Option Investor

Daily Newsletter, Wednesday, 12/13/2017

Table of Contents

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

Market Wrap

Holding Pattern

by Keene Little

Click here to email Keene Little
The stock market is typically bullish during opex week and generally speaking that's been true for this week. But there's usually a little more volatility than we've seen and the quiet period is probably due traders waiting to get through the FOMC announcement (today) and the tax reform bill. The VIX has slowly climbed back up the past two days as worries continue to mount. But the bulls remain in control until proven otherwise.

Today's Market Stats

As we've seen most mornings, the stock market started with a small gap up and then essentially stopped. The bulk of the recent rally has again occurred during the overnight sessions in the futures market, which is more easily manipulated due to the lower volume and higher leverage. Get the futures higher by the market's open, create a gap up and a little bit of short covering and the HFTs mop up by getting in front of the orders. They then shut down their operations and wait for the market-on-close orders before setting up for the next day. In between the first and last 30 minutes of trading we typically find a quiet market and today was no different. Even this afternoon's post-FOMC price action was subdued.

Following this morning's pre-market economic reports there was a slight bump higher in the futures as the CPI data showed inflation in line with expectations (so no reason for the Fed to change course). Total CPI increased +0.4%, as expected, and core CPI increased +0.1%, which was less than expected. Removal of food and energy, especially energy in the last month (higher gas prices), shows inflation (as measured by the government) is still not up to the Fed's target rate of 2% annually.

Year-over-year total CPI is up +2.2%, at the Fed's target rate, which is a slight bump higher than the +2.0% ending in October. A 3.9% increase in energy costs was the primary driver behind the increase in November. The year-over-year core CPI slowed down slightly from +1.8% at the end of October to 1.7% at the end of November. These numbers suggest the Fed doesn't need to worry about inflation yet and justifies a reason to slow down their expected rate increases. But I think the Fed is more interested in a rate cushion for the next recession, which they will likely help cause with their rate increases and removal of liquidity from the economy.

The market has generally been on hold this week, making for a quiet opex week (we didn't even get the usual volatility on the Thursday/Friday in front of opex), while waiting to get through this afternoon's FOMC announcement. There weren't any expectations for a surprise from the Fed but it was still one of those uncertain events that cause traders to pause while waiting to get the event behind them. As expected, the Fed raised rates another 1/4 point and left expectations for next year unchanged. Now we wait to see what becomes of the tax reform bill making its way through Congress.

And speaking of Congress, last night's strong win by Democrat Doug Jones against Republican Roy Moore is viewed as a strong win for the Democratic machine while rebuking President Trump's influence. This creates more political tension for the market to deal with since the Senate now has only a 51-49 Republican advantage, which will make it even more difficult to get things done (I view that as a positive since a locked-up Congress is general good for us). The added uncertainty comes from what could happen to the Republican lead in the mid-term elections.

December is typically a bullish time for the stock market, especially the second half (the Santa Claus rally). The first half of the month often sees some kind of correction/consolidation that then leads to the Santa rally but this month we've had a rally in the first half and that begs the question about what the second half might be like. As I'll get into with the charts, there are reasons to believe Santa might be a no-show this year, or at least he might have come early.

The next thing the market wants to get past is the tax reform bill. It's looking like it's getting closer to some kind of compromise and it could be signed by next week (along with a new budget and an increase in the debt limit). The market has been rallying with anticipation of the tax reform bill and how it will help the bottom line for corporations.

There's also a high expectation for the repatriation of corporate profits made overseas and how that will be used by corporations to pay higher dividends and be used for stock buybacks, both of which are bullish for stocks. The big question is whether or not the successful passage of the tax bill will result in a continuation of the rally or if instead we'll get a sell-the-news reaction. One could easily argue either outcome so we'll use the charts to at least provide some trigger levels where one or the other outcome will be more likely.

As we near completion of the first half of December and opex week on Friday there's growing concern about what the second half of December will be like. We've had a nice rally but it's slowing down, showing some bearish divergences and money managers could soon turn into profit-protection mode rather than worrying about trying to get another percentage or two out of the market. And if the tax reform bill begins to look like it's going to struggle for passage that profit protection could turn into a full-fledged selloff. As always, we'll let the charts tell us when to turn bearish vs. sticking with the bulls.

S&P 500, SPX, Weekly chart

SPX appears to be heading toward a trend line drawn across the two highs in April 2016 - March 2017, which is currently near 2700. A nice round number like 2700 would be a fitting number to achieve for the year and if the market can hold up for another two weeks it should be easily achievable. Only a breakdown below the November 15th low near 2557 would the weekly pattern turn bearish, especially since a drop below that low would also be a break of the uptrend line from February-November 2016.

S&P 500, SPX, Daily chart

The SPX daily chart is a little messy since I'm trying to show a couple different ideas for how it could play out the rest of the month. I think the two highest-probability moves are shown in green -- either a little stronger pullback the rest of this week and then higher next week, shown in bold green, or a little higher first and then a pullback and final push higher into the end of the month (the Santa Claus rally), shown with the light-green dashed line). Both bullish scenarios call for a rally to just above 2700. From a daily perspective I think a drop below the December 1st low near 2605 would tell us a top is already in place.

Key Levels for SPX:
- bullish above 2672
- bearish below 2605

S&P 500, SPX, 60-min chart

The 60-min chart shows the bold green depiction for a little larger pullback to the uptrend line from November 15 - December 1, near 2650 on Friday, and then a final rally next week, finishing at the trend line along the highs from September-October, near 2700 (note that this line is slightly below the longer-term trend line along the highs from April 2016 - March 2017, as can be seen on the daily chart above).

It's possible SPX will simply continue higher on Thursday, maybe into Friday, and reach up toward the September-October trend line before pulling back a little and then higher again next week. I think we'll see the completion of the rally in a rising wedge pattern but it's not clear how large or small the pattern will be and it says we should see a choppy climb higher.

Note also that a sharp decline from here, confirmed with a break below the uptrend line November 15th, near 2646, could lead to a drop down to the uptrend line from August-October, near 2610, but I doubt it would be bearish. I think that kind of decline from here, since there's not a good ending pattern to the upside, would be a bear trap and would likely lead to a strong rally to follow.

Dow Industrials, INDU, Daily chart

With respect to the trend line along the highs form April 2016 - March 2017, the Dow is stronger than SPX since it's above the line, currently near 24400. As long as the Dow remains above 24400 it will remain more bullish than not but if it too follows a choppy rise higher into next week I'll be arguing for a top sooner rather than later. A choppy rally into next week would leave the week between Christmas and New Years vulnerable to a selloff. That possibility will be evaluated more carefully next week. The bears need to see the Dow below the December 1st low near 23922, which would be a strong indication an important high is in place.

Key Levels for DOW:
- bullish above 24,670
- bearish below 23,920

Nasdaq-100, NDX, Daily chart

An end-of-year rally is typically led by the techs and small caps (December being the typically strongest month for the RUT) but that's not what we have currently and that's one of the warning signs that bulls should pay heed to. They haven't done anything bearish yet but their lack of leadership is warning us that money managers are moving into protection mode (moving money into the relative safety of the blue chips and the bond market).

NDX has now met the minimum expected for the 5th wave of its rally from August (5th wave equals 62% of the 1st wave at 6394, where NDX closed on Monday and today). There's higher potential to about 6493-6500, which is where the 5th wave would equal the 1st wave and it would hit the top of its up-channel from July. I suspect the bearish divergence will continue to hold even if we get a new price high, which would be another warning sign for the bulls.

Key Levels for NDX:
- bullish above 6426
- bearish below 6234

Russell-2000, RUT, Daily chart

Like NDX, the RUT left a bearish divergence at its November 30th and December 4th highs in relation to the October 4th high and if it does push higher it will likely leave another bearish divergence. It's this weakness that's surprising to see this month and it makes it harder to argue the bullish case from here. But if the RUT does make it higher I see the potential for a choppy rally in some kind of ending pattern this month. If it's able to hold up in December and continues to show bearish divergence I think it would tell us to think seriously about shorting this index later this month and ride will likely be a strong decline in January. If the RUT drops below 1498 sooner rather than later I would seriously doubt we'll see any further rally this month.

Key Levels for RUT:
- bullish above 1560
- bearish below 1498

30-year Yield, TYX, Weekly chart

While I don't trade the bond market futures like I used, I still like to follow the market because it's the smarter one. That market trades more on fundamentals than the stock market and I like to follow the 10-year and 30-year, the latter being a better forecaster for where inflation could be headed. For a while now it looks like the bond market can't figure that out either.

Following the high in December 2016 and the retest of that high in March 2017, which was also a test of its downtrend line from February 2011 - December 2013, TYX has pulled back but in a choppy pattern. Since June it's been cycling around price-level S/R at 2.85%. I've long believed we have not seen THE lows for bond yields (for years I've been expecting we'll see the 10-year below 1% and the 30-year below 2%) and I can easily argue for a decline from here, or maybe after one more small bounce back up in its sideways pattern that it's been in since the low in late June.

I also see the potential for a higher bounce back up to the downtrend line from 2011-2013, near 3.02-3.05, before heading lower but it's looking vulnerable here. Buying in the bond market, perhaps coincident with a selloff in the stock market, would drive yields lower and that would be a statement from the bond market that they don't see inflation as a problem. If the Fed continues to raise rates in that environment they would likely create a recession, which of course would be bad for the stock market. I'll continue to watch this market carefully for further clues.

KBW Bank index, BKX, Weekly chart

The rally in the banking sector looks vulnerable to a reversal. The daily chat of BKX shows bearish divergence at this week's test of last week's high. Both highs are a poke above the trend line along the highs from April 2010 - March 2017, currently near 106. If BKX rolls over from here it would also leave a bearish divergence on its weekly chart, shown below. The pattern of its rally from February 2016 can be considered complete at any time with a completed 5-wave move up and the 5th wave as a rising wedge. This pattern calls for a strong decline once it breaks down -- the rising wedge for the move up from April should be retraced quickly, so back down to price-level support near 89.

U.S. Dollar contract, DX, Daily chart

Today's big red candle for the US$ looks bearish because of where the rally stopped yesterday. As I've noted on its chart, it was first bullish when an inverse H&S neckline at 94 was broken with the rally on October 26th. But that turned into a head-fake break with the drop back below the neckline with the selloff on November 14th. The dollar then dropped down to the top of the broken down-channel from January 2017 at the end of November and successfully back-tested it with the bounce back up. Bullish-turned-bearish has once again turned potentially bullish.

But the bounce off the November 27th low stopped at the neckline near 94 and today's red candle looks like the start of a bearish reversal. The potential bullish setup has reversed again into a bearish pattern and dollar traders are getting whipped around. The negative reaction following the FOMC announcement now has it looking like the dollar could head down to support near 90 before finally setting up a stronger rally into next year.

Gold continuous contract, GC, Daily chart

With today's decline in the dollar there was a countermove in gold and it rallied back above its downtrend line from September 2011 - July 2016, currently near 1250. Gold bulls need to see that level hold as support since another drop below it would likely keep going this time. The pattern for gold looks bearish to me but I see the potential for a at least a little higher bounce to price-level S/R near 1265 and possibly up to its broken uptrend line from December 2016 - July 2017, near 1275.

A higher bounce to 1275 would also result in a test of its broken 50-dma. Between 1265 and 1275 gold would run into its broken 20-, 50- and 200-dmas and that's a lot of resistance to plow through. For that reason gold would be bullish above 1275 and even more bullish above price-level S/R near 1300. In the meantime I think the path of least resistance is to the downside.

Oil continuous contract, CL, Weekly chart

Oil has been in a choppy consolidation pattern since the November 24th high and it looks like it's going to make another stab higher, especially if it can hold its uptrend line from August-October, currently near 56.30 (today's low was 56.55). The top of a possible rising wedge for its rally from February 2016 is near 62 and remains an upside target. But oil is currently struggling at its broken 200-week MA, at 57.76, and price-level resistance near 58.50. Coinciding with this level is the 38% retracement of its 2013-2016 decline, all of which makes it possible oil will roll over from here. It would be more bullish above 62 but confirmed bearish below 50.70.

Economic reports

Thursday's pre-market economic reports include retail sales, the unemployment data and import/export prices. Retail sales are expected to show improvement in November but interestingly, the retail sector (XRT retail ETF) is looking vulnerable to selling off following the 3-wave bounce off the August low.


The stock market is struggling but it's not time yet for bears to start making stabs at shorting it. We're seeing bearish divergences as the momentum of the rally slows but as long as we don't get disturbing news out of Washington D.C. about diminishing chances for the passage of a tax reform bill the market will remain hopeful. And as long as the market remains hopeful it should continue to chop its way higher. There might even be a spike higher on the news of successful passage of a bill. I suspect it would be a high on news but that would obviously have to be evaluated if and when it happens.

At the moment it's looking like the indexes, in particular the blue chips, are chopping their way higher in what looks like ending patterns (rising wedges) and the bearish divergences supports this view. These patterns suggest we'll see the market chop its way a little higher into next week (perhaps first a pullback tomorrow and into Friday) to then complete THE rally.

The completion of the rally next week would mean Santa Claus will be a no-show. Profit-taking into the end of the year could become the primary focus of money managers Again, this possibility will have to be evaluated if and when we get higher highs into next week. SPX 2700-2720 is the upside target zone. Just be careful of the chop and maybe a couple of whipsaws thrown in for good measure.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying



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New Option Plays

Retail Warrior

by Jim Brown

Click here to email Jim Brown

Editors Note:

The battle for the hearts and minds of US consumers is heating up. Target announced a free shipping program comparable to Amazon Prime and promised same day delivery by the end of 2019.


TGT - Target Corp - Company Profile

Target Corporation operates as a general merchandise retailer. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides home furnishings and decor, such as furniture, lighting, kitchenware, small appliances, home decor, bed and bath, home improvement, and automotive products, as well as seasonal merchandise, such as patio furniture and holiday decor; music, movies, books, computer software, sporting goods, and toys, as well as electronics, such as video game hardware and software. In addition, it offers in-store amenities, including Target Cafe, Target Photo, Target Optical, Starbucks, and other food service offerings. Target Corporation sells products through its stores; and digital channels, including Target.com. As of September 13, 2017, the company operated 1,816 stores in the United States. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

I would not normally recommend a retailer only two weeks before Christmas but I expect Target to overcome the normal post holiday depression.

Earnings Feb 14th.

Target announced on Wednesday they were buying grocery delivery platform Shipt Inc for $550 million in cash. The company said they would be offering same day delivery across all major product categories by the end of 2019. They will be offering same day delivery for groceries, essentials, home products, electronics and other items by mid 2018.

Shipt's services cost $99 a year for unlimited deliveries. Shipt already has a network of more than 20,000 personal shoppers to fulfill orders from various retailers and deliver within hours in more than 72 markets. Shipt partners include stores like Costco, Whole Foods, Meijer, etc.

Target is going to continue letting Shipt deliver for their other customers. The more widely recognized the brand is the larger it will grow and Target will be able to benefit from their ability to scale deliveries all over the country. Plus, they will profit from the fees received for those other deliveries.

This is a great deal for Target as it ramps up competition against Amazon.

I wrote last week that shippers were noting the increase in packages from Target. They were the second largest volume in UPS trucks after Amazon. They should have a great Q4.

Buy March $65 call, currently $2.61, initial stop loss $59.85.


No New Bearish Plays

In Play Updates and Reviews

New Leaders

by Jim Brown

Click here to email Jim Brown

Editors Note:

A new set of stocks lifted the Dow to a new record on Wednesday. 3M was the biggest loser on Tuesday erasing 19 Dow points. McDonalds erased 4 and CAT -3. Today those stocks were in the top 6 and completely erased their Dow losses from yesterday. However, the Dow did close 76 points off its intraday high and the S&P gave back an 8 point gain to close negative. The Nasdaq came to a dead stop at 6,895 three times intraday before falling back 20 points to end with only a 13 point gain. The market is struggling despite positive news of an agreement on the tax compromise.

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

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AMAT - Applied Materials - Company Profile


No specific news. No material movement.

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.

CGNX - Cognex - Company Profile


No specific news. Down with the weak tech sector.

Original Trade Description: December 9th.

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.

Position 12/11/17:

Long Feb $67.50 call @ $3.20, see portfolio graphic for stop loss.

GILD - Gilead Sciences - Company Profile


No specific news. Shares closed at a 6-week high. The stock is moving up on the positive Car-T news last weekend.

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. New 6-week high.

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.

PGR - Progressive Corp - Company Profile


Progressive reported results for November. Premiums written rose 20% to $2.022 billion. Premium earned rose 17% to $2.113 billion. Policies in force for autos rose 11%, business policies +20%. It was a very good month for Progressive. Shares closed at a new high.

Original Trade Description: December 11th.

The Progressive Corporation, through its subsidiaries, provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. Its Personal Lines segment writes insurance for personal autos, and recreational and other vehicles. This segment's products include personal auto insurance; and special lines products, including insurance for motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles. The company's Commercial Lines segment provides primary liability, physical damage, and other auto-related insurance for autos, vans, and pick-up trucks, and dump trucks used by small businesses; tractors, trailers, and straight trucks primarily used by regional general freight and expeditor-type businesses, and non-fleet long-haul operators; dump trucks, log trucks, and garbage trucks used by dirt, sand and gravel, logging, and coal-type businesses; tow trucks and wreckers used in towing services and gas/service station businesses; and non-fleet taxis, black-car services, and airport taxis. Its Property segment provides residential property insurance for homeowners, other property owners, and renters, as well as offers personal umbrella insurance, and primary and excess flood insurance. The company also offers policy issuance and claims adjusting services; home, condominium, renters, and other insurance; and general liability and business owners policies, and workers' compensation insurance, as well as sells personal auto physical damage and auto property damage liability insurance in Australia. In addition, it offers reinsurance services. Company description from FinViz.com

Expected earnings January 16th.

Despite the hurricanes in Aug/Sep, Progressive reported earnings of 41 cents that rose 13.9% and beat estimates for 30 cents. Premiums written increased by 18% to $7.1 billion. Premiums earnings rose 14% to $6.5 billion. Premiums written benefitted from a 15% rise in prices. Operating revenues rose 15% to $2.1 billion. Investment income rose 20%, fees and other revenue rose 16% and service revenues rose 22%. These are outstanding numbers despite the impact from the hurricanes on auto losses.

At the end of the quarter there were 5.9 million direct auto policies in force and 5.5 million agency auto policies in force, an 11% overall rise.

In early November, they reported premiums written in October totaled $2.758 billion, up 22% from Oct 2016. Total personal policies in force rose 9% to 15.950 million and commercial policies rose 5% to 643,500.

There is no bad news anywhere in their financial disclosures.

Shares have been rising steadily over the last month and Friday was a new high close. Progressive has completely ignored all the recent market volatility.

Position 12/12/17:

Long Feb $55.00 call @ $1.80, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


BMO Capital raised their price target from $80 to $85 saying the sale of the credit business will reduce expenses and increase earnings per share. The sale will free up $1.0 billion in cash for 2018 and $2.5 billion in 2019.

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 Semiconductor Index was flat for the day. No rush back into chip yet.

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.

Update 12/12: The industry group, Semi, said at the annual Semicon Japan exposition today that sales of semiconductor manufacturing equipment would rose 35.6% in 2017 to a record high of $55.9 billion. The forecast for 2018 is for a 7.5% rise to $60.1 billion and another record.

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. Shares closed at a new high.

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.

Update 12/12: Trinity announced a plan to spin off the company's infrastructure related businesses to shareholders. The tax free spin will occur in late 2018. The infrastructure businesses are leaders in their respective sectors with construction, energy and marine markets. Trinity manufacturers highway guard rails, crash cushions and other barriers. It supplies various aggregates including sand, stone, shale, clay, asphalt and steel products for infrastructure projects. Read the description below for the full list.

This will allow Trinity to concentrate on its highly profitable rail business where it manufactures, sells and leases railroad cars.

The company also announced a $500 million share repurchase program.

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 posted another big gain to close at a new high. The Dow is determined to hit 25,000 by the end of December.

I have considered closing the position but the potential for a negative tax headline, government shutdown, January market crash, etc is too strong to be unprotected. If we were not in this position, I would be adding it this week.

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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