Option Investor

Daily Newsletter, Monday, 10/16/2017

Table of Contents

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

Market Wrap

Black Monday, Reboot

by Thomas Hughes

Click here to email Thomas Hughes


Markets held steady and even set new highs on the 30th anniversary of Black Monday. While interesting to look back on Black Monday it has little relevance on today's markets. Today's trading is supported by positive economic trends and earnings, along with another jump in oil prices. Action was on the light side with decliners and advancers roughly equal but bullish with far more issues making new highs than new lows.

Asian indices were mostly higher with gains in the range of 0.5%. The Shang Hai index lagged with a loss of -0.35% as Chinese inflation data came in a bit hotter than expected. The CPI came in as expected at 1.6% YOY but PPI beat expectations at 6.9%. European indices were more mixed, closing flat on the day as issues in Catalonia continue to simmer. European balance of trade also has some impact on trading, falling nearly 1.4 billion Euros since last year.

Market Statistics

Futures trading was positive all morning and indicative of marginal gains at the open. The trade held fairly steady throughout the early session with little impact from economic data or early morning earnings releases. The open was a bit hectic as weekend traders sought to enter the market; the SPX opened with a gain of roughly 2 points and then extended that to nearly 6 points in the first 4 minutes of trading. This peak turned out to be intraday high for the broad market, leaving most indices trending sideways to flat for the rest of the day. The point of note is that the Dow Jones Industrials, the NASDAQ Composite and S&P 500 all set new all time intraday and/or closing highs in today's action.

Economic Calendar

The Economy

The Empire State Manufacturing Survey made a surprise jump in indication of robust expansion, their words, within the greater New York Federal Reserve region. The headline gained nearly 6 points to hit 30.2 and a 3 year high. Gains were made on new orders, shipments and employment. New orders rose to 18, shipments gained 11 to hit 27.5 and labor came in strong at 15.6. Other signs of strength were in prices paid, down from last month but still showing inflationary pressure, delivery times and inventories. Forward outlook is also good rising 6 points to 44.8 and just below 3 year highs.

Moody's Survey of Business Confidence fell -1.4% to 30.7% in the last week. The drop shows some instability in week to week confidence but is generally steady at historically strong levels. Mr. Zandi says global business is able to look past political uncertainties and geopolitical tensions, that future outlook is positive and expecting further improvements in global economies. Inventories and hiring remain healthy.

With a little more than 6% of the S&P 500 reporting for the 3rd quarter the numbers are already looking a bit mixed. Last week's reports from the financial sector having the largest impact, particularly those of Wells Fargo and those among the insurance group. That said 81% of those reporting are beating on the bottom line and a slightly smaller 78% are beating on the top, both figures are above their 4 year averages. The blended rate of earnings growth is now 2.1% and well below expectations at the start of the quarter.

Looking forward earnings outlook remains strong and relatively stable with some improvement to the long term. Full year 2017 estimate has fallen by a tenth to 9.1% on this week's fall in the Q3 blended rate, 4th quarter 2017 estimate held steady at 11.10%. Looking to 2018 full year estimates have improved on rising oil prices and improvements in forward guidance to hit 11.6%, its highest level in nearly 4 months. First quarter 2018 estimate was upped by 0.2% to 10.6% while the second held steady at 10.3%.

The Dollar Index

The Dollar Index gained about 0.20% today as traders await this week's data. On the domestic side of things the big mover of the week will be the Fed's Beige Book on Wednesday. Indications of strength within the economy and in particular inflationary pressures will be dollar strong. Countering this, and in light of last week's weaker than expected CPI and PPI, is a raft of data out of the EU, Germany and the UK that could easily tip the balance of power away from the dollar. The index created a small green bodied candle today, halted by resistance near $93 and the short term down trend line. A break above this line may be bullish, a fall from it will confirm the ongoing down trend.

The Gold Index

Gold prices edged lower on today's rise in the dollar, falling a half percent to trade just below $1,300. The drop below $1,300 could precede a deeper pullback but with the dollar trending lower I'd wait until a little later in the week before committing to that trade. While US economics are improving and driving hawkish forward FOMC expectations so too are data points in Europe, and there is far more important data coming out of Europe this week than here at home. This means that any dollar strength could driven by the Beige Book could be undermined by euro and pound strength, keeping gold prices at or near current levels. A firm break of $1,300 would be bearish, a snap-back and bounce would be bullish, with short to long term direction range bound.

The Gold Miners ETF GDX fell nearly -2%, confirming resistance at $24, and breaking below the short term moving average. Today's move looks bearish but remains within current trading ranges, both near and long term. The indicators are both consistent with range bound trading; MACD momentum is trending weak and near 0 at this time while stochastic confirms resistance with a reversal and bearish crossover just below the upper signal line. The ETF may continue to move lower with first target for support at the long term moving average near $23.15. A break below that would be more bearish but still face potentially strong support levels at $22.50 and $22. A bounce could be bullish within the range but faces resistance at $24 and then $25.

The Oil Index

Oil prices jumped today on Iraq's decision to annex oil fields in the Kurdish held region around Kirkuk. The move has raised fears of supply disruptions, adding to fears sprouted last week when Trump refused to certify Iran's compliance with the nuclear deal. WTI jumped more than 0.80% to trade near $52 and at a two week high. Price is bouncing up from the $50 level and looks like it could go higher into the near term. First target for resistance is near $52.50, a break above that level could take oil up to $55.

The Oil Index gained more than 0.35% to set a new short term high but was not able to hold it into the close. The index did close with small gains but created a small red candle within but at the top end of its near term consolidation range. This range has been forming for nearly a month and has taken on a decidedly bullish cast. The indicators are still mixed but rolling into a bullish trend following signal already confirmed by a weak crossover in the stochastic. Resistance is in the range of 1,225, a break above which will be bullish. Based on the magnitude of the current rally upside targets exceed the 1,300 level and 2 year highs.

In The News, Story Stocks and Earnings

Tesla is reported to have fired more than 400 engineers, managers and factory workers last week. The move is speculated to be part of a plan to help improve production of the Model 3 which has been plagued by issues. The issues stem from plans to ramp up production and could be alleviated by what Kelley Blue Book managing editor Michael Harley called a major change in staff. Shares fell from the short term moving average to shed more than -1.25%. Price action has been choppy over the past few months but is forming what looks like a flat topped and bullish triangle.

Netflix reported after the bell and beat across the board. The company reported a marginal beat on revenue with a more substantial beat on both EPS and net new subscribers. EPS of $.37 beat by a nickel, net new subscribers of 5.3 million beat by about a million and forward guidance is strong for the 4th quarter and full year. The stock was up more than 1.5% in the open session, setting a new all time high, and extended that by another 1.5% in the after hours session.

The VIX gained about 3% today but the move was more sideways than not. The index remains low at 9.90 and below the 10.15 resistance line. The indicators are mildly bullish and consistent with the most recent bounce from support but are not indicative of strength at this time. Resistance is just above today's close at 10.15, support is at the long term low near 8.80. At current levels the index is consistent with low levels of implied volatility and bull market conditions.

The Indices

Today's move was tepid to say the least but in most respects still bullish. The stand out is the Dow Jones Transportation Average which fell about -0.80%. The transports are moving lower in a near term move following a breach to new all time highs last week. The indicators are bearish and point to lower prices with an eye on testing support at the short term moving average near 9750. A break below this level would be more bearish with target near 9,400 and the long term moving average.

The S&P 500 made the smallest gains today, only 0.13%. The broad market created a small spinning top doji drifting up to set a new high after a week of such moves. The index is trending higher in the near, short and long term with bullish indicators. The indicators are both bullish but also showing some weakness in the near term that needs to be watched. A fall from current levels would not break trend but would be bearish in the near term with first target at the short term moving average. Until that happens upward momentum is likely to persist, and stochastic is about to fire a weak crossover suggesting the possibility of further upside. Upside target is still 2,580.

The NASDAQ Composite closed with a gain near 0.30%. The tech heavy index created a small doji candle hanging at a new all time high and in danger of being abandoned. The indicators are both bullish but showing near term weakness suggesting consolidation or correction is still possible. A fall from this level may find support near the short term moving average at 6,500. That being said the current rally is fairly strong and could easily continue to drift higher into the near term, upside target is still 6,800.

The Dow Jones Industrial Average posted the largest gain, 0.37%, and created a small bodied green candle moving up to set a new all time, closing at the highs of the day. The indicators are a bit mixed but show an asset trending strongly higher with the possibility of extending the move. MACD momentum has subsided from its most recent peak but flattened out above 0 while stochastic begins firing a bullish crossover, both consistent with continuation within an up trend. Near term target is 23,000, a break above that could go to 23,500.

Today's action was hopeful, hopeful that earnings season will play out as expected. This means a rise in the blended rate of S&P 500 earnings growth and continued positive forward outlook for both the economy and earnings. So far the blended rate has failed to deliver but that is likely to change this week, the other two are in the bag, at least for now. I remain bullish in the long term but remain cautious for the near, keeping those stops close and on the look out for new opportunities.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Hurricanes Are Over

by Jim Brown

Click here to email Jim Brown

Editors Note:

The hurricanes are over and it is time for fun in the sun again. With winter coming it is time to take a cruise to the Caribbean and enjoy the sun before the snow flies.


CCL - Carnival Corporation - Company Profile

Carnival Corporation operates as a leisure travel and cruise company. It offers cruises under the Carnival Cruise Line, Princess Cruises, Holland America Line, and Seabourn brands in North America; and Costa, AIDA, P&O Cruises (UK), Cunard, and P&O Cruises (Australia) brands in Europe, Australia, and Asia. The company operates approximately 100 cruise ships. It also owns Holland America Princess Alaska Tours, a tour company in Alaska and the Canadian Yukon, which owns and operates hotels, lodges, glass-domed railcars, and motor coaches. In addition, the company is involved in the leasing of cruise ships. It sells its cruises primarily through travel agents and tour operators. Company description from FinViz.com.

Earnings December 26th.

Carnival shares had been on a steady path higher since last October but were derailed by the hurricanes. Many of the cruise destinations, including Puerto Rico, saw significant damage. Carnival had to cancel a couple cruises but continued running a full schedule almost without interruption. Shares have recovered from their decline and are moving towards pre hurricane levels.

More than 40 islands visited by cruise ships are open, fully operational and welcoming cruise ships on a daily basis. The majority of the 48 cruise ports in the Caribbean were not impacted at all by the storms. In places such as Jamaica, Belize and Cozumel in the Western Caribbean, and Aruba, Bonaire and Curacao in the Southern Caribbean, and Antigua and St. Kitts in the Eastern Caribbean, it's business as usual. Ports in the Bahamas, including Nassau and the popular private islands of Half Moon Cay and Princess Cays, are also open for business.

The only ports out of the normal 48 that are not yet operational are St. Thomas, St. Maarten, Grand Turk, Dominica, Puerto Rico and St. Croix.

The beauty of the cruise ship industry is that they can change itineraries very quickly if a normal destination is out of service.

Carnival reported Q3 earnings of $2.29 beating estimates for $2.20. Revenue of $5.52 billion beat estimates of $5.39 billion. The temporary port closures are expected to cause a 10-12 cent reduction in Q4 earnings. They guided for a range of 44-50 cents and analysts had been expecting 63 cents before the storms hit.

Based on the rebound it appears investors are not worried about the storm impact.

Buy Jan $70 call, currently $1.95, initial stop loss $63.65.


No New Bearish Plays

In Play Updates and Reviews

New Records Everywhere

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes recovered from an intraday dip to post new record highs. The indexes were off to a good start until President Trump said he was going to fix high drug prices so Americans did not pay any more than other countries. We do have the highst prices in the world, sometimes 2-3 times more than that other countries pay for the same drug. The idea of price fixing caused the drug sector and health care sectors to fall sharply after the comment.

Big gains by Goldman Sachs, Apple, Travelers and JP Morgan powered the Dow out of its midday slump and we closed at new highs.

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

COST - Costco
The long call position was entered at the open.

The long call position was closed at the open.

TER - Teradyne
The long call position was closed at the open.

ADBE - Adobe Systems
The long call position was stopped at $150.85.

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BULLISH Play Updates

ADBE - Adobe Systems - Company Profile


Adobe was cut from buy to hold at Deutsche Bank on valuation concerns. Shares fell -$3.50 on the news to stop us out at $150.85.

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:

Closed 10/16: Long Nov $150 call @ $2.89, exit $4.11, +1.22 gain.

ADI - Analog Devices - Company Profile


No specific news. Only a minor decline from the 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. Earnings on Oct 24th, we need to exit soon.

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. It's "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.

COST - Costco - Company Profile


No specific news. Shares gave back some of Friday's big gain.

Original Trade Description: October 14th.

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.

Position 10/16/17:

Long Jan $165 call @ $3.85, 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 US Navy and Australian Air Force awarded harris with a $133 million F/A-18 Electronic Warfare contract.

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 over prior resistance.

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. We closed the position at the open for non-performance.

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:

Closed 10/16: Long Nov $45 call @ $1.25, exit .70, -.55 loss.

MU - Micron Technology - Company Profile


The secondary offering closed on Monday and shares rebounded from last week's post announcement decline.

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. We closed the expiring October position at the open.

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:

Closed 10/16: Long Oct $37 call @ .90, exit $1.80, +.90 gain.

VIX - Volatility Index - Index Profile


Volatility actually rose despite strong gains on all indexes. Trouble ahead?

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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