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Newsletter

Daily Newsletter, Saturday, 11/11/2017

Table of Contents

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

Market Wrap

No Conviction

by Jim Brown

Click here to email Jim Brown

Friday was the lowest volume day of the week and there was no conviction in either direction.

Weekly Statistics

Friday Statistics

The indexes traded in narrow ranges and returned to the flat line at the close. The Russell 2000 and the Nasdaq 100 posted fractional gains while the rest of the major indexes closed in negative territory. After the big intraday declines on Thursday, you would have expected either a continuation to the downside or a rebound to try and recover those losses. Neither appeared with the Dow trading in a very narrow 46-point range after the opening drop.

This was a wait and see market. Details about the competing tax packages were dribbled out all day. There were rumors Saudi Arabia was about to declare war on Iran and multiple well-known analysts said Thursday was the start of a 3% to 5% correction. There were numerous cross currents and investors were sitting on their hands waiting for a direction to appear.


The only economic report was the first reading on November Consumer Sentiment. The headline number fell from the multi-year high of 100.7 to 97.8. The present conditions component declined from 116.5 to 113.6. The expectations component declined from 90.5 to 87.6. The main reason for the declines was a sudden drop in expectations for future income. Individuals expecting their income to rise over the next year declined -3.2% for 52.5% of the respondents. Businesses were slightly more confident with 35% expecting conditions to improve, a gain of 2%. The obvious headline that comes to mind is the sharp drop in excitement over the tax plan announced by the House. The Senate plan had not yet been released when this survey was taken. Despite the minor decline sentiment remains at decade highs.


The calendar for next week rebounded from the holiday like calendar we saw last week with almost no reports. This week we will have the PPI/CPI, NY and Kansas manufacturing surveys and the most important of the regional Fed surveys, the Philly Fed Manufacturing Survey. This is the proxy for the national ISM coming up on December 1st.


The earnings calendar also shrank as the Q3 cycle comes to an end. The last three Dow components report next week but they are not likely to provide much lift. Cisco Systems is a low dollar stock at $33 so even a 10% move would only add about 21 Dow points. Home Depot is $164 and they should report strong earnings because of the hurricanes but the expectations are already strong. There is the potential for a sell the news event. Wal-Mart is a $91 stock and it is up about 15% over the last month. The odds of a continued post earnings spike are not very high.

Through Friday 457 S&P-500 companies have reported earnings and 72% have beaten estimates. 67.1% have beaten revenue estimates. These are above the long-term averages of 64% and 59% respectively. Earnings growth for the quarter has now jumped to 8.1%. That is up from 4.3% at the beginning of the cycle. I wrote several weeks ago that the Q3 estimates normally rise 4% from the beginning to the end of the cycle and it is right on track to repeat that trend. The forward PE is now 18.2. There are 18 S&P companies reporting this week.


The only recognized company with earnings on Friday was JC Penny (JCP). The company posted an adjusted loss of 33 cents that beat estimates for 42 cents. Revenue of $2.81 billion beat estimates for $2.78 billion. Same store sales rose 1.7% and beat estimates for 0.6%. They guided for full year earnings of 2-8 cents and same store sales of flat to -1%. Al of those numbers may not seem particularly exciting but they were much better than investors expected. One analyst said JCP lowered its goals and then beat them. Shares had traded down to $2.35 over the last week and the lowest level since the company went public in 1970. Analysts were cautioning about chasing the 15% rally on Friday saying the business model is broken and without going 100% promotional 100% of the time, store traffic will continue to decline.


The biggest earnings mover on Friday was Nvidia (NVDA) after they posted another blowout quarter after the bell on Thursday. Revenue rose 32% to $2.64 billion with earnings of $1.33. Analysts were expecting $2.37 billion and earnings of 95 cents. Revenue from data centers doubled from the year ago quarter to $501 million and rose 20% from the prior quarter. The Tegra processors that fuel everything from video game consoles to cars saw revenue rise 74% to $419 million. Video graphics chips rose 25% to $1.56 billion, professional visualization chips rose 15% to $239 million and automotive chips rose 13% to $144 million. For the current quarter, they guided to revenue of $2.65 billion and more than analyst estimates at $2.44 billion. They guided for gross profits of 60%. They declared a quarterly dividend of 15 cents and said they plan to return $1.25 billion to shareholders in 2018, similar to 2017 levels.

CEO Jensen Huang said every major cloud provider now supports the Volta GPU for deep learning and other AI tasks. Every major computer company now markets systems containing Volta GPUs. The Volta chips will power the world's first level-5 robotic taxi, which will go live next year. Level-5 is fully autonomous driving. When asked about the company's guidance he said "we feel super bullish about our guidance." Goldman Sachs said the ramp on Volta is tracking well and "has significant runway ahead as a broader set of customers adopt the new architecture in the coming quarters."

Everyone who has been reading my commentary for any period of time knows I am an Nvidia bull. I have been a tech nerd since the late 60s when I was managing IBM mainframes and I have a very good understanding of Nvidia's architecture. They are years ahead of Intel and AMD and accelerating rapidly. By the time those companies catch up to Nvidia's performance today, they will still be years behind where Nvidia will be by then.

I am not stupid enough to chase the stock at these levels but I would be a buyer on any pullback until Nvidia's growth slows or somebody else produces a truly competitive product. I do not foresee either of those things happening in the coming quarters.

At least 18 analysts raised their price targets with B.Riley FBR hiking from $250 to $270. Sun Trust Robinson went from $220 to $253. Jefferies raised their target to $240 and RBC to $240. Rosenblatt raised their target to $250 and said the "Volta GPU is likely to be the most successful product in the company's history. A single Volta GPU can replace 100s of server CPUs in a deep learning environment." Nomura said they were falling on their sword and raised their price target from $110 to $190 and their rating from sell to hold. Stifel raised their target from $110 to $184. BMO Capital is not convinced but they raised their target from $90 to $135 while keeping a sell rating. Analyst capitulation is a wonderful thing because it encourages more buying.


Disney (DIS) rallied on earnings despite missing on both earnings and revenue. The company said it was moving forward into full streaming and would be announcing more details in early 2018. However, CEO Bob Iger said they were planning on pricing "significantly below Netflix prices." Boom! That immediately sent Disney shares higher and Netflix shares lower. The streaming component is something Disney has been lacking and they have a large amount of content in their own inventory. They have been producing movies and full-length cartoons for more than 50 years. They own all their content where Netflix has to rent it for years at a time for a lot of money. Once Disney gets their program in operation, a lot of content will disappear from Netflix.

Obviously, Netflix has seen the future for a long time because they have to negotiate the long-term rights. Disney already announced they were pulling some content starting in 2019 for their own use.

I am a Netflix fan as well but they have some serious competition issues 2-5 years from now. They will probably control the international streaming market for years to come but the North American market is going to be tough. Facebook, YouTube, Amazon, Apple and now Disney are going to be chipping away at the subscriber base. Apple is planning on spending $1 billion on original content in 2018 and just outbid Netflix for a TV series starring Reese Witherspoon and Jennifer Aniston. They have also commissioned a new season of Amazing Stories, the 1980 Sci-Fi/Horror series. Apple has to cash to blow the other streamers away if they decided to own the market.

Add in Roku, Hulu and others and cord cutting is going to be a major recreational sport. The more services come available, the bigger the problem for Netflix. Disney will end up selling its streaming service to the accessory services like Roku and that will further pressure Netflix. However, as cord cutting picks up speed that is going to pressure Disney in other areas like ESPN. The beauty of all this is that lots of competition means lower prices for consumers.

Disney is going to spend another $1 billion to expand its theme parks and they just signed another deal for three more Star Wars movies that will take place in a different galaxy with different characters. That will insure another generation of kids grow up with Star Wars and that will feed attendance to theme parks and eventually those movies will end up on Disney's streaming service along with the Marvel, Pixar and other Lucasfilm movies.

I am not a fan of Disney shares today. These are all long-term events, late 2019, and the company did miss on earnings and revenue. Earnings of $1.07 missed estimates for $1.13 and revenue of $12.78 billion missed estimates for $13.23 billion. Cable revenue declined slightly to $3.95 billion and missed estimates for $4.06 billion. This short-term headline rally is likely to fade.


Netflix shares were down for the week despite the fact Disney's service will not be available until the second half of 2019. They were also down after they cut Kevin Spacey out of House of Cards and the movie Gore because 18 people including some of the cast complained of sexual abuse. The rumor making the rounds is that Spacey's character will be killed off and his wife will take over the main role. Louis CK has also been booted from Netflix and FX for sexual abuse.

Netflix said on their recent earnings call that they will be just fine without Disney content. Currently they only offer Disney content internationally in the Netherlands, Australia and Canada but international subscriber growth in more than 180 countries was huge with 4.5 million new subscribers in the quarter. A Piper Jaffray survey of 500 U.S. Netflix viewers after the Disney announcement said only about 20% of viewers watch Disney content and of those they only spent about 10% of their viewing on Disney content. Piper estimated Netflix spent about $200 million a year on Disney content and that was only 3% of its overall budget for 2019.

I think the threat of Disney impacting Netflix in late 2019 is a little far off to be impacting the stock today. Netflix has 120 million subscribers today and growing by about 5 million a quarter. That means they will have 155 million or more at the end of Q2 2019. That means a minimum of 6 quarters with no impact so I would be a buyer of Netflix at the 100-day average currently $179. That is about a $13 drop from Friday's close.


Alibaba (BABA) had another record Singles Day. They sold $17.8 billion in one day in 2016 and that rose 39% to $25.4 billion on Friday. That is far bigger than Black Friday and Cyber Monday combined. Cyber Monday saw sales of $3.45 billion in 2016. The promotion had 60,000 international brands and 7,000 US brands participating. The company is trying to expand it from one 24-hour day to 24 consecutive days this year with promotions continuing for the next three weeks. Up to 1.5 billion packages will be shipped over the next 5 days. That is roughly the number of packages shipped in China for the entire year in 2016. Alibaba is growing much faster than Amazon with annual revenue expected to grow from 53% to 61% in 2017.


Don't take your iPhone X out in the cold because they quit working under 32 degrees. Users are complaining that below freezing the screen turns off and the battery loses its charge. Hey, not to worry, once you are back in a warm room it will recover. I see a market for iPhone heaters if you want to talk on the phone outside in this winter. Apple has acknowledged the problem and said they were designed to work between 32 and 95 degrees. Really? So only people in tropical climates were supposed to use them? Apple said it would release a software update in the coming weeks that would expand the operating parameters. Who in their right mind would have thought those parameters would be ok to start with? You cannot make this stuff up.

There is another problem that just showed up. Apparently after several days of use a green line shows up on the edge of the screen on some phones. Apple acknowledged the problem and said they would replace any phone with that problem.

Apple is well on its way to become the first trillion dollar company. At a share price of $175, their market cap is $900 billion. At roughly $195, their market cap will break the $1 trillion mark. The most recent target hikes have been to the $187-$194 range with Morgan Stanley at $194. There is likely to be a monster sell the news event at $195. Apple shares closed at $174.67 on Friday. I would be a buyer of Apple at $165 but there is no guarantee they will repeat the historical $10 post earnings drop.


Mattel (MAT) shares rose sharply on Friday after news that Hasbro (HAS) had made an acquisition offer. The legendary toy brands would create a $17 billion company and achieve significant benefits of scale. Both were hurt by the Toys-R-Us bankruptcy and the decline in normal retailing channels. Almost any new toy that hits the market is instantly copied by Chinese companies.

I saw a talking chipmunk toy advertised on TV and I went to Amazon to by one for a grandson. There were 9 manufacturers selling the identical looking toy. I have a reader that invented a product a couple years ago and had it made in China. It sold for $159 and for the first 6 months, he made a lot of money. Within six months there were multiple exact copies selling for $39 to $59 which was less than it cost him to make the first 10,000. Within 18 months, he was out of business. I feel for Hasbro and Mattel because they need all the help they can get.

There was no mention of price for Mattel and both companies refused to comment publicly. The companies have held merger talks before in 1996 and 2015. Hasbro also tried to buy Lions Gate Films earlier this year. They also held talks with DreamWorks in 2014 but the studio was bought by Comcast instead. The Toys-R-Us bankruptcy pushed Mattel shares down to $13 and Hasbro probably thought this was a new buying opportunity. Shares were $26 in April and $35 in 2016 so any offer will have to contain a significant premium or it may not get done.



It has been a wild couple of months for Bitcoin holders. The price hit $7,803 on Wednesday before falling back to $6,300 on Saturday. There was a scheduled upgrade to the cryptocurrency software on Thursday November 16th that would have split Bitcoins into two. The planned 2:1 split was called off and the price rocketed 10% higher on the news. The "fork" would have created another offshoot of Bitcoin with an even larger digital block size that would allow for more coins. Bitcoin is limited to 21 million by its current block size. By cancelling the fork, it means prices will continue to rise because of the upper limit on the available coins.


Crude prices continue to hold around $57 on worries about Nigerian production and new concerns about the Saudi "corruption" sweep and a potential war with Iran. The missile fired from Yemen targeting a Saudi airport near Riyadh was Iranian. Multiple nations are trying to figure out how Iran supplied the missile to the Yemeni rebels. This would be a violation of several UN resolutions. Saudi Arabia called it "blatant military aggression by the Iranian regime which may amount to an act of war." The Saudis claim they have the right to respond.

With 20% of the world's oil supply moving through the Strait of Hormuz, if even a single ship were damaged by hostilities, it could halt that flow of oil until hostilities ceased. Insurers would suspend coverage for ships making that voyage and that means there would be no tankers. Oil prices would rocket higher, probably well over $100.

Saudi Arabia is also warning all citizens to leave Lebanon because of Iranian influence on Hezbollah. Iran is the main supplier of arms to that terrorist group. Saudi has relatively modern military capabilities. They shot down the missile with a US anti missile system. They recently signed deals for billions more in military hardware. If a war broke out, they would have a technological edge over Iran but Iran would have an edge in quantity of offensive weapons. Iran does not have any material anti missile capability but Saudi Arabia does not have a large inventory of offensive missiles. It would boil down to dumb bombs and plane against plane. Both countries have significant antiaircraft defenses. If I were in charge of Saudi Arabia, I would wait as long as possible to engage Iran and spend every dollar I had improving my offensive and defensive capability. It is only a matter of time before there is a war with Iran although it could be years from now. Saudi will want to engage them before they have nuclear capability otherwise the fight would not end well. There are rumors that Saudi Arabia has tried to buy some nuclear weapons from Pakistan. That country is thought to have 140 nuclear bombs, including tactical nukes, bombs and missile delivered weapons, and has been a seller of nuclear technology in the past.

When, not IF, a war with Iran occurs, the price of oil could easily hit $200 a barrel. Oil will be the first casualty on both sides and could quickly eliminate 15% of global production for what could be years.


With oil over $50 now for several weeks and likely to stay there because of the Middle East uncertainty, US producers reactivated 9 rigs last week. At the same time US production rose to 9.62 million bpd and higher than the 9.61 mmbpd peak in June 2015. The impact to production from the oil price collapse has been erased, at least in production numbers. The number of active rigs at 907 is still less than half the 1,931 rigs at the peak in September 2014. That represents a lot of unemployed workers and a major decline in capex spending. However, fracking techniques have nearly doubled the amount of initial production today compared to wells drilled in 2014.



LAST WEEKEND TO SAVE $50 on your EOY Subscription
!!! This Offer Expires Tuesday !!!

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 20 years this Thanksgiving.

Several years ago, we offered a free silver dollar with an EOY subscription. It was our most successful promotion since the Financial Crisis. We are going to repeat that again in 2017 with a specific coin this time. Each EOY subscriber will receive a genuine Morgan Dollar, which is thought to be one of the best looking silver coins ever minted. These make great Christmas presents!

Morgan Dollar

If you already know you want to renew your subscription at the cheapest price of the year then click the link below. As in past years, we are offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. The Early Bird Discount Offer expires on November 14th and the price will revert to normal.

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Markets

Much of the market momentum over the last year has been related to the semiconductor sector. The $SOX declined -43 points intraday on Thursday or -3%. This was a major hit to the Nasdaq and the S&P. The chip stocks are a major sector in each of those indexes. The 3% decline drug the indexes sharply lower.

There are many headlines surrounding the sector with things like the Intel-AMD joint venture, Broadcom-Qualcomm acquisition, WDC-Toshiba memory fight, Nvidia's blowout earnings, etc. The chips are not likely to continue lower because of headline overload. As long as the chips are rising the broader market will rise as well.



Unfortunately, there is another sector at work that is dragging market sentiment lower. The Dow Transports have fallen -579 points from their 10,080 high in mid October. The transports are supposed to reflect business activity because every product has to be moved from raw material to manufacturer to retailer to consumer and therefore the activity in the sector is a barometer of business activity. Pulling the index lower is increased competition in the airlines, resulting in lower prices and margins and lower stock prices. That is actually a good thing for consumers because low prices increase the volume of travel. Also impacting the transports is the slowing of activity in the energy sector. With rig counts falling over the last 15 weeks, that means less well pipe and less frac sand. The low price of oil also means lower volume shipments of oil by rail from the shale fields to refiners. Shipping oil by rail costs $8-$10 a barrel and with oil at $50 it is not a winning proposition. Now that it is back to $57, we could see those shipments increase.

The point here is that there are reasons for declining transport stocks and they do not really reflect on overall business activity. The decline in the sector is damaging to market sentiment but it is not a major problem long term.


The decline in the small cap indexes is a different problem. First, they had a monster rebound from mid August until early October. The Russell 2000 gained 162 points. We had over a month of consolidation where the index held its gains but that began to weaken when November arrived. The weakness is increasing. With the dual tax bills taking different routes to completion and the possibility of the reform becoming law is growing slimmer every day, investors are taking profits in the small cap stocks.


The AAII Sentiment Survey that ended Wednesday showed no increase in bullish sentiment but there was a sharp jump from bearish to neutral, probably on their way to bullish. Bearish sentiment fell to 23.1% and the lowest level since September 13th. Remember, this survey closed on Wednesday and before the big drop on Thursday.


The S&P has only declined for two days since its record high on Wednesday. We are a long way off from a correction and so far, this has only been a minor dip to support and a 12-point drop over two days. That could change next week but with support at 2,565 and the index at 2,582, there is plenty of cushion. However, a break of that support level could turn bearish very quickly.


The Dow fell -253 intraday on Thursday and rebounded 150 points after testing support just above 23,300. Friday's narrow 46-point range on low volume saw the entire decline at the open. That was probably margin call selling left over from Thursday. As long as the Dow remains above 23,000 it is just a garden variety bout of profit taking and it should be temporary. If the index falls below 23,300, we could see a lot of stop losses getting hit and there is a big air pocket down to 22,275. While I seriously doubt we will see a decline of that magnitude it all depends on the outlook for tax reform.

There are three Dow components reporting earnings this week so there could be some volatility as I mentioned earlier.



The Nasdaq has been averaging a triple digit decline about every 4 weeks. It has been 2 weeks since the 112-point decline in late October. The index did drop more than 100 points intraday on Thursday but rebounded. Uptrend support held and the index is only 39 points below its record high. That is hardly a correction or even a decent dip.

The big caps were mostly flat on Friday because a $3 move on a $1,000 stock qualifies as flat. The average move for the top 15 big cap stocks was -.64 cents. That is flat!

That is why the Nasdaq Composite closed with only a fractional -0.89 loss.

There was no conviction by either buyers or sellers. This was a wait and see market.




There is a market problem brewing. The new uproar over Judge Roy Moore has the potential to kill any tax reform proposal. Without Moore, the republicans have only a 1-vote margin in the Senate and several republican senators are already doubtful about voting it through. This could be a market killer. If by chance the senate version was actually passed, the corporate cuts would not be effective until 2019 and that is also a market killer. The allegations about Moore did not really explode onto the scene until late Friday and that has been the main topic on TV all weekend. It may all blow over but I doubt it. Monday's open could be rocky.

Even a flawed tax reform package would be bullish for the market but a disaster similar to the Obamacare votes would be very bearish. Even though earnings and economics are good, there is a lot of optimism built into the market over tax reform. If the proposals fail, the chances are very slim the GOP will maintain their majority after the 2018 elections and that means nothing is going to get done for at least two more years. The market normally thrives in a gridlocked government but it will likely thrive from a lower level.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"I am ready to meet my Maker. Whether my Maker is prepared for the great ordeal of meeting me is another matter."

Sir Winston Churchill



LAST WEEKEND TO SAVE $50 on your EOY Subscription
!!! This Offer Expires Tuesday !!!

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 20 years this Thanksgiving.

Several years ago, we offered a free silver dollar with an EOY subscription. It was our most successful promotion since the Financial Crisis. We are going to repeat that again in 2017 with a specific coin this time. Each EOY subscriber will receive a genuine Morgan Dollar, which is thought to be one of the best looking silver coins ever minted. These make great Christmas presents!

Morgan Dollar

If you already know you want to renew your subscription at the cheapest price of the year then click the link below. As in past years, we are offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. The Early Bird Discount Offer expires on November 14th and the price will revert to normal.

CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL



Index Wrap

Tax Cloud Looming

by Jim Brown

Click here to email Jim Brown
Tax plan rumors sank the market on Thursday and the cloud is still here.

For months analysts have been talking about the impact of tax reform on the market. Cutting the corporate tax rate to 20% and allowing repatriation of $2 trillion in cash from overseas would add about $15 in earnings to the S&P and add 270 points to the S&P index. Optimistic expectations rarely work out as expected.

Investors slowly bought the hype and the major indexes continued to hit new highs. Last Thursday those expectations were hit with a dose of potential reality and the markets imploded intraday with the Dow falling -253 points at the low. The leaks of portions of the Senate proposal included more tax brackets, corporate rates unchanged until 2019 and a 12-14% tax on repatriated funds. While compared to the current tax rate/structure this would be an improvement, it was far from what investors were expecting.

The market decline and then the spin doctors went to work. "It is not that bad and still an improvement." The house and senate bills will be merged in the conference committee and President Trump will not accept the 2019 date. The rumor mill was active and headlines were flowing. The market rebounded on Thursday and then went dormant on Friday while they waited for further information.

The news that Alabama senate candidate Roy Moore may have actively sought to date underage women more than 40 years ago, could have a very negative impact on the senate. If Moore loses his election in December, the GOP margin in the senate will drop to only 1 vote. If any two republicans fail to vote for tax reform, it would go down in flames like the Obamacare repeal. That would have far-reaching effects for the 2018 elections and would be very bearish for the market.

In theory, the market prices in all potential events before they happen. The gains over the last several months on expected tax reform gains are a prime example.

Here is where it gets rocky. Just as we priced in gains in anticipation of reform, the market will immediately subtract those expectations if it appears reform is not going to occur. Now that tax reform is front and center in the house and senate that means over the coming weeks every headline is going to cause a market ripple either positive or negative depending on the headline. The closer we get to an actual vote on a conference bill, the more erratic the market may become.

Fortunately, it will take weeks for these events to take place. The house and senate will each have to pass their versions and then the conference committee will take a couple weeks to hammer out their differences. The combined house and senate will be in session for only 14 days over the rest of 2017. They have a week off for Thanksgiving and two weeks for Christmas. With only 14 days of available activity, that suggests the actual vote on the conference bill will not be until January.

This will reduce the number of hard headlines the market has to digest through the end of December. That does not mean there will not be any volatility.

The 2nd/3rd week of November is normally when post earnings depression causes some market weakness. That is not big declines but just weakness as investors exit some positions and look for positions to capitalize on Q4 earnings in January.

November 1st also starts the six best months of the year, in normal years. This means the average investor probably believes it is time to buy stocks.

The S&P has not seen a 5% decline in 495 days and the average is twice a year. We are due for a decline or some sort. Personally, I am expecting it in January. We will be in a new tax year, good or bad, and there are a lot of gains that will be captured from the 2017 rally. The Dow is up 18% in 2017, Nasda1 25%, S&P-500 15%, semiconductors 44%, biotechs 33% and homebuilders 35%. Those numbers alone should make you fearful of a decent decline in the coming months. Markets never go up in a straight line. There are always pauses.

I have been using the A/D line on the S&P as our canary in the coal mine. That means when this canary rolls over and dies, the market is likely to die with it. The A/D line has flattened over the last three weeks even though the S&P closed at a new high on Wednesday. That means market breadth is shrinking. Fewer stocks are leading the charge higher.

The S&P Bullish Percent Index is also weakening. This is the percentage of S&P stocks with a buy signal on a Point & Figure chart. At 71.4% it is close to a six-week low.

The percentage of S&P stocks above their 50-day short-term average has fallen to 63% and that is a two-month low. Market breadth is weakening.

The percentage of stocks over their 200-day long term average strengthened somewhat as the big caps stocks rallied on earnings but post earnings depression could also push the percentage to a two-month low.





The chart of the S&P is still bullish. However, the MACD has been negative for several weeks. The CCI is starting to decline but is still in bullish territory. On the surface the S&P chart is still positive and we should not worry until the index declines below 2,565. Secondary support at 2,545 would be the line in the sand where a breakdown should send everyone rushing to the sidelines. The dip buyers should be active until a dip below that level and then all hands would abandon ship.

I am not anticipating this unless there is some very bad news about the tax reform, Moore's election or more charges in the Russian collusion investigation and then it depends on who is charged.

This is still a bullish chart as long as support is respected.


The Dow chart has the potential to turn bearish very quickly. If support breaks at 23,300 there is a very large air pocket down to 22,275. That would be a monster drop and the index is very unsupported.

However, the index has only closed lower for two days and it is far too early to be running for the exits. We have seen the dip buyers appear on every dip for months and so far there has not even been a dip. Short-term support is holding. Under 23,300 and the outlook will change dramatically.

The A/D line on the Dow mimics the A/D on the S&P. Even on the narrow 30 stock index, the internals are weakening.



The Nasdaq Composite is still bullish as well. The index is only one decent gain below its recent high and above support at 6,675. The Nasdaq has been declining about every four weeks so it is not as overextended as the Dow. The late October dip took some of the pressure off and allowed the recent rally. The 6,550 level is critical support. That would be a 200 point drop from Friday's close and we have seen that type of drop several times in 2017 with no ill effects.

I don't think I have to interpret the A/D chart on the Nasdaq. This is pretty clear that while the Nasdaq has been making new highs the number of stocks participating has declined significantly. When you compare the A/D chart to the chart of the index, it would appear there is more market weakness ahead.



The most bearish index is the S&P 600 Small Cap Index. The consolidation pattern has failed and support has broken. There is a large air pocket between Friday's close at 893 and support at 820. The A/D line is at a 6-week low and the MACD and CCI are both confirming the decline. Without an immediate rebound, the small caps could drag the entire market lower.



The McClellan Oscillator for the NYSE has turned negative at -39 and approaching a three-month low. The oscillator reached -82 in August and -88 in March. Both represented buying opportunities but the indexes were much farther below their prior highs. We are not even close to relative decline levels so the NYMO would have to reach those lows before we could be talking about a market bottom. In reality, the big cap market has not even dipped yet. The NYMO is simply showing us that market breadth is shrinking and that will eventually lead to a market decline if the decline persists.


We rarely ever see a sudden breakdown in all the indexes/indicators at the same time. Normally there is a weakening around the edges with the small caps and the momentum indicators turning down before the big caps stumble. This is the troops deserting the generals and without the troops it is hard for the generals to win the war.

Despite the negativity in the small caps and oscillators, the market has not yet broken stride. With the 3rd week of November normally weak, I would look to buy a dip around expiration Friday unless the longer term trend has changed. Earnings and economics are still strong and the biggest roadblock to a continued rally will be the political headlines.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

New High on Friday

by Jim Brown

Click here to email Jim Brown

Editors Note:

The chip sector is hot and not expected to decline. Nearly every manufactured product today has embedded electronics and that requires memory.



NEW DIRECTIONAL CALL PLAYS

MU - Micron Technology - Company Profile

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. Some 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 Q3, 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, they guided for earnings of $2.09-$2.23 on revenue of $6.10-$6.50 billion. Analysts were expecting $2.14 in earnings.

Despite the strong earnings and forecasts, the company trades at a PE of 9.5 when the S&P is trading at 18.2. 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. On Oct 31st, they spiked again to $45 after Toshiba said DRAM and NAND memory would remain in high demand and tight supply through 2018.

On October 10th, they announced a $1 billion secondary offering and shares dipped for several days while the offering was priced and completed. This added 25 million shares to the float with 1.14 billion shares outstanding.

This was a great deal. They are using the proceeds to help fund the retirement of $2.25 billion in debt priced at 7.5% and 5.5% interest. This will reduce their costs and eliminate those debt service payments. They raised about $1.2 billion after the offering was upsized and the rest of the funds for debt retirement will come out of cash on hand.

Summit Redstone said buy because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Credit Suisse reiterated an outperform rating and $50 target. Susquehanna has a $50 target and Evercore ISI has a $50 target. 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. Stifel has a $60 target. Needham's, Rajvinda Gill has a price target of $76.

UBS analyst Stephen Chin says he expects Micron's profits to rise 50% in 2018 to $7.50 per share. If you put any kind of market multiple on those earnings, the stock should double.

Shares drifted lower from the Halloween spike but rebounded on Friday back to the highs. There are no sellers in Micron.

Buy Jan $46 call, currently $3.10, initial stop loss $39.85.


NEW DIRECTIONAL PUT PLAYS

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In Play Updates and Reviews

Treading Water

by Jim Brown

Click here to email Jim Brown

Editors Note:

There were no material losses on Friday with the indexes roughly flat. This was a trading water day where investors did not know whether to buy or sell. The lack of any follow on decline to Thursday's losses was positive. With headlines about an Iran-Saudi Arabia war possible, I am surprised the losses were not worse.



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


AABA - Altaba
The long call position was entered at the open.



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

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BULLISH Play Updates

AABA - Altaba - Company Profile

Comments:

Shares were up slightly as the Singles Day/Month kicked off in Asia. In the first 15 minutes they did $5 billion in sales and $10 billion in the first 70 min. We reoaded the position with the Jan $72.50 call at the open.

Alibaba's new Global Shopping Festival began on Friday and that will produce a lot of headlines over the coming days. In 2016, they sold $17.7 billion on that day, up 32% from the prior year. With 549 million active customers, they could do well over $20 billion this year. The estimate is $24 billion.

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.

Update 11/2: Alibaba reported an outstanding quarter with a 61% rise in revenue. They raised guidance for 2018 for a 49-53% rise in revenue, up from prior guidance of 45-49%. Their cloud computing business revenue rose 99%. Earnings of $1.29 bear estimates for $1.04. Revenue of $8.29 billion beat estimates for $7.86 billion. Monthly actuve users rose 3.8% to 549 million. The current quarter is going to show explosive growth given the expanded Single Day promotion.

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

Position 11/10/17:

Long Jan $72.50 call @ $3.48, see portfolio graphic for stop loss.

Position 10/19/17:
Previously Closed 11/9: Long Jan $70 call @ $3.10, exit $3.72, +.62 gain.


AXP - American Express - Company Profile

Comments:

No specific news. The financial sector has now declined for four days. This is a sector problem not an American Express problem.

Original Trade Description: November 4th

American Express Company, together with its subsidiaries, provides charge and credit payment card products and travel-related services to consumers and businesses worldwide. It operates through four segments: U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services, and Global Merchant Services. The company's products and services include charge and credit card products, as well as other payment and financing products; network services; expense management products and services; travel-related services; and stored value/prepaid products. Its products and services also comprise merchant acquisition and processing, servicing and settlement, merchant financing, point-of-sale marketing, and information products and services for merchants; and fraud prevention services, as well as the design and operation of customer loyalty programs. The company sells its products and services to consumers, small businesses, mid-sized companies, and large corporations through online applications, direct mail, in-house teams, third-party vendors, and direct response advertising. American Express Company was founded in 1850 and is headquartered in New York, New York. Company description from FinViz.com.

The company was founded in 1850. Did you really think a temporary blip from the change at Costco was going to impact them long term? Of course not although analysts were pretty negative for several months. Since that fiasco shares have recovered nicely and closed at a record high on Friday.

They posted Q3 earnings of $1.50 that beat estimates for $1.47. Revenue of $8.44 billion beat estimates for $8.32 billion. Revenues rose 9% and earnings rose 19%. They guided for full year earnings of $5.80-$5.90, up from prior guidance of $5.60-$5.80.

Earnings January 17th.

The CEO said "we are completing a two year turnaround ahead of plan with strong revenue and earnings growth across all our business segments. We added products and benefits, shown continued strength in acquiring new customers and expanded our merchant network. Loan growth continued to be strong and credit metrics were again in line with our expectations. We contained operating costs and reallocated a significant part of those savings to fund many of the initiatives that are driving growth across the business."

Shares have been moving mostly sideways with a slight upward bias the last 7 days but I believe they are about to break out for a new leg higher.

Position 11/6/17:

Long Jan $100 call @ $1.67, see portfolio graphic for stop loss.


COST - Costco - Company Profile

Comments:

No specific news. Outstanding day. New 5-month high in a weak market.

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.

Update 11/2: Costco reported a 10.1% increase in sales for October to $10.02 billion. For the first 8 weeks of their fiscal 2018 sales have risen 11.3% to $19.87 billion. Same store sales for that 8-week period was +8.1% in the USA, +9.0% in Canada, +9.3% international. Companywide comps sales were +8.3% with a 32.2% in ecommerce sales. I can't wait to see the Whole Foods comp sales numbers but I doubt Amazon will break them out. There is ZERO impact on Costco from the Whole Foods/Amazon acquisition.

Position 10/16/17:

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


GILD - Gilead Sciences - Company Profile

Comments:

No specific news. Finally a rebound from support.

Original Trade Description: November 7th

Gilead Sciences, Inc. discovers, develops, and commercializes medicines in the areas of unmet medical needs in Europe, North America, Asia, South America, Africa, Australia, India, and the Middle East. The company's products include Descovy, Odefsey, Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Vemlidy, Epclusa, Harvoni, Sovaldi, Viread, and Hepsera products for treating liver diseases. It also offers Zydelig, a PI3K delta inhibitor, in combination with rituximab, for the treatment of certain blood cancers; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of chronic angina; Lexiscan/Rapiscan injection for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging; Cayston, an inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis patients; and Tamiflu, an oral antiviral capsule for the treatment and prevention of influenza A and B. In addition, the company provides other products, such as AmBisome, an antifungal agent to treat serious invasive fungal infections; and Macugen, an anti-angiogenic oligonucleotide to treat neovascular age-related macular degeneration. Further, it has product candidates in various stages of development for the treatment of HIV/AIDS and liver diseases, such as hepatitis C virus and hepatitis B virus; hematology/oncology; cardiovascular; and inflammation/respiratory diseases. The company markets its products through its commercial teams and/or in conjunction with third-party distributors and corporate partners. Gilead Sciences, Inc. has collaboration agreements with Bristol-Myers Squibb Company, Janssen R&D Ireland, Japan Tobacco Inc., Galapagos NV., and Spring Bank Pharmaceuticals, Inc. Company description from FinViz.com.

Earnings January 25th.

Shares of Gilead surged in late August after the company raised guidance on drug sales. Those gains faded as they approached the Q3 earnings date. The declined even further after the company lowered guidance on sales because of increased competition. However, producing $25 billion a year in revenue and having multiple drugs in the pipeline with one of them expected to produce $3.5 billion in 2018, is a reason to buy this stock on a dip to support.

The company reported earnings of $2.27 compared to estimates for $2.13. Revenue of $6.5 billion also beat estimates for $6.4 billion. Net income was $2.7 billion.

Gilead bought Kite Pharma for $12 billion earlier this year to gain access to their cancer immunotherapy drugs. The company is working on logistics for for launching sales of the newly approves non-Hodgkin lymphoma drug Yescarta developed by Kite. The drug costs $373,000 for a one-time treatment.

Gilead warned that Hep-C revenue was declining as fewer patients were deemed eligible for treatment and there was higher competition from companies like AbbVie. Sales of their Hep-C drugs declined from $3.3 billion to $2.2 billion in Q3. They lowered full year guidance for Hep-C from $9.5 billion to $9.0 billion.

At the same time they raised full year guidance on all sales from $24.0 billion on the low side to $24.5 billion with the upper rage at $25.5 billion.

While Hep-C sales may be slowing thanks to a 95% cure rate there are plenty of other drugs in the pipeline. Gilead has plenty of cash to develop and market new drugs. This is a good company and the drop to support is a buying opportunity.

Update 11/8/17: Mizuho raised the price target to $83. The analyst said Gilead did not overpay for Kite given the strength of the drug pipeline. Recent trial results have been positive on multiple drugs. The analyst reminded that Gilead paid $11 billion for Pharmasset in 2011 that enabled them to corner the Hep-C market for 5 years.

Position 11/8/17:

Long Feb $75 Call @ $3.45, see portfolio graphic for stop loss.


MDCO - Medicines Co - Company Profile

Comments:

No specific news. Shares up sharply in a weak market.

Original Trade Description: November 8th

The Medicines Company, a biopharmaceutical company, provides medicines for patients in acute and intensive care hospitals worldwide. The company markets Angiomax, an intravenous direct thrombin inhibitor used as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, and for patients undergoing percutaneous coronary intervention; Ionsys, a fentanyl iontophoretic transdermal system for the short term management of acute postoperative pain for adults requiring opioid analgesia in the hospital. It also markets Minocin IV, an intravenous formulation of a tetracycline-class antibiotic used for the treatment of infections due to susceptible strains of designated gram-negative bacteria; and Orbactiv, an intravenous antibiotic used for the treatment of adult patients with acute bacterial skin and skin structure infections, or caused or suspected to be caused by susceptible isolates of designated gram-positive microorganisms. The company's approved products include Adenosine, Amiodarone, Esmolol, and Milrinone for acute cardiovascular; Azithromycin and Clindamycin for serious infectious disease; and Haloperidol, Midazolam, Ondansetron, and Rocuronium for surgery and perioperative treatment. Its research and development stage products comprise Carbavance, an antibiotic agent that has completed Phase III development stage for the treatment of hospitalized patients with serious gram-negative bacterial infections; Inclisiran, a synthesis inhibitor for the potential treatment of hypercholesterolemia; and MDCO-700, an intravenous anesthetic agent developed for moderate or deep sedation and general anesthesia in patients undergoing diagnostic or therapeutic procedures. The Medicines Company has a collaboration agreement with Alnylam Pharmaceuticals, Inc.; SciClone Pharmaceuticals; and Symbio Pharmaceuticals Limited. Company description from FinViz.com.

Earnings January 25th.

MDCO reported a loss of $1.19 that beat estimates for a loss of $1.23. However, revenue of $16.9 million missed estimates for $22.9 million.

The company announced the layoff of 85% of its workforce from 410 workers to only 60. As part of the restructuring the company is divesting its infectious disease business by the end of 2017. The revenue from the divestiture should allow the company to "aggressively" move its drug candidate through late stage clinical development. The drug, inclisiran is part of a new class of cholesterol lowering therapies called PCSK9 inhibitors. The phase three trial started the first week of November. MDCO is partnering with Alnylam (ALNY) on the trial. There are 1,500 in the trial at 100 clinical sites in eight countries. This is only one of four concurrent trials covering nearly 3,500 patients. The initial trials were very positive.

The stock declined to $28 on the dramatic layoffs and traded sideways for two weeks. A rebound has begun and options are cheap.

Update 11/9: Cardiologist Milton Packer is already pounding the table on MDCO's PCSK9 drug and it is still a couple years away from sales. He said it has the potential to be better than Amgen's Repatha and only needs to be dosed twice a year rather than twice monthly. He said it will also be significantly cheaper than the $14,000 a year for Repatha.

Position 11/9/17:

Long Jan $32 call @ $2.00, see portfolio graphic for stop loss.


PYPL - PayPal - Company Profile

Comments:

No specific news. Only a minor decline.

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.

PayPal just launched domestic payment services in India with 1.324 billion people.

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


STX - Seagate Technology - Company Profile

Comments:

No specific news. The uptrend has resumed.

Original Trade Description: November 6th

Seagate Technology plc provides data storage technology and solutions in Singapore, the United States, the Netherlands, and internationally. The company manufactures and distributes hard disk drives, solid state drives and their related controllers, solid state hybrid drives, and storage subsystems. Its products are used in enterprise servers and storage systems applications; client compute applications, primarily for desktop and mobile computing; and client non-compute applications, including various end user devices, such as portable external storage systems, surveillance systems, network-attached storage, digital video recorders, and gaming consoles. The company offers external backup storage solutions under the Backup Plus and Expansion product lines, as well as under the Maxtor and LaCie brand names available in capacities up to 120 terabytes. It sells its products primarily to original equipment manufacturers, distributors, and retailers. Company description from FinViz.com.

Earnings January 22nd.

Seagate posted earnings of 96 cents that beat estimates for 86 cents. Revenue of $2.63 billion beat estimates for $2.53 billion despite a 6% decline. The declared a quarterly dividend of 63 cents payable January 3rd to holders on Dec 20th. During the quarter they returned $350 million to shareholders through dividends and stock repurchases. Cash on hand was $2.3 billion.

The company said demand was increasing as the move to cloud storage was creating the need for massive amounts of data bandwidth, storage, manipulation and retrieval. The average storage per drive shipped was 1.7 terabytes with the average selling price $64 per drive. Hard drive storage is a commodity business where existing technology is competing on a byte per dollar basis and new technology is the only way to expand ASPs. Seagate is progressing in that battle with larger and larger drives that operate at faster speeds and last longer between failures. With many businesses moving to SSD storage, Western Digital has the lead there because of its partnership with Toshiba. However, Seagate just signed on to the consortium that is buying the other half of the Toshiba memory business that WDC does not own. This will enable Seagate to acquire memory for the lowest prices possible and compete with WDC in the SSD arena.

Seagate just announced AI powered hard drives for video monitoring.

Seagate shares spiked from $35 to $40 on the earnings. They declined back to $36 where they found support and it appears a rebound has begun. Shares were already trending higher before the earnings and this could be an extension of that trend.

Position 11/7/17:

Long Jan $39 call @ $1.14, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

The VIX spiked up to 11.58 intraday but faded with the market rebound began. This position will expire on Wednesday. Given the rebound in equities, you could sell the lower call strike, say the $12 strike that closed at 45 cents on Friday. That would generate a little cash to defray the cost of the $15 strike we are holding. The market should rebound next week if there are no headlines over the weekend.

This was insurance against a 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 496 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

Comments:

Finally some weakness but it was only intraday. The option is only worth 48 cents today. With the Dow possibly cracking, I think we should hold it until it expires. Our strike is only about 234 Dow points from today's close. You could also sell the $233 put, currently 74 cents and your risk would be 26 cents against a potential gain of 74 cents that would offset some of the loss on our $232 put. This position will expire next Friday and the market "should" rebound on Monday assuming no negative headlines over the weekend.

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.


OMC - Omnicom Group - Company Profile

Comments:

No specific news. Shares posted a small gain but remain under resistance at $68.

Original Trade Description: Nov 1st.

Omnicom Group Inc., together with its subsidiaries, provides advertising, marketing, and corporate communications services. The company offers a range of services in the areas of advertising, customer relationship management, or CRM, public relations, and specialty communications. Its services comprise advertising, brand consultancy, content marketing, corporate social responsibility consulting, crisis communication, custom publishing, data analytics, database management, environmental design, financial/corporate business-to-business advertising, graphic arts/digital imaging, healthcare communications, and instore design services. The company's services also include direct, entertainment, experiential, and field, interactive, mobile, multi-cultural, non-profit, promotional, retail, search engine, social media, and sports and event marketing services; and investor relations, marketing research, media planning and buying, organizational communications, package design, product placement, public affairs, public relations, and reputation consulting services. It operates in North America, Latin America, Europe, the Middle East, Africa, Australia, China, India, Japan, Korea, New Zealand, Singapore, and other Asian countries. Omnicom Group Inc. was founded in 1944 and is based in New York, New York. Company description from FinViz.com.

Omnicom reported Q3 earnings of $1.13 that beat estimates for $1.10. Revenue of $3.72 billion declined -1.9% and narrowly beat estimates for $3.71 billion.

Expected earnings Jan 16th.

Omnicom was the only advertising agency that posted decent earnings. Interpublic Group (IPG) and WPP Group (WPPGY) both lowered guidance as their biggest clients like McDonalds, Procter & Gamble, J&J, etc, all began to shrink advertising budgets. Amazon has turned into a seller of everything and companies like PG and JNJ are suffering from product price declines and less buying from normal wholesale customers.

McDonalds said this week they were going to review their $2 billion advertising budget and see how much they needed to divert to social sites like Instagram and Facebook. The advertising being served on Facebook does not need a multibillion dollar ad agency to place it. Everything is online and companies have instant access to more than 3 billion consumers between Facebook, YouTube and the Google Chrome browser. The historical advertising business is undergoing a revolution.

Shares of OMC have declined to a two-year low and with the other companies lowering guidance and Facebook posting blowout advertising numbers tonight, we could see lower lows on OMC.

Position 11//2/17:

Long $65 put @ $1.70, see portfolio graphic for stop loss.




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