Option Investor

Daily Newsletter, Saturday, 11/25/2017

Table of Contents

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

Market Wrap

Low Volume Levitation

by Jim Brown

Click here to email Jim Brown

Friday's volume of 2.7 billion shares was extremely low but selling volume was even lower.

Weekly Statistics

Friday Statistics

Volume was even lower than the 3.0 billion shares for Thanksgiving Friday in 2016. Declining volume was only 1.1 billion shares compared to advancing volume of 1.57 billion. Even more telling was the 628 new 52-week highs compared to only 96 new lows. The sellers must have either been at the mall shopping or at home sleeping off the turkey overdose. The bulls were enjoying another day of gains while the bears were left out.

There were no economic reports or earnings on Friday. The only headlines talked about Black Friday sales and shopper volume. For anyone staying home it was a good day just to rest or catch up on those do list items you had been putting off.

The calendar for next week is full of reports and events. There are ten speeches from Fed heads including one from Janet Yellen on Wednesday. The confirmation hearing for Jerome Powell is on Tuesday and that will be televised. The most important reports for the week will be the Richmond Manufacturing Survey and the ISM Manufacturing Index. The ISM is a national report and carried the most weight. All the economic reports are expected to be positive and show continued growth.

The GDP on Wednesday is expected to show a slight upward revision to 3.2% growth.

The volume of earnings continues to decline and should no longer provide support for the market. Jack in the Box, VMWare and Ulta Beauty are the highlights for the week.

After 489 S&P companies have reported earnings, the expected growth for Q3 is 8.3% with revenue growth up 5.4%. 72.2% of companies have beaten the street's earnings estimates and 67.8% have beaten revenue estimates. There have been 63 earnings warnings for Q4 and 37 guidance upgrades. Only six S&P companies report this week.

Broadcom (AVGO) is reportedly considering raising the offer for Qualcomm (QCOM) from $70 to $77 but there may be a poison pill in the offer. Qualcomm would have to cancel its bid for NXP Semiconductor (NXPI). Qualcomm has offered $110 for NXPI and the stock is trading over $114 on expectations for a higher offer from Qualcomm. The company believes it must own NXPI if it is going to remain independent in order to compete in the sector in the future. Some analysts believe QCOM was willing to bump their offer to as much as $120.

This actually gives Qualcomm and escape route from the unwanted clutches of Broadcom. If QCOM raises their bid for NXPI to $120-$125, Broadcom would likely lose interest in Qualcomm. However, this would ratchet up the leverage for Qualcomm and set them up as a target for activist investors.

The downside is that a failure to acquire NXPI for whatever reason makes QCOM an even bigger target for Broadcom. The acquirer could make the case that QCOM was incapable of competing in a sector that is rapidly increasing in complexity and competition.

Broadcom (AVGO) shares are rising after they announced a 7 nanometer (NM) application specific integrated circuit (ASIC) for deep learning and networking. The core is built on the Taiwan Semiconductor Manufacturing (TSM) 7nm process technology. This technology on this small of a chip was technically unheard of just a couple years ago. This IP technology makes it perfect for advancing the 5G communications standards for systems on a chip (SoC) in the years ahead. Broadcom is a leader and major competitor in wireless solutions.

Teva (TEVA) shares posted a gain on news they were going to cut their workforce by about 4,000 workers. Reportedly, they will lay off 20% to 25% of their workforce in Israel and 10% in the USA. A financial website in Israel (Calcalist) reported the news. Teva is facing significant generic competition and falling prices for generic drugs. They missed on Q3 earnings and cut full year guidance from $4.30-$4.50 to $3.77-$3.87. Operating cash flow guidance fell from $4.4-$4.5 billion to $3.15-$3.30 billion. Shares spiked at the open but fell back to close with only a fractional gain. The company never confirmed the story.

When President Trump visited Saudi Arabia in May, he came home with $110 billion in defense orders. Part of that deal was $7 billion in precision munitions that would be provided by Boeing (BA) and Raytheon (RTN). There are concerns now that the munitions orders could be held up by congressional concerns about the number of civilians being killed in Yemen by the Saudi bombing. Reportedly, between 5,000 and 10,000 civilians have been killed and 40,000 injured. The Houthi rebels are experts at locating their command and control and weapons storage in heavily populated areas thinking Saudi Arabia will not bomb them there.

The order contains more than 8,000 laser guided bombs, 10,000 general purpose bombs and more than 5,000 GPS guidance kits for dumb bombs. The $110 billion in orders for 2018 is just part of what could be $350 billion over the next ten years. With Saudi Arabia becoming more overtly hostile towards Iran, it would be better to sell them the weapons and let them keep Iran in check rather than risk US lives and assets in policing Iran.

Lockheed Martin (LMT) said Saudi Arabia was negotiating to buy $28 billion in "integrated air and missile defense, combat ships, tactical aircraft and rotary wing technologies and programs." Boeing has other orders from the president's trip that include Chinook Helicopters and P-8 reconnaissance planes.

Defense stocks seem to be a bulletproof sector for the coming years.

Jeff Bezos net worth hit $100 billion on Friday as Amazon (AMZN) shares surged $30 to close at $1,186 and a new high. He is now the richest person in the world and the first person in modern times to hit $100 billion. He owns 78.9 million shares of Amazon. His Amazon shares are worth about $93.6 billion, up $2.4 billion on Friday. He has a $3 billion stake in Blue Origin, the rocket company competing with Elon Musk and Space X. He also owns the Washington post.

David Rockefeller was worth several hundred billion in today's dollars but nowhere near $100 billion when he was alive. Russia's Vladimir Putin is believed to be worth more than $100 billion but all his wealth comes from secret side deals with companies that he allows to do business in Russia so there is no way to know his actual wealth.

Amazon is going to host the 6th annual re:Invent cloud conference next week from Monday through Friday. There could be numerous announcements of new products and partnerships that will lift the stock.

Tesla (TSLA) announced the prices on its new trucks. The starting price for a Tesla Semi with a 300-mile range will be $150,000 and the 500-mile range vehicle will cost $180,000. The order demand has been strong and Tesla bumped the deposit from $5,000 each to $20,000 each. Other than the dog and pony show held by Elon Musk last week there has not been a list of features in the standard package and what options are available at extra cost. Tesla has said the trucks will be able to deliver an 80,000-pound payload but nobody knows how much the actual truck will weigh. That would add to the total weight and is relative for highway use tolls based on weight.

Morgan Stanley (MS) predicted the stock could rise to $400 in 2018 and then drop back to $200 because of a failure to ramp up production and increasing competition. GM has more than 20 electric vehicle models that will be in production in the coming years. Several other carmakers including BMW and Mercedes are rushing electric cars into production. Every mass-market car that hits the streets will weigh on Tesla prices in the future.

Barclays upgraded GM shares from neutral to buy saying the company was going to reinvent itself with electrification and autonomy. One analyst said the new GM could include a spinoff of their electric car division that could easily grow to $60 billion in market cap by 2025. That would be double GM's market cap today. They raised the price target from $41 to $55. Shares closed at $44.

Apple shares have shaken off the post earnings depression phase after a minor $8 drop and just short of the typical $10 decline. Shares have rebounded $6 from the $168 low the prior Wednesday when the major indexes closed at multi week lows. You can chalk it up to holiday shopping frenzy and the Thanksgiving week trend for investors to buy big cap tech stocks.

China's Economic Daily News said the company is preparing to launch a new lower-priced iPhone SE 2 that will cost about $450 and be aimed at emerging markets where consumers cannot afford the $1,000 premium phones. The current SE has a 4 inch screen and starts at $349. Analysts expect the phone to have a faster processor in order to run iOS 11.

The Wall Street Journal said stock buybacks are occurring at the slowest pace in five years. Year to date, S&P 500 companies have bought back about $125 billion in stock per quarter or targeting roughly $500 billion through December if the pace holds. The quarterly average between 2014-2016 was $142 billion a quarter. Authorizations increased by 20% in Q3 suggesting there are more buybacks ahead but there is a problem with that theory. With the broader market up 19% YTD and the indexes making new highs, stocks are expensive. Companies, like smart investors, are going to wait for a pullback so they can buy their stock cheaper and get more bang for their bucks. Goldman Sachs is forecasting a 3% increase in buybacks in 2018 to $515 billion.

Secondly, many companies have been paying off debt incurred after the financial crisis and with stock prices so high, they are prioritizing debt payments to increase future profitability. Many companies were borrowing money to finance buybacks and that practice has declined for the third consecutive quarter according to Bank of America. The pace of mergers and acquisitions is rapidly accelerating. The bank said M&A just had its busiest quarter of the year.

If tax reform passes with a 20% corporate rate and a minimal repatriation tax, we could see a surge in buybacks and dividends once the new rules become effective. There are estimates between $1 and $3 trillion in cash overseas that could be transferred to the US with a favorable tax treatment.

For investors this means future market declines should be short and shallow. Companies buying back their own stock on the dips will provide a floor under those securities. Obviously, not all companies buy back stock and the companies with billions in authorizations are the larger blue chip companies.

Consumers went shopping for bitcoin on Thursday as well. The largest bitcoin exchange in the US, Coinbase, added about 100,000 accounts from Wednesday to Friday to bring their account total to 13.1 million. One year ago, the exchange had only 4.9 million users. Bitcoin was worth $735 each last November. The CME is going to start offering bitcoin futures the second week of December. The move by the CME has given a sort of legitimacy to the cryptocurrency and consumers and investors are racing to get a piece of the pie. Analysts now expect bitcoin to be worth more than $10,000 by the end of the year. As of Saturday, the current price was $8,731.

Adobe Systems (ADBE) said Black Friday sales were surging. Online spending rose by 18.4% while mobile purchases rose by 46.2%. Online spending on Thanksgiving was up 18.3%. Shoppers surveyed indicated that 64% still planned on doing some holiday shopping in stores while 36% planned to do all their shopping online. More than 70 million consumers plan on using Cyber Monday sales to pick up some bargains. Overall consumers are expected to spend about $680 billion in November and December this year. That accounts for 17% of annual consumer spending.

Crude prices spiked again to close just under $59. Reportedly, there were comments from OPEC officials that Russia was going to agree to extend the production cuts. Others said Russia was going to agree only with certain conditions. The country is aggravated that the high prices are fueling US shale producers and the new flood of exports is cutting into Russia's export market share.

The growing hostility between Saudi Arabia and Iran was also credited with some of the price support. Personally, I doubt Saudi Arabia will enter into direct conflict with Iran for several years because of their billions of dollars in orders for military equipment. I believe they would want to have all those supplies and equipment on hand before starting a war.

Lastly, the Keystone pipeline is still offline while they repair the leak. That means inventories are going to decline next week and that supports prices.

The November OPEC production meeting is on Thursday. There will undoubtedly be a lot of propaganda from the participants as they flock to microphones like moths to a flame.

The active rig count rose by 8 with 9 oil rigs added and 1 gas rig removed. Producers have now reactivated 25 rigs over the last three weeks. Higher oil prices are providing the stimulation.


With only 2.7 billion shares traded and more than 60% of that likely done by computers, the market activity was about as exciting as watching a recent Denver Bronco football game. The Dow and S&P gapped open and then rose slightly intraday to peak around 11:AM and then faded into the close. The Nasdaq rose all day as investors bought the big cap tech stocks.

The market appears sluggish but nobody should have expected any material gains on Friday. This was more a lack of sellers than a surge of buying.

The balance of investor sentiment swung back slightly in favor of the bulls but given the new market highs last week you would have thought it would have been a bigger swing. With 64.5% still not convinced the market is moving higher, there is room for a lot more capitulation to the bullish camp.

The 2,600 resistance level on the S&P could still exert its influence next week. The 2-point gain over that level is not enough to escape its pull. Thanksgiving week is typically bullish and the gains were right on par with what was expected historically.

I went back on the charts to try and decide if there were any post Thanksgiving trends that we should watch. In recent years there was a sell off but not routine enough to be predictive for 2017.

S&P gains/losses in the week after Thanksgiving:

2016 -26 points
2015 flat
2014 -25 points
2013 -29 points
2012 flat
2011 +105 points
2010 flat

Obviously, those moves were related to events and market action leading up to Thanksgiving but that is more analysis than I am prepared to do here and past results are no guarantee of future performance. This simple exercise was to try and project a pattern.

The only one of significance is that there was only one gain in the last 7 years. If I was going to focus on one thing that would be it.

The Dow had one good day last week and then failed at resistance the last three days. The index is still struggling because of post earnings depression in many of its components. It is not serious but it is weighing on the index.

Round number resistance at 23,600 has held for three days. The Dow remains the most at risk index because of the big air pocket down to 22,275.

The Nasdaq 100 gained 23 points and AMZN, FB and AVGO supplied 20 of those points. This was a narrow rally at first but broadened out to 3:2 advancers to decliners on Friday.

The Nasdaq Composite is approaching 6,900 and the 7,000 level is being mentioned as a target and potential top in December. Reaching that level would represent a monster 30% gain for the year. Trees do not grow to the sky and markets do not rally forever.

The Russell succeeded in punching through the new high resistance from October and stalled at 1,520. That is where it has closed for the last three days. The monster four day rebound erased six weeks of declines. Can it continue? It would appear the Russell is due for a rest but anything is possible.

I believe investors should be cautious next week. With lawmakers going back to work, the tax reform package will take center stage and currently there are six GOP senators on the fence and considering voting no. With the extreme pressure that will be brought to bear over the next two weeks, I would expect some positive conversions but at least four have to switch to yes votes and this is just to get the bill into the conference committee. Once out of committee it will be even more difficult to get it passed again by both the House and the Senate. Time is growing short to get this done by Christmas as the administration has promised. That means there will be some deals cut that could appease some and displease others. A failure in the senate could mean a significant market decline.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


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Index Wrap

Tax Tightrope

by Jim Brown

Click here to email Jim Brown
The next two weeks lawmakers will try to walk a tightrope across a minefield of positive expectations.

The focus returns to Washington next week and both sides are heavily involved in pass or defeat the tax reform bill. This is where the rubber meets the proverbial road. The passage or failure of this effort between now and Christmas will dictate where the market will go in the weeks that follow.

Until it either passes or fails, the market will be walking on eggshells in fear of the bills failure or the inclusion of components that will be market negative.

We can diagram the current index charts 23 hours a day but it will not be the technical levels or the fundamentals that will drive the market. The market will be purely headline driven over the next several weeks. The earnings are over and economics are benign. Tax headlines should be the only market mover unless war breaks out somewhere in the world.

The major indexes have broken out to new highs in the normally bullish Thanksgiving week. The week that follows Thanksgiving has only been up one time in the last 7 years but it has been flat three times. Considering our recent gains, the extension in the indexes and the headline risk, I am biased towards some weakness but the Nasdaq and S&P charts are bullish.

The S&P closed at a new high on Friday, just over 2,600 on very weak volume. Analysts have been hedging their bets over the last 7-10 days with a 2600-2650 target for December. Some feel it will be early in the month and some at the end of the month. Only a couple of analysts are expecting a higher number.

The S&P charts have turned positive. The A/D line has turned up again with a new high over 4,400. This is positive despite the minor gain on Friday of only 2 points. The MACD is on the verge of turning positive more than four weeks in decline.

The Bullish Percent Index closed at a 4-month high at 73.4% meaning that percentage of the S&P stocks have a buy signal on a Point & Figure chart.

The percentage of S&P stocks over their 50-day average rose by 7% to 64.6% and reversed the four-week decline.

On the daily bar chart, the MACD is one day away from being positive and the CCI completely reversed from a single day of negativity to strongly positive. Overhead resistance if around 2,625, assuming the index does not slip back below the prior resistance at 2,600. This chart is turning bullish.

The Dow chart is on the edge of bullish. The A/D chart has rebounded to the top if its recent range and the bar chart has the Dow holding just below resistance at 23,600. The MACD is swinging back towards positive but it would take several more days of gains to turn it bullish. However, a decent Dow breakout over that 23,600 level is all we would need to trigger another market move higher. The Dow is the laggard in the market scenario.

The Nasdaq charts have had a miraculous turnaround. The A/D line has turned nearly vertical to the upside as did the percentage of stocks over their 50-day average, which rose 12%. The MACD in both cases has turned bullish.

The Nasdaq blew through resistance at 6,800 thanks to the normally bullish week for tech stocks. Why they are normally up over Thanksgiving week is always attributed to retail investors planning their end of year bonus investments. I do not care as long as the rally continues. The Nasdaq breakout is very strong and prior resistance at 6,800 should now be support.

The small cap A/D line went vertical on four days of strong gains by the sector. That rally stalled over the last three days but they are holding the recent gains. The spike in the Nasdaq helped power the small capo rally with the semiconductor sector making a new high. The S&P-600 blew through resistance at 920, which should now be support.

Despite all the end of year factors I discussed last week, the historical trend prevailed for a bullish Thanksgiving week. I hope the bullish sentiment holds as we wait for lawmakers to reach a decision. This is more than likely a binary event. The market will either surge higher or drop lower depending on the result. There are likely to be a multitude of headlines both positive and negative before the end result is known. We should expect an increase in volatility over the coming weeks.

I strongly recommend not chasing the markets/stocks higher until that result is known.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Headline Disaster

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes stocks drop on headlines that have no impact on operations. Investors see the headline and think the worst and sometimes it is a buying opportunity.


DXCM - Dexcom Inc - Company Profile

DexCom, Inc., a medical device company, together with its subsidiaries, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. The company offers its systems for ambulatory use by people with diabetes; and for use by healthcare providers in the hospital for the treatment of patients with and without diabetes. Its products include DexCom G4 PLATINUM system for continuous use by adults with diabetes; DexCom G4 PLATINUM with Share, a remote monitoring system; and DexCom G5 Mobile, a CGM system that directly communicates to a patient's mobile and its data can be integrated with DexCom CLARITY, which is a next generation cloud-based reporting software for personalized, easy-to-understand analysis of trends to improve diabetes management. The company also offers sensor augmented insulin pumps. It has a collaboration and license agreement with Verily Life Sciences LLC to develop a series of next-generation CGM products. The company markets its products directly to endocrinologists, physicians, and diabetes educators. Company description from FinViz.com.

DSCM was slammed for a $22 loss at the open on Sept 28th on news that Abbott Labs had made a glucose monitoring system that did not require the daily pinprick to draw a drop of blood. Shares fell from $67.50 to $44.50 and stayed there for a month. Investors feared diabetics would drop the DexCom monitoring products in a heartbeat and move to Abbott's system.

On November 1st, the company posted better than expected earnings and revenue and the stock began to rise again.

Expected earnings January 31st.

The DexCom CEO gave an interview on CNBC last week and he said the Abbott system will not have a dramatic impact to DexCom sales. He pointed out that they had been competing against the Abbott Libre system in Europe for three years and growth has continued to rise. It wa sup 80% in Q3 alone.

The CEO said the DexCom system does much more than the Abbott system. "Our system connects to phones. We share data with people who watch patients. We offer performance and accuracy that others do not. He said DexCom could release its own blood-free glucose monitoring device by the end of 2018. DexCom is also in a venture with Apple to monitor glucose through the Apple Watch. The data will go straight to the cloud for monitoring and there will be no need to communicate through a daily phone call. The watch will become your monitoring device.

The $20 drop was serious overkill and the stock is rebounding now that investors understand there is no immediate impact and there are new devices on the horizon.

We have to reach out to the March strikes because the February series has not yet been added. With earnings January 31st we need to hold an option dated after the earnings to avoid the rapid decline in premium in pre-dated options.

Buy Mar $60 call, currently $3.50, initial stop loss $48.75.


No New Bearish Plays

In Play Updates and Reviews

Trend Intact

by Jim Brown

Click here to email Jim Brown

Editors Note:

The "buy big cap techs" trend for Thanksgiving week is intact. Typically the big cap tech stocks see decent gains in Thanksgiving week as investors take the opportunity of a day off to buy tech stocks rather than hit the malls.

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

No Changes

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

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Long and short equity trades = Premier Investor

BULLISH Play Updates

CCOI - Cogent Communications - Company Profile


No specific news but we finally got a decent rebound.

Original Trade Description: November 20th

Cogent Communications Holdings, Inc., through its subsidiaries, provides high-speed Internet access and Internet protocol communications services primarily to small and medium-sized businesses, communications service providers, and other bandwidth-intensive organizations in North America, Europe, and Asia. The company offers on-net Internet access services to bandwidth-intensive users, such as universities, other Internet service providers, telephone companies, cable television companies, Web hosting companies, content delivery network companies, and commercial content and application service providers; and to corporate customers located in multi-tenant office buildings, including law firms, financial services firms, advertising and marketing firms, and other professional services businesses. It also provides its on-net services in carrier-neutral data centers, Cogent controlled data centers, and single-tenant office buildings. In addition, the company offers off-net services to businesses that are connected to its network primarily by means of 'last mile' access service lines obtained from other carriers primarily in the form of metropolitan Ethernet circuits. Further, it provides Internet connectivity to customers that are not located in buildings directly connected to the company's network, as well as offers voice services. The company operates 52 data centers. Company description from FinViz.com.

Cogent missed on earnings in early November and shares fell 20% in the days that followed. They reported earnings of 8 cents and analysts expected 14 cents. Revenue of $122 million also missed estimates for $123.6 million. Revenue was up 8% over the year ago quarter and 2.7% over Q2. Cash flow from operations rose 26.1% to $28.8 million. Total customer connections rose 16.2% to 69,417.

Expected earnings Feb 1st.

One of their biggest plusses is the number of buildings where they offer internet service to all tenants. This is stable income and the ongoing costs are minimal. Once the building is wired all the material costs are over. Their connected buildings rose 34% for the quarter.

The increased their dividend by 2 cents to 48 cents payable Dec 4th to holders on the 17th. We are past the ex-dividend date.

Shares traded sideways for two weeks after the post earnings drop. They started to tick up on Thr/Fri and surged $1.55 today. The post earnings depression appears to be over.

Position 11/21/17:

Long Apr $50 call @ $3.10, see portfolio graphic for stop loss.

COST - Costco - Company Profile


No specific news. The "sell the news" trade was working against Costco. There is a strategy where trades buy retail stocks like Costco, Wal-Mart and Target on November 1st and then sell them on Black Friday. I did not recommend exiting Costco because I believe it still has room to run but we could see a couple days of weakness.

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


No specific news. Facebook and the other big tech stocks benefitted from the Thanksgiving week trend of investors buying big tech stocks. This is a normal occurrence for Thanksgiving week.

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.

Update 11/17/17: 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.

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


No specific news. Gilead took a small step backward but is holding over 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


No specific news. Minor profit taking from the midweek spike.

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.

MU - Micron Technology - Company Profile


No specific news. Minor gain but new closing high.

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


No specific news. New closing high.

Original Trade Description: October 25th.

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

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

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

Expected earnings January 18th.

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

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

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

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

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.

Update 11/21/17: Paypal is going to allow customers to buy stocks through app-based micro investor Acorns. The app automatically invests your spare dollars into stocks you select. This can be a one-time investment or can be set up as a recurring investment. You can also have the app "round up" your Paypal purchases and invest the change into low cost diversified ETFs.

Position 10/26/17:

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

STX - Seagate Technology - Company Profile


No specific news. No material movement.

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


The Dow could not push through to higher highs and fell back into the consolidation pattern once again.

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.

FL - Foot Locker - Company Profile


No specific news. Shares starting to weaken and $40 was intraday support.

Original Trade Description: November 18th.

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.

Position 11/20/17:

Long Feb $38 put @ $2.05, see portfolio graphic for stop loss.

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