Option Investor

Daily Newsletter, Saturday, 10/21/2017

Table of Contents

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

Market Wrap

Irrational Exuberance

by Jim Brown

Click here to email Jim Brown

The Dow has officially moved into irrational exuberance mode and 12 Dow components report earnings this week.

Weekly Statistics

Friday Statistics

Since the 21,787 close on September 8th, the Dow has gained 1,541 points or 7% for an average daily gain of 51.37 points over 30 trading days. The Dow is a perfect example of price chasing.

Any portfolio manager holding cash at the end of the summer and expecting to pick up some bargains in the normal Sept/Oct volatility was left waiting at the station because the train has already left. Typically, the market begins to move higher after October option expiration because the volatility has passed. We never had the volatility and now the race is on to get positioned for the "normal" end of year rally. Since none of the normal seasonal trends played out as expected this year, you have to wonder if the normal end of year rally will appear on schedule. November 1st is the start of the best six-month period of the year. Will that trend appear on schedule?

There is nothing to suggest the rally will fade. A budget was passed in the Senate, similar to the one passed in the House and now they would go to a conference committee to be merged. However, House leadership is signaling they do not want to go through the conference committee process and will vote on the Senate version next week. If that is passed, it will go directly to the president for signature and tax reform will immediately take center stage. However, there is one hurdle left. That is the debt ceiling, which expires on December 8th. Since they passed a budget, you would think they would pass a debt ceiling extension to go along with it. Of course, that would be rational thought and Washington is rarely rational.

Part of the lifting power on Friday was the news the House would take up the Senate bill and cut weeks out of the process. If they can pass a debt ceiling bill at the same time it would remove all the political hurdles in front of the market. That would allow them to concentrate solely on the tax reform package and investors would begin to hyperventilate at the possibilities.

This all means the markets could continue to post gains, but not likely as vertical as the Dow's gains last week. There is always the potential for some unforeseen event but all the events we can see this weekend are rapidly diminishing in their capability to halt the market.

Even the economic reports continue to surprise and create their own headline flow. The big news was the record low jobless claims on Thursday of 222,000. While that was the lowest level since March 31st, 1973, there was an external reason. Power and communications outages caused by Irma and Maria are still disrupting the claims processing in Puerto Rico and the Virgin Islands. Infrastructure has been so damaged that people are more concerned with getting food and water than walking miles to file a claim. The prior 4-week moving average of 258,000 is more representative of reality.

Existing home sales for September rose slightly from 5.35 million to 5.39 million. The number was boosted by a flurry of home buying in the Houston area where rental corporations and fix/flip companies are buying up flooded homes by the hundreds to repair and either sell or rent until property values return. Prices have been reported as low as 40 cents on the dollar compared to pre hurricane levels. Those homes with 6-8 feet of water damage have to be completely gutted and repaired. The floodwaters had large amounts of human wastewater from flooded treatment plants, animal wastes, dead animals, chemicals, etc. It was a toxic nightmare and insurance companies are wholesaling them off rather than repair them. After seeing what they looked and smelled like after the floodwaters receded, homeowners are bailing out to look for homes on higher ground.

The supply of existing homes is holding at 4.2 months for the last 5 reports. The median selling price declined from $253,100 to $245,100.

The economic calendar for next week is short but contains some important reports. There are two manufacturing surveys from the Richmond Fed and Kansas Fed. New Home sales and Pending Home sales will round out the home sales reports for the month. The third and last revision of the Q2 GDP will be on Friday and analysts are looking for a sharp drop from 3.1% to 2.5% as a result of the hurricanes.

General Electric (GE) was sucking all the oxygen out of the market before the open on Friday after reporting the first earnings miss in 2.5 years. The company reported adjusted earnings of 29 cents compared to estimates for 49 cents. That is not a typo. It was ugly. GE has not missed estimates by more than a penny in more than nine years. Revenue rose 14% to $33.47 billion and beat estimates for $32.51 billion. The new CEO said it was a very challenging quarter and cash flow was "horrible" despite solid performance by most of their businesses.

The CEO said everything is under review and they plan to divest $20 billion in assets to improve cash flow and profitability. They have an investor meeting on November 13th and most analysts believe they will cut the dividend before the meeting. This would be only the second dividend cut since the Great Depression. With 8.7 billion shares outstanding and a 96-cent annual dividend, that is $8.35 billion a year in dividends. The company guided for full year earnings of $1.05-$1.10, down from the prior range of $1.60-$1.70. Analysts were expecting $1.54.

With the new CEO inheriting a company with good businesses but serious problems, he has already gone into kitchen sink mode and you can bet they will miss earnings in Q4 as well after they throw everything possible into the quarter to clear the books for 2018.

GE shares fell more than $2 (10%) to $21.47 before the open but rebounded during the conference call and then struggled higher all day to actually close with a 25-cent gain at $23.67. Volume was 192 million shares. Average volume is 43 million. Some analysts were recommending a buy here because all the bad news is priced into the stock, now at a two-year low.

Procter & Gamble (PG) was the biggest Dow loser and erased 22 points after reporting earnings of $1.09 that only beat estimates by a penny. Revenue of $16.65 billion rose only 1% and missed estimates for $16.69 billion. The company reaffirmed its full year revenue growth estimates of 2% to 3% and EPS growth of 5% to 7%. Investors were not excited with what they considered anemic growth. The grooming business that sells Gillette razors and Braun epilators saw a third consecutive quarter of declining sales. They blamed the hurricanes for their poor performance.

Synchrony Financial (SYF) reported earnings of 70 cents that beat estimates for 64 cents. Revenue of $3.88 billion beat estimates for $3.78 billion. Loans rose 9% to $77 billion. Deposits rose 9% to $54 billion. Interest and fees rose 11%. They ended the quarter with total liquidity of $22 billion. They repurchased $390 million in stock. Shares rose 4%.

Schlumberger (SLB) reported earnings of 42 cents that matched analyst estimates. Revenue of $7.91 billion also matched estimates. Investors are rarely happy with matches and shares fell to a two-year intraday low. The bigger problem was a warning that investments in North America were moderating as producers elected not to expand their drilling programs with oil prices hovering around $50. The company said Gulf of Mexico activity continued to decline and the outlook remained weak based on customer plans.

PayPal (PYPL) reported earnings of 46 cents that rose 31% and beat estimates for 44 cents. Revenue of $3.24 billion rose 21% and beat estimates for $3.17 billion. They processed $114 billion in payments and person to person payments rose 47% to $24 billion. The Venmo app processed $9 billion in payments for 93% growth. They added 8.2 million new active members. They guided for the current quarter to earnings of 50-52 cents and for the full year for $1.86-$1.88. Shares spiked 5% on the report.

As we move into the center of the Q3 earnings cycle, 88 S&P companies have reported with 70.5% beating earnings estimates. This is below the average for the last four quarters of 72% and down from the 80% rate just a week ago. Of those companies, 71.6% have beaten on revenue with the four-quarter average at 60%. The consolidated earnings forecast has slipped slightly from 4.4% to 4.2% growth. The revenue growth estimate is stable at 4.4%. There have been 80 earnings warnings and 49 instances of positive guidance. There are 183 S&P companies reporting earnings next week.

Amazon (AMZN) and Alphabet (GOOGL) are the big dogs on Thursday but there are 12 Dow components including Microsoft and Intel. Amgen, Biogen and Gilead Sciences also report as the biggest biotechs on the Nasdaq. The three largest energy companies COP, CVX and XOM report and guidance will be critical.

DBV Technologies (DBVT) said its drug for peanut allergies did not meet the goals in a highly anticipated late-state study. The drug, was delivered in a 250 microgram daily stick-on patch called Viaskin Peanut, missed the main goal for increased tolerance to peanuts. The patch must be replaced daily over a long period to desensitize people to peanuts. After 12 months of treatment, only 35% of patients developed any statistically significant tolerance. Peanut allergies are the leading cause of food-induced allergic reactions in the US. The number of children affected more than doubled from 1997 to 2008 and now affects 2% of newborns. Shares were crushed for a $29 loss in afterhours.

Celgene (CELG) said a phase III trial for a Crohn's disease drug would be terminated. The Data Monitoring Committee, which assesses benefit/risk of ongoing trials, recommended ending it early. This suggests the risks being seen in the trial outweighed the benefits. Shares fell $14 on the news.

Apple (AAPL) was crushed on Thursday after China's Economic Daily News reported the company had slashed component orders for the iPhone 8 by 50% due to weak sales. This is the first time orders have been cut this early after a debut and by the largest amount. This is a good news, bad news story. This suggests tens of millions of customers are delaying their purchase of an 8 because they want to look at or buy an iPhone X. With only a couple hundred dollars difference in price, customers are thinking about stepping up to the cool new toy. The good news is that Apple will make more money on the X. The bad news is the very slow production cycle. Another news story reported Apple will only have 3 million phones in inventory when the order lines open on the 27th. This means significant delays, upset customers and revenue being kicked into Q1 rather than Q4. Apple reports earnings on Nov 2nd and guidance is going to be critical.

Bitcoin surged again to trade at $6,079 on Friday. Bitcoin owners are thrilled while the rest of us have a coulda, woulda, shoulda pity party.

Oil prices rose early in the week on Iraq's movement to take over the oil fields around Kirkuk. When there was no material conflict and production continue to flow, prices declined slightly. There was more chatter out of OPEC about extending the production cuts until the end of 2018 but at this point, they are just trying to talk up the market. There was also chatter that Russia would not agree to an extension. They are not even going to make the decision until January so everything you hear now is just propaganda. The next OPEC production meeting is not until November 30th.

OPEC should be happy about the sharp decline in active rigs in the US. There were 15 rigs deactivated last week to reduce the total to 913 and the lowest level since May 26th. That was 7 oil rigs and 8 gas rigs. This confirms the Schlumberger warning that capex spending is declining in the US. Apparently, a few producers are trying to get off the drilling treadmill until prices firm significantly.


The S&P closed at a new high on Friday but it also posted five consecutive days of gains. That may sound routine but it has only happened 17 times in the last 90 years. The last time was in 1998. It was a struggle with a couple days of only minimal gains but they were still gains. This is further proof that markets do not simply move higher every day even in a bull market.

Thursday's 14-point drop at the open put that streak in jeopardy but the dip buyers were waiting. Not only did they recover that 14 points to close positive but the buying accelerated into the close and continued on Friday. After nine days of miniscule gains and losses that added only 10 points, the index rebounded 27 points in two days. Investors do not like to buy market highs. They would rather buy the dips.

The index is now in blue-sky territory with no material resistance in sight. Keene targeted some short-term resistance at 2,585 in his Wednesday market wrap. Plotting resistance targets on a market breakout this long always proves challenging. Support is clearly defined at 2,550.

Resistance is going to end up being the analyst estimates. The reported consensus estimate for year-end is 2,475 but the most recent estimates I can find average 2,534. The highest forecast on the street is 2,700 by Morgan Stanley and the lowest is Mizuho at 2,300. Goldman Sachs says 2,400 without tax reform and 2,650 if something is passed. Federated is targeting 3,000 but they don't specifically say by year end.

The grouping at 2600-2650 are the most recent and that is more than likely where the S&P will top out for the year unless there is a tax cut. If enough analysts target that range, an equal number of investors will start to take profits at that level. However, the Morgan Stanley target of 2,700 has a nice round number feel and that is only a 5% gain from Friday's close. Once the bulls are charging anything is possible and there will be constant talk of tax reform even if it is not passed in 2017.

Sam Stovall noted in a recent post that "since WWII the market has had 56 pullbacks between 5% and 9%, 21 corrections between 10% and 19.9% and 12 bear markets with drops of more than 20%. On average, only six months have separated the end of one decline and the start of the next." We have now gone 475 days or nearly 16 months without even a 5% decline. There has not been a 10% decline since the one that ended in February 2016. We are due for some profit taking and the longer we retain a bullish bias the worse the decline will be when it finally arrives.

The S&P finally blew past the 2,555 resistance after two weeks of struggle. That level should now be short-term support.

The Dow has now posted six consecutively daily gains. Back in late September, it ran for 9 days before breaking stride. To say the Dow was overextended would be an understatement but it does not mean it cannot go higher. With 12 Dow components reporting next week we know there will be volatility. Whether that is up, down or both we will not know until it happens. CAT, MCD and MMM have a good chance of moving the index. All three report before the open on Tuesday.

Like the S&P there is no clear resistance with the Dow in breakout mode. The round numbers will take on more importance the higher it goes. The 23,500 level could be tested next week. I would bet that some traders have 25,000 as a whisper number by the end of December. That would definitely be round number resistance and portfolio managers would be taking profits with both hands ahead of year-end statements.

The Nasdaq rebounded sharply from the Thursday dip to regain 71 points but it did not close at a new high on Friday. The Nasdaq missed a record close by 3 points and put it right back against resistance that held for the prior 4 days. The big cap techs were mixed and those that did finish positive only gained a little with the exception of Adobe. That Adobe spike came on raised guidance on Wednesday evening that prompted a 22-point gain over two days.

The Nasdaq has been posting minor gains like the S&P while investors wait for some earnings catalysts. Amazon and Alphabet could do that on Thursday night.

Short-term resistance is 6,630 and support is 6,560.

The Russell 2000 recovered from its three days of declines under the support at 1,500 and retested the prior record high. This is encouraging because there was a lot of profit taking potential on the Russell and the majority of investors failed to run to the sidelines. The two week dip was minimal.

The investor sentiment survey did not show any major changes last week. With the markets holding at the highs everyone seems pretty confident about their positions. I would have expected bullish sentiment to rise slightly since the herd is normally the most bullish at the highs.

The Dow is overbought and facing another week of earnings volatility. That could continue the rally or send it into a ditch. You cannot predict market direction in the middle of earnings season. There are too many headlines driving individual stocks. So far, we have not had that much impact from the hurricane ate my earnings excuse but it has not been forgotten.

In theory, the market should continue higher because all the fundamentals are positive and there is a lack of negative headlines on the horizon. We escaped the week without North Korea doing anything stupid but I doubt rocket man will simply roll those missiles back into their caves. He may be biding his time looking for a new opportunity OR he may have considered his survival options and decided to launch stupid comments instead of missiles.

I would continue to buy the dip until that trade no longer works. Remember the statistics I quoted above. We are long overdue for pause but I doubt it will be this week.

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

subscribe now

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"There are three kinds of men. The ones that learn by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves."

Will Rogers


Index Wrap

Caught by Surprise

by Jim Brown

Click here to email Jim Brown
Portfolio managers hoping to buy the Sep/Oct dip were caught by surprise when there was no dip.

This has been a year of surprises. The indexes spiked after the election and for months analysts kept waiting on a post election decline. Despite several minor dips along the way, with the largest only 3.2% on the S&P, the index has rallied 23.5% since the November 4th close at 2,085. Everything that has happened in 2017 has been a surprise. None of the seasonal trends appeared and the market kept ignoring multiple events that should have caused deeper corrections.

Now portfolio managers are trapped. If they were holding cash in hopes for a dip, they are under performing the market. They have to hold their nose and buy stocks ahead of the "normal" Q4 rally, which typically starts after October option expiration. November 1st is historically the start of the best six months of the year.

Cash is trash today in terms of portfolio performance. They have to buy something. So far, they are not buying big cap tech stocks. Nearly all of the big tech stocks have choppy charts where investors have been rotating out of those positions and into materials, industrials, defense and small caps.

There is an actual rally in progress. We have to ignore the Dow because of its limited 30 stock, price-weighted construction. As we have seen in recent weeks only five stocks (BA, CAT, HD, MMM, UNH) contributed 500 of the last 1,000 Dow points. That is not a market. It is a simple indicator of investor sentiment.

The Dow is grossly overbought and over extended but as we know from past experience, stocks and indexes can remain irrational far longer than we can remain liquid if we are betting against them. The Dow will eventually see some profit taking and the talking heads on stock TV will wring their hands and ask stupid questions to analysts to fill airtime with a reason for the sudden decline. Ignore it.

The economy is fine. Jobs are fine. Earnings are expected to show double-digit growth for the next three quarters. The global economy is expanding. Tax reform is coming. As long as North Korea does not explode a nuke over the Pacific the market should continue its rally. There will be pauses but over the next six weeks, every pause should be bought.

Why are portfolio managers in a panic and chasing prices? They are taught some level of technical analysis early in their career along with fundamental analysis. They are taught to buy dips. They do not buy tops because over the long term the dip buys are always more profitable. Many managers have simple systems. They almost always default to moving averages.

It is hard to go wrong picking a moving average that is clear support on whichever stock or ETF you want to buy and then wait for that average to be tested. A 50-day average is common along with the 100-day and 200-day. The longer averages require more patience. Unfortunately, every stock/ETF reacts differently to every average. Managers have to find the one that works for that stock and then wait. A 7-year old could do it. Unfortunately, it requires patience and this year, patience and the calendar have not been evenly matched.

For instance, in the QQQ chart below, the 50-day average (green) does not work. It is penetrated to often and that causes nervous nights at fund headquarters. An astute manager could have played with the numbers and saw that the 75-day works perfectly for the QQQ over the last year. You wait for the dip to the 75-day and enter the position. On the QQQ, everything worked perfectly. There was a dip in late September exactly when it should have dipped and the ETF is now at new highs.

So let's see how that would have worked on the S&P. Using the same 50-day average there was a test in August that would have been a great entry point but managers were expecting the volatility to continue into September since Aug/Sep are the two most volatile months of the year. The S&P rebounded and did not come back to the average since that August dip. The S&P is up 150 points since that late August low and managers who did not buy the dip in August have been sitting on the sidelines watching the market run away from them. As a portfolio manager, that is a very frustrating experience.

Now, knowing what you know, would you buy this chart on Monday morning? I seriously doubt it. You can wait because your job and your performance bonus is not riding on your gains over the next two months. You can be patient, while fund managers at the end of October, no longer have that luxury.

On a side note look at the CCI indicator on the bottom. Notice how clear the signals are? Green equals buy, red equals sell. The MACD is even better. Sell when the blue line crosses down over the red and buy when it crosses back higher. The MACD gives earlier signals but it has a little more noise. Use them both together. Note the MACD at the far right where a negative cross appears imminent.

Our reality check on the S&P is still the A/D chart which closed at a new high on Friday. There is no weakness in the internals despite the small gains in the index early in the week.

The Dow is so overbought there is nothing I can say positive. Nobody in their right mind would buy this chart but the key is that they are not buying the chart but 2-3 Dow stocks based on headlines. Nearly every day the advancers and decliners are almost even but there are 2-3 outperformers that rescue the index. There are 12 Dow stocks reporting this week and once that is over the post earnings depression period will appear.

The 50-day average is normally used to track the Dow but nobody actually trades the Dow. There is an ETF (DIA) but it only traded 3 million shares on Friday when the Dow was exploding higher.

I only have one question. Does anyone believe the Dow will not retest the 50-day average in the coming months? Obviously, everyone should expect it regardless of how bullish your bias.

The Nasdaq chart looks a lot like the beginning of a rounding top. If the index falls back below 6,600 again, I think it could trigger a bigger decline. If you look at the three times on the chart where the index went nearly vertical for several weeks it always ends suddenly. Two of the three times is took a month for the index to recover. I am not predicting that over the next several weeks but there are plenty of big earnings events that could spoil sentiment for the tech sector. I would love to see a couple hundred more points but we have to be realistic and expect patterns to repeat. Note the MACD on the far right.

The Russell moved sideways for so long the moving average is not working. The index is still overbought but it did work off a lot of the pressures with the decline over the last two weeks. I am in "show me" mode here. A move over 1,520 is a bullish breakout and a close under 1,500 again is a danger signal. Note the MACD crossover.

I believe the market will continue to move higher over the next month but not necessarily in a straight line. There are overbought pressures to be equalized and that can happen by consolidating in place for a week or two or a sharp 2-3 day decline and rebound. The consolidation is less painful but does not provide clear buying opportunities. With fund cash positions still high, every dip should be bought.

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

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Amazon Proof, Overbought

by Jim Brown

Click here to email Jim Brown

Editors Note:

There are survivors in the retail sector and this store is Amazon proof. Nothing in the store is over $1. It is hard for Amazon to sell, pack and ship for under $1.


DLTR - Dollar Tree - Company Profile

Dollar Tree, Inc. operates variety retail stores in the United States and Canada. It operates in two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1.00. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables, such as household paper and chemicals, and frozen and refrigerated food; various merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and seasonal goods, which include Valentine's Day, Easter, Halloween, and Christmas merchandise. This segment operates under the under the Dollar Tree and Dollar Tree Canada brands, as well as 11 distribution centers in the United States and 2 in Canada, and a store support center in Chesapeake, Virginia. The Family Dollar segment operates general merchandise discount retail stores that offer consumable merchandise, which comprise food, tobacco, health and beauty aids, household chemicals, paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies; and home products, including housewares, home decor, and giftware, as well as domestics, such as blankets, sheets, and towels. It also provides apparel and accessories merchandise comprising clothing, fashion accessories, and shoes; and seasonal and electronics merchandise, which include Valentine's Day, Easter, Halloween, and Christmas merchandise, as well as personal electronics that comprise pre-paid cellular phones and services, stationery and school supplies, and toys. This segment operates under the Family Dollar brand, 11 distribution centers, and a store support center in Matthews, North Carolina. As of January 28, 2017, the company operated 14,334 stores in 48 states and the District of Columbia, and 5 Canadian provinces. Company description from FinViz.com

Dollar Tree reported earnings in late August that rose 36.1% to 99 cents and beat estimates for 87 cents. Revenue of $5.28 billion rose 5.7% and beat estimates for 5.24 billion. Same store sales rose 2.4%. They guided for the full year for revenue of $22.07-$22.28 billion, up from $21.95-$22.25 billion. Earnings guidance of $4.44-$4.60 rose from $4.17-$4.43.

Shares spiked $6 on the earnings and then went through a week of post earnings depression then began a steady hike higher.

Next earnings Nov 23rd.

After earnings Raymond James upgraded them from market perform to strong buy. Bernstein upgraded from underperform to market perform. Telset Advisory reiterated an outperform.

Dollar Tree is Amazon proof. With everything in the store $1 or less even Amazon cannot sell and ship items that cheap. Since their acquisition of Family Dollar, they now operate 14,334 stores. This is a retail powerhouse and even if the economy weakens, their business will thrive because of the low price point.

Shares have traded sideways for the last 7 days but they moved up on Friday to close at a new 52-week high. Their historic high in August 2016 was $99 and that is the next resistance level.

In September they promoted the past VP of stores since 2001 who became COO in 2007, president in 2013 and now to CEO. He has a ton of experience in every phase of the business. He oversaw the acquisition of Family Dollar in 2015 as president and COO of Family Dollar during the transition. This is very positive for DLTR and the rise in the stock suggests investors like the choice.

The November options expire several days before earnings so I am going with the December strikes so there are some earnings expectations in the premium when we exit before the event.

Buy Dec $95 call, currently $2.75, initial stop loss $87.75.


DIA - Dow SPDR ETF - ETF Profile

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity.

I am going to make this as simple as possible. The Dow is extremely overbought. It is due for a rest. There are 12 Dow components reporting earnings this week. Volatility will occur but we do not know in which direction. Since all the Dow gainers are already up strongly over the last several weeks, there is a good chance we could see some declines.

This is highly speculative. I am using November options because they are cheap but they will require a substantial move in the next ten days or they will decay quickly. This will be a quick trade.

Buy Nov $232 put, currently $1.86, no initial stop loss.

In Play Updates and Reviews

Extremely Overextended

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow exploded higher again with a 465-point gain for the week and into extremely overextended mode. A gain of that size is not that unusual but it rarely comes after several weeks of strong gains. The index is very top heavy here and you could make a case that Friday was a buying climax. We will have to wait until next week to see if profit taking appears.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

No Changes

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AABA - Altaba - Company Profile


No specific news. Shares were up intraday but faded to flat at the close with a 50 cent drop.

Original Trade Description: October 18th.

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.

Position 10/19/17:

Long Jan $70 call @ $3.10, see portfolio graphic for stop loss.

ADI - Analog Devices - Company Profile


Shares spiked at the open but closed on the lows for the day.

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.

CCL - Carnival Corporation - Company Profile


Carnival posted only a minor gain but we may have found out why the cruise sector was down last week. It appears a lot of ships going to China have been takes off that route. China was once touted as the new Caribbean with companies adding ships for Chinese customers. There is no confirmation but maybe taking a cruise was not on the bucket list for most Chinese. Analysts claim it would not be a material impact to cruise earnings but it would reduce suspected growth targets for the coming years. I tightened the stop loss in case the decline continues.

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


Oppenheimer reiterated an outperform rating and $185 price target. They listed 5 reasons why Costco is still a buy. Management optimism, credit card change is over, the new delivery options are just starting, IT investments over the last several years are paying off and costs are declining, improved advertising showing the extended benefits of being a member. Shares rose $2.31.

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.

Update 10/18: 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.

Position 10/16/17:

Long Jan $165 call @ $3.85, see portfolio graphic for stop loss.

FMC - FMC Corp - Company Profile


No specific news. Shares posted a minor gain.

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.

MU - Micron Technology - Company Profile


No specific news. Deutsche Bank reiterated a buy rating. UBS reiterated a buy rating and raised his price target from $39 to $53. UBS said Micron would be cash positive in 2018. The analyst no longer sees DRAM prices declining in 2018 as previously forecast.

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.

Update 10/18/17: 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.

Position 10/10/17:

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

VIX - Volatility Index - Index Profile


Back below 10 again.

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 475 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.

BEARISH Play Updates (Alpha by Symbol)

No Current Puts

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now