Option Investor

Daily Newsletter, Tuesday, 10/31/2017

Table of Contents

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

Market Wrap

Calm before the Storm

by Jim Brown

Click here to email Jim Brown

The flurry of headlines over the next two days is likely to produce new market volatility.

Market Statistics

Wednesday alone had a week's worth of headlines packed into a single day. The minor market gains on Tuesday continued the established trend of a positive market the day before a Fed announcement. Nobody knows what causes it but it has been tracked and studied for the last decade. What happens after the announcement is a different story and normally the initial direction is wrong.

Tuesday's gains were lackluster with the S&P adding only 2 points and trading in a narrow 6-point range.

The economic news on Tuesday was about as lackluster as the market. The consumer confidence for October rose 5.4 points from 120.6 to 125.9. That was the highest level since 2000. The present conditions component rose from 146.9 to 151.1 and the highest level since July 2001. The expectations component rose from 103.0 to 109.1 and the highest level since March. Those who felt jobs were plentiful rose from 32.7% to 36.3%. Prospective homebuyers declined from 7.4% of respondents to 6.0%. Prospective appliance buyers declined from 53.8% to 48.9%. Auto buyers rose from 12.1% to 13.1% and probably related to the hurricanes.

The August Case Shiller Home Price Index rose slightly to 5.9%, up 0.1% from July. This is a lagging number and was ignored.

The Employment Cost Index for Q3 rose +0.7% after a +0.5% rise in Q2. Benefit costs rose +0.8%. This report was also ignored.

After the bell, the weekly API crude inventory report showed a huge decline of 5.087 million barrels compared to expectations for a 1.4 million barrel decline. Gasoline inventories fell 7.697 million barrels compared to expectations for a drop of 1.7 million barrels. Distillate inventories declined -3.106 million barrels. The decline in refined products is due to the seasonal switchover from summer blend fuels to winter blends and not a function of surging demand. Refiners are not replacing the summer blends in the storage facilities until the inventory levels decline to make room for the winter products. Refiners are also in a maintenance cycle to prepare for that production change.

WTI prices rose another 25 cents after the API data. That put prices just slightly over resistance from early 2017. The real move will come if the EIA report on Wednesday morning shows similar declines.

The calendar for Wednesday begins with the ADP employment numbers for October. The estimates have declined 25,000 to a gain of 200,000 over just the last two days. The Nonfarm payrolls on Friday have seen estimates rise 5,000 to 315,000 over the same period. As long as we get numbers in those ranges, the Fed is not likely to accelerate their rate hikes. Anything hotter than that and the Fed could become uneasy.

The ISM Manufacturing Index is expected to decline slightly from 60.8 to 60.5. That number could be completely ignored but any significant deviation could raise some concerns. There could be some hurricane impact that depresses the October activity levels.

The FOMC announcement is not expected to raise any eyebrows as long as they do not surprise us with a rate hike. That would truly be a lightning strike and nobody expects any movement.

The real challenge is going to be the release of the details on the tax reform package. The rumors are flying and there could be something in the package for both the bulls and the bears. Negative details could cause a major hiccup in the market. Analysts fear the need to get something passed will have necessitated the inclusion of features in hopes of appeasing both fiscal conservatives and a few democrats as well. This will be a witch's brew of good, bad and ugly components. Since all the good expectations are already priced into the market, the odds of a sell the news event are very high.

Late news tonight: The GOP is going to postpone the release of the proposal until Thursday.

Also on Thursday, President Trump is expected to nominate Jerome (Jay) Powell to take over as Fed Chairman when Janet Yellen's term ends in January. Anyone else but Powell is likely to tank the market. The other names in contention are seen to be more hawkish and favor less policy accommodation.

The rest of the week will be tame by comparison to Wed/Thr with Thursday night earnings the big focus after the dual Fed headlines.

The headline earnings for Wednesday will be Facebook, Qualcomm and Tesla. All will come after the bell. On Thursday, Dow components Apple and DowDuPont will report along with Alibaba and Starbucks.

The early morning earnings disaster was Under Armour (UA). Actual earnings of 22 cents beat the street by 3 cents but fell -24% from the year ago quarter. However, revenue fell -5% to $1.41 billion and missed estimates for $1.49 billion. This was the first quarterly revenue has decline ever. The company guided for full year earnings of 18-20 cents. Think about that a minute. They posted 22 cents in Q3 but they are guiding for 18-20 cents for the year. That was the second time they have lowered guidance in three months and about half the 37-40 cents they were expecting in August. They cut full year revenue growth forecasts from 9-11% to "low single-digits." North American revenue fell -12% and Under Armour gets 90% of its earnings from North America. UA shares fell 22% on the news.

While UA and Nike are struggling, Adidas saw North American revenue rise 24% in 2016 and 32% in the first six months of 2017.

Pfizer (PFE) reported earnings of 67 cents that beat estimates by 2 cents. Revenue rose 1% to $13.17 billion and matched estimates. The company is trying to decide if it wants to sell off its consumer product business consisting of brands like Chapstick, Centrum vitamins, Advil and dozens of other brands. A decade ago, they sold off profitable brands including Listerine, Visine, Sudafed and Neosporin to J&J for $16.6 billion in order to invest in their new drug pipeline.

Pfizer's drugs still under patent saw an 11% rise in sales to $8.12 billion. Older drugs with generic competition declined 12% to $5.05 billion. Consumer health sales rose 4% to $829 million. The company guided for the full year for earnings of $2.58-$2.62 and slightly better than the $2.54-$2.60 forecast in August. They guided for revenue of $52.4-$53.1 billion, down from the $52-$54 billion in the prior guidance.

Aetna (AET) reported earnings of $2.45 compared to estimates for $2.06. That was up from $1.70 in the year ago quarter. Revenue of $14.95 billion missed estimates for $15.11 billion. The company guided for full year earnings of $9.75, up from prior guidance of $9.45-$9.55. Analysts were expecting $9.55. Aetna has fully exited the Obamacare market where it previously had over 900,000 people insured. The sign up window opens this week but Aetna is not participating in 2018.

Allison Transmission (ALSN) reported blowout earnings of 75 cents that beat estimates for 48 cents. Revenue of $595 million beat estimates for $526 million. The beat was powered by higher demand from North American off-highway products and higher parts sales. Shares spiked $3 at the open but gave it all back.

MasterCard (MA) reported earnings of $1.34, up 11%, that beat estimates for $1.23. Revenue of $3.4 billion rose 21% and beat estimates for $3.29 billion. MasterCard's gross transaction volume rose 11% to $1.35 trillion.

Shopify (SHOP) reported earnings of 5 cents that beat estimates for 2 cents. Revenue rose from $99.6 million to $171.5 million and beat estimates for $166.0 million. They guided for Q4 revenue of $205-$208 million with full year revenue of $656-$658 million. Analysts were expecting $204.3 million and $650.4 million. Shares fell $10 after a post by short seller Citron Research about their marketing tactics.

Alibaba (BABA) shares are up $17 in four days as traders position themselves for the November 11th singles day. However, this year Alibaba is calling it the 11.11 Global Shopping Festival and instead of 24 hours, they have lengthened it to 24 days. This is going to produce monster revenue with new sale items and promotions being presented on each of the 24 days by more than 100,000 vendors. Alibaba earnings are before the open on Thursday.

Mylan's (MYL) president was named in a major suit brought by 46 state attorneys general against 18 drug makers. The prosecutors are calling it a "mind-blowing" scheme to fix generic drug prices. Reportedly, manufacturers met at trade shows, conferences and other events as well as through email, phone and text messages. Together the 18 companies worked together to falsely inflate generic drug prices. The prosecutor said the "collusion was so pervasive that is virtually eliminated competition in the market for 15 drugs" to treat glaucoma, arthritis, high blood pressure, diabetes, anxiety, asthma and several other conditions. The suit also includes TEVA, RDY, NVS, LCI, Actavis Pharma, Emcure Pharma and Heritage Pharma among others. Since the generic drug market is a $75 billion a year market, one prosecutor said they could see a fine of $5 billion a year and the records go back 10 years or more.

Apple shares are screaming higher after the orders for the iPhone X opened on Friday. Shares have rallied $12 in three days. Apple provided sample phones to the various writers that review tech gadgets and every one of them had glowing reviews. They said the X is not perfect but it was the greatest iPhone ever made. "It was as revolutionary as the original iPhone." The rumors of slow production continue to be dispelled to some extent but we will get more information when Apple reports earnings after the close on Thursday. We say this all the time but "the guidance will be critical." Beware a sell the earnings news event!

Apple is only $127 billion away from having a trillion dollar market cap.

Qualcomm (QCOM) shares fell sharply after a report that Apple could replace the QCOM chips in their phones and iPads as early as the Q3 product update in 2018. The companies are in a multibillion-dollar battle over patent licensing and both companies have suits in progress all around the world. Intel would be the beneficiary. Intel already supplies more than half of the modem chips in the iPhones as Apple tries to move away from Qualcomm. A couple years ago, Samsung dropped Qualcomm chips and did not tell the company until it was almost time to ship the phones. Shares fell 7% on the news.

Netflix (NFLX) shares declined on news they have halted production on season 6 of House of Cards (HoC) because of the sexual allegations against Kevin Spacey. The company had already said it was going to drop the show after season 6 but the new season was eagerly awaited and production had already begun. Actor Anthony Rapp said Spacey picked him up, placed him on a bed and climbed on top of him while making sexual advances, while he was a minor in 1986. Spacey was 26 at the time and Rapp was 14. The claim by Rapp caused a confession by Spacey that he did not remember it because he was drunk at the time and if it happened, he apologized for the event. That did not appease the public and there is a huge outcry against him. He also took the apology opportunity to admit that he was gay. Netflix said production will be suspended until further notice. Since HoC is one of their top original programs, they will be pressured to complete it but also pressured to drop Spacey. Shares were down $3 intraday.

Your rally today was brought to you by the letters S-O-X. The semiconductor sector was on fire led by a $2.66 gain in Micron after Samsung reported strong demand and short supply of DRAM and NAND memory would continue through 2018. Nvidia gained $3 and closed at a new high at $206.75. Intel also surged to a new high at $45.49 with a $1.12 gain. The semiconductor sector leads the Nasdaq. Where chips go, the Nasdaq will follow. Past Option Investor writer Jeff Bailey called the $SOX the "head of the snake" because the Nasdaq had to follow wherever it went.


Also dragging the markets lower on Tuesday was another decline in the Dow Transports. This is seen as a sentiment indicator for the Dow Industrials and it closed at a four week low. The airlines have been declining and now the railroads are declining as well. If the economy is so strong, why are these subsectors in decline? Enquiring minds want to know.

Robert Shiller has been making the rounds on TV recently because the CAPE Ratio (Cyclically Adjusted PE Ratio) has risen to 31.42 and the same level it was when Alan Greenspan gave his famous irrational exuberance speech in December 1996. Today is the second highest market valuation ever. However, that big spike on the right of the chart came after the Greenspan speech. Overbought can always become more overbought and that is eventually followed by the sharp declines into oversold as seen on the chart. The key is being aware that markets do not go up forever and be prepared to exit when the slide begins.

The S&P is moving up on the strength in the tech stocks. The A/D ratio on the S&P was 233:223 with advancers only ahead of decliners by 10 stocks. However, that was much worse than the broader market at 4,586 advancers to 2,595 decliners. There was some buying under the surface that kept the markets positive.

The S&P has resistance at 2,580 and support remains 2,555-2,565.

The Dow barely closed positive once again with the index declining sharply a few minutes before the close. In the last 20 min of trading, the Dow dropped 46 points but recovered 15 points in the last four minutes to end with a gain of 28. Apple was the leader again and it has contributed nearly 85 Dow points in just the last three days. Without Apple's rebound, we would be looking at a lower level on the Dow today.

Note that the A/D on the Dow was evenly mixed at 15 winners and losers. The majority of the components only posted fractional gains. This is either due to worries over the Fed meeting and the tax plan on Wednesday (now on Thursday) or the post earnings depression phase has already started.

Resistance is 23,470 and initial support is 23,250.

The Nasdaq managed to move over resistance at 6,700 and close at a new high thanks to the chip sector and Apple. Given the 144-point spike on Friday and the gains today, the Nasdaq is already moving into overbought territory but at least it had a week off to rest the prior week. This could give the tech sector some more running room as long as the Dow does not implode. Having AAPL, MSFT and INTC in the Dow is providing tech support.

Support is now well back at 6,550.

The Russell rebounded thanks to the chip stocks and closed back over the prior support at 1,500 but it now has a confirmed pattern of lower highs. The Russell needs to break out over 1,512 on volume to convert the sellers back into buyers and begin a new leg higher. This week and next are small cap earnings weeks.

With the rescheduling of the tax plan release for Thursday, I would have expected the market to fade or continue to trade sideways until the event. However, once the date change was confirmed the S&P futures began to rise and are now up +3.75.

Keep some cash in your account in case we do get a buying opportunity because it will eventually appear. I am not talking about a crash or correction but just a 3-5 day bout of profit taking. Follow the Boy Scout motto and "be prepared."

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

Headline Risk

by Jim Brown

Click here to email Jim Brown

Editors Note:

The next two days are very busy with high-risk headlines ahead. I am afraid of the tax proposal. There could be negative details the market will not like. The postponement from Wednesday to Thursday means they are still fighting over what to put in it. If any of the details leak it could be market negative since all the positive headlines are already priced into the market.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Indexes United

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the major indexes posted gains with the Nasdaq closing at a record high. The gains were muted on the Dow at +28 and the S&P +2 but it was still a positive day. The Russell gained nearly 12 to put it back over prior support at 1,500. The star power of the earnings reporters is beginning to fade and this will worsen over the next week.

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

PG - Procter & Gamble
The long put position was entered at the open.

BA - Boeing
The long call position remains unopened until a trade at $253.

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


Alibaba shares up sharply again after they expanded their Nov 11th singles day into a 24 day "Global Shopping Festival" which is sure to drive their sales and earnings to even higher highs.

Alibaba's new Global Shopping Festival 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. Shares closed just under Monday's record 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.

BA - Boeing - Company Profile


Position unopened until a trade at $253.

Original Trade Description: October 28th.

The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. It operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements; and provides related support services to the commercial airline industry. This segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, and technical advice to commercial and government customers. The Boeing Military Aircraft segment researches, develops, produces, and modifies manned and unmanned military aircraft, and weapons systems for global strike, vertical lift, and autonomous systems, as well as mobility, surveillance, and engagement. The Network & Space Systems segment researches, develops, produces, and modifies strategic defense and intelligence systems, satellite systems, and space exploration products. The Global Services & Support segment provides integrated logistics services comprising supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services that include pilot and maintenance training. The Boeing Capital segment offers financing services and manages financing exposure for a portfolio of equipment under operating and finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The company was founded in 1916 and is headquartered in Chicago, Illinois. Company description from FinViz.com.

Business is booming. Boeing finalized a $13.8 billion order with Singapore Airlines last week. The order is for (20) 777-9 and (19) 787-10 planes. The rumor that will never die surfaced again and that being an Amazon order for (100) 767 freighters. This first appeared in March and keeps resurfacing. Amazon's leases for its current (40) 767 freighters do not expire until 2023. That means there is no rush to order more since it would take years for Boeing to make them but still deliver before 2023. There is another rumor that surfaced last week that Amazon is shopping for financing/lease arrangements for (400) 767s to be delivered over the next ten years. Boeing went to its managers and workers last week to see what would be needed to "significantly" boost production rates for a large and important customer. Boeing is rumored to be looking at a doubling of the production rate. They currently produce (2) 767s per month and they are planning on raising this to 4 per month from January 2020 through January 2021 then slowly scale back to 2 per month by 2025. This would seem to indicate a 40-60 plane order from a single customer for delivery in 2021. Shares closed at a new high.

Boeing got another windfall when Trump was elected and suddenly took an interest in producing more F-18 Hornet's than F-35s. Boeing was only expected to produce 5 Hornets this year with a big order for F18 Growlers filling out the production line. The Growlers are the radar jamming planes that protect a flight of fighters. In the budget that was just passed, an additional $1.1 billion was allocated for 14 additional F-18s in this year. Trump had asked for 24 but Congress only approved 14. There will be a lot more in the budget for 2018. The F-18 is the workhorse of the Navy and many of their older planes are reaching the 6,000 flight hour maximum threshold. That means the Navy will need hundreds over the next several years to replace the aging aircraft. Boeing expects the production line to increase to 3-4 per month starting in 2020. Boeing expects another 100 planes to be ordered over the next five budget cycles and possibly more as the military scales down requests for F-35s in favor of the much cheaper F-18s. Boeing has an enhancement called Block III that basically gives the F-18 the networking capability of the F-35. They envision a stealthy F-35 entering hostile airspace and doing reconnaissance and then transmitting back threat and target information to the heavily armed F-18s to actually carry out the attacks. Over the last five years, the Navy has requested five times as many F-18s as F-35s. A F-18 costs $75 million and F-35 $121 million.

Boeing said on any given day 2 out of every three F-18 planes are out of commission waiting for repairs. Planes have been flown hard in the post 9/11 world with multiple theaters of war and planes down for a single part end up getting cannibalized for other parts to keep the remaining planes flying.

All of this means Boeing is going to remain highly profitable for a very long time and this is just two production lines of the dozens of products being manufactured by the company.

Boeing recently upgraded their forecast for plane demand from China. The company now predicts China will buy 7,240 planes, up from 6,810 in the prior forecast. The value of these planes will be more than $1.1 trillion. The period covered is 2016 to 2036. China is expected to be 20% of the global demand for aircraft over the next 20 years. Boeing said the rapidly growing middle class and the continued economic growth in China would fuel the growth of airline travel.

Boeing raised its 20 year target on deliveries to Southeast Asia by 460 planes saying demand should exceed 4,210 new planes worth $650 billion. Boeing said Southeast Asia was the fastest growing market in the world and 10% of the global market.

Boeing reported a 7.4% rise in Q3 deliveries due to the high demand for the 737 jetliners. Boeing delivered 202 planes in Q3 compared to 188 in the year ago quarter. Of that total 145 were 737s, up from 120 last year. The 787 Dreamliners slipped 1 to 35 and 777s fell from 22 to 16. Boeing has delivered 554 planes in 2017 and expects to deliver 760-765 for the year. They received 127 new orders in Q3.

For Q3 they reported earnings of $2.72 per share that beat estimates by 7 cents. Revenue was $24.31 billion, which also beat estimates. They guided for the full year for earnings of $9.90-$10.10, ten cents higher than prior guidance. They repurchased $2.5 billion in shares in Q3. Their order backlog is $474 billion for nearly 5,700 commercial planes.

The Commerce Department said orders for commercial aircraft surged 30% in September.

Shares declined with the Dow after earnings. Since they are up roughly 80% for the year, it is understandable they needed to rest. There is support at $253 and again at $234. If the Dow declines next week I would like to enter this position on a touch of initial support.

With a BA trade at $253.00

Buy Dec $260 call, estimated premium $3.50, initial stop loss $248.50.

CCL - Carnival Corporation - Company Profile


No specific news. Only a minor gain.

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


Costco announced a quarterly dividend of 50 cents payable Dec 1st to holders on Nov 17th.

They will report comp sales for October this 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.

MU - Micron Technology - Company Profile


Shares soared after Samsung reported earnings and said supply og DRAM and NAND memory would continue to be tight through 2018. That means higher prices for all memory makers. Samsung posted a 200% increase in profits on a 30% increase in revenue.

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.

PYPL - PayPal - Company Profile


No specific news. New record high.

Original Trade Description: October 25th.

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.

Position 10/26/17:

Long Jan $72.50 call @ $2.95, see portfolio graphic for stop loss

VIX - Volatility Index - Index Profile


Minor decline in a positive market.

If we ever hit that exit target at 16 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 482 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 only posted a minimal and losses could continue if the tax reform details are negative on Wednesday. We need a move soon since this is a November option.

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.

PG - Procter & Gamble - Company Profile


PG shares posted only a minor gain despite Mondelez beating on earnings and revenue.

Original Trade Description: October 28th.

The Procter & Gamble Company provides branded consumer packaged goods to consumers in the United States, Canada, Puerto Rico, Europe, the Asia Pacific, Greater China, Latin America, India, the Middle East, and Africa. The company's Beauty segment offers hair care products, including conditioners, shampoos, styling aids, and treatments; and skin and personal care products, such as antiperspirant and deodorant, personal cleansing, and skin care products. It markets its products under Head & Shoulders, Pantene, Rejoice, Olay, Old Spice, Safeguard, and SK-II brands. The company's Grooming segment provides shave care products comprising female and male blades and razors, pre- and post-shave products, and other shave care products; and appliances that include electric razors and epilators under the Braun, Fusion, Gillette, Mach3, Prestobarba, and Venus brands. Its Health Care segment offers toothbrushes, toothpastes, and other oral care products; and gastrointestinal, rapid diagnostics, respiratory, vitamin/mineral/supplement, and other personal health care products under the Crest, Oral-B, Prilosec, and Vicks brands. The company's Fabric & Home Care segment provides fabric enhancers, laundry additives, and laundry detergents; and air care, dish care, P&G professional, and surface care products under the Ariel, Downy, Gain, Tide, Cascade, Dawn, Febreze, Mr. Clean, and Swiffer brands. Its Baby, Feminine & Family Care segment offers baby wipes, diapers, and pants; adult incontinence and feminine care products; and paper towels, tissues, and toilet paper under the Luvs, Pampers, Always, Tampax, Bounty, and Charmin brands. The company sells its products through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores, and pharmacies. The Procter & Gamble Company was founded in 1837 and is based in Cincinnati, Ohio. Company description from FinViz.com.

P&G survived a proxy fight from activist investor Nelson Peltz but that does not mean their problems are over. Peltz said, "I believe that there is a direct correlation between how poorly a company is doing and how big of a fight they put up." Peltz estimated the company spent $100 million in their fight to keep him off the board. He said that is a lot of money for a company to spend to keep a knowledgeable investor from seeing the real numbers inside the company. Peltz has not conceded and an official recount of the votes is being conducted.

PG reported adjusted earnings of $1.09 that beat estimates by a penny. Revenue of $16.65 billion rose only 1% and missed estimates for $16.69 billion. Revenue from their grooming business has declined for three consecutive quarters. Peltz believes the entire company is in decline and they are massaging the numbers to put some lipstick on the pig. That only works for a short time.

Earnings January 19th.

Shares have declined $5 since the Oct 18th earnings and they are on the verge of breaking below 52-week support at $86. If the market is going to weaken on post earnings depression after this week, PG could be a leader to the downside given the negative analyst views.

Position 10/31/17:

Long Jan $85 Put @ $1.88, see portfolio graphic for stop loss.

SLB - Schlumberger - Company Profile


No specific news. Crude oil prices are holding over $54 and that is supporting the energy sector.

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