Option Investor

Daily Newsletter, Saturday, 12/16/2017

Table of Contents

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

Market Wrap

Tax Reversal

by Jim Brown

Click here to email Jim Brown

The markets shook off Thursday's worries about the tax bill and rallied on positive comments Friday morning.

Weekly Statistics

Friday Statistics

On Thursday, there were multiple concerns about getting enough votes to pass in the senate with multiple senators either undecided or definite no votes. Further tweaking occurred, promises made and early Friday there appeared to be enough votes to pass it. In addition, as details leaked out the FIFO provision had been removed, corporate AMT was removed and the cuts are effective January 1st. The market gapped open on multiple positive rumors but representative Kevin Brady's comments at 11:AM lifted the Dow to 24,674 and slightly above prior resistance. The markets remained positive the rest of the day as further details appeared and rallied again just before the close as Rubio and Corker said they would vote yes. There was some option expiration selling at the close but the markets remained strongly bullish. The Dow rebounded 277 points from Thursday's closing low to Friday's intraday high.

Here is the skinny details of the tax plan:

Corporate tax rate cut from 35% to 21%.

Individual tax rates with 7 brackets, 10%, 12%, 22%, 24%, 32%, 35% and 37%. The current top rate is 39.6%.

CNCB Table for New Rates

CNBC Table Current Tax Rates

The standard deduction rises to $12,000 or $24,000 for a family.

Pass through businesses will receive a 20% deduction for the first $315,000 in income.

Obamacare lack of insurance penalty removed starting in 2019.

Corporate AMT eliminated. Individual AMT threshold raised significantly.

Estate tax remains but the $5.5 million exemption before taxation was doubled.

Child tax credit doubled from $1,000 to $2,000.

SALT deductions up to $10,000 for local sales, income or property taxes.

Current mortgage interest exemptions remain. New mortgages are capped for loans up to $750,000, down from $1,000,000.

Tax deductions for charitable contributions and retirement savings plans remain.

FIFO, first in, first out, stock sale provision removed.

The last hurdle is getting it passed by both the house and senate. In the senate that means John McCain and Thad Cochran, both currently in the hospital, will have to show up to vote. The only senator still on the fence is Susan Collins and she is leaning towards a yes vote after three amendments she backed were included. In theory McCain and Cochran would not have to show up if republicans were sure the other 50 GOP senators were going to vote yes. Vice President Pence could cast the tie breaking 51st vote. However, I am sure they will not want to take that risk. There is always the potential for an unexpected event so those two should be there if they have to arrive by ambulance and rolled in on a gurney.

The House is planning to vote on it on Tuesday. The Senate vote depends on when they expect McCain and Cochran to show up. That is more than likely on Wednesday.

With all the major warts out of the bill and corporate cash flows expected to grow by 15% to 20% next year as a result, the market "should" be positive into the end of December. Without the FIFO worries there is no reason to sell stocks that would have given you an higher tax bill in 2018. That threat is gone.

While nobody knows how much of the tax reform expectations for 2018 have been pulled forward into 2017, there should still be some gas left in the tank.

The S&P is up +590 points (28%) since the election without any material pullback. There was a 3.1% decline in March but we normally have two 5% declines and one 10% decline every year. There is a lot of uncaptured profit in the market and that means January could see some strong volatility.

Friday's economic reports were positive but far from bullish. The NY Empire State Manufacturing Survey for December declined from 19.4 to 18.0. That was not a big month-month decline but the high was 30.2 in October and December was a 5-month low so it is material. Anything over zero represents economic expansion so it was still positive. New orders declined slightly from 20.7 to 19.5. Back orders also declined slightly but from -4.6 to -8.7. That was the worst component in the report. Employment declined slightly from 11.5 to 5.1. The capital expenditures component rose sharply from 25.4 to 34.1 and the highest reading since 2010. Technology spending rose from 10.8 to 22.5 and a five-year high.

Industrial production for November declined from +1.2% to +0.2%. The majority of the decline came from a drop in utility output due to unseasonably warm weather. Overall, industrial production is up +3.4% since November 2016. Remaining outages from hurricane damage to the supply chain were also a factor.

The economic reports for the week lifted the Atlanta Fed's real time GDPNow forecast for Q4 back to 3.3% growth, up from 2.9% on December 8th. Spending growth estimates rose from 2.5% to 3.2% after the Consumer Price Index.

The final revision for Q3 GDP will be released on Thursday. Expectations are for 3.3% and unchanged from the prior revision.

This is the week for the housing reports with the Housing Index, existing sales and new home sales. The Philly Fed Survey is also on Thursday and the most important economic report for the week because it is a proxy for the national ISM.

The biggest challenge for the week is still the government funding deadline for midnight on Friday. The republicans are adamant about getting defense funding done for the rest of the fiscal year, reauthorization of the Children's Health Insurance Program or CHIP and increased funding for immigration enforcement. The democrats are equally firm on subsidizing premiums for Obamacare, authorizing citizenship for "dreamers" and various other funding for social issues. Both sides have said multiple times they will not support the funding for the items on the other side. The house wants to submit a defense funding bill for the full year and kick everything else into January with another continuing resolution. Democrats have said absolutely not and even some republicans are against that tactic.

There will be a fight and there will be negative headlines about a potential government shutdown. If that causes a market meltdown, it could be a buying opportunity but there is still risk of a minor correction in January.

Earnings actually pickup some next week with an active schedule on Tue/Thr. FedEx and Micron will highlight on Tuesday and Dow component Nike on Thursday.

The three big cap tech stocks that reported earnings after the bell were moving on Friday. Costco (COST) posted a $6 gain after beating on earnings by 2 cents. Revenue rose 13.3% to $31.12 billion. Expectations were high because of their recent release of blowout sales numbers for November. Same store sales rose 10.5% and e-commerce sales rose 43.5%. Membership renewals were 90%, which is in line with the historical average, so no drop offs. Member households rose from 49.4 million to 49.9 million and cardholders rose from 90.3 million to 91.5 million. They plan to add 20-25 stores in 2018. I challenge anyone to show me the impact of the Amazon/Whole Foods acquisition. I have pointed out many times the two stores are not related.

Adobe Systems (ADBE) reported earnings of $1.26 beating estimates for $1.16. Revenue rose 25% to $2.01 billion and beating estimates for $1.95 billion. They guided for the current quarter for earnings of $1.27 compared to estimates for $1.24. Revenue of $2.04 billion was in line with current estimates. Adobe said they were raising the subscription fees for various creative cloud products in March. They said they were seeing aggressive renewals by enterprise customers ahead of that price increase. Bank of America reiterated a buy with a $220 price target. Barclay's raised the price target to $193. Morgan Stanley reiterated a neutral and $186 price target. BMO reiterates a buy and raised their target to $205. Pivotal Research maintained a hold and $162 target. Shares closed at $177.

Oracle (ORCL) reported earnings of 70 cents compared to estimates for 68 cents. Revenue of $9.62 billion beat estimates for $9.57 billion. Cloud revenue rose 44% to $1.52 billion with software as a service revenue rose 55% to $1.12 billion. Analysts were expecting $1.56 billion and $1.14 billion respectively and a miss on both metrics. It was a good quarter and surprising when revenues can grow 44% and 55% and still miss estimates. Shares were punished despite the good quarter.

Teva Pharmaceutical (TEVA) announced on Thursday they were cutting 14,000 workers from their 56,000-person workforce. They expect to reduce costs by $3 billion by the end of 2019, with $1.5 billion in cost reductions in 2018. The company also suspended its dividend for ordinary shares and will eliminate bonuses for 2017. They are planning on closing a "significant number" of R&D facilities, offices and other locations around the world. They are going to consolidate offices in the US from 7 locations to only one campus. Teva incurred a lot of debt when they purchased the Allergan generic pharmaceuticals business for $40 billion last year. That was poorly timed just as generic prices were crashing. The company is also reviewing its asset base in order to sell noncore assets. Apparently, the new CEO, Kare Schultz, is determined to turn the company around sooner rather than later. Shares are bouncing back from a 17-year low in November. Shares were upgraded by Morgan Stanley, Goldman Sachs and Credit Suisse on Friday.

Foot Locker (FL) was upgraded from hold to buy at Canaccord and they raised the price target from $42 to $64. Part of the thesis was the move by Nike (NKE) to reduce their retailers from 30,000 to only 40. Foot Locker was one of the 40. Those 30,000 retailers have more than 110,000 locations. Nike said it was not going to remove product from those locations but it was going to focus future efforts on marketing and exclusive product offerings with those top 40 partners. Nike is going to prioritize "direct to consumer" e-commerce sales rather than a major network of small retailers. Nike wants retailers to create a unique "branded" Nike space within their stores. Foot Locker has already put that plan in motion.

Nike will supply trained and experienced sales and marketing people to assist with sales. More than one-third of Nike offerings will be exclusive to Nike.com e-commerce sales. The company is also cutting available styles by 25% starting in January. Canaccord sees Foot Locker as the major Nike retailer with more than 3,350 stores. Foot Locker shares were up 3% but the real winner last week was Nike with a $5 gain to a new 52-week high.

Fitbit (FIT) fell -8% after Stifel Nicolaus cut the stock from hold to sell. The analyst said, "With the stock market near all-time highs, no visibility to monetization of healthcare opportunities, and no opportunity for Fitbit to benefit from corporate tax reform, we cannot advocate owning Fitbit shares. There are no sightlines to profitability" with demand weak for fitness trackers. Earlier in the week, Morgan Stanley said inventory was continuing to build despite the holiday season.

Bitcoin had a rocky week after the CBOE began trading futures last Sunday evening. The coin fell from $18,000 to nearly $13,000 and then rebounded back to $18,000. Volume declined as the week progressed. Volume peaked on the 8th at $22.3 billion traded with Friday's volume at roughly $5 billion in trades according to WorldCoinIndex.com.

The CBOE began trading bitcoin futures last Sunday evening and their website was very slow to down completely for most of the first 6 hours. The CME will begin trading bitcoin futures Sunday night with a 5-bitcoin contract. Several brokers announced on Friday they would allow customers to begin trading and shorting bitcoin futures next week. Up until now, there were only a limited number of traders able to actually buy bitcoin futures. The faster new investors are allowed to trade the futures the less volatility will be seen. Volume reduces volatility as an actual market is created.

Crude prices continue to be dormant. The price has fluctuated between $56-$58 for the last two weeks. There has not been a material move since the OPEC meeting. There have been some daily moves but they were reversed almost immediately. Inventories should continue to decline over the next two weeks then rise again in January after the property tax deadline passes on December 31st. Refiners do not want oil in inventory on the 31st, but there will be a surge of imports beginning the next week. As inventories rise, prices should decline, assuming there are no additional outages. The 450,000 bpd Forties pipeline in the North Sea was shut down last week because of cracks and could be down for a couple weeks. This will help reduce the global inventory levels by about 3.1 million barrels a week until restarted.



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If conventional wisdom ruled the markets, we could expect several more months of stellar gains as investors priced in lower taxes, cash repatriation, higher dividends and more stock buybacks. Unfortunately, the markets are controlled by fear and greed and they tend to look forward months into the future.

That means some portion of the 590 S&P points (28.3%) gained since the election was in anticipation of reduced regulations and tax reform. How many of those points were pulled forward is unknown. Analysts have said that corporate tax cuts to 20% would add 10% to 15% to S&P earnings and that would equate to about 225-275 S&P points. The S&P has already gained 590 in the Trump bump so we have to assume a lot of those 225-275 points have already been pulled forward.

This does not mean the market is not going higher but it does mean we should not expect to see S&P 3,000 by March. Now that FIFO is no longer a threat to holding positions over December 31st, we could see continued gains for the rest of the year. Investors will now want to hold over and not sell until 2018 so they can get the benefit of the lower tax rates.

I continue to believe we could see some increased volatility in January as investors in "low tax rate" stocks like tech stocks, dump those shares in favor of high tax rate sectors where the impact of lower taxes could be dramatic.

Sectors with the highest tax rates according to Goldman:

Energy 35%
Telecom 33%
Industrials 32%
Utilities 31%
Consumer Discretionary 30%
Consumer Staples 30%
Finance 28%
Materials 27%
Healthcare 27%
Technology 24%

The S&P is only 25 points from 2,700. That seems to be a given at this point even though it could produce a minor sell the news dip. With two normally bullish weeks left in December, I have no idea how much higher the index could run. Conventional wisdom would suggest 2,800 could be a target since selling should be limited. Bearish analysts have been predicting tops for weeks and I am sure they will target 2,700 and 2,750 as easily discernible selling points. Personally, if I were bearish, I would take the rest of the year off and sell the open on January 2nd.

Support is now 2,650 with 2,675 as initial resistance.

The Dow broke out to a new high and even with the -31 point drop at the close, it posted a nice gain of 143 points. Resistance was 24,666-24,672 and the Dow traded just over that intraday but fell back at the close. I do not see this as material. I do expect higher highs and the 25,000 level would be the obvious target and a highly visible selling target if there were any shorts left in the market.

The Nasdaq was significantly responsible for the market gains on Friday. The Nasdaq and the Russell 2000 had been lagging. The Nasdaq big caps have been weak for the last three weeks since the sector rotation virus hit the index. The big cap stocks woke up on Friday and the index surged to a new high well over 6,900. The Nasdaq 100 blew out over 6,400 to a new high. I doubt this run is over. These stocks have been lagging so badly that Fridays short squeeze in tech stocks probably has room to run.

The Russell 2000 closed at a three-week low on Thursday with a -1.16% decline. They spiked over two weeks of resistance on Friday with a +1.55% gain. Since small caps are normally favored in December and the tax cut will be beneficial to small corporations, I am surprised the index has not been stronger. It may have been fears the tax bill was going to fail and investors were taking profits. Once it appeared to be a sure win, they raced back into the sector. That is one theory.

Financials were up strongly on Friday and that is 17% of the index. Biotechs were also up strongly along with semiconductors, also large index components. Everything was working in the Russell's favor.

Investor sentiment surged 8% to 45.0% and the first time in five weeks it is over the historical average of 38.5%. This survey closed on Wednesday so sentiment should be higher again next week with all the major indexes at new highs and the tax bill passed.

New market highs tend to produce additional new highs. We are not in a euphoria stage yet and there is just enough weakness every few days to give investors new entry points and keep the party rolling. While there is nothing on the horizon to hold the market back other than the potential for a government shutdown on the 23rd, there is always the risk of profit taking. The market has a million moving parts and it only takes a few to cause a hiccup.

The potential for a government shutdown does not carry as big an impact as in the past. Everyone knows it will only be temporary but the negative headlines could provide a buying opportunity. Just be aware of the potential for some portfolio restructuring in early January.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

Arthur Schopenhauer 1788-1860

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Index Wrap

Ready, Set, Go

by Jim Brown

Click here to email Jim Brown
In theory, the starter's gun fired on Friday when the GOP said they had enough votes to pass the tax reform bill.

Unfortunately, Yogi Berra was once quoted as saying "In theory there is no different between theory and practice. In practice there is." The same thing goes for a military engagement. The rules of engagement and the plan of attack are drawn out in great detail in advance. Once the first shot is fired the plan goes out the window.

In theory, passing the tax cuts will produce a significant increase in S&P earnings and a corresponding increase in the S&P. In reality, much of those S&P gains may already be behind us since portfolio managers have been expecting this ever since election night 2016. The S&P is up 590 points since the election.

Since the passage of the tax cuts will mean lower taxes on stock sales in January there is very little incentive for selling in 2017. Obviously, every investor and portfolio manager has different reasons for selling but tax management is always a big factor.

The market "should" continue higher through December. That may not be a vertical ramp but the overall trend should continue.

We saw a lot of reversals on Friday. Many sectors had been down over the last couple of weeks and several had decent rebounds.

The biotech sector has been choppy since the high on December 4th and the Biotech Index posted a 1.56% gain on Friday. We do not know if this will continue back to resistance but the index has resisted making a lower low for the last month.

The chip sector had been down -8% since the November 24th high. Despite the sharp decline the sector had been resisting a rebound until Friday when it gained +1.49%. This helped the Nasdaq and the Russell 2000. Normally the chips lead the Nasdaq bith up and down. The sharp decline blunted the Nasdaq's gains but the tech index recovered as the big cap stocks recovered from the sector rotation drop. If the chips continue their rebound the Nasdaq could move to even higher highs.

Helping lift the Nasdaq to a new record high was the sudden return to correlation by the FANG stocks. When they all move in lock step the Nasdaq has no choice but to follow.

The Nasdaq blew through resistance at 6,900 to cap a rebound from the sector rotation lows from December 6th. As long as the big caps remain positive there is nothing keeping the Nasdaq from higher highs. The minor 119-point retracement in early December relieved the overbought pressures and the sector should be free to move higher.

The Dow Transports had an amazing rally in late November to set new highs at 10,400. For the last two weeks, they have been stalled at those historic highs. Friday's gain saw an intraday test of resistance at 10,435 and a minor retracement at the close. The volatility at the top should have equalized the overbought pressures from that monster spike. If the transports can move to a new high, it would provide support for the Dow to add to its gains.

The Dow shook off the prior week's decline to close at a new high. However, the resistance at 24,666-24,672 has held for the last three days. The Dow is at the top of its channel and it would not hurt for it to move slowly sideways for several days to equalize. However, positive news on the tax bill is likely to energize the industrial stocks in the index and Dow 25,000 is the obvious December target.

The advance/decline line on the S&P continues to make new highs despite a hiccup midweek. The minor decline on Thursday was due to 359 decliners and only 99 advancers. Monday, Tuesday and Wednesday saw the A/D ratio almost dead even. There was definitely some rotation in progress but hopefully Friday's news ended that for the rest of December. Remember, as long as this A/D line is moving higher, the market is not going lower.

It is interesting that despite the positive A/D line, the percentage of S&P stocks over their 50-day average has been flat at around 74%. You would have thought the 30+ new highs on the S&P every day would have been lifting more stocks over their short-term average. We have seen positive improvement in the percentage of stocks over the 200-day average at 79.8%. That is nearing the highs for the last two years.

Prior resistance at 2,650 has become support and the likely target for December is now 2,750. The uptrend support suggests that 2,650 level will hold unless there is a real washout.

The small cap A/D line hit a short-term low on Thursday and the rebound is a long way from setting a new high. The small cap Russell gained 1.55% and that was due to financials, chips and biotechs and probably some short covering from the -1.14% decline on Thursday.

I am not convinced that the small caps are going to continue higher. If they were to move over 1,550, we could see a real broad market rally begin but that is still 20 points higher and it is resistance. We need a couple days of decent follow through to be convincing.

The broader Russell 3000 Index posted nearly a 1% gain and a new high. After that short period of weakness, the R3K could be primed to move even higher. The index is just over the middle of its channel with positive indicators. This is the broadest representation of the entire market with the top 3,000 stocks.

You may have heard commentators talking about the High Yield Index (HYG). There is a strong correlation between the high yield debt and the direction of the S&P. There was a couple days last week before the Fed meeting when yields were slightly volatile along with the S&P. The HYG is the red line. Note it has crossed the S&P to the downside but only slightly. What we do not want to see is a repeat of the decline in 2015. If yields start to become erratic, the S&P typically mirrors that move.

In theory, the market should move higher as long as nothing happens to upset the votes on the tax cut package. There could always be a sell the news event at any time, but it should be a buying opportunity. I would worry about a significant volatility event in January once we are into the new tax year but that should be limited since the corporate tax cuts will provide a significant boost to earnings. Buy any dip but not on the first day. I would rather buy a rebound from the dip. Let somebody else determine the bottom.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Tax Trouble Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

The new tax brackets are going to cause employers a lot of problems. Surprisingly a lot of companies, especially small companies still do their own payroll taxes. The new rates will complicate their payroll accounting.


PAYC - Paycom - Company Profile

Paycom Software, Inc. provides cloud-based human capital management (HCM) software solution that is delivered as software-as-a-service for small to mid-sized companies in the United States. It provides functionality and data analytics that businesses need to manage the employment life cycle from recruitment to retirement. The company's HCM solution offers a suite of applications in the areas of talent acquisition, including applicant tracking, candidate tracker, background checks, on-boarding, E-Verify, and tax credit service applications; and time and labor management, such as time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting, and geofencing/geotracking applications. Its HCM solution also provides payroll applications comprising payroll and tax management, Paycom Pay, expense management, garnishment management, and GL Concierge applications; and talent management applications that include employee self-service, compensation budgeting, performance management, executive dashboard, and Paycom learning applications. In addition, the company's HCM solution offers HR management applications, which comprise document and task management, government and compliance, benefits administration/benefits to carrier, COBRA administration, personnel action forms, surveys, and affordable care act applications. Paycom Software, Inc. was founded in 1998 and is headquartered in Oklahoma City, Oklahoma.Company description from FinViz.com.

Paycom is the smallest of the payroll, HCM companies with a $5 billion market cap. ADP has $52 billion, PayChex is $25 billion, Workday $14 billion and Ultimate Software $7 billion. However, Paycom has the fastest growth and rising margins.

Paycom is focused on companies with 50-2000 employees. ADP, Workday and PayChex cater to larger companies. Since 2014 Paycom has been growing revenue at an average of 47.7% per year. Their operating margins have risen from 10.4% to 17.9%. For Q3 revenue rose 31% while expenses rose only 16%.

Q3 earnings were 29 cents and much better than the 16 cents analysts expected.

They guided for revenue growth of 28% in Q4 to $111.5-$113.5 million. Adjusted EBITDA in the range of $26-$28 million or +24% growth.

Expected earnings January 30th.

The other companies are too big to grow this fast. Paycom may be the underdog but they are rapidly increasing market share on companies missed by the big processors. Customer service is the number one goal at Paycom and apparently, it is working.

Shares sold off in the Nasdaq sector rotation decline in late November. They are a tech company with a strong chart and that made them a target.

Buy Feb $85 call, currently $3.10, initial stop loss $74.50.


No New Bearish Plays

In Play Updates and Reviews

Strong Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

News that the tax plan was complete and could actually pass caused a strong rally. It appears that the tax plan could actually work and most of the warts were removed leaving a bullish scenario for 2018. Investors bought the comments early in the day and shorts from Thursday were forced to cover. Everything rallied including chips, biotechs, small caps, etc. Next week should be interesting.

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


AMAT announced a quarterly dividend of 10 cents payable March 14th to holders on Feb 21st. That is really planning well in advance.

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. No material movement in a strong market. Our stop is very tight. Any further decline will take us out.

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. Minor rebound from Thursday's loss.

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.

Update 12/14/17: Down on news their breakthrough cancer treatment Yescarta had only been given to 5 patients despite long waiting lists. The $373,000 treatment is not yet approved by Medicare, Medicaid or any private insurance. There is a long list of people who want to take it but until it is approved for payment, they are out of luck. Numerous candidates on the lists have already died because they could not afford it.

Position 11/8/17:

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

MCK - McKesson - Company Profile


McKesson won a $400 million contract for medical digital imaging network picture archiving and maintenance from the Pentagon. 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


No specific news. Minor rebound.

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.

Update 11/13: 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.

Position 12/12/17:

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

PYPL - PayPal - Company Profile


No specific news. Nice $1.39 gain.

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 reentered 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.

Update 12/13: 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.

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 finally posted a decent gain as the Nasdaq broke out to a new high.

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 only rebounded slightly.

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


This position is driving me crazy with the Dow up 117, down 77, up 143. The DIA was not as bullish on Friday as the Dow. We are still at risk over the next four weeks.

I had 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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