Option Investor

Daily Newsletter, Wednesday, 10/25/2017

Table of Contents

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

Market Wrap

Decision Time for Market

by Keene Little

Click here to email Keene Little
The small pullback from last Friday is showing signs of being something more than just a pullback but the jury is still out deciding whether or not a top is now in place. The bulls and bears each have their arguments and now we wait for the jury (price) to decide.

Today's Market Stats

The day started with a small gap down following some disappointing earnings reports and then proceeded to sell off more strongly. The selling was stronger than we saw last Friday and that has the pullback looking a little more bearish than just a pullback. It's still too early to call a top but the pieces are falling into place for one if the selling continues on Thursday.

The bulls might have one more rabbit to pull out the hat but they can't waste any time -- they need a rally on Thursday to save the market from breaking down. The bears need another low for the pullback to provide evidence a top is in place. As always, I'll identify on the charts what we're watching for so that we'll have some early clues.

This morning's economic reports included Durable Goods shipments, which climbed +2.2%, coming in better than the expected +1.3%. It was also an improvement from the upwardly revised +2.0% in August (revised up from the originally reported +1.7%). Subtracting transports, the number was +0.7%, which was also better than the expected +0.5% and matched the upwardly revised August number.

The new home sales report was released at 10:00 and it looks encouraging. September saw sales jump nearly +19% from August, doing well in all regions except the West (only +2.9%). The current sales pace drops the inventory to 5 months from 6 months in August. The new home sales and the Durable Goods reports didn't help the market today and the home builders sold off sharply after they gapped up this morning (selling good news are we?). But the reports at least showed the economy held up despite the South getting clobbered by hurricanes.

We all know the market is stretched to the upside and with only minor pullbacks along the way. Today was the worst selloff since September 1st but we're still talking only a minor decline. As of today's close the S&P 500 has now gone 245 days without a 3% intraday decline, breaking the previous record of 241 days set 21 years ago in 1996.

Jason Geopfert, who writes the SentimenTrader newsletter, wrote last Friday about the combination of records set with Friday's close. SPX had at that time closed at a record high every day of the week (5 days) and it closed at a new weekly high for each of the past six weeks. On top of that it had closed at a record monthly high for each of the past seven months, so 5/6/7 days/weeks/months. Yea, not too stretched to the upside. Geopfert noted that the trifecta (daily, weekly and monthly high closes) is something that has never been seen before.

All these record highs have finally caught the attention of retail traders who are now jumping in with both feet to ride this northbound train. As of last week equity funds attracted the largest inflow of money seen in the past 18 weeks. This is actually not a good sign for bulls since the retail crowd is always the last to react -- they are notorious for buying the top and selling the bottom. Actually I take that back, the government is always the last one to react.

We know fear has evaporated although there are signs that that's changing. Like the market's non-stop record highs, the VIX had set its own record when it last closed below 10 on October 5th. The VIX had managed to close below 10 a total of nine times between 1990 and 2016. But in 2017 the VIX has closed below 10 so far 33 times. Interestingly, as the market has continued higher since October 5th we've seen the VIX making its way higher and the Fear & Greed index has been coming down from its high reading of 95 (out of 100, showing an Extreme Greed reading).

As I had shown in recent wraps, market tops are generally made about a week or two after a low in the VIX and a peak in the F&G index. This is a result of fewer people participating in the rally to its final high and instead they start to hedge their bets. Hence the slow rise in the VIX as more put buying occurs (the put/call ratio has been working its way higher since the end of August). The market can continue to make new highs but when it's running out of participation it's generally not a good time to chase it higher.

Most of the bulls are still in buy-the-dip mode as they've been conditioned to expect the market to keep heading higher. This was evidenced today with the bounce off this morning's low. The initial decline in the market was accompanied with a spike higher in the VIX, which had jumped +18% (+2.04 to 13.20). But then the bounce off this morning's lows in the indexes saw the VIX drop back down to only +0.6% for the day (+0.07, closing at 11.23). In other words, all fear evaporated as the bulls believed there's nothing to worry about and the bounce will lead to higher highs (after all, the market always heads higher, which reminds me of the feelings about the housing market leading to the top in 2006-2007).

The bulls could be correct in their assumption that the market will head higher but if it does it's going to need more help than it's seen in the past month. Looking at market breadth, the rally is running on fumes and we could be seeing its last gasp here. The two charts below show market breadth and it's not encouraging for bulls. The first chart shows SPX compared to the number of new 52-week highs and lows. Keep in mind that these are not timing signals but instead they only show when we should be confident in a move vs. when we should be wary of it. Right now it's time to be wary.

SPX vs. 52-week highs and lows, Daily chart

I've drawn a vertical line through the peaks in new 52-week highs (middle chart) and the new 52-week lows (bottom chart), both of which occurred at the beginning of October. New highs have been in decline since then and new lows have been climbing. In other words, while SPX continued to tack on more points during the month it was doing so on the backs of fewer and fewer stocks while some stocks were probing lows not seen in the past year. On Tuesday, while the Dow spiked higher there were 12 Dow stocks in the red. The general is out in front of the troops but the ranks are thinning as the troops abandon their leader. Never a good thing in battle.

SPX vs. Advance-Decline line and volume, Daily chart

Another way to look at market breadth is with the advance-decline volume (middle chart below) and advance-decline line (bottom chart). This picture is actually a little worse than the chart above since the negative divergence started showing up in the middle of September. The number of advancing stocks and the amount of volume going into advancing stocks has been deteriorating for over a month while SPX has continued to march higher, oblivious to the fact that the number of participating stocks is declining.

Again, all of this doesn't mean the market will turn back down right away but the longer this goes the more vulnerable it becomes to a downside disconnect. There's already a big air pocket below us with a rally that hasn't had much in the way of backing and filling (as discussed above). Bulls need to have their eyes wide open here and not be complacent about the upside. The collapse back down in the VIX today says the bulls are complacent. Don't be one of them.

The Dow has been the stronger index so I thought I'd start with its charts tonight to see when we should start worrying about some potentially tough resistance areas. We should start worrying.

Dow Industrials, INDU, Weekly chart

The Dow has made it up to the trend line along the highs for the rally from January 2016 (the April 2016 - March 2017 highs). Both the weekly and daily charts are overbought as it hits this line of resistance and it's therefore a risky time to look for higher highs. It could happen but the setup looks good for at least a pullback.

Dow Industrials, INDU, Daily chart

In addition to its trend line along the highs from April 2016-March 2017 the Dow hit the top of a parallel up-channel for its rally from August. If the Dow can rally above 23500 and stay above that level there's a decent chance we'll see 24K but right now it's vulnerable to at least a larger pullback.

Key Levels for DOW:
- bullish above 23,500
- bearish below 23,000

Dow Industrials, INDU, 60-min chart

Looking a little closer at the Dow's leg up from early September, there are two parallel up-channels, the tops of which crossed the April 2016-March 2017 trend line on Monday and Tuesday. The pullback from there had the Dow dropping to the bottom of its smaller up-channel for this month's portion of the rally. We now wait to see if the rally will continue back up to the top of the channel, which will be near 23585 by the end of the day Thursday, or if instead today's bounce will lead to another drop lower. The bears want to see a drop below the October 19th low at 23052, which would also be a break of the uptrend line from September 8-27, which would confirm an important top is likely in place.

S&P 500, SPX, Daily chart

Today's decline for SPX had it breaking its uptrend line from August 29-September 25, currently near 2564. SPX looks more bearish than the Dow and my expectation is for it to continue lower. This market has fooled me more than once (OK, about a 1000 times) but I'll be surprised to see it make new highs from here. As noted on the chart, Monday finished with a bearish engulfing candlestick, which is an outside down day (gap up, make a higher high and then close lower than the previous day's open).

The bearish engulfing candlestick on Monday gave us a key reversal and the only way the bearish pattern can be negated is with a rally above Monday's high at 2578. It'll be interesting to see how this week closes since a close below last week's open at 2555 would leave a key reversal for the week. I expect we could see a little volatility for the rest of the week before heading more strongly lower next week.

Key Levels for SPX:
- bullish above 2580
- bearish below 2548

Nasdaq-100, NDX, Daily chart

The techs have been a little weaker than the blue chips but interestingly its pattern supports the idea for a new high into next week (hold the market up into the end of the month?) before topping out. A crossing of some trend lines near 6200 makes a good upside target if the rally continues from here. Today's low at 6011 was a test of price-level support at 6010 and the bounce back up to close near its 20-dma, at 6057, was a good showing by the bulls. They now need to hold it above 6010.

Key Levels for NDX:
- bullish above 6200
- bearish below 6010

Russell-2000, RUT, Daily chart

The RUT also has a pattern that supports the continuation of the bull run. This morning's low can be considered a throw-under completion of its expanding triangle consolidation pattern off the October 5th high. Another leg up, assuming it would be the 5th wave of the rally from August, could run up to about 1548 where it would equal the 1st wave. There would be lower targets to keep an eye on but for now that's the bullish potential if we see the RUT get above 1515. But if this morning's low at 1482 is broken it would support the bearish view that a top is now in place.

Key Levels for RUT:
- bullish above 1515
- bearish below 1481

10-year Yield, TNX, Weekly chart

The 10-year yield has rallied up to its long-term downtrend line from 1988-2007, which is where its rally into the March high also stopped. Currently near 2.47, TNX would be more bullish above that level, although there's a projection near 2.51 which could be tagged before TNX reverses back down. That price projection is for a possible a-b-c move up from June (not the lower low in September) where the c-wave is 162% of the a-wave. Based on that projection TNX would be more bullish above 2.51.

If bond yields have not seen their multi-decade low yet, which is the way I continue to lean, we'll see TNX reverse from resistance and start heading back down. One reason this could start is if the stock market is ready for a stronger pullback/decline. That would likely prompt rotation into the relative safety of the Treasuries and thus drive prices higher, yields lower.

KBW Bank index, BKX, Weekly chart

The weekly chart of BKX shows the past 3 weeks has seen resistance holding at the top of its parallel up-channel for its rally from 2009. There's also a short-term trend line along the highs of the bounce off the April low. Along with the high on March 1st, it's also testing the 78.6% retracement of its 2007-2009 decline (no new highs for the banks while the other indexes have done so). With the bearish divergence at the current high as it hits resistance I'm thinking BKX will at least pull back a little stronger before trying it again. The more bearish wave count calls for a major top here.

Transportation Index, TRAN, Weekly chart

The TRAN peaked with a closing high on October 12th and minor new intraday high on October 13th. Since then it has been coming back down while the Dow went on to make new highs. It's only short term but with the TRAN not confirming the Dow's new highs we have negative divergence. The TRAN was stopped by the trend line along the highs since December 2016 - March 2017 and is showing bearish divergence against those highs. It's not a bullish picture here.

U.S. Dollar contract, DX, Daily chart

The US$ is close to breaking out of its down-channel for this year's decline, the top of which is currently near today's close. Breaking out of the down-channel and getting above its October 6th high at 94.10 would be a bullish move. A short-term price projection points to 94.30 and therefore above that level would be good confirmation a low is in for the dollar. But until that happens there is still the potential for one more new low, near 90, before setting up a bigger rally into next year.

Gold continuous contract, GC, Daily chart

As with the dollar, gold is about to make a decision which way to go and it should be a strong move. Bullishly, gold broke its downtrend line from 2011- 2016 in August and then back-tested it in early October. It's now testing an uptrend line from July-October, near 1276, and if that leads to a rally above its high at 1308.40 on October 16th it should lead to a strong rally. That might happen if the dollar heads back down toward 90. But if gold drops below its October 6th low at 1262.80 it will likely lead to a strong decline. Flip a coin for direction from here but then it should be a strong move.

Oil continuous contract, CL, Daily chart

I see upside potential for oil to a price projection near 54 for two equal 3-wave moves up from June. It would be more bullish above 54 but at the moment, with bearish divergence against the highs at the end of September there is risk to the downside from here as it again approaches its broken uptrend line form April-August-November 2016, currently nearing 53.

Economic reports

Thursday morning we'll get some more housing data with the Pending Home Sales report. The number for August was a disappointing -2.6%. Other than Friday's final Michigan Sentiment number there isn't much left this week to report.


The market is weakening significantly and the decline since Monday morning's highs has the potential to develop into a much stronger pullback/decline. The bulls could pull another rabbit out of the hat with a rally on Thursday and into Friday. If that happens I suspect we'll see the market hold up at least through the end of the month. After that would be a coin toss. Unless we see strengthening in the market breadth, as discussed in the beginning of tonight's wrap, I think the higher this market goes the weaker it will become, which would make a coming correction that much worse. We already have a significant air pocket (more like a vacuum pocket) below us.

We have early signs that this week's pullback is the start of something bigger to the downside but no confirmation of that. The pullback to support for the techs, as well as a corrective-looking pullback pattern for the RUT, supports the idea for another rally leg, which would likely be the last one. But I think it's now especially risky to be thinking long.

If you believe in the longer-term bull and therefore do not want to sell your positions (perhaps for tax reasons or just because you hate selling and then looking for another entry point) then a good way to protect yourself is with put options, long inverse ETFs and/or short some weaker stocks. At least you'll be hedged and then later decide what you want to do with your positions.

If you're a bear itching to get in the fight, we are close to knowing whether or not it's time to enter the ring. A drop back down on Thursday, to test today's low or break slightly below it, could lead to a slightly stronger bounce into Friday, maybe Monday. From there that would be a good setup to get short for what would likely be a much stronger decline. We'll obviously know more this time next week. In the meantime both sides need to exercise caution since things could get a little more volatile.

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

Keene H. Little, CMT

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

New Option Plays

No Dip Today

by Jim Brown

Click here to email Jim Brown

Editors Note:

PayPal did not sell off in the Wednesday decline. The outlook is too strong and everyone is looking for a buying opportunity.


PYPL - PayPal - Company Profile

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

They reported Q3 earnings of 46 cents, up 32%, that beat estimates for 44 cents. Revenue of $3.24 billion, up 21% and beat estimates for $3.17 billion. They guided for the current quarter for earnings of 50-52 cents and full year earnings of $1.86-$1.88. Mobile payment volume rose 54% to about $40 billion. Total payments rose 31% to $114 billion. Free cash flow rose 36% to $841 million and they have $7.1 billion in cash. They added 8.2 million active accounts with net new actives up 88%. They now have 218 million active customer accounts with 17 million merchants. They processed 1.9 billion payments, up 26%.

Q4 revenue is expected to rise 20-22% to $3.570-$3.630 billion. Paypal said payment platform Venmo was on track with expectations. The platform processed $9.1 billion in payment volume, a 93% YoY increase.

Expected earnings January 18th.

The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.

Pacific Crest Securities said their market cap of $85 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.

In mid August Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.

Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.

Shares posted an 81% gain on Wednesday when the market was down on much needed profit taking. Investors looking for a buying opportunity are going to be left behind.

Buy Jan $72.50 call, currently $2.73, initial stop loss $65.50.


No New Bearish Plays

In Play Updates and Reviews

Reality Returns

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors were reminded once again that markets do not go up forever. As declines go, today was calm. Stocks up a lot in recent days, declined a little with the exception of Boeing, which lost $7.50 and erased 52 Dow points. Goldman and IBM continued their losing trend.

The Dow was down -190 at the lows and rebounded about 78 points into the close. The declines may not be over because the Nasdaq just barely clung to support and the Russell closed at a 4-week low under 1,500. The S&P was down sharply at 2,544 but rebounded to close just over support at 2,555.

As the first day of a multi-day decline, the major indexes performed as expected. The rebound was not strong enough to suggest it will be a V dip and off to make new highs again on Thursday but it was just enough to raise that possibility.

In theory, this should be a multi-day drop because of the ridiculous gains heading into Tuesday's high. Whether rational trading returns or not remains to be seen. The best outcome for the long-term market would be two more days of profit taking followed by a rebound beginning on Monday. The risk will return the second week of November when the earnings cycle fades and the market fuel evaporates.

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. Alibaba shares posted a $3 decline 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. Only a minor decline in a weak market.

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. Still holding over support in a weak market.

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 only a minor drop of 11 cents. 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 down with the market 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


No specific news. Only down slightly in a negative sector.

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.

Update 10/24/17: David Einhorn's Greenlight Capital took a new position in Micron saying investors are under appreciating the dynamics of the current memory cycle.

Position 10/10/17:

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

VIX - Volatility Index - Index Profile


The VIX hit 13.20 intraday when the Dow was down -190. If we ever hit that 16 exit target it means we are probably going to lose other long positions. This is insurance against that potential decline.

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 480 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 gave back some of its gains before rebounding intraday. This selling may not be over. I added an exit target at $230.25.

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. The EIA said inventories rose 856,000 barrels compared to expectations for a 2.6 million barrel decline. Gasoline inventories and distillate inventories both fell by more than 5 million barrels each and that lifted energy stocks slightly.

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.

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