on Tuesday could be the early trouble spots.

Netflix is the first big tech stock to report and analysts are tripping over each other to hike their target prices. Over just the last week there were nine hikes to the target and the prior week Wells Fargo beat the pack with an upgrade to $235.

New Price Targets

$206 Jefferies
$215 Cosen
$215 KeyBanc
$225 JPM
$225 Morgan Stanley
$225 Canaccord
$230 Stifel
$230 Bernstein
$235 Wells Fargo
$235 Goldman Sachs

The catalyst for all these target hikes is the recent hike in subscription prices. The bump in rates is expected to earn Netflix roughly $200 million a month in additional revenue with no increase in expenses. One analyst calculated the subscription increase was worth about $15 billion in market cap and NFLX has only gained about $8 billion since the announcement.

Netflix is expected to have added about 800,000 subscribers in Q3 compared to their guidance for 750,000. I would be surprised if the actual number was not over one million new subs.

Netflix traded over $200 intraday but that was a sell trigger for a few traders ahead of Monday's earnings. This will be an interesting report and an even more interesting stock reaction. Shares are up $20 over the last week on the hike in subscription prices. Assuming Netflix just has a good quarter rather than a blowout quarter, I would expect to see a significant decline on the news. Any decline from this point would be a buying opportunity.

The big earnings news on Friday was the continuation of the big bank reporting. Wells Fargo (WFC) posted earnings of $1.04 that narrowly beat estimates for $1.02. Revenue of $21.9 billion missed estimates for $22.4 billion. The bank had to take a charge of $1 billion for a litigation reserve given their many ongoing legal problems. The bank said credit quality was better than ever. Loan originations for auto loans fell 47% to $4.3 billion as they try to reduce their lending to non-prime credit customers. Mortgage loan originations fell -16% to $59 billion because the rising price of homes and rising interest rates were limiting the number of customers that can qualify for loans. Shares fell -2.75% on the news.

Bank of America (BAC) reported earnings of 48 cents that beat estimates for 46 cents. Revenue of $22.83 billion beat estimates for $22.02 billion. Like the other big banks, the low market volatility has hurt their trading desks with a 13% decline in trading revenue. Deposits rose $45 billion or +4% while business loan balances increased $46 billion or +6%. The bank repurchased $7.9 billion in stock and paid $2.8 billion in dividends. Shares rose slightly on the news.

PNC Financial (PNC) reported earnings of $2.16 that beat estimates for $2.13. Revenue of $4.58 billion beat estimates for $4.13 billion. Loans rose $3.1 billion to $221.1 billion. Deposits rose $1.6 billion to $260.7 billion. Credit quality remained stable. They repurchased 4.2 million shares and paid dividends of $400 million. The quarterly dividend rose 20 cents to 75 cents. Shares declined $1.50 on the news.

JB Hunt Transportation (JBHT) reported earnings of 91 cents that missed estimates for 96 cents. Revenue of $1.84 billion narrowly beat estimates for $1.83 billion. The company has missed on earnings in three of the last four quarters. The company blamed "increases in driver wages and recruiting costs, increased rail purchase transportation rates, higher insurance and claims costs, increased legal and consulting costs, higher equipment maintenance costs and acquisition and integration costs." They also said the intermodal segment experienced $1.8 million in additional costs because of Harvey, Irma and Maria. The Dedicated Contract Services division saw a $1 million hit from the storms that resulted in an 18% hit to earnings. Network disruption "limited our ability to handle 5,500 loads" in the intermodal segment. Shares fell $4.34 on the report.

The Q3 earnings cycle is still young but 32 S&P companies have reported with 84.4% beating estimates and 81.3% beating revenue estimates. Revenue and earnings are expected to rise 4.4% for the quarter but over the last four years the October earnings have risen 4% above the initial estimates, which would mean 8.4% growth if that trend continues.

Nvidia (NVDA) closed at another new high after Goldman raised their price target to $217, RBC Capital to $220 and Needham from $200 to $250. That ties the Evercore ISI target at $250. Needham said Nvidia is not a one trick pony. They have "huge opportunities" in data centers, self-driving cars, artificial intelligence, video game consoles, gaming PCs and crypto currency mining. The analyst said the total addressable market for data center processors could be $21-$35 billion over the next five years. "We believe our data center estimates for $1.7 billion in 2018, $2.1 billion in 2019 and $2.8 billion in 2020 could prove conservative when addressing a $30 billion market."

Goldman reiterated a conviction buy rating with the analyst saying he was even more convicted after attending the GTC Europe 2017 conference.

The sheer power and capability of the new Nvidia Drive PX Pegasus system is causing a lot of upgrades. With the power to process 320 trillion operations per second and combine all the cars sensors into one interface, it is years ahead of the competition.

PG&E Corp (PCG) had a bad week after regulators began investigating to see if the California wildfires were caused by power lines downed by strong winds. The company confirmed California fire officials were investigating. PG&E equipment has caused fires in the past when power lines were blown down. PG&E has $800 million in insurance but that would be a mere pittance compared to their liability exposure if their equipment was to blame. With 31 people confirmed dead, 400 reported missing and billions in property damage, the liability could be huge. In 2015, a power line problem caused the Butte fire that destroyed 70,000 acres, burned hundreds of homes and businesses and killed 2 people. In 2013, a power line problem caused a 670-acre fire near Hollister CA.

Facebook (FB) said it had launched an online food ordering and delivery service. The initial companies on the service include Chipotle Mexican Grill, Jack in the Box, Five Guys and Papa John's. The service has also signed on food ordering services including EatStreet, Deliver.com, DoorDash and OLO. The ordering process is under the "Explore" menu on the left side of your Facebook page. Shares of GrubHub declined on the news.

Facebook shares closed at a two-month high but still below resistance at $175. Earnings are not until November 1st. The shares have overcome all the election advertising hoopla so far and earnings are almost a guaranteed beat. Mizuho has the highest price target on the street at $230 but it is only a matter of time before somebody puts a $250 number out for the stock.

Hewlett Packard (HPQ) raised guidance saying earnings are likely to come in at the high end of prior guidance. They guided for earnings of $1.74-$1.84 for FY 2018 and analysts were expecting $1.68-$1.86. The company expects to produce at least $3 billion in free cash flow and return up to 75% of that to shareholders. HP said growth opportunities could accelerate in sectors like 3D printing in plastics and metals. Gartner (IT) said HP is now the leading supplier of PCs again. The outlook for the stock is good since its current PE is only 15. Shares rose 6.5% on the guidance update.

President Trump said he was going to halt payments to insurers that a court found to be unconstitutional several months ago. The payments had been authorized by an executive order from President Obama when he knew he could not get them approved by Congress. The CSR payments amounted to billions of dollars for "cost sharing reduction." This puts the problem back on Congress if they want these subsidies to the insurance companies to continue. Many of the large companies had already planned for the payments to be discontinued after they were found to be unconstitutional.

The insurance companies will still be required to offer the subsidies to low income consumers who sign up for Obamacare but the government is no longer going to refund those subsidies. Nearly 85% of those insured under Obamacare receive a subsidy against their payments. The insurers in the Obamacare system were hit hard on Friday. Those who had already exited the system or never entered were still declining because investors were throwing everyone out rather than take the time to figure out who had exposure.

Dow component, UnitedHealth (UNH) fell sharply on the announcement to $186 but recovered to close flat at $192 because they had already reduced their exposure to the system in anticipation of the payments being cancelled.

Hospitals also declined on worries that more patients would not be able to pay their bills if they were forced out of Obamacare because of higher premiums.

Bitcoin surged again to $5,741 and almost back to the high set on Oct 12th. I am kicking myself again for not using my computer background and building a Bitcoin mining operation in my garage back in January 2015 when Bitcoin was only $200. Back then I thought, "It is only $200. If I only mined a couple a month it would not be worth it." Boy was I wrong. A couple a month over the last 34 months would be 68 today and worth almost $400,000 for a $10,000 investment in the mining computers.

The key with Bitcoin is that supply is limited to 21 million by the algorithm used to produce them. Currently there are 16 million in circulation and only five million left undiscovered. The amount of power needed to mine Bitcoins today is exponentially higher than 3 years ago because computers have to wade through trillions of unprofitable computations before finding the one that results in a coin. Some analysts believe Bitcoin could rise to $25,000 or even $50,000 over the next decade as demand increases but supply is fixed. The value of all Bitcoins in circulation was $92.8 billion as of Friday.

Saudi Arabia may be rethinking the IPO of Saudi Aramco. Originally, they considered floating 5% in the IPO with expectations of raising $100 billion. With oil prices struggling to hold at $50 and no guarantee they will rise before a late 2018 launch date, the kingdom may be having second thoughts. Low oil prices would mean significantly less money from the IPO process. Last week we learned that a Chinese investor may be trying to take a large stake in the enterprise. How large was not disclosed but reportedly very large. Why that would impact an IPO is unknown. There are also rumors that Saudi Arabia is considering selling large stakes to other sovereign wealth funds.

There is also talk about a two stage IPO where it lists on Riyadh's Tadawful exchange in 2019 and then expands to an international listing in 2020. Another factor could be the outlook on prices. With production rising in OPEC and non-OPEC countries and oil demand growth slowing because of the surge in electric cars and cars that require less fuel, they may be projecting lower oil prices in the 2020s and less benefit for Saudi Aramco. However, that would be a reason to IPO sooner rather than later since future profits would be declining. Who knows what they are really thinking but oil prices are not likely to rise significantly until mid 2018. Longview Economics chief market strategist predicted $10 oil in 2023-2025 because of the rapid adoption of electric vehicles. I would not hold my breath.

On Friday, the weak Consumer Price Index report caused the dollar to decline sharply in the morning and commodity prices to rise. The Iran decertification event also provided price support even though any impact would be a long way off. Congress has to get off its collective butt and actually do something about changing the JCPOA and/or adding additional sanctions. Even after that point, any Iranian oil export limitations would be well into the future and subject to a complete lack of compliance by other nations. Iran exports 2.3 million bpd with 10% going to Turkey, 13% to Europe, 46% to China/India, 14% to Japan/Korea and 17% going to other places. Unless Iran tested a nuclear weapon, I do not see any of those countries voluntarily halting Iranian imports.

US oil production declined 81,000 bpd last week because all of the Gulf production platforms have not yet been restarted after Hurricane Nate blew through last weekend. I am surprised the decline was not larger.

For the week ended on Friday the active rig count declined by 8 rigs to 928 and the lowest level since June 9th. Five oil rigs were deactivated and two gas rigs. Offshore rigs declined -2 but that could have been the result of the hurricane.


The major indexes managed to creep higher last week despite the worry over bank earnings, political headlines, economics and the concerns over Iraq and Iran. Next week the earnings really accelerate and those headlines will overshadow the rest of the topics in that last sentence. The only wild card would be an outright provocation by North Korea.

The bears are beginning to capitulate. Fundstrat's Tom Lee raised his year-end price target on the S&P from 2,275 to 2,475 saying he was wrong to be so bearish over the last several months. However, his new target is still 79 points below Friday's close. The confirmed bears are struggling to accept the reality of a market making new highs.

The sentiment survey for last week saw a sharp decline in the number of bearish investors. Bullish sentiment is back above the historical average for only the sixth time this year. Since the markets have been making new highs since early January it is surprising that sentiment has only been above the historical average six times. Bearish sentiment hit a five-week low as more investors begin to capitulate and join the bullish crowd.

The S&P gained only 2 points on Friday and finished one third of a point below its prior closing high. It was close but the crashing insurance companies stole the intraday gains. The resistance level at 2,550 has broken and new resistance is 2,555. Initial support is 2,544 followed by 2,525 and 2,495.

The Dow suffered from lackluster performance by its components on Friday. There were no big winners or losers and only four components moved more than $1 and they offset each other. American Express was the surprise gainer since the majority of the banks were lower on their earnings. Apple posted another surprising gain despite constant headlines about delivery problems, iPhone 8 mechanical problems and Qualcomm's suit to halt sales of the iPhone in China.

The Dow missed closing at a new high by one point but it was still a decent day given all the cross currents in the market. The Dow is relatively unsupported after ten days of mostly gains. The advance has been slow but steady. Initial support is around 22,735 and resistance is going to be 23,000 as a large round number that is sure to attract sellers unless a monster rally breaks out to power us through that level. The 20-30 points a day, the index has been adding is likely to come to a halt at that level.

The Nasdaq eased through the 6,600 level to close at a new high on Friday. The majority of the big caps were positive and the index shook off losses in the biotechs to post a minor 14-point gain. The Nasdaq has not had a 200 point dip since mid August and it is definitely due. With earnings approaching, I would expect some volatility but no material change in direction for the next couple weeks. We could easily see some consolidation of the last three weeks of gains. Initial support is 6,565 with resistance around 6,700.

The Russell 2000 is slowly bleeding points but has only given back 12 of the 162 points it gained since August. This remains bullish as long as the support at 1,500 holds. A breakdown there could trigger some cascade selling as investors rush to lock in gains.

The outlook for the market remains bullish but the major indexes have lost their momentum. There are various reasons for the slowdown and hopefully the barrage of earnings headlines next week can push those other concerns aside. The North Korea situation remains the wild card and hopefully the next event will be just a simple missile launch and the market can ignore it.

I continue to recommend holding some cash in your account just in case a buying opportunity does appear. The market does not need a reason to decline. We sometimes attach too much importance to the daily headline stream as a market propulsion device. Markets have a mind of their own and they can be very unpredictable at times.

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


"I find that the harder I work the more luck I seem to have."

Thomas Jefferson


Index Wrap

Earnings Crack

by Jim Brown

Click here to email Jim Brown
Investors are desperate for an earnings fix to provide new life to the markets.

The major indexes posted gains last week but they were far from exciting even though there were some new highs. There were multiple reasons for the lethargic behavior and investors are hoping the coming earnings tsunami will push the indexes over resistance and create a new leg higher. Unfortunately, hope is not a strategy. Hope is what you have when positions are not working out the way you expected.

For this earnings cycle, the expectations are for 4.4% growth. They should come in higher than that but that is the official consensus. With prior quarters in double digits, this could be a letdown if that number does not improve significantly.

With a number that close to zero, there is always a danger that a string of earnings misses could push the consolidated growth back into negative territory. With the flurry of hurricanes already being blamed for some earnings misses and we are just into the first week of the cycle, that suggests there could be a lot of companies using the same excuse.

Normally, a weather related excuse is ignored. Everyone understands that is something out of the control of the company and just a temporary event. That works for single companies and their shares are not punished severely. However, if we get dozens or even a couple hundred companies using the hurricane excuse enough to push the consolidated earnings lower, it could also push the market lower.

The reasons for the market rally are improving economy, improving earnings, tax reform and accommodative Fed. Remove any one of those and the market could become unstable. Since the Fed is determined to hike again in December, that is a minor weakness. If tax reform looks like it will be pushed into 2018 that would be another destabilizing factor. If earnings for Q3 suddenly fall back to zero or slightly negative, that would be a major hurdle to continued gains.

Lastly, given the extremely partisan politics in Washington, the potential for getting a budget passed and debt ceiling raised, appears to be very unlikely. Those headlines will begin to heat up once we are into November.

The lackluster indexes last week could be telling us, investors are worried about all of those events. Add in the potential for a North Korean event this week and there was no reason for investors to add to existing positions.

On the positive side the A/D line for the S&P continues to rise. The S&P is showing no weakness other than the meager point additions. As long as the A/D line is positive, the index is not going to decline. If we saw the A/D line weakening and the index only gaining a couple points a day, that would be a major warning sign. As of Friday, the S&P is still positive.

Add in the weekend event risk and it is actually not surprising the index only gained a couple points. We should be thankful there were gains instead of losses.

There was some weakening on the MACD but it has not yet turned negative. The MACD is the product of two moving averages and the minimal point gain tends to bring the averages closer together.

The Dow chart is far less bullish than it would appear at first glance. The index has posted mostly gains for the last 12 days and it has reached overbought status. Major support is well back at 22,275. While I do not expect the Dow to return to that level, that is where support exists. With 9 Dow components reporting earnings this week, we could get some significant volatility. That volatility could convince investors of the need to take profits.

The Nasdaq has also reached the point where it is overbought. However, the slow pace of recent gains has allowed some consolidation in place over the last week. The index did squeeze over 6,600 on Friday and the next resistance is 6,700. The Nasdaq is powered by the top 15 big cap stocks and their trends have been mostly positive over the last two weeks. They are still choppy ahead of earnings and there is some real risk of major drops if the earnings are not perfect.

Netflix reports on Monday after the close and that could be a trigger for a Nasdaq move in either direction depending on the results.

The broader market as represented by the Russell 3000 has come to a dead stop at 1,516. The index has made no forward progress since August 5th. This index is THE market. As evidenced by the chart below the market has stalled after a long advance. This is troubling but this formation typically ends with a breakout. It does not happen always but often.

The R3K is the largest 3,000 investable stocks in the market. It is the combination of the Russell 1000 big caps and the Russell 2000 small caps. If we are going to see overall market weakness, it will appear here.

Before 2017, the VIX had closed under 10 only 9 times since 1990. In 2017, the VIX has closed under 10 on 32 days. That is nearly four times as many as in the prior 27 years.

The historic 24-year low close of 9.19 was October 5th. To say that volatility was at an all time low would be an understatement. What we do know from observing the VIX over the last 27 years is that low periods of volatility are always followed by periods of high volatility. This time is not likely to be different but there is no bell at the bottom. There is no starter's gun that fires when the race to higher levels begins. One day everything is calm and then something triggers the rocket ride to higher levels. That could be an event in North Korea or something as simple as a sudden flurry of missed earnings estimates.

We should not get lulled into a false sense of complacency that the market will just continue going up because there is nothing on the horizon that should change the trend. It is the events we do not see coming that cause the greatest impact. Always be prepared.

Assuming the earnings continue to be positive, the market could continue higher for a few more weeks. The real hurdle in our path is the political deadlines in early December. The headlines will start in mid November right around expiration week. That assumes nothing is resolved ahead of time but nothing ever happens in Congress until the last minute.

This coming week should be a proxy for the rest of the earnings cycle. If good things appear, the market could move higher. If too many earnings are missed for whatever reason, we are likely to see some early exits. There is a lot of uncaptured profit in the market and portfolio managers will be looking for any signs of weakness. They will want to capture those profits and lock in their performance bonuses for the year.

The trend is our friend until it ends but there is rarely any warning.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Ignore the Critics

by Jim Brown

Click here to email Jim Brown

Editors Note:

Costco has a cult following and strong earnings but analysts are negative because of the Whole Foods acquisition.


COST - Costco - Company Profile

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.

Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.

Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.

Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.

Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.

Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.

On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.

That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.

I looked at the December option with only 48 days left because it was cheaper but I chose the January option with 97 days left because it expires after their January 4th earnings and will retain its premium better. We can always buy time but we do not have to use it.

Buy Jan $165 call, currently $3.90, initial stop loss $153.50.


No New Bearish Plays

In Play Updates and Reviews

Point by Point

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P is creeping slowly higher point by point. The 2-point gain on Friday was not a new high but it was one more step above the prior resistance at 2,550. That resistance level has widened to 2550-2555 and it is slowly eroding. The index has been slowly inching higher for the last week.

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

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

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Long and short equity trades = Premier Investor

BULLISH Play Updates

ADBE - Adobe Systems - Company Profile


No specific news. Minor gain.

Original Trade Description: Sept 27th.

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

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

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

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

Expected earnings Dec 19th.

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

Position 9/28/17:

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

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 decent 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!

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


The Navy awarded Harris with a $765 million single-award IDIQ contract to provide tactical radios and accessories to the Navy and Marine Corps.

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. The momentum has stalled and I am recommending we close the position. There is nothing wrong with the stock but the option will begain to degrade quickly starting next week.

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.

MU - Micron Technology - Company Profile


The secondary offering is scheduled to close on Monday and that should remove the cloud over the stock.

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.

Update 10/12/17: 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.

Position 10/10/17:

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

TER - Teradyne - Company Profile


No specific news. Time has run out on the TER option. Next week is expiration week and I am recommending we close the position on Monday.

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


Volatility evaporating as the markets inch higher.

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 468 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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