Option Investor

Daily Newsletter, Saturday, 12/9/2017

Table of Contents

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

Market Wrap

Tis the Season

by Jim Brown

Click here to email Jim Brown

The markets shook off multiple future events and rallied on Friday. Are investors seasonally jolly?

Weekly Statistics

Friday Statistics

The markets celebrated lawmakers kicking the government shutdown can two weeks farther down the road. Why worry, that is two weeks from now and an eternity in market time. They rejoiced because the House/Senate conference committee is trying to find some way to keep the SALT deductions and not cause a taxpayer revolt in the high tax states of CA, NY, CT, NJ and IL. That rejoicing may be premature because in order to keep the SALT deduction lawmakers have to find $800 billion in revenue from somewhere else. It is not likely to happen and if they did, everyone in the rest of the country would pay the price.

Regardless of the reasons for the bullish market on Friday, the tech sector is still sick. While the Dow and S&P closed at new highs, the Nasdaq Composite closed at its lows and well off the intraday highs. Investors are still taking profits in tech stocks. The chip sector was the hardest hit again with the $SOX closing down -6 points and the only index with a loss.

The big economic report for the day may have produced some of the bullish sentiment. The Nonfarm Payrolls for November showed a gain of 228,000 jobs compared to a revised 244,000 jump in October and estimates for a gain of 199,000. The big lift for the month came from an addition of 62,000 workers in goods producing industries led my manufacturing. The services sector created 166,000 jobs. Average hourly earnings rose +0.2% after a -0.1% decline in October. The average hourly wage rose 5 cents to $26.55. The unemployment rate was flat at 4.1% and a multi decade low. The labor force participation rate was unchanged at 62.7%.

Contractors added 24,000 jobs, more than likely as a result of hurricane repair, manufacturers added 31,000 and energy/mining added 7,000. Involuntary part time workers increased by 48,000. Those are people forced to take a part time job because they cannot find full time employment.

With the economy growing at a steadily increasing pace, new jobs should continue to grow. If the tax reform bill makes it into law, we could see the pace increase later in 2018.

The preliminary Consumer Sentiment for December declined from 98.5 to 96.8 compared to estimates for a rise to 99.0. The drop was led by a decline in the expectations component from 88.9 to 84.6. The present conditions component rose from 113.5 to 115.9 compared to the recent 116.5 high in October.

The decline in expectations was led by respondents who claimed to be democrats and worried about the potential hike in their taxes. Since the most democratic states are the five states with the highest taxes, the loss of the SALT deduction would be a blow to their finances.

Wholesale trade inventories declined -0.5% in October and the biggest decline since the -0.6% drop in February 2016. Durable goods inventories rose +0.1% but nondurables fell -1.3%. Sales of durable goods rose +1.3% and nondurables +0.2%. The decline in inventories is actually positive because it means a boost to manufacturing in 2018.

The combination of the weak wage growth and the drop in wholesale inventories pushed the Atlanta Fed real time GDPNow forecast for Q4 down from 3.2% to 2.9% growth. This is a volatile forecast and changes weekly.

The calendar for next week is headlined by the FOMC rate hike decision on Wednesday and the Yellen press conference immediately afterwards. The Fed funds futures are predicting a 100% chance of a quarter-point hike with a 9.8% chance of a 50 basis point hike. Nobody in their right mind would expect the Fed to upset the status quo with a 50-point hike just before Christmas and as Yellen is packing up her office to head into retirement. She would not want her last official act to be crashing the market. More than likely, she wants to slip out the door quietly so she does not get blamed if something goes wrong with the economy in 2018.

There are several important economic reports next week including the inflation indicators in the CPI and PPI reports. Retail sales should also be important since this is the report that covers Black Friday.

Unless there is a major miss in expectations for any of these reports, the market should ignore them. Investors are on cruise control while they wait for the outcome of the tax bill changes in the conference committee.

Believe it or not, the Q4 earnings cycle kicks off on Thursday. Adobe reports earnings for Q4, Costco and Jabil for Q1-2018 and Oracle for Q2-2018. These companies always get a jump on the crowd by several weeks.

Adobe has already guided higher and expectations are for earnings of $1.16. Costco has also guided higher with their blowout sales for November. Expectations are for earnings of $1.35. Oracle is the dead money sleeper of the group with expectations for 68 cents. Oracle shares rarely move vertically unless they miss or beat earnings.

Alexion Pharmaceuticals (ALXN) spiked $7 on Friday after activist investor Elliott Management was rumored to be pushing for changes. They want the company to issue guidance that is more aggressive or put itself up for sale. Elliott is considering a proxy fight to shake up the board. The firm gave Alexion until the end of December to add more biotech experts to the board. Alexion said it is always interested in "active and constructive dialog" with all shareholders. Depending on where Elliott acquired its stake, they could be really upset since shares have fallen from $145 to $110 over the last two months.

Sage Therapeutics (SAGE) spiked 70% on Thursday and another 11% on Friday. Moving the stock was phase II trial results on their SAGE-217 treatment for major depressive disorder or MDD. The results showed a "highly significant mean reduction in the Hamilton Rating Scale for Depression among patients taking the drug." The company is planning a late stage trial in 2018. Reportedly, this drug is for short-term use. You take it, you get well. If the symptoms come back later, you can take it again. Normally depression drugs are a lifetime treatment program. The CEO said he could see the drug being as big as Prozac saying there is nothing else available that produces results this significant. He said, "I have been doing this for 20 years, and I don't think I have ever seen data this dramatic in a mid-stage trial." Needham reiterated a buy and raised their price target from $100 to $193. Canaccord raised their target from $140 to $191. Chardan Capital raised their target from $140 to $225.

Deutsche Bank (DB) raised their rating on Trivago (TRVG) from hold to buy saying the company should benefit from a more stabilized bidding environment among its biggest customers. The analyst did not change the $10 price target with shares at $6.60 before the upgrade. Shares spiked to $7.58 then fell right back to $6.60. The stock has had a rough four months with a decline from $24 to a close at $6.46 on Monday. The company gave an investor presentation on Thursday and apparently, Deutsche Bank was the only one impressed. Nobody else changed their outlook or even reiterated their positions.

Reportedly, the summer was rough on these companies with the hurricanes causing chaos in the hotel/travel business in the south. Revenue growth fell from the prior average of 67% to only 17% in Q3. Guidance of 2% to 15% growth in Q4 was met with prolonged selling. Trivago will celebrate its one-year anniversary of being a public company next week. Happy birthday. Will Trivago still be around for number two?

Apple (AAPL) is reportedly in talks to acquire Shazam Entertainment Ltd for $400 million. The Shazam app lets a user identify songs or TV shows by pointing your smart phone at the audio source. The song app already works with Siri ("Hey Siri, what is that song?") but the TV show portion has not yet been integrated. Shazam is privately held and has raised $183 million in venture capital over its 18-year lifespan. Pitchbook recently valued the company at $1 billion. Apple is trying to beef up its 27 million subscriber music service to compete with Spotifiy's 60 million subscribers.

Apple said Chief Design Officer Jony Ive is returning to day-to-day management of the company's design teams after a two-year stint focusing on other projects. Ive was behind many of Apple's iconic designs including the early Macs and iPhones. His recent job was designing the new spaceship campus.

Rumors continue to flow over the three iPhones to be announced in 2018 according to AppleInsider. Yes, the iPhone X is only a little over a month old and there are new phones in the pipeline. The largest one will have a monster 6.5-inch OLED screen. There will also be a 5.8 inch and 6.1 inch model with an LCD screen. All three will have larger batteries, which suggest longer battery life, except they have to power those larger screens. The biggest phone is rumored to have a 3,300-3,400 mAh battery, much larger than the current 2,716 mAh in the iPhone X. AppleInsider said Apple is planning an earlier ramp on these phones so there will be sufficient quantity available when they are announced in September.

The tax reform bill has not even been firmed up yet and companies are announcing monster stock buyback plans. Home Depot (HD) announced a $15 billion buyback and raised guidance for annual sales between $114.6-$119.8 billion by the end of 2020. The new repurchase program replaces the existing $15 billion program. The company expects to buy back $8 billion in shares total in 2017 with $2.1 billion in Q4. Since 2002, Home Depot has bought back 1.3 billion shares worth $73 billion.

At an investor presentation on Wednesday the company said they expect revenue to grow 6.3% for the current year with same store sales rising 6.5%. Earnings are expected to rise 14% to $7.36. Full year 2017 sales are expected to be $100.6 billion.

Honeywell (HON) announced on Friday an $8 billion stock repurchase program. This included $1.5 billion currently unspent in the prior $5 billion program. At the current price, this would be about 7% of the outstanding shares.

The company also said it was buying 25% of Chinese software provider Flux Information Technology. They will also form a joint venture with Flux to serve customers outside of China and Honeywell will own 75% of the venture. Flux makes warehouse management systems and software and currently manages more than 129 million square feet of warehouse space in China.

Bank of America (BAC) announced last week it was buying back another $5 billion in shares on top of their previously announced $12 billion buyback from July 1st through June 30th, 2018. BAC has recently moved out of a 10-month consolidation pattern under $25.

Mastercard (MA) boosted its dividend to 25 cents, payable Feb 9th to holders on Jan 9th. They also boosted their existing share buyback from $1.5 billion to $5.5 billion. No date was given for the repurchase program.

Nvidia (NVDA) announced a new Titan V graphics processing unit (GPU) for PCs. The Titan V is built on the company's new Volta architecture. The video card is targeted at machine learning and artificial intelligence (AI). The 12gb HBM2 video memory card has 21.1 billion transistors, can deliver 110 teraflops of performance and is NINE TIMES more powerful than its predecessor the Titan Xp, which was just announced in April.

Think about that. Nvidia already had the fastest GPU on the planet that was less than 9 months old and they have already produced a new one that is nine times faster. This is why AMD and Intel do not have a chance. While they are trying to figure out how to copy Nvidia's prior architecture, Nvidia is already light years ahead of them with the next version.

Gartner (IT) said PC shipments rose 3.6% in Q3 but the high-end PC market that includes gamers and GPU enabled PCs grew much better than expected. Allied Market Research said the GPU market is expected to reach $157 billion by 2020 with an annual average growth rate of 35.6% from 2016 through 2022. Jon Peddie Research said graphics board shipments rose 29.1% in Q3 over Q2 and 21.5% YoY. Nvidia continues to be the leader with 72.8% market share.

Nvidia shares fell $30 from $217 to $187 in the chipwreck over the last two weeks. Everything I wrote about above plus the dozens of other areas they dominate, suggests this is yet another buying opportunity.

I normally do an informal survey of shippers during the holidays. With about 25 people/kids in my immediate family, we have multiple deliveries nearly every day in the weeks surrounding Black Friday. My daughter has all her online purchases delivered to my house so her kids will not discover what she bought. My wife adds to the load buying for the kids and grandkids.

Last year the Postal Service was the main carrier with daily stops and I wrote that UPS must not have bid low enough to capture Amazon's business. This year I have seen the entire range of carriers. I have had the postal service make more than one delivery a day more than once along with UPS, which actually made 3 deliveries in one day.

Bear with me I am getting to the point. I always look to see what packages are in the trucks. Who is doing the most business? This year, according to my UPS drivers, 85% of their packages are from Amazon. About 5% are Target, higher volume than in the past, and maybe 5-7 a day are from Walmart. Harry & David packages have more volume than Walmart. UPS started something new this year. They have drivers using their personal cars to deliver the overflow. That is how I got 3 deliveries in one day. Two were personal cars with different drivers and one was the truck.

FedEx said only about 5% of the packages were Amazon and normally the large or heavy packages. They said Target (TGT), Wayfair (W) were the next most common. FedEx has far less volume than UPS. Twice last week the truck came around 2:PM and had only about a dozen boxes left while the UPS truck can show up well after dark and have multiple dozens of packages left. The FedEx driver said he did not know why volume was lighter this year.

The Postal Service has been delivering the small lightweight stuff from Amazon and others. Nothing over about 3 pounds. Amazon made up about 25% of their loads and almost no Target or Walmart.

The investing outlook from this survey is that UPS is likely to surprise to the upside with significantly higher volume than Q4-2016. I only had 3-4 deliveries total in Q4-2016 from UPS with most from the Postal Service. I have had at least a dozen deliveries from UPS this year. UPS added a surcharge of between 27-97 cents for shipments between Nov-19th and Dec-2nd and again between Dec-17th and Dec 23rd.

I would expect FedEx to underwhelm on Q4 earnings. I think Target will surprise higher and Walmart may underperform. Amazon will likely post blowout numbers. The UPS driver said he has been with them for 10 years and has never seen this much volume from Amazon.

The bitcoin phenomenon is continuing. Coins hit a temporary high of $19,000 on one exchange last week but only one. There are more than a dozen exchanges and each one has a different price depending on the buy/sell volume on that exchange. The graphic below is a real time snapshot of prices as of midnight Friday ET. The lowest price quoted was $14,648 and the highest price was $16,611. The exchanges with the highest volume typically have the average price with the extremes on the low volume exchanges.

The CBOE will launch the first bitcoin futures contract on Monday with the symbol XBT starting at 6:PM ET Sunday night. The contract will represent one bitcoin and the margin will be 40% of the bitcoin price. When the CME launches its futures product representing 5 bitcoins the margin will be 35%. I am sure margin rates will escalate rapidly if the volatility continues. Both exchanges said they stand ready to adjust margin as required. With the price at $15,000 on Friday night, that would require $6,600 in margin with the CBOE on Monday. Reportedly, many hedge funds are prepared to go long in hopes of capturing the rally without the headache and added expense of actually buying bitcoins. Also, there are quite a few large funds that are prepared to short the futures because they believe this bubble is going to pop soon.

There will be a price limit of 10% above or below the prior day's close. Trading will be halted for 2 minutes. When trade resumes and the contract moves 20% above or below the prior day's close, trade will be halted for 5 minutes.

I think it is a safe bet that all the major traders are going to tiptoe into the market. Initial bets will be small until they get a feel for the movement and then positions will increase. Last week bitcoin moved 40% higher in about 40 hours and when you are talking about a $15,000 price tag that becomes either a major gain or a major loss very quickly.

For mere mortals there is a trust security (GBTC) that represents one bitcoin at one-tenth of the price of a coin. This is dangerous since it does not trade 24 hours a day. Gaps higher or lower could be a killer. There are no options.

Crude prices are no longer rising despite the decline of -5.6 million barrels in the EIA inventory report last week. The US produced another record high at 9.707 million bpd and the fifth consecutive weekly record. The OPEC meeting is behind us, the good news is priced in and we are heading into a weak demand cycle. Analysts are targeting a move back below $55 in the weeks ahead.



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The S&P rebounded back to resistance at 2,650 with a decent 14-point gain on a Friday. News that the conference committee was trying to find a compromise on SALT deductions was credited for some of the gains. The feeling that some kind of tax reform would eventually be passed is also lifting sentiment. The drag from last week on worries about the negative points in the bill has apparently faded.

Investor sentiment was mostly unchanged as of Wednesday's close but with rallies on Thr/Fri we could see a different ratio next week. Just over 64% still believe the market is not going higher. That means there are a lot of investors that could be converted if the markets continue making new highs.

The S&P closed at a new high at 2651.52 on Friday. The prior high was 2,647.58. At this level, every point counts. The forecasts for 2018 are piling up with Morgan Stanley at 2,750, Bank of America 2,800, Goldman 2,850, UBS 2,900, BMO Capital 2,950 and Oppenheimer at 3,000. Nearly everyone expects a material decline in 2018 with a rebound to those forecast levels.

I believe we have to get out of 2017 first. The coming week could be lackluster because of the tax unknowns. However, this is December and tis the season to be merry and invest those end of year bonuses.

The Dow also closed at a new high at 24,329 after several days of declines. The Dow remains very unsupported but the industrial stocks are still being bought. The blue chips are bringing in the green for the holidays. The key here is that the corporate tax cut will be good for these companies and the 12-14% repatriation tax will allow them to bring their cash hoard back from overseas. That means higher dividends, more buybacks and probably more acquisitions.

Dow support is 24,150.

The Nasdaq opened higher but faded to close near the lows. The big cap tech stocks have not regained their traction despite some minimal gains for two-thirds of the group. The 6,900 level remains resistance with the closing high at 6,912. Earnings expectations for ORCL, COST and ADBE could lift the Nasdaq late in the week.

The small cap Russell 2000 only posted a minor gain on Friday and remains in the clutches of resistance at 1,520. The small caps are supposed to be strong in December and the tax reform should give them an added boost. They do not seem to have gotten the message yet. We need to see the Russell move higher for the overall market to have a chance of continued gains.

Despite the record close on the Dow and S&P we are not out of the woods yet. The market is normally up on the day before a Fed announcement so that is positive for sentiment. Even if the Fed hikes as expected, the market is likely to ignore it unless Yellen develops a case of foot in mouth disease at the press conference.

The main storm cloud remains the provisions in the tax bill when it comes out of the conference committee. That will drive the market when it happens. Secondly, lawmakers kicked the can down the road on the government funding but not far enough to get us into 2018. The commentary from both sides of the isle suggests there could really be a government shutdown before Christmas unless they kick the can again into 2018. The battle lines have been drawn and neither side seems interested in compromise.

With the tax bill and funding bill both due out before Christmas and both with the potential to be major market movers, I would be careful about putting a lot of new money to work. The Dow could easily be 1,000 points higher or lower by Christmas. The historical trend is for gains in December but prior years did not have those two potholes in the road ahead. Be patient, there is no rush to trade. There is always another day if you have money in your account.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"When asked how he would spend his championship money a Philadelphia Phillies relief pitcher reportedly said, "90% I will spend on good times, women and Irish Whiskey. The other 10% I will probably waste."

Tug McGraw 1944-2004

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Index Wrap

Record Market Highs

by Jim Brown

Click here to email Jim Brown
Who would have thought after the prior week's volatility we would have been at record highs again this week?

The week started slow with the major indexes posting minor declines but sentiment improved as the week progressed and the Dow and S&P closed at new highs on Friday. With two major events in the near future that could tank the market, investors have decided to ignore the headlines and stick with the historical December trend.

The market internals are acting as though there were only rainbows ahead with a pot of gold around every corner. Bullishness is breaking out all over but it is somewhat hidden behind the lackluster gains on the indexes. The Dow only gained 97 points for the week but overcame profit taking to close at a new high. The S&P only gained 9 points but closed at a new high. The Nasdaq actually lost 7 points and the Russell 2000 lost 15 points. It is this index divergence that is hiding the bullish sentiment.

As I said in my market commentary, investors are buying the tax cuts because they expect them to produce more dividends, stock buybacks and higher earnings. I cannot blame them as long as that actually happens. Making new laws in a divided government is a tough task and it is not over until the president signs it. That could be in 7-10 days or it could be in late January if the current negotiations blow up.

Maybe I worry too much because I study the market and the external influences every day. I see all the potential pitfalls where a normal investor is only looking at the Dow at a new high and seeing the positive tax cut headlines. It is those investors who are blissfully ignorant that are profiting from the market.

We always tell readers to trade the trend until it ends. The positive trend that has produced a 24% YTD gain on the Dow has not ended. Yes, there is a minor hiccup now and then, but the trend has not ended. We get closer to that train wreck every day but nobody has a crystal ball to tell us the time and date.

I have warned for the last month that January could be rough. That has not changed. If we get past the potential for a sell the news event on tax reform, we could see significant profit taking in January as we enter the new tax year. Periodically, January's can be a challenge. In 2016, the S&P fell -269 points in three weeks after setting highs in early December. I am not saying it is going to happen again but we do need to be prepared after a 24% gain on the Dow, 30% gain on the Nasdaq and 18% gain on the S&P. That is a lot of uncaptured profit.

Our primary market indicator is the A/D line on the S&P and it closed at a new high on Friday. The early December weakness has been erased and based on this chart the market should continue higher. When more stocks advance then the day before and do it routinely, it is a sign of rising investor sentiment. This is a strong motivator.

The S&P dipped exactly to uptrend support and rebounded on Thursday and Friday to close at a new high. There have been two higher intraday highs but Friday was a record close. The indicators are all positive with the RSI back over 70. There were 362 new 52-week highs on the S&P on Friday. That is the most since November 28th and represents 72% of the S&P at new highs. It is hard to argue with that kind of bullishness.

Note the length of the bars over the last two weeks. The intraday volatility has increased significantly and that normally happens in times of investor indecision, which normally signal tops or bottoms in the market. Just because everything is bullish does not mean it will remain bullish. There were a lot of intraday sellers to produce those tall bars. On the bright side, the index recovered from the volatility and is making new highs. The buyers won the battle.

The Dow A/D line also made a new high and the Dow closed at a record high. The blue chip industrial stocks are still being bought because investors believe taxes are going lower, earnings and dividends will rise and buybacks will increase. For the retail investor if we add in a rising global economy this is the perfect investing scenario. The only problem is that the tax cuts are not yet law.

The Dow closed at 24,329 and the prior high was 24,290. The close was right at resistance and the index could be poised for a breakout, headlines permitting. Despite the new high, the index is very unsupported with the 2,050 point gain over the last two months. That is a 9.2% gain in two months. In many years, the Dow does not gain that much in an entire year.

The Nasdaq has rebounded from the two bouts of sector rotation out of techs stocks and into industrials but it has not returned to the highs. The A/D line has only shown a minor uptick.

On the indicator chart the MACD is still bearish and the RSI is just starting to reverse higher. The CCI did turn positive because it reacts faster. Note the length of the bars for the last two weeks. The grouping of strong intraday volatility is the result of indecision and the rotation. The dips were bought but it was a battle. There is solid resistance at 6,900.

The small cap S&P-600 is struggling. The index tried to move higher and was quickly sold. This is a carbon copy of the Russell 2000. Small cap stocks should be bullish in December and they should be bullish ahead of the tax reform. This is a warning sign and we should pay attention if the weakness continues.

To summarize: The big cap indexes are bullish because of the expected tax cuts, which would increase earnings and allow them to bring cash back from overseas to use for dividends and stock buybacks. The tech stocks are weaker because of rotation out of tech growth and into industrial value for the tax benefits. The small caps are weak without any obvious reason other than possibly rotation in to the industrials for the same reasons. Small companies should benefit from the tax cuts but the large companies have billions overseas that could be put to immediate use and therefore a stronger gain in stock prices.

We can never know exactly why a market or sectors move. There are millions of moving parts and conflicting ideas. In the end, it boils down to how many investors believe the shares are going up and how many expect them to go down. It would appear the group thought leading the parade in December is the positive benefits from the proposed tax cuts. The potential government shutdown on December 22nd is not even a consideration for retail investors as is the possibility for a failure of the tax reform bill. Both are real possibilities.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Tech Bounce

by Jim Brown

Click here to email Jim Brown

Editors Note:

Hundreds of stocks were hammered over the last week on Nasdaq rotation. Good stocks as well as bad stocks were punished. Cognex was one of the good stocks.


CGNX - Cognex - Company Profile

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes worldwide. The company offers machine vision products, which are used to automate the manufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Its products include VisionPro, a software suite that provides various vision tools for programming; displacement sensors with vision software for use in 3D application; In-Sight vision systems that perform various vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance; In-Sight vision sensors; ID products, which are used for reading codes that are applied on discrete items during the manufacturing process, as well as have applications in logistics automation for package sorting and distribution; DataMan barcode readers; barcode verifiers; vision-enabled mobile terminals for industrial barcode reading applications; and barcode scanning software development kits. The company sells its products through direct sales force, as well as through a network of distributors and integrators. Cognex Corporation was founded in 1981 and is headquartered in Natick, Massachusetts. Company description from FinViz.com.

Cognex is a tech stock where growth is booming. Every manufacturer is looking to automate as many tasks as possible and Cognex provides them the opportunity with robotic vision equipment that can inspect and track items much faster than humans.

For Q3 they reported earnings of $1.14 that beat earnings for $1.05. Revenue of $259.7 million beat estimates for $256.8 million. They guided for the current quarter for revenue of $170-$180 million and analysts were expecting $155 million. That was a major guidance beat.

Expected earnings Jan 29th.

They announced a 2:1 split that was effective on December 4th. Shares immediately sank $7 on post split depression and Nasdaq rotation but have rebounded the past two days. The 50% decrease in the stock price also reduced the option premiums by 50% and made them cheap enough to buy.

Buy Feb $67.50 call, currently $3.20, initial stop loss $60.45.


No New Bearish Plays

In Play Updates and Reviews

Good Friday

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and S&P posted decent gains for a Friday even with headlines swirling. The Dow seems determined to touch that 25,000 level in December with a nice rebound gain of +117 points. The S&P gained 14 to put it right back at 2,650 resistance. The end of year bullishness seems to be overcoming the worries about tax headlines and government shutdowns.

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

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BULLISH Play Updates

AMAT - Applied Materials - Company Profile


No specific news. Chip sector down again.

Original Trade Description: December 4th.

Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide. It operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells a range of manufacturing equipment used to fabricate semiconductor chips or integrated circuits. It offers products and technologies for transistor and interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor deposition, physical vapor deposition, chemical mechanical planarization, and electrochemical deposition; patterning, selective removal, and packaging products and systems that enable the transfer of patterns onto device structures; and metrology, inspection, and review systems for front- and back-end-of-line applications. The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software for semiconductor, display, and other products. The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays, organic light-emitting diodes, and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices, as well as equipment for flexible substrates. The company serves manufacturers of semiconductor wafers and chips, liquid crystal and other displays, and other electronic devices. Applied Materials, Inc. was founded in 1967 and is headquartered in Santa Clara, California. Company description from FinViz.com.

Expected earnings Feb 15th.

Wells Fargo initiated coverage on AMAT today with an outperform rating and $65 price target. Chips run the world and with new and faster chip types being announced almost monthly, the chip makers have to continually buy new manufacturing equipment from Applied Materials.

AMAT reported Q3 earnings of 93 cents on revenue of $3.97 billion. Analysts were expecting 91 cents and $3.94 billion. The company guided for the current quarter for earnings of $.94-$1.02 on revenue of $4.0-$4.2 billion.

Flash memory equipment sales surged 38%. Semiconductor revenue rose 14.2%. Sales of equipment to make display screens for phones and TVs rose 50%. Their order backlog rose 32% to $6.03 billion. The CEO said AMAT will see strong double digit growth in 2018 for all their lines of business.

"This is the most exciting time in the history of the electronics industry," said Dickerson. "AI will transform entire industries over the coming years, creating trillions of dollars of economic value, and Applied is uniquely positioned to deliver the innovative materials needed to enable next-generation memory and high-performance computing."

Shares had declined to $50 in the chipwreck over the last week. This is the 100-day average, which has been support since early 2016.

Update 12/7/17: The IBD raised their relative strength rating to 96 and earnings rating to 98. That puts them in the very top of the entire IBD stock universe. That means their relative strength is better than 95% of all stocks and earnings strength better than 97% of all stocks.

Position 12/7/17:

Long Feb $52.50 call @ $3.00, see portfolio graphic for stop loss.

DXCM - Dexcom Inc - Company Profile


No specific news. Nice gain to a another two-month high.

DXCM will present an update on the company to be presented at 11:AM ET on Dec 14th at the BMO healthcare conference.

Original Trade Description: November 25th

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.

Position 11/27/17:

Long Mar $60 call @ $3.30, see portfolio graphic for stop loss.

GILD - Gilead Sciences - Company Profile


No specific news. Nice rebound from the decline on the acquisition news.

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.

Update 11/30/17: Maxim Group upgraded Gilead from hold to buy with a $94 price target. Gilead closed at $75 giving it plenty of room to run.

Update 12/7/17: Gilead said it was buying privately-held startup Cell Design Labs for $567 million to boost its CAR-T cancer drug pipeline. Gilead will make an initial payment of $175 million and additional payments of $322 million upon meeting certain milestones. Shares dropped 57 cents on the news.

Position 11/8/17:

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

MCK - McKesson - Company Profile


No specific news. Finally a nice rebound.

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.

PYPL - PayPal - Company Profile


No specific news. Surprising decline in a positive market.

Original Trade Description: November 29th

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.

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.

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.

Paypal closed exactly on horizontal support and the 30-day average, which has been support since February. The company is more of a bank than a tech stocks and should benefit from any further rotation into banks.

The original PYPL position was stopped out in the Nasdaq crash on Nov 29th and we rentered this new position on Nov 30th.

Update 12/2: Keybanc believes the Venmo payment app is going to be a breakout hit in 2018 and raised his price target for Paypal from $85 to $90. In a recent survey of 500 consumers, Venmo was the preferred payment option for 76% of respondents. Paypal is forecasting $75 billion in Venmo payments in 2018 and they get an estimated 4 cent EPS boost for every $10 billion.

Position 11/30/17:

Long Feb $75 call @ $3.75, see portfolio graphic for stop loss.

SMH - Semiconductor ETF - ETF Profile


No specific news. The bounce from the Broadcom earnings lasted only one day. The chip sector was down again.

Original Trade Description: December 2nd.

VanEck Vectors Semiconductor ETF (SMH) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor production and equipment. The index seeks to track the most liquid companies in the industry based on market capitalization and trading volume. Industry Leaders: Index methodology favors the largest companies in the industry. Global Scope: Portfolio may include both domestic and U.S. listed foreign companies allowing for enhanced industry representation.

The semiconductor sector leads the Nasdaq because chips affect every tech product and service. The semiconductor sector was down -8% at the low on Friday in only four days. The decline stopped at the 50-day average, which has been support several times over the last year.

If the Nasdaq is going to move higher the chip sector will lead it.

Position 12/4/17:

Long Feb $100 call @ $3.50, see portfolio graphic for stop loss.
Short Feb $105 call @ $1.30, see portfolio graphic for stop loss.
Net debit $2.20.

TRN - Trinity Industries - Company Profile


No specific news. Holding at the 3-year highs.

Original Trade Description: December 4th.

Trinity Industries, Inc. provides various products and services to the energy, chemical, agriculture, transportation, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and tank cars, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2016, this segment had a fleet of 85,110 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Trinity Industries, Inc. was founded in 1933 and is headquartered in Dallas, Texas. Company description from FinViz.com.

More than 11,500 January $35 calls traded on Monday against an open interest of only 325. The excitement was generated by activist shareholder ValueAct Holdings, which has acquired 1.3 million shares since October and now owns 18.595 million and more than 12% of the company. Their last purchase was 43,000 shares on November 16th.

In October, the courts reversed a $663 million judgment against Trinity. The claim was for fraud after the company changed its formula for the steel in highway guardrails in 2005 and did not tell the Federal highway system. Billions of dollars of these rails have been installed around the country and after extensive testing the government found nothing wrong but complained anyway. A Texas court in 2015 awarded the judgment and Trinity appealed. The appeals court wrote a 42-page opinion tossing the case and reversing the judgment.

Earnings estimates for Trinity for Q4 have risen 31 cents to 42 cents per share over the last two months. That is a 300% rise. For the full year estimates have risen from $1.25 to $1.44.

Earnings January 24th.

Shares closed at a new 52-week high on Monday and appear destined to make higher highs. That massive amount of option volume at the money at $1.25-$1.50 per share represents $1.6 million in premium at an average of $1.40 per share. I am recommending we follow this trade only buy a higher strike.

Position 12/5/17:

Long Jan $37 call @ $1.20, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


The Dow is determined to hit 25,000 by the end of December. I considered closing the position but the potential for a negative tax headline, government shutdown, January market crash, etc is too strong to be unprotected.

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.

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