Option Investor

Daily Newsletter, Wednesday, 10/18/2017

Table of Contents

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

Market Wrap

IBM To the Rescue

by Keene Little

Click here to email Keene Little
All of the indexes have been struggling the past week+ with some chopping their way slowly higher while others chop sideways or down. The market has been looking tired and while some indexes did not enjoy IBM's rally today it helped the Dow break through some tough resistance. Now all the bulls need is some follow through.

Today's Market Stats

Following last night's earnings report IBM blasted higher in the after-hours session. There was no give-back this morning and the shorts couldn't cover fast enough. The rally continued into this afternoon and only gave back a little at the end of the day. It was up +10% (+14.69) before closing +8.9% (+12.99). That gave the Dow a big boost and launched it up and over some strong resistance and now all the bulls need to do is hold today's gains, or at least not let it backtrack too much before continuing higher. The other indexes however, were more reserved and still suggest caution about the upside.

Other than the Dow, we had the same kind of start to the day that we've been seeing repeatedly -- start with a gap up, immediately sell into and then work the indexes back up into the afternoon and then sell into it again, which has it looking like a distribution pattern playing out. This can continue for as long as big money wants to distribute inventory and retail traders want to buy. The net result has been a lot of choppy price action with some indexes, like SPX, slowly working their way higher in a small rising wedge (the Dow broke out of its rising wedge pattern today and needs to hold above it).

The RUT has been a little different from the others with a choppy pullback over the past 2 weeks but the pattern looks like a potential bull flag consolidation pattern. The net result of all this choppy price action is that we traders need to wait for confirmation of the direction it's going to break out. The Dow could be our leading index and if the others follow in the next day or two we could be looking at the start of the next rally leg. But the risk of a downturn is high and it's reasonable to remain cautious about the upside.

There was no reaction to this morning's pre-market economic reports, which included housing starts and building permits, both of which declined slightly in September. As we move into fall and then winter it's typical to see a slowdown in building and sales so a little slowdown is to be expected, although the slowdown in September was a little more than had been expected and housing starts are now at a 1-year low.

This afternoon's Fed's Beige report basically said the economy is blah (my term, not theirs). The pace of growth for the economy is "split between modest and moderate," whatever that's supposed to mean. I guess it simply means it's not robust, hence blah. The Fed is confused as to why a stable economy and a tight labor market (in their view) hasn't led to more inflation. They still expect higher inflation but can't find any evidence of it yet.

Unfortunately the Fed's economic models don't reflect the fact that our economy is not nearly as strong as they think it is. There has been a fundamental change with all the money thrown at it but a significant lack of use of that money (except for asset appreciation like houses and stock prices).

The Fed believes the recent hurricanes put a damper on economic growth but that it's temporary and they're likely to continue with their plan to raise rates again in December. Essentially there was nothing in the Beige book that wasn't already known. The market sold off slightly following the report but nothing significant.

With the anniversary of the October 19, 1987 Black Monday, which had followed a steep decline the previous days, there's been a lot of talk about the vulnerability of the current market vs. back then. It could be just talk around the 30-year anniversary but there are some smart market observers, who were in the market back then, who are issuing warnings that today is looking eerily similar to what the market was like then. As I'll show further below, even though the Dow was very bullish today, there are reasons to be cautious about the upside.

A strong reason to be cautious, both in the long term and the short term, is that the market is stretched to the upside. Current market valuations suggest the return over the next 10 years is likely to be dismal. Therefore it doesn't make a lot of sense to commit large sums of money to a stock market that is over-valued and likely to correct.

The short-term problem for the market is that we have a very different market than we've had in the past and yet some similarities. Part of the problem today is the amount of computer (algo) trading combined with passive investing (ETFs instead of stock picking). The flash crash in 2015 still hasn't been figured out as to why or how it happened. And today we're even more vulnerable as the move into ETFs will lead to a situation where there will be no buyers when the selling begins. There is a significant air pocket below us that's been created by having virtually no backing and filling during the rally. It's been a steady rise with virtually no pullback. That sets us up for a nasty correction when it comes and it's very likely to catch most off guard.

As for the current picture, the charts don't emphatically point in one direction or the other and we're waiting for a break from the past two weeks so that we can get a sense of the next move, which could be big. Whether or not that started with the Dow today remains a big question mark. We'll have a better sense of that by the end of the week or next week at the latest (we need to get through opex and its control of the market).

I'll lead off tonight's chart review with the SPX weekly chart.

S&P 500, SPX, Weekly chart

For the past 3 weeks SPX has been nuzzling up against its trend line along the highs since April 2016 (ignoring the slight poke above it in February 2017) and the midline of its up-channel from 2010-2011, both of which are currently crossing near 2564 (today's high). SPX would start to look more bullish above 2565 although there are some shorter-term reasons that support a rally to the 2580 area and therefore it would be more bullish above 2585. From a weekly perspective the first sign of trouble for the bulls would be a break below the uptrend line from February-November 2016, currently near 2500, and a top would be confirmed in place if SPX drops below its August 21st low at 2417.

S&P 500, SPX, Daily chart

The daily chart shows a little more clearly the price action at the trend along the highs since April 2016 and the slight loss of momentum since the October 5th high. There's upside potential to a price projection at 2579, which is where it would achieve two equal legs up from April (I'm looking at the possibility for just an A-B-C move up from April for the 5th wave of the rally from January 2016 since the rally has created a large rising wedge pattern). Slightly higher is a trend line along the highs for the rally from August, which will be near 2585 by next Monday.

Key Levels for SPX:
- More bullish above 2585
- bearish below 2541

S&P 500, SPX, 60-min chart

The 60-min chart doesn't show the trend line along the highs from April 2016 but essentially it's the top of the little rising wedge pattern that has developed since the October 5th high. That little wedge will be negated if today's rally continues into the end of the week, in which case I'll be looking for 2579-2587. In addition to the 2579 price projection on the daily chart (for two equal legs up from April), there is the same price projection for the 5th wave of the rally from August (where it would equal the 1st wave). That makes 2579 a price level of interest if reached.

SPX is currently trying to get through the price projection at 2564.73, which is where the 5th wave would equal 62% of the 1st wave in the rally from August, which is a common relationship when a move has gone too far too fast (without any appreciable correction). Therefore there is the potential the rally could complete at any time, especially considering the fact that it is pressed up against resistance at its trend line along the highs from April 2016 (daily chart).

International Business Machines, IBM, Weekly chart

Before looking at the Dow, which was driven primarily by IBM today (the other 29 stocks effectively cancelled each other out), I think it's a good idea to check out IBM's chart to see what it's currently dealing with. The risk is a one-and-done kind of move today. IBM broke above its downtrend line from 2013-2014, near 159, and closed today on its broken 50-week MA at 159.58 with today's close at 159.53. It had popped above this level and came within a point of hitting its broken 200-week MA at 162 before pulling back into the close.

With today's high at 161.23 it was able to achieve a 50% retracement of its February-August decline, at 160.96, and back-test its broken uptrend line from February 2016. In other words, it's facing a lot of resistance here and it's possible there will be no follow through to today's rally. That of course remains to be seen and if IBM is able to rally above price-level resistance at 165 and above the 62% retracement of its decline, near 166, it could be off to the upside for this stock.

Dow Industrials, INDU, Daily chart

With IBM's push, the Dow broke above the top of its parallel up-channel from April, near 23060. It also busted out the top of a rising wedge pattern for its rally from August, the top of which is near today's open at 23087. This all looks bullish if the Dow can now hold above this morning's open on any pullback.

The pattern for the rally from April, the way I'm counting it, is a double a-b-c (double zigzag) and the 2nd a-b-c is the move up from June 29th. The c-wave of this move would be 162% of the a-wave at 23189, about 16 points above today's high. A trend line along the highs from June-August (light grey line) was reached today and the combination of this and the 23189 projection has me wondering if today has nearly completed its rally rather than starting a stronger leg up. Again, we'll know better in the next few days but stay bullish above 23087 and bearish below it, especially below 22820.

Key Levels for DOW:
- bullish above 22,000
- bearish below 22,000

Another reason to be cautious about today's rally for the Dow, even though price action looks bullish, not all is well underneath the surface of the water (cue the soundtrack from Jaws). The battle between "smart" money (commercial traders) and "dumb" money (retail traders, which includes most fund managers) is almost always won by smart money. They truly play the long game of buying low and selling high. Even Warren Buffet now has one of his largest cash positions ever held. The same is true for many large "smart" fund managers -- they've been slowly building their cash position while retail traders get giddy about buying new daily highs.

Measuring what the smart money is doing can be seen from the COT (Commitment of Traders) report and right now the COT report shows the widest spread between commercials (black line at the bottom of the chart below, which shows a very large net-short position) and non-commercials (blue line, showing a very large net-long position) since before 2003 (as far back as I can find a chart). In addition to the wide spread, each side holds the largest position since before 2003. In other words each side is betting BIG and it's a huge spread. The warning from this chart, which goes back to 2009, is that the coming correction is going to hurt a lot of the retail traders betting on the long side. The only question is when the correction will come.

Dow e-mini futures vs. COT report

Nasdaq-100, NDX, Daily chart

The techs were hurt today by the FAANG stocks, which mostly finished in the red (only a minor gain for GOOGL). NDX continues to struggle with its broken uptrend line from June-November 2016, which it's been battling since October 5th. A little higher is its trend line along the highs from November 2014, currently near 6165, so there's a little more upside potential (and more bullish above 6180) but the pattern is at the point where it can't tolerate much of a drop without turning on the selling. I think the first sign of trouble would be a drop below 6100 but it will take an impulsive decline, instead of a choppy pullback, to tell us a high is likely in place.

Key Levels for NDX:
- bullish above 6180
- bearish below 6010

Russell-2000, RUT, Daily chart

While the other indexes have been chugging higher (hard to call them rallies) the RUT has been consolidating off its October 4th high and has nearly made it down/over to its uptrend line from August 18 - September 8, currently just below 1495. This is also where a trend line along the lows of the consolidation intersects the uptrend line Thursday morning. As long as the RUT stays above 1495 it's in a bullish consolidation pattern and breakout to the upside should coincide with a bullish breakout by the other indexes as well.

If the RUT drops below 1490 it would leave a failed bullish pattern in its wake and failed patterns tend to fail hard. Considering the vulnerability of this market (air pocket below us, commercial traders massively short, passive investing, computer trading, highly overvalued, shall I continue?), take any failure to rally seriously.

Key Levels for RUT:
- bullish above 1515
- bearish below 1490

30-year Yield, TYX, Weekly chart

There's been a lot of noise in the daily charts of the Treasury yields and little sense of direction. The weekly charts aren't providing much clarity either. But last week I discussed the 30-year yield and the fact that its bounce failed at its broken and crossing 50- and 200-week MAs. I thought it needed to hold above price-level S/R at 2.85 but it failed to do that with a drop back below it last Friday. If it stays below 2.85 I think it will be bearish and today's rally brought it back up to that level. While it will have to deal with potentially stronger resistance at its downtrend line from 2011-2013 if it rallies from here, I would say it's bullish above 2.85 (bearish for bond prices) and bearish below.

U.S. Dollar contract, DX, Daily chart

The US$ pulled back to support last week at its recovered 20- and 50-dma's, as well as the bottom of a previous down-channel from January, and bounce off support has it looking like we could see its rally continue. It's currently struggling with price-level resistance near 93.30 and a new downtrend line from April through the October 6th high, which was tested with today's high at 93.65 before pulling back to close at 93.23. If both of these resistance points can be cleared it would then be bullish.

If the dollar makes a new high above the October 6th high at 94.10 it would give us an impulsive move up from the September 8th low and that would signal a bottom is in place. A subsequent pullback from a new high would then be a buying opportunity for the dollar. But without a new high above 94.10 the dollar would turn short-term bearish if it drops back below the October 13th low at 92.59. There is still the potential for a drop down to the $90 area before setting up the next longer-term rally.

Gold continuous contract, GC, Daily chart

On October 5-6 gold successfully back-tested its broken downtrend line from 2011-2016, near 1266 at the time, and it was looking like it was off to the races when it got back above its 20- and 50-dmas last Friday. But gold has dropped back down below those MAs, now near 1289 and 1302, resp., as well as price-level S/R at 1300. As long as gold holds above its October 6th low near 1263 it stays potentially bullish. But a drop below 1262 would confirm the likelihood that gold is heading lower (potentially below last December's low at 1124).

Oil continuous contract, CL, Weekly chart

The bounce pattern for oil's rally from June has the potential to make it up to the $56 area and still be just a correction to its longer-term decline. There's also price-level S/R near 58.50, shown on the weekly chart below, that could be an upside target. But currently oil is fighting resistance at a downtrend line from May 2015, currently near 52 (today's high was 52.33). A longer-term uptrend line from 1998-2008 is currently near 53 so there's plenty of resistance for oil bulls to fight through.

As noted on the chart, it's possible to consider the downtrend line from May as the neckline of an inverse H&S bottoming pattern, which means a break above the trend line could be very bullish (the price objective for the pattern would be the height of the head, so about 84-85. But I think the larger oil pattern is bearish and the sideways consolidation over the past 3 years will be followed by another leg down. I think oil is in a longer-term decline, especially if demand continues to shrink while new sources/methods continue to increase supply.

Economic reports

Thursday's economic reports include the unemployment data and Philly Fed index and Leading Indicators, the latter being more or less an after-the-fact kind of report. The Philly Fed index is expected to show a little slowing from September but the market is likely to ignore it. On Friday we'll get some existing home sales data for September, which is expected to be down slightly from August, as were today's reports on new homes.


The stock market is clearly bullish and it doesn't make sense to fight it. In other words, no reaching in to grab rising knives. Ride it for as long as it holds but I think the rally has reached the point where it could top out at any time. More importantly, I think there's considerable downside risk since a decline could rapidly pick up speed and scare more and more traders into selling.

Computer trading could will likely exacerbate the problem by selling ETFs hard and not finding buyers on the other side. Between that and the air pocket below us (due to no significant corrections along the way in the rally) we could see a flash crash that puts the one in August 2015 (down -10% in 3 days) to shame. Waking up to a big gap down is the kind of downside risk I see.

Believing there is significant downside risk, it's tempting to get into some speculative short positions but that's equally dangerous in a market that could still have a long way to go into a blow-off top. However, getting into some short positions as a hedge to protect your long positions makes a lot of sense right now. Hopefully you won't need the insurance but you'll be glad to have it if we suddenly experience a 1000-point down day for the Dow. Do I believe we could see that kind of move? Absolutely.

It'll be interesting to see how the next week plays out since the indexes are either poised to turn back down from ending patterns to the upside (such as the SPX rising wedge pattern) or ready to break out to the upside from consolidation patterns (such as the RUT's choppy sideways/down flag pattern). The Dow has broken through some important resistance levels and could be our bullish indicator.

Right now, with the differences between the indexes, we need to let price lead the way from here. Stay cautiously long until we see some impulsive moves to the downside. Just stay aware of the potential for a significant decline that happens very quickly and catches most bulls back on their heels, unsure how to react and likely to get hurt badly before realizing the market is not coming back.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Option Plays

Alter Ego

by Jim Brown

Click here to email Jim Brown

Editors Note:

We are using this stock to capture the post earnings gains in a different stock. We are going to own Altaba to profit from Alibaba earnings.


AABA - Altaba - Company Profile

Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017. Altaba Inc. was founded in 1994 and is based in New York, New York. Company description from FinViz.com

Altaba owns a 15% stake in Alibaba, currently worth about $70 billion. They hold a stake in Yahoo Japan currently worth $7.7 billion. They have $130 million in investments. They have a $740 million stake in Excalibur, a unit of the new company that holds all the Yahoo patents that were not sold to Verizon. The company has $12 billion in cash. They recently announced a $5 billion stock buyback and the company has committed to returning nearly all the cash in the bank plus any thrown off by the investments, to the shareholders.

Owning Altaba is just like owning Alibaba only without the expensive options and a lot less volatility. We get the other parts for free. Obviously Altaba is reactive to Alibaba movement so there will still be some volatility, it is just comes with a lower risk.

Alibaba is growing much faster than Amazon and they have a larger market with 4.5 billion consumers in Asia.

Alibaba reports earnings on Nov 2nd and Altaba reports on Nov 29th. Because of the lower volatility and cheaper option prices, we can own AABA over the BABA earnings and profit from any post earnings gains.

Last week Alibaba said it was going to spend an additional $15 billion over the next three years on research. They already spend $3 billion and have more than 25,000 engineers on the payroll.

The new effort will create the Alibaba DAMO Academy, short for Discovery, Adventure, Momentum and Outlook. The academy will set up labs in China, USA, Russia, Israel and Singapore and fund collaborations with universities. They plan to explore AI, IoT, quantum computing, visual computing, machine learning and network security.

BABA shares fell $6 on the announcement because of the impact to profits. AABA shares followed Alibaba shares down and they bounced today off the 30-day average, which has been strong support. If the trend holds, this should be a buying opportunity.

I am using the Jan options so there will still be earnings expectations in the premium when we exit.

Buy Jan $70 call, currently $3.45, initial stop loss $63.85.


No New Bearish Plays

In Play Updates and Reviews

Not What it Appears

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow gained 160 points but the S&P gained less than 2 points and the Nasdaq less than 1 point. The rally was not a "market" rally. It was an IBM rally with help from Goldman Sachs. Those two stocks added 130 points to the Dow and caused a little short covering, probably in the Dow ETFs. The Nasdaq gained 0.56 of a point and the S&P 1.9 points. This was not a market rally. If it were not for IBM and GS the S&P would have been negative.

The Dow blew through 23,000 and 23,100 but that just made it more overextended and the other indexes are not confirming. The odds are very high that we will see some profit taking in the Dow in the coming days.

American Express beat on earnings after the close but announced the CEO was leaving. That erased a $3 spike in afterhours and AXP is not likely to boost the Dow on Thursday.

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

CAT - Caterpillar
The long call position was closed at the open.

HRS - Harris Communications
The long call position was stopped at $135.25.

HTZ - Hertz Global
The long call position was stopped at $24.85.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

ADI - Analog Devices - Company Profile


No specific news. Semiconductor segment was flat today.

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. The position was closed at the open.

I considered recommending a weekly call for the Friday after earnings at $1.07 for the $134 strike just in case they report blowout earnings. However, if the market waffles between now and next Tuesday, that option premium could disappear in a heartbeat. That potential trade is there if you want to take it.

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:

Closed 10/18: Long Nov $120 call @ $2.75, exit $10.87, +$8.12 gain.

CCL - Carnival Corporation - Company Profile


No specific news, minor decline of 67 cents on sector weakness. Royal Caribbean declined -$2.34 and Norwegian -$1.14.

Original Trade Description: October 16th.

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.

Position 10/17/17:

Long Jan $70 call @ $1.90, see portfolio graphic for stop loss.

COST - Costco - Company Profile


Reuters released a survey of 8,600 online shoppers and 75% said they never or rarely by groceries online. While that should have been negative to Amazon and the Whole Foods purchase, it weighed on COST as well because of their efforts to accelerate their online business. Amazon fell $12 on the news.

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. Minor decline from the 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


No specific news. The company said they would report earnings on Oct 31st and shares fell $1.75 at the open. Who knew a simple schedule announcement could be so negative? We were stopped out on the support break for a small gain.

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:

Closed 10/18: Long Nov $135 call @ $2.40, exit $3.10, +.70 gain.

HTZ - Hertz Global - Company Profile


No specific news. Shares fell sharply in the morning to $24.84 and stopped us out by a penny before rebounding to close positive.

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:

Closed 10/18: Long Jan $27.50 call @ $2.90, exit $2.24, -.66 loss.

MU - Micron Technology - Company Profile


Micron said it was retiring $2.25 billion in debt that carried interest rates of 7.5% and 5.25%. The secondary offering last week will provide most of the funds with the rest paid out of cash on hand. Shares posted a nice gain on the news and have almost recovered the $42 highs before the secondary was announced.

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.

VIX - Volatility Index - Index Profile


Volatility declined only slightly despite the Dow blowout.

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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