Option Investor
Newsletter

Daily Newsletter, Saturday, 11/18/2017

Table of Contents

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

Market Wrap

No Follow Through

by Jim Brown

Click here to email Jim Brown

There was no follow through after Thursday's short squeeze on the big cap indexes.

Weekly Statistics

Friday Statistics

The Dow gapped about 100 points lower at the open on Friday and then traded in a very narrow 30-point range after 10:30. The Dow gave back more than half its gains from Thursday. For an expiration Friday, volume was moderate at 6.2 billion shares. There was no excitement and worry over the tax reform details filled all the headlines.

The S&P also gapped lower but only gave back 7 points and about a third of Thursday's gain. After trading in a narrow range, the index declined near the lows of the day at the close.



The economic calendar was very busy on Friday with almost as many reports as we will see for all of next week.

New residential construction rose from 1.127 million starts to 1.290 million and blew away estimates for 1.180 million. This was a 13.7% gain. Multifamily starts surged from 302,000 to 413,000 for a 36.8% gain. Single-family starts edged up from 833,000 to 877,000. Housing permits were also strong with a rise from 1.225 million to 1.297 million. Those broke down to 839,000 single-family and 458,000 multifamily. Housing completions rose sharply from 1.094 million to 1.232 million for a 12.6% increase. Considering the impact of the hurricanes these were very strong numbers.


Internet E-Commerce sales for Q3 rose from $111.5 billion to $115.3 billion. Sales were up 15.5% year over year. E-commerce sales as a percentage of all sales rose to 9.1%. Internet sales have risen for 35 consecutive quarters. With labor markets tight and labor costs rising, more companies are going to invest in their online sales portals. Without a recession, these totals are only going to rise.

The Kansas Fed Manufacturing Survey dipped sharply from 23 in October to 16 in November. This is still in the high range for the last 10 years and growth is still strong. This was the 4th best reading over the last 12 months. New orders declined from 27 to 22 and back orders dropped from 23 to 12 for a big drag on the headline number. Employment fell from 21 to 16 and production dropped from 20 to 15. Any numbers over zero represent economic growth. On a positive note, inventories fell from 18 to 2 suggesting manufacturers will have to gear up to replenish those inventories.


The Atlanta Fed real time GDPNow forecast for Q4 dropped from 3.5% to 3.4% growth after the housing starts were released on Friday. I am sure nobody is going to complain if we finish this quarter at anything over 3.0%.


The CME Fedwatch tool is forecasting a slight chance of a larger than a 25 basis point rate hike in December. This is crazy because multiple analysts are now talking about the Fed skipping the December rate hike. I personally believe it will be a benign 25-point hike and the last one Janet Yellen can claim. Her term expires on January 31st. The confirmation hearing for Jay Powell is on November 28th.


The calendar for the holiday week is light with the FOMC minutes the most important event. Second in importance are the existing home sales. All of these reports are likely to be ignored because of the holiday mood and light volume. Very few traders will be paying attention to the market.


The earnings calendar has also dried up. Salesforce.com and the Hewlett Packard twins will be highlights on Tuesday followed by Lowe's and Dollar Tree.

According to Thomson Reuters, Q3 earnings are now expected to rise 8.2% and well over early estimates. Of the 474 S&P companies that have reported, 72.2% have beaten on earnings and 67.7% have beaten on revenue. Revenue growth for Q3 is now expected to rise 5.4%. There have been 56 guidance warnings and 31 guidance upgrades. The forward PE is 18.2 and 15 S&P companies report earnings this week to close out this cycle.


On Friday, Foot Locker (FL) reported earnings of 87 cents that beat estimates for 80 cents. Revenue of $1.87 billion beat estimates for $1.84 billion. Same store sales fell -3.7%, up from the -4% to -5% expected. Shares rose only slightly until the company said they were expanding their marketing relationship with Nike (NKE) to include a pop-up store called Sneakeasy NYC that will open on Nov 22nd. The store will only be open one week and will feature Nike and Jordan products. Foot Locker said they were now taking reservations on the Special Air Force-1 priced at $160.

Foot Locker said it was hiring new employees with Nike training who will serve as full-time "Nike Pro Athletes" and "Nike Pro Leads." They are going all out to bring awareness to the Nike brand and try to move some of those high priced shoes. For Q4 Foot Locker is expecting same store sales to decline 2% to 4% and slightly better than prior guidance of -3% to -4%. Earnings are expected to decline 15% to 25% to $1.03-$1.16 and below analyst estimates for $1.18.

Shares exploded higher on the less bad results and the new Nike marketing program. I am surprised the Nike news overpowered the negative same store sales and 15% to 25% drop in earnings guidance. Time for a short here?



The much-maligned Abercrombie & Fitch (ANF) reported earnings of 30 cents that beat estimates for 24 cents. Revenue of $859.1 million rose 4.5% and beat estimates for $820.3 million. Same store sales rose 4.0%. The company guided for revenue growth in Q4 of mid to high-single digits and same store sales of low single digits. I hate it when companies give that kind of guidance that cannot be tracked. "Low single digits" gives them a 4% range on same store sales when everyone else is giving exact numbers of maybe a 3% to 4% growth outlook. This kind of guidance is seen as a "get out of trouble free" card because of the wide range. It is a big target and that gives them a wide margin of error. I definitely think this is a short opportunity.


Hibbett Sports (HIBB) reported earnings of 37 cents that easily beat estimates for 22 cents. Revenue of $237.8 million beat estimates for $219 million. The company guided for full year earnings of $1.42-$1.50 per share, up from prior guidance of $1.25-$1.35. Same store sales are expected to decline in mid single digits, up from mid to high single digit declines. Shares rallied 15% on the change from mid to high to simply mid single digit declines? If they can beat on earnings with sales declining investors should be happy but you can only cut costs so much.


Buckle Inc (BKE) reported earnings of 41 cents on revenue of $224.3 million. Estimates were 39 cents on revenue of $223.4 million. Shares gained 4% on the minor beat.


Splunk (SPLK) reported earnings after the bell on Thursday of 17 cents that beat estimates for 14 cents. Revenue of $328.7 million beat estimates for $309 million. The company guided for Q4 revenue of $388-$390 million. Analysts are expecting 32 cents in earnings and $384 million. During the quarter, Splunk signed 450 new enterprise customers. Shares spiked 18% on the news.


Shares of Square (SQ) posted a 5% gain after Evercore ISI upgraded their rating to outperform with a $51 price target. That is twice their old target at $25. The analyst said revenue could grow 40% in 2018 and 35% in 2019. That is compared to consensus estimates of 31% and 28%. Shares jumped the prior day on a report they had introduced an option to buy Bitcoin through the Square Cash app. The app allows you to buy and sell Bitcoin through an exchange but it does not allow you to use them to buy products or services or pay people with Bitcoin. However, several analysts said Square is positioning itself to take that next step at some point in the future.


Bitcoin rallied another $2,000 for the week to $7,800 on Thursday. I am still kicking myself.

Bitcoin Chart

Tesla (TSLA) shares posted a muted gain of $2.55 after the company showed off its two new vehicles. The first was a semi truck with a 500-mile range on a single charge and all electronic cab. They can go 0-60 in 5 seconds and 0-60 in 20 seconds with a full 80,000 pound load. They also have bulletproof windshields to protect against road debris. Wal-Mart immediately said it would order 10 for a test in Canada and 5 for a test in the USA. Trucker JB Hunt said it had reserved "multiple" units. The "Tesla Semi" is scheduled to begin production in 2019. The Class 8 semi market is about $30 billion in size making every 1% of market share worth about $300 million. The Tesla Semi is expected to save owners about $25,000 a year in operating costs at $1.26 per mile to operate compared to $1.51 for a diesel truck. Elon Musk said they would have a one million mile warranty.

At the end of the truck demo, Musk said oh by the way, customers are always asking us when we are going to make a new roadster. Well, here it is, as a red roadster drove up behind him. The car will go 0-60 in 1.9 seconds and have a 620 mile range. There is a catch. The first 1,000 will cost $250,000 each and be a limited edition "Founders Series" with a $50,000 deposit. After 1,000 are sold, the standard model will start at $200,000. Production to start in 2020.

Not a word was said about the 450,000 Model 3 deposits Tesla is still holding because they cannot make the cars fast enough. How they are going to make two additional models is still unknown.

Tesla Roadster


Crude prices traded in a wide range for the week with the concern over the Saudi "corruption sweep" fading and the API showing a larger than expected build in inventories. Prices fell sharply mid-week. They rebounded on Friday after a pipeline leak caused the Keystone pipeline to be shut down for repairs.

The Saudi problem has taken on a new dimension. Reportedly, Mohammed Bin-Salman (MBS) has offered to settle with the princes he has detained if they will sign over 70% of their accumulated wealth to the state. By doing this he can escape the challenge of proving any potential corruption and he will appear as a hero of the state to the younger population. Of course, that is going to be a problem for some of the high profile billionaire princes. If they agree to surrender their wealth, it will appear they were guilty. There is no easy answer here and there are several chapters still to be written. Without the rule of law, any court proceeding could easily be rigged on fake evidence and testimony.

Another problem for oil prices are some growing doubts that Russia will agree to extend the production cuts. With US production at a record 9.65 million bpd and possibly 10.0 mmbpd by the end of December, Russia and others are worried the US is going to take market share with our increasing exports. With oil at $57 they feel it is no longer necessary to cut back on production just so the US shale producers can thrive. We have the makings for a new price war in 2018.

Brent crude spiked to more than $64 last week and the highest level since 2015.

OPEC meets on November 30th to discuss production.


Oil rigs remained flat last week at 738 but gas rigs surged +8 to 177. Gas prices are trading near 5-month highs and we saw the first week of gas withdrawals from storage for the winter demand season. Gas inventory levels declined -18 Bcf for the week.




Markets

Bullish investor sentiment appeared to fall off a cliff last week except you have to remember this survey closes on Wednesday and that was when the indexes all closed at multi week lows. For our purposes, this graphic is worthless this week because of the ending date.


It was an interesting week with the major indexes closing at 3-week lows or longer on Wednesday and then rebounding sharply on Thursday with the Nasdaq Composite closing at a new high. How do you play that trend? The short answer is that you don't play it, the market plays you. Stuff happens and headlines become market moving. It helps a lot when the market is leaning bearish when Wal-Mart and Cisco Systems beat earnings at the same time and add roughly 90 Dow points by themselves. The short covering in the Dow ETFs added the rest.

The Dow and S&P rallied right to resistance and failed in the afternoon. The follow through on Friday was to the downside. The Dow gave back 100 of the 187 points it gained on Thursday and the S&P gave back 7 of its 21 points. Neither decline was convincing and all the movement occurred in the first 30 minutes of trading. From that point on everyone was just trying to run out the clock.

The S&P rallied to the top of its congestion range on Thursday and then closed in the middle of that range on Friday. Upside resistance is now 2,590 and support remains 2,565 followed by 2,555. The range has not changed in three weeks. The S&P was consolidating its gains while the Q3 earnings cycle played out and the tax reform proposals worked their way through committees.


The Dow rebounded from 23,242 intraday on Wednesday to test resistance at 23,485 on Thursday. The decline on Friday took the index right back to within 8 points of support at 23,350. That support was broken twice last week only to recover sharply. The Dow is the most at risk index because of its narrow construction and all the components have now reported earnings. That magic growth elixir of strong earnings is now behind us for another 8 weeks.

Thanksgiving week is normally positive for the Dow. Investors home for the holidays with some cash in their account tend to gravitate to the blue chips and the big cap tech stocks. Whether those "sitting at home bored with nothing to do investors" can overcome negative headlines from the tax legislation is unknown. Fortunately, the Senate is not in regular session this coming week so the headlines should be minimal.



The Dow Transports have been in a steady decline and weighing on the Dow Industrials. The transports closed right on prior resistance, now support, on Friday. If the transports can hold at this level or even rebound slightly, it would take a lot of pressure off the Dow Industrials.



The Nasdaq struggled on Friday but did not pull back far from Thursday's record close. The -10 point drop was very minor profit taking. The Nasdaq 100 did worse with a 25-point drop because most of the big cap stocks were negative. Microsoft lost 80 cents but knocked -5.4 points off the Nasdaq 100 while Alphabet lost 12 points but only erased 4.1 points from the index. Apple accounted for 4.3 points and Intel for 4.2 points.

The tech indexes are positioned to move higher if the right market catalyst appears. I have no idea what that would be today.





The Russell 2000 Index and the S&P-600 Small Cap Index were the only two major market indexes to close positive on Friday. Why the small caps were being bought and the big caps were being sold is a question for Karnack. The small caps have resistance at 1,500 and they came close on Friday with a high at 1,497.


With the house and senate on vacation next week, we are going to see a lot of headlines about the four GOP senators opposed to the wording in the senate version of the tax bill. The proposal cannot pass unless at least two of them can be convinced to come back from the dark side and vote in favor of its passage. The bigger battle will be once the house and senate bills are merged together and the senate has to pass it again with even more points not to like. This is going to be a battle, probably the week before Christmas.

There is also the fight over another continuing budget resolution and debt ceiling hike that must be passed by December 8th. Paul Ryan said they would probably go with a short-term continuing resolution to avoid causing problems ahead of the vote on taxes. That does not mean the continuing resolution will be a slam-dunk. It will still face opposition but nobody will want a government shutdown two weeks before Christmas.

House & Senate Calendar

We are also headed into tax selling season. Offsetting that will be corporate buybacks. Over the first 9 months of the year buybacks declined 10% but authorizations rose 20%. There are a lot of unfinished authorizations outstanding and companies like to tidy up loose ends going into year-end. We will also see some end of year window dressing in December. With the markets up 18% (Dow) to 29% ($NDX) heading into December, fund managers will not want any cash on the books on December 31st. This suggests portfolio managers who have been holding off on purchases in hopes of a decent dip, will eventually hold their nose and buy something. Cash is trash on year-end fund statements.

Lastly, all of those items above could set us up for a major decline in January. Once the tax year rolls over to 2018 and hopefully a new tax schedule, the selling could be extreme.

There is a new provision in the tax plan for forcing FIFO (first in, first out) accounting. That means if you have 400 shares of Nvidia that you bought in 100 lot increments at different prices over the last couple of years, any sales of Nvidia shares will be assumed to be the first ones purchased. That provision will force higher gains and higher taxes and could trigger some sales before year-end to avoid the FIFO rules.

Personally, I believe we could move higher in December but the odds of some additional profit taking are high. A December peak may not be at the end of the month. I would continue to buy dips but wait for a rebound to occur. Don't try and catch the falling knife.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Life isn't about waiting for the storm to pass; it's about learning to dance in the rain."

Vivian Greene


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

subscribe now


Index Wrap

Twilight Zone Ahead

by Jim Brown

Click here to email Jim Brown
We are entering that period of the year where crazy things happen for unknown reasons.

The Q3 earnings cycle is over and there are a number of factors that will impact the markets over the next six weeks. Some are positive and some are negative.

Post earnings depression.
Tax loss selling.
Tax avoidance selling.
Stock buybacks.
End of year window dressing.
Investing of year-end bonuses.
Cash is trash purchases before year end.
Portfolio restructuring for 2018.
Potential failure of the tax reform in the senate.
Last but not least, profit taking.

I am not going to describe these all in a lot of detail because I think most readers understand each one. The post earnings depression cycle runs through the end of November. Earnings gains are sold and traders look for stocks to ride into the January earnings cycle.

The tax loss selling is simply closing positions to offset gains or losses in other positions in order to reduce the tax impact. Tax avoidance selling is simply taking profits in this tax year because they expect their tax bracket in 2018 to be higher for reasons not related to the tax reform effort.

The stock buybacks run from the middle of November until the end of December. Companies with outstanding authorizations that run through the end of 2017 will try to close out those authorizations. Others that just started on an authorization will try to make some significant progress to report with their full year earnings reports in January.

Employees that regularly receive large yearend bonuses typically spend the holidays, both Thanksgiving and Christmas deciding where they want to invest the money.

Fund managers sitting on cash and looking for a dip to buy will eventually run out of time and have to buy something. With the markets up double digits for the year, they do not want to have any cash in the bank for the year-end statements. They will want to be fully invested. Cash is trash on the year-end statements. This could lead to a potentially strong market decline in January.

Portfolio managers that have ridden the market up all year will be reducing some of the stocks that have done the best and looking for new positions for 2018. This restructuring is normally done at a casual pace but time is running out on the November statements.

More than 48% of funds close their books for the year in Oct/Nov. They are required to pay out distributions in December so that individuals will have the information for their personal tax returns in January. That means funds are cleaning up their portfolios over the next couple of weeks to prepare for their "fiscal year end" accounting process. Many have already closed their books but there are always laggards.

Never discount the urge to take profits. With the Dow up 18%, Nasdaq 26%, S&P 15%, semiconductors up 44%, biotechs 35%, housing 38%, etc, there are plenty of uncaptured profits in the market. While I believe those profits will be held until January because of the chance of a cheaper tax rate, there is no guarantee. There could be a race to the exits at any time but I just don't see it given all the current fundamentals.

The one event that could push the markets off the cliff would be a failure of the tax reform in the senate. That could cause immediate profit taking because much of the anticipated gains have already been factored into the market.

The major indexes have been trading sideways since October 23rd. for four weeks there has not been any major progress even though the Nasdaq closed at a new high on Thursday. That just matched the high from two weeks ago on Nov 6th.

The big decline last week that saw the indexes close at multi-week lows on Wednesday, setup the potential for a major short squeeze. On Wednesday night I wrote that we were poised for a big squeeze and it happened on Thursday. It was just a squeeze. A million investors die not suddenly wake up on Thursday and decide they wanted to buy Wal-Mart shares $10 higher than they were the day before. These things happen when the market has declined for the prior six days. The shorts all load up and then they get killed when the squeeze appears.

This is similar to playing craps. When a shooter is hot, the other players can accumulate bets all across the board and ever roll that wins they press their bets like they expect the shooter to continue winning for hours to come. When that 7 finally appears, the table is cleared and everybody loses all at once. At least at craps your losses are limited to the amount you have on the table. If you are short stocks when the market turns your losses are unlimited. Foot Locker gained 28% on Friday and their fundamentals still stink. Nobody rushed into the market on Friday because they just had to have some Foot Locker in their account. It was just a short squeeze.

The big decline on Wednesday and the sharp reversal on Thursday messed up the internals and the oscillating indicators. It looks like everyone suddenly turned bullish but that is not what happened. Now it will take 7-10 days for them to level out again.

The A/D line on the S&P reversed sharply from the 3-week low but it did not make a new high. There is a limit to the madness. The MACD on the A/D only showed a minor fluctuation and remains bearish despite the prior bullishness on the actual A/D line.


The S&P Bullish Percent Index ticked up on Thursday because there were so many stocks that spiked $2-$3 in the short squeeze. That was enough to turn the Point & Figure charts bullish on a price basis. The move on the chart was not big and it was just one day but that can linger for weeks on the P&F charts unless there is a corresponding price decline.


The S&P closing high of 2,594 was made on Nov-4th but the index has been trading sideways over support at 2,565 since October 20th. There have been a couple downside breaks but they were immediately bought. The MACD remains bearish. Another close below 2,565 could trigger significant selling as investors are getting nervous because of the lack of forward motion.


The A/D line on the Dow is on the verge of a 4-week low. All the Dow components have reported earnings and there is nothing left to provide lift. Investors are taking profits and moving on to new positions. I expect the A/D to worsen for the rest of November unless the Thanksgiving buying from individual investors provides some support.


The sideways market motion is easily seen on the Dow chart. The index has been in that consolidation pattern since October 24th. Wednesday's close was a 4-week low that looked like a signal for a larger decline. Thursday's short squeeze rescued the Dow but it gave back more than half its gains on Friday. The Dow is the most at risk index because of the narrow 30 stock compensation and all the stocks have reported earnings. The Dow has the biggest air pocket under the current pattern.


The Nasdaq appears to have made a miraculous recovery based on the A/D chart. However, the majority of the big caps tech stocks were negative on Friday. The Nasdaq Composite did close at a new high on Thursday at 6,793 and only gave back 10 points on Friday. That is somewhat bullish if the index can retain those gains. This week will be the key. If the Nasdaq can remain positive it could provide positive sentiment for the entire market. The big cap tech stocks are normally favorites for Thanksgiving week investors.


The FANG stocks moved back into correlation over the last two weeks and that helped keep the Nasdaq within reach of its prior highs.


The Nasdaq has resistance at 6,800 and support at 6,675.


The semiconductor sector weakened last week after a strong run and recent new highs. This was a drag on the Nasdaq but the index did overcome the weight. The $SOX is consolidating rather than declining so that is good news.



The small cap indexes fell the hardest over the last month but rebounded sharply on both Thursday and Friday. The Russell 2000 and the S&P 600 both posted extended gains on Friday while the big cap indexes were lower. I researched why those indexes were positive thinking maybe a single sector could have provided them with lift. I could not find anything. However, the senate voted the tax bill out of committee and that was a positive event since small companies are going to benefit from immediate expensing and lower tax rates.

If the small caps can maintain their upward momentum this week, it would be a plus for the broader market.



I would remain cautious over the next several weeks because of the numerous crosscurrents. The senate vote on the tax bill after Thanksgiving is the biggest near term hurdle. The rest of the points outlined above are not as easily seen in the market. Wells Fargo said a failure of the tax bill would result in an immediate drop of 120-150 S&P points. That would be very painful and it could happen quickly even before the vote if it appears they do not have the votes. There are four senators on the fence and it only takes 3 to kill it. If 2 vote no, VP Pence can be the tiebreaker.

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

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Sell the News

by Jim Brown

Click here to email Jim Brown

Editors Note:

Earnings spikes rarely last and Foot Locker was riding a wave of short covering to gain 28% on Friday.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

FL - Foot Locker - Company Profile

Foot Locker, Inc., through its subsidiaries, operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. As of April 29, 2017, this segment operated 3,354 stores in 23 countries in North America, Europe, Australia, and New Zealand. The Direct-to-Customers segment sells athletic footwear, apparel, equipment, and team licensed merchandise for high school and other athletes through Internet and mobile sites, and catalogs. This segment operates sites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com, as well as footlocker.com, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com, and sidestep-shoes.com. In addition, the company had 62 franchised Foot Locker stores in the Middle East and South Korea, as well as 15 franchised Runners Point stores in Germany. Foot Locker, Inc. was founded in 1879 and is headquartered in New York, New York. Company description from FinViz.com.

On Friday, Foot Locker (FL) reported earnings of 87 cents that beat estimates for 80 cents. Revenue of $1.87 billion beat estimates for $1.84 billion. Same store sales fell -3.7%, up from the -4% to -5% expected. Shares rose only slightly until the company said they were expanding their marketing relationship with Nike (NKE) to include a pop-up store called Sneakeasy NYC that will open on Nov 22nd. The store will only be open one week and will feature Nike and Jordan products. Foot Locker said they were now taking reservations on the Special Air Force-1 priced at $160.

Foot Locker said it was hiring new employees with Nike training who will serve as full-time "Nike Pro Athletes" and "Nike Pro Leads." They are going all out to bring awareness to the Nike brand and try to move some of those high priced shoes. For Q4 Foot Locker is expecting same store sales to decline 2% to 4% and slightly better than prior guidance of -3% to -4%. Earnings are expected to decline 15% to 25% to $1.03-$1.16 and below analyst estimates for $1.18.

Shares exploded higher on the less bad results and the new Nike marketing program. I am surprised the Nike news overpowered the negative same store sales and 15% to 25% drop in earnings guidance.

Post earnings spikes rarely continue higher and in the cash of Foot Locker when the fundamentals are so bad, you have to believe that 28% short squeeze on Friday is going to fail. Seriously, a 28% gain on guidance for earnings to decline 15% to 25% for Q4? That is ridiculous.

Buy Feb $38 put, currently $2.10, no initial stop loss.



In Play Updates and Reviews

Minor Retracement

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P only gave back 7 points of the 21 points gained on Thursday. The S&P was relatively well behaved but the Dow retraced 100 of the 187 it gained in the Thursday short squeeze. Friday was actually somewhat positive. He big cap averages only declined slightly, with the exception of the Dow, but the Russell 2000 gained 6 points. That was definitely unexpected.

I am leaving most of the stop losses wider than normal in hopes we will not be stopped if the market really does take a dive.



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


DIA - Dow Diamonds ETF
The long put position was entered at the open.



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

COST - Costco - Company Profile

Comments:

No specific news. Holding the recent gains.

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.


FB - Facebook - Company Profile

Comments:

Facebook launched Facebook Creator, a video service to offer social media influencers a means to foster communities around their content. The new Creator app provides video creators exclusive tools such as a Live Creative Kit for adding intros and outros to broadcasts, a unified inbox of Facebook and Instagram comments and Messenger chats, cross-posting to Twitter and expansive analytics.

Original Trade Description: November 13th

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. As of December 31, 2016, it had approximately 1.23 billion daily active users. Facebook, Inc. was founded in 2004 and is headquartered in Menlo Park, California. Company description from FinViz.com.

Everyone should know this story. There is no need to go into lengthy detail on this tech giant. They posted blow out earnings and spiked from $170 to $183. Shares have traded sideways to down for the last two weeks but they have quit declining with three consecutive days at $178.

Analysts are targeting well over $200 because Facebook is printing money. Their growth is outstanding and they still have numerous web properties they have not yet monetized. They are launching Facebook TV, original content, the list of new opportunities is endless.

RBC Capital raised their price target from $190 to $230 to match Mizuho. Monnes Crespi Hardt is $210, Aegis Capital $215, Needham $215, etc. There is plenty of upside from here. Facebook is the largest earnings grower in the space.

They have eradicated Snapchat. Apple reported that Snapchat is no longer in the top 10 downloads from the Apple store.

I believe FB is about to break out of its post earnings depression phase and begin a new move higher. The option premiums are very high so I am recommending a February spread to capture inflated option premiums ahead of earnings.

Position 11/14/17:

Long Feb $185 call @ $6.33, see portfolio graphic for stop loss.
Short Feb $200 call @ $2.30, see portfolio graphic for stop loss.
Net debit $4.03.


GILD - Gilead Sciences - Company Profile

Comments:

No specific news. Shares holding over prior 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.


MCK - McKesson - Company Profile

Comments:

No specific news. Minor decline after two days of big gains.

Original Trade Description: November 15th

McKesson Corporation provides pharmaceuticals and medical supplies in the United States and internationally. The company operates in two segments, McKesson Distribution Solutions and McKesson Technology Solutions. The McKesson Distribution Solutions segment distributes branded and generic pharmaceutical drugs, and other healthcare-related products; and provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. This segment also provides specialty pharmaceutical solutions for pharmaceutical manufacturers; and medical-surgical supply distribution, logistics, and other services to healthcare providers. In addition, this segment operates retail pharmacy chains in Europe and Canada, as well as supports independent pharmacy networks in North America and Europe; and supplies integrated pharmacy management systems, automated dispensing systems, and related services to retail, outpatient, central fill, specialty, and mail order pharmacies. This segment serves retail national accounts, including national and regional chains, food/drug combinations, mail order pharmacies, and mass merchandisers; and institutional healthcare providers, such as hospitals, health systems, integrated delivery networks, and long-term care providers, as well as offers its services to pharmaceutical manufacturers. The McKesson Technology Solutions segment provides clinical, financial, and supply chain management solutions to healthcare organizations. McKesson Corporation was founded in 1833 and is headquartered in San Francisco, California. Company description from FinViz.com.

Earnings Jan 25th.

McKesson reported earnings of $3.28 that beat estimates for $2.80. Revenue of $52.06 billion beat estimates for $51.73 billion. So far, so good. However, they lowered 2018 guidance from $7.10-$9.00 to $4.80-$6.90. There were multiple reasons for the lowered guidance and none of them were sales related.

Amortization of acquisition related intangibles of $2.40-$2.70. Acquisition related expenses and adjustments of $.90-$1.10. Inventory related charges for LIFO adjustments of up to 20 cents. Restructuring charges of $1.10 to $1.40. "Other" adjustments of $1.40-$1.60. Given all those charges it is amazing they had any earnings left.

However, the line everyone overlooked was the guidance for "adjusted" earnings without those charges and that was $11.80-$12.50 for 2018. If you put a market PE of 18 on earnings of $12, you get a $216 share price. MCK shares were $138 today.

Shares have been holding over support at $135 for three weeks and suddenly rebounded $2.69 today in a very weak market. This relative strength should protect us against a further market decline.

Options are expensive so you can use the optional short call to make it a spread.

Position 11/16:

Long Feb $145 call @ $4.90, see portfolio graphic for stop loss.
OPTIONAL: Short Feb $160 call @ $1.59, see portfolio graphic for stop loss.


MDCO - Medicines Co - Company Profile

Comments:

No specific news.

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.


MU - Micron Technology - Company Profile

Comments:

No specific news.

Original Trade Description: November 11th

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.

Update 11/13: Micron announced a new 32gb NVDIMM memory that is twice as large as current chips on the market. This is non volatile DIMM that retains data in memory next to the processor to speed up processing of large datasets. Shares closed at a new high.

Position 11/13:

Long Jan $46 call @ $2.95, see portfolio graphic for stop loss.


PYPL - PayPal - Company Profile

Comments:

No specific news. Shares gave back $1.32 after the $4.27 gain on Thursday.

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.

Update 11/16/17: Paypal signed a deal to sell $5.8 billion in its credit card portfolio to Synchrony Financial. The company said that would free up cash for acquisitions and expansion. The company raised its revenue forecast to $3.64-$3.70 billion for the current quarter. They raised earnings guidance from 37-39 cents to 52-59 cents.

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 gains continue!

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.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile

Comments:

The new DIA position got off to a good start but the opening gap lower inflated the option premiums.

Original Trade Description: November 16th

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 still extremely overbought. It is due for a rest. The earnings cycle is over. Post earnings depression is here. The short squeeze is likely to fail. The tax plan faces an uphill battle and January could see a major market decline. It has been over 500 days since the market had a 5% decline and we average twice a year. We are due.

This is highly speculative. I am using March options because I want to have as much time as possible for this scenario to play out.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.
Short March $210 put @ $1.71, see portfolio graphic for stop loss.
Net debit $3.45.




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