Option Investor

Daily Newsletter, Tuesday, 10/24/2017

Table of Contents

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

Market Wrap

Four Stock Rally

by Jim Brown

Click here to email Jim Brown

The Dow outperformed the rest of the market thanks to four stocks.

Market Statistics

I wrote several times that Tuesday would be a major volatility day for the Dow because of three major components reporting earnings before the bell. I certainly did not expect the gains we got and most of that was related to the monster spike in 3M, which added nearly 100 Dow points all by itself.

Three other stocks also contributed to the outsized performance with CAT, BA and GS also powering the Dow higher. Those four stocks added 179 points to the Dow and sent the index into even more overbought status.

Shorts were clearly in a lot of pain with the Dow gapping higher by 168 points at the open and it closed with that same 168-point gain.

Of the four Dow components reporting earnings on Tuesday, 3M (MMM) was the king of the mountain. They reported earnings of $2.33 compared to estimates for $2.21. Revenue of $8.17 billion beat estimates for $7.92 billion. 3M raised its full year guidance range from $8.80-$9.05 to $9.00-$9.10. 3M gets 60% of its revenue from overseas and the weak dollar added to its profitability. Obviously, a 12 cent beat and a minor top end hike on guidance does not merit a $17 intraday spike in the stock. This was a monster short squeeze after the stock closed at new highs over the prior three days. I get it that the global economy is growing and this is good for 3M but this is going to be a short magnet over the next couple of weeks until the $13 closing gain is neutralized.

Caterpillar (CAT) reported earnings of $1.95 that nearly quadrupled and blew past estimates for $1.22. That is the kind of earnings beat that should have spiked the stock $13 like MMM but given CAT's recent string of new highs over the last three months, a lot of excitement was already priced into the stock. Revenue rose 25% to $11.41 billion compared to estimates for $10.61 billion. Construction equipment revenue rose 37% with energy and transportation equipment revenue rising 12%. CAT raised guidance for the full year from $5.00 to $6.25 on revenue of $44 billion. Analysts were expecting $5.29 and $42.94 billion. This was a killer quarter for CAT and this confirms more than anything else that the global economy is beginning to surge.

McDonalds (MCD) reported earnings of $1.76 that only matched estimates. Revenue of $5.75 billion declined from $6.42 billion and matched analyst estimates. Global same store sales rose 6.0% and beat estimates for 4.6% with US sales rising 4.0%. This was a disappointing report. Many analysts, including myself, expected the company to post stronger results because of their new premium burger menu and the full implementation of the delivery program. McDonalds did say the premium burgers were responsible for its earnings growth along with the McPick 2 menu. That is where you get two low dollar items for $2.50 or two larger items for $5.00. The company returned $2.9 billion to shareholders in Q3 through share buybacks and dividends. I believe the bloom is fading from McDonalds after this report and the stock is likely to give back some of its pre earnings gains.

The last Dow component reporting today was United Technologies (UTX). The company reported earnings of $1.73 that declined -7.8% and beat estimates for $1.69. Revenue of $15.06 billion beat estimates for $14.98 billion. United raised full year guidance from $6.45-$6.60 to $6.58-$6.63 and revenue guidance from $48.5-$59.5 billion to $59.0-$59.5 billion. Investors were hoping for better news and shares declined just over $1 for the day.

Biogen (BIIB) reported earnings of $6.31 that beat estimates for $5.73. Revenue rose 4.1% to $3.08 billion. Shares fell sharply because sales of Spinraza for spinal muscular atrophy came in at $197.6 million and missed estimates for $242 million. The drug costs $750,000 for the first year of treatment and drops to $375,000 in subsequent years. Sales of the MS drug Tecfidera dropped -3.5% to $1.07 billion and missed estimates for $1.09 billion. The competition is increasing from Roche, Celgene and Sanofi. As their drugs gain market share, Biogen is going to suffer. Shares fell $13 on the earnings news.

GM shares closed at a new high after the company reported earnings of $1.32 and beating estimates for $1.11. Revenue declined from $38.89 billion to $33.62 billion but beat estimates for $32.18 billion. The company said it would introduce two electric vehicles over the next 18 months with AT LEAST 20 by 2023. Look out Tesla! Volume declined 26% to 268,000 units due to planned down time. That reduced dealer inventories by -160,000 vehicles to 821,000 as of the end of the quarter.

Stanley Black & Decker (SWK) reported earnings of $1.95 compared to estimates for $1.87. Revenue of $3.3 billion beat estimates for $3.16 billion. The company guided for the full year for earnings of $7.33 to $7.43, up from $7.18-$7.38. Sales of tools and storage rose 22.2% with a 9% rise in volume. Sales in the industrial segment rose 8.9% on an 8% rise in volume. The security segment saw sales decline -8.8% due to divestitures. Shares rose $7 on the news.

After the bell, Chipotle Mexican Grill (CMG) reported earnings of $1.46 that missed estimates for $1.63. The company said hurricanes cost them 13 cents a share and a security breach cost them 64 cents. It was still a big miss. Revenue of $1.13 billion missed estimates slightly of $1.14 billion. They guided for full year same store sales of 6.5% and below the estimate for 7.2%. They also said they were going to open fewer new locations than previously expected. They had guided for 195-210 in prior months and they said it would be at the low end of that range and they would open only 130-150 stores in 2018. Shares fell $25 in afterhours and closed at a 5-year low of $293.80.

AMD reported earnings of 10 cents compared to analyst estimates for 8 cents. Revenue of $1.64 billion rose 25.7% and beat estimates for $1.51 billion. Shares collapsed in afterhours after the company guided for a 12% to 18% decline in Q4 revenue to around $1.34-$1.44 billion and analysts were expecting $1.34 billion. Based on analyst expectations that lower guidance was not that bad but it is the principle of lower guidance that sends investors running for the exits.

Juniper Networks (JNPR) reported earnings of 55 cents that missed estimates for 56 cents. Revenue of $1.26 billion narrowly beat estimates for $1.25 billion. The company guided for the current quarter for earnings of 49-55 cents with revenue of $1.20-$1.26 billion. Analysts were expecting $1.35 billion. Shares fell to $24.50 in afterhours and a 52-week low.

There were so many earnings on Tuesday it would be impossible to cover them all. The next two days will be the same with a flood of companies reporting. There are three Dow components on Wednesday, BA, KO and V. Boeing is the only one that could be a real market mover. They closed at another new high today with a $3.68 gain. If their earnings are anything besides outstanding, there could be a major decline, which would be Dow negative.

Thursday is tech day with MSFT, INTC, AMZN and GOOGL. All of those are after the bell so Friday morning will see the resulting volatility.

Whirlpool (WHR) reported earnings after the bell on Monday. Earnings of $3.83 missed estimates for $3.93. Revenue of $5.4 billion missed estimates of $5.5 billion. They guided for full year earnings of $13.60-$13.90 and analysts were expecting $14.61. Today they announced they were no longer going to sell appliances through Sears. They have been selling their appliances there for the last century. Whirlpool said the two companies could not agree on prices the company needed to be profitable. Sears fired back saying Whirlpool sought to use its dominant position in the market to bully Sears into accepting a price hike. Sears represents about 3% of Whirlpool's revenue. The company manufactures Maytag, KitchenAid, Jenn-Air in addition to the Whirlpool brand. Shares fell $19.

Apple Inc (AAPL) survived another iPhone X manufacturing story on Tuesday and actually closed higher. The Nikkei Asian Review said Apple may only be able to ship 20 million X phones this year rather than the 40+ million previously expected. The article said the OLED screen problem had been resolved but the TrueDepth camera system was still causing problems. An article last week said Apple may only have 3 million phones on launch day. Apple is trying to counter all these leaks by putting out a press release saying the X phones will be in all their stores on launch day and if you want one you need to get there early. That caused some consternation among analysts. If you only have 3 million to sell, why tell everyone to get to the Apple stores early. That is only going to cause long lines and frustrated customers when the inventory runs out. However, 3 million phones could produce a lot of store inventory and that means the online buyers are the ones that will face a long waiting period. Drexel Hamilton warned that anyone not getting an early order or one of the phones at a store is likely not going to get a delivery until after the holidays.

UBS did a survey and found that 19% of respondents plan on buying a new phone in the next 90 days. Of those respondents 69% plan on buying an iPhone. Of those buying an iPhone, 43% plan on buying the model X. That suggests demand for the X will be huge even with an estimated average price of $1,150. Also, the 8 Plus is out selling the regular 8 so Apple's revenue is going to rise due to the average selling price (ASP) of most phones rising. < a href="https://www.appleworld.today/blog/2017/10/23/another-survey-iphone-x-demand-will-be-exceptional" target="new">Link UBS said the higher ASP could lift Apple's FY 2018 earnings to $11.40.

The API petroleum inventory report after the bell showed a gain of 519,000 barrels of oil compared to estimates for a 425,000 barrel decline. Oil prices rose in afterhours because gasoline inventories declined 5.753 million barrels compared to estimates for a drop of 2.3 million. Distillate inventories fell -4.949 million barrels compared to estimates for a decline of 2.05 million. The decline in refined products suggests oil inventories will decline as refiners ramp up production. However, we are at that time of year where refiners let inventories of refined products decline before they ramp up production of the winter fuel blends. We should not apply too much importance to these numbers.

Crude prices also rose on comments from the Saudi energy minister saying basically "We will do whatever it takes to support prices." The minister said Saudi Arabia was determined to end the oil glut. Prices also rose on his comments that the confrontation between Iraq and Kurdistan was creating concerns in the market.

On the economic front, the Richmond Fed Manufacturing Survey for October declined from 19 to 12. The 7-point decline was the largest since April but it was from a high level. While the survey continues to show economic expansion this was a broad decline in the main components.

The calendar for the rest of the week is headlined by home sales reports and the Kansas Fed manufacturing report. The third revision of the Q2 GDP is on Friday. None of these reports should move the market. Investor interest is focused on earnings.


The Dow was the outperformer with a 0.70% gain because of four Dow components. The Nasdaq only gained 0.18% and the S&P 0.16%. The Dow gains are simply not sustainable. The index is quickly going to run out of earnings reporters to power the gains. Once the post earnings depression phase appears, it could be ugly. Stocks and indexes that post outsized gains for an extended period, typically post outsized losses when that growth spurt ends.

I am afraid we are reaching that point on the Dow. None of the other indexes are confirming the Dow gains. The only reason they were barely positive today was market sentiment created by the Dow. Anyone short anything probably took some off the table with the Dow exploded out of the gate.

The S&P gained only 4 points and that was probably due to CAT, MMM, AMZN and NFLX. The index is not confirming the Dow's gains and is well off its recent high at 2,578 and the closing high at 2,575. This formation suggests we will see additional declines. Support is now 2,555.

The Nasdaq should have done better than an 11 point gain. The big cap tech stocks were mostly positive but the gains were not outstanding given the stock prices. Netflix would be the exception to that claim. A $3 gain on a $1,000 stock is noise and will not lift the index.

The tech earnings are clustered on Thursday after the bell and they better all be blowouts if the Nasdaq is going to rally on Friday. Given some of the misses and big stock declines from today, tech investors may be reconsidering holding over the coming reports.

The Nasdaq has support at 6,565 and resistance at 6,635.

The Russell 2000 closed right at prior support at 1,500, which may be turning into resistance. The index still has not seen any material profit taking from its 162-point rally so any lower close on the Russell would trigger additional selling.

While I do expect the market to move higher over the next month, I am very concerned that we are moving ever closer to a significant profit taking event. Stocks take the stairs up and the elevator down. Earnings for most stocks have been great but we are starting to see a larger percentage of misses as the earnings volume grows. If portfolio managers begin to worry about the post earnings depression phase, they could begin taking profits soon and plan to reenter once we get a decent dip to buy.

The Dow is going to rapidly run out of earnings fuel in three days. The majority of the index will have reported when this week ends. That means next week could be bumpy. Since most traders try to anticipate events, that suggests we could see some bumps this week as well.

We are rapidly approaching a new challenge. With the president declaring outright war on senator's Flake and Corker, that eliminates 2 of the 52 he needs to get tax reform passed. That leave vice president Pence as the tie-breaking vote but if we see another defection from the ranks that would kill the tax reform process. When your own soldiers are defecting, you cannot afford to whittle down the remaining ranks or the war will be lost. We are very close to losing tax reform and once investors see that as a possibility, they will take their chips off the table.

Keep some cash in your account in case we do get a buying opportunity because that is looking more likely with each passing day.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


If you like the market commentary 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


New Option Plays

Patiently Waiting

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow's unbelievable move is going to end. It is only a matter of time. Today's gains are only going to hasten its decline once the short squeeze ends. We need to wait patiently for a dip to buy or risk buying a market top. I know waiting is not fun but is is definitely better than losing money. .


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Trouble Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow gained 168 points but the top four stocks added 179 Dow points. The Dow was powered higher by gains in MMM, CAT, BA and GS but the rest of the index painted a less rosy picture. I did not think it was possible but the Dow became even more overbought today. The index is constantly being led higher by gains in just a handful of stocks and the index is rapidly running out of earnings reporters that can continue the trend. Post earnings depression is going to be very painful when it hits.

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

SLB - Schlumberger
The long put position was entered at the open.

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. Alibaba shares posted only a minor gain with the Nasdaq still weak. Alibaba's singles day is coming on November 11th and that will produce a lot of headlines in the two weeks ahead of the event. In 2016, they sold $17.7 billion on that day, up 32% from the prior year. With 466 million active customers they could do well over $20 billion this year.

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


No specific news. Nice $1.71 gain to a new high.

Original Trade Description: Sept 30th.

Analog Devices, Inc. designs, manufactures, and markets a portfolio of solutions that leverage analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems. It offers data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; high-performance amplifiers to condition analog signals; and radio frequency ICs to support cellular infrastructure. The company also provides MEMS technology solutions, including accelerometers used to sense acceleration, gyroscopes to sense rotation, and inertial measurement units to sense multiple degrees of freedom. In addition, it offers isolators for various applications, such as universal serial bus isolation in patient monitors; and smart metering and satellite applications. Further, the company provides power management and reference products; and digital signal processing products for high-speed numeric calculations. Its products are used in electronic equipment, including industrial process control systems, medical imaging equipment, factory automation systems, patient monitoring devices, instrumentation and measurement systems, wireless infrastructure equipment, energy management systems, networking equipment, aerospace and defense electronics, optical systems, automobiles, and portable electronic devices. The company serves clients in industrial, automotive, consumer, and communications markets through a direct sales force, third-party distributors, and independent sales representatives in the United States, rest of North/South America, Europe, Japan, China, and rest of Asia, as well as through its Website. It has a collaboration with TriLumina Corp. to provide illuminator modules for automotive flash LiDAR systems. Analog Devices, Inc. was founded in 1965. Company description from FinViz.com.

Expected earnings Nov 29th.

ADI is a 52-year-old chip company. Yes, they had chips in 1965. The company is doing great and tends to make chips nobody else is making and that gives them an edge. They reported Q2 earnings of $1.26, which rose 54% snf beat analyst estimates at $1.15. Revenue of $1.43 billion rose 65% and beat estimates for $1.40 billion.

They guided for the current quarter for earnings of $1.29-$1.43 and analysts were only expecting $1.25. Revenue guidance was $1.45-$1.55 billion and analysts were expecting $1.46 billion.

Shares gapped up on the late August earnings then worked through the post earnings depression cycle before moving higher. They closed at a new high on Friday.

Last week IBD raised their composite rating from 93 to 96, which means ADI is outperforming 96% of all stocks in terms of fundamental and technical stock ranking criteria. The stock has an EPS rating of 97 with moderate institutional buying over the last several weeks.

I believe the breakout will continue and we could see $90+ before earnings in November. Options are still cheap because ADI is not a high profile stock.

Position 10/2/17:

Long Dec $90 call @ $1.95, see portfolio graphic for stop loss.

CCL - Carnival Corporation - Company Profile


No specific news. Minor gain but the trend has turned positive.

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.

Update 10/20/17: 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.

Position 10/17/17:

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

COST - Costco - Company Profile


No specific news. Shares posted another minor gain. They will report comp sales for October next week and expectations are for +7% same store sales and +9% total sales. That should give the stock a boost.

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.

Update 10/20: 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.

Position 10/16/17:

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

DLTR - Dollar Tree - Company Profile


No specific news. Shares holding their gains.

Original Trade Description: October 21st.

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.

Position 10/23/17:

Long Dec $95 call @ $2.70, see portfolio graphic for stop loss.

FMC - FMC Corp - Company Profile


No specific news. Shares posted a minor decline but they are holding the recent gains.

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


David Einhorn's Greenlight Capital took a new position in Micron saying investors are under appreciating the dynamics of the current memory cycle.

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 but 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.

Update 10/20/17: 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.

Position 10/10/17:

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

VIX - Volatility Index - Index Profile


The Dow was up 167 points and volatility actually rose. Investors are starting to believe in the climax top scenario.

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 478 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)

DIA - Dow SPDR ETF - ETF Profile


The Dow exploded higher thanks to only 4 stocks but the index is quickly running out of earnings drivers. If we were not already in this position I would be recommending it again today.

Original Trade Description: October 21st.

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.

SLB - Schlumberger - Company Profile


No specific news. WTI rallied 50 cents and that caused a minor relief rally in energy equities.

Original Trade Description: October 23rd.

Schlumberger Limited supplies technology products and services to the oil and gas exploration and production industry worldwide. Its Reservoir Characterization Group segment provides reservoir imaging, monitoring, and development services; wireline technologies for open and cased-hole services; slickline services; exploration and production pressure and flow-rate measurement services comprising surface and downhole services; software integrated solutions, such as software, consulting, information management, and IT infrastructure services; consulting services for reservoir characterization, field development planning, and production enhancement; and petrotechnical data services and training solutions, as well as integrated management services. Its Drilling Group segment designs, manufactures, and markets roller cone and fixed cutter drill bits; supplies drilling fluid systems; provides pressure drilling and underbalanced drilling solutions, and environmental services and products; mud logging services; land drilling rigs and support services; and well planning and drilling, engineering, supervision, logistics, procurement, contracting, and drilling rig management services, as well as bottom-hole-assembly, borehole-enlargement technologies, impact tools, tubulars, and tubular services. Its Production Group segment provides well services comprising pressure pumping, well cementing, and stimulation services; coiled tubing equipment; well completion services and equipment that include packers, safety valves, and sand control technology, as well as completions technology and equipment; artificial lifts; and integrated production and production management services. Its Cameron Group segment offers integrated subsea production systems; surface systems; drilling equipment and services; and valve products and measurement systems. Company description from FinViz.com.

The company said the already week offshore sector was also declining because offshore drilling/production is not profitable at $50 oil. This sector will continue to decline until oil prices rebound over $75 sometime in 2019 according to best estimates.

Schlumberger said production growth was slowing faster than expected. That means less cash flow for producers and another decline in rig counts. The company said customers were reducing their forecasts for prices and activity for 2018 and future revenue and profitability was likely to decline.

Shares fell $2 post earnings to $62 but the odds are very good we are going to see lower lows as the energy companies report disappointing earnings and guidance in the weeks ahead.

Earnings January 19th.

Position 10/24/17:

Long Jan $60 put @ $1.42, see portfolio graphic for stop loss.

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