Option Investor

Daily Newsletter, Wednesday, 12/20/2017

Table of Contents

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

Market Wrap

Waiting for Santa's Arrival

by Keene Little

Click here to email Keene Little
The market has been rallying a long time in anticipation of the tax reform bill, which appears to be heading to President Trump for his signature. We now wait for the final market response once the tax changes become law.

Today's Market Stats

This morning started off with another gap up, thanks to another overnight rally in the futures (which started again as soon as the market closed on Tuesday). But as soon as the market opened and gapped up it got hit with some strong sell orders. I'm sure the overnight rallies and selling the opening gaps is just a random pattern since we know it's too hard to manipulate the market (cough).

Following the morning selloff there was a bounce attempt to keep the bears away and the net result this week has been a corrective pattern that suggests the pullback from Monday's high will be followed by another rally leg into next week. This pattern supports the idea that we'll get the Santa Claus rally but as I'll review in the charts, the rally could be short-lived and might not even make it into the end of next week.

There were no significant economic reports this morning other than existing home sales, which were stronger than had been expected and November's number showed growth from October. The home construction sector was one of the stronger sectors today.

The metals, energy and transportation sector were the stronger areas today while dragging the bottom was the utility sector. Interestingly, the REIT index was at the bottom of the pile today, which might have been a result of a jump in Treasury yields. The selling in bonds remains supportive of the stock market.

Assuming the tax reform bill will be signed into law today or tomorrow, the market will have received what it's been looking for and why it's been rallying. But even as the tax bill heads for signature the market's response this week has been ho-hum (not quite bah humbug) and we could get a sell-the-news reaction once it's all said and done. But the price charts support the idea that Santa should arrive, even if he has to leave early.

There has been a bullish expectation that the tax reform bill will enable the repatriation of corporate earnings from overseas. The general belief is that a flood of money will come from across the oceans and make its way into our markets. The estimated amount held oversea is $2.6T and that's a lot of money. But there are a couple of unknowns about what will happen with that money.

The first unknown is how much of the money will actually be brought back to the U.S., especially since many companies are expanding their operations overseas, not here at home, and they will use some of their earnings where they feel they'll get the biggest bang for the buck (or euro, yen, yuan, peso, etc.). The second unknown is how much will be rotated out of U.S. Treasuries, which is where much of that money is already parked. In other words much of that money is "already here," as mentioned by Jim Rickards on Fox Business News recently.

Some of the money will surely be used for paying shareholders dividends and buying back more stock. Very little is expected to be invested in additional capacity here since there hasn't been enough demand to warrant it (it's part of the problem with economists saying the economy is doing well and the reality of companies not seeing that growth). But it's been the expectation of more stock buybacks and special dividends that has encouraged investors to bid the market higher. The reality vs. expectations could be very different.

As far as bond buying goes, very little of it is going into the riskier junk bond market and that continues to warn us of trouble ahead. A review of the junk bond index, using the High Yield Corporate bond ETF, HYG, continues to show why bulls should remain a little more cautious than usual. The "animal spirits" of the market is a good sentiment measure to track since the willingness to be in riskier assets, such as high-beta stocks and higher-yielding bonds, is generally a good signal to watch when gauging how much you want to be long other asset classes. HYG has been warning us for some time that the uber-bullishness we're seeing in the stock market is only stretching things further and the correction is likely to be more significant.

Investors have been ignoring HYG but it will be hindsight that many will come to recognize the warning sign. With junk bonds significantly underperforming the stock market we'll either see a return to a desire to invest in these riskier assets or the stock market's whistling past the graveyard will be followed by a sudden wave of panic as investors go screaming and running through the woods in the dark. We all know what's out there in the woods in the dark (wink).

HYG has been shifting from a "risk-on" environment to "risk-off" while stock market investors continue to plow ahead, bidding stocks higher based on what they believe the new tax bill will provide. That could be a dangerous assumption but obviously we won't know until it's behind us.

For now the HYG chart is simply a warning sign, especially since it dropped below its 50- and 200-dmas in late October and has only been able to bounce back up to its broken 20-dma, which tells us the intermediate trend is down.

The weekly chart below shows it's still holding price-level support near 86.30, which was tested on November 15th, but daily MACD remains below zero and the bearish divergences on the weekly chart suggest lower prices ahead. A drop below 86 would likely be followed by stronger selling, in which case some astute stock money managers might take notice. The last time HYG dropped below 86, other than the quick pullback in October 2016, was in August 2015 and it was at that time that the stock market suffered one of its strongest corrections (into the February 2016 low) since mid-2011. Keep HYG on your radar.

High Yield Corporate Bond ETF, HYG, Weekly chart

Along with the junk bonds, the RUT is a great market sentiment indicator since it also reflects the animal spirits of investors. I'll start tonight's chart review with a top-down look at the RUT.

Russell-2000, RUT, Weekly chart

Since pushing to new highs in September and rallying above the longer-term trend line across the highs from 2007-2015 the RUT has been showing a slowdown in the momentum of its rally. As I'll show on the daily chart further below, the rally from August has formed a rising wedge pattern, which fits as the final part of the rally from February 2016 and why the negative divergence is a warning sign.

The leg up from August fits as the 5th wave of the rally from February 2016 and it would equal the 1st wave at 1562. The December 4th high missed that projection by 3 points and I think the chances are good that the projection will be achieved with one more push higher. But the wave count and bearish divergence suggest one more push higher will be a good opportunity for the bears, not the bulls. The coming correction could be sharp, strong and fast, which is just the kind of move bears love.

Russell-2000, RUT, Daily chart

The rising wedge for the rally from August can be seen on the daily chart below and while the price pattern since the December 4th high is not clear, it does continue to support the idea for another push higher to the top of the wedge, which is currently near 1575 and will be close to 1580 by the end of next week. From here, only a drop below 1505 would we have confirmation that a significant high is already in place.

Key Levels for RUT:
- bullish above 1553
- bearish below 1505

Russell-2000, RUT, 60-min chart

If the RUT continues higher from here it could rally to 1583 if it's to achieve two equal legs up from December 14th. With the top of rising wedge near 1577 next Tuesday (Monday is of course closed) we have an upside target zone at 1577-1583. But keep in mind the 1562 projection on the weekly chart since it's possible that's all we'll see for the RUT.

Once the RUT makes a new high above Monday's, at 1553 (assuming it will), all the pieces will be in place to call a major top at any time. We have the upside target zone but there's no guarantee it will get there, just as there's no guarantee it will stop there. For now we simply have a level of interest to watch if reached and bulls should recognize the significant downside risk with a reversal from there.

S&P 500, SPX, Daily chart

SPX is also pushing higher inside a rising wedge pattern and while I see upside potential to the 2725 area, any new high from here, like the RUT, would then put the pieces in place to call a major top at any time. I like the crossing of trend lines near 2725 on January 2nd since it would be a "pretty" finish for the rally but there are reasons to doubt it will make it that high. It's certainly a level of interest if reached.

For now I'm assuming this week's pullback will be followed by another push higher. We could see it chop a little lower to about 2671, where it would hit the bottom of its rising wedge and the previous high on December 13th, and then look for another leg up (the Santa Claus rally). If it rallies all week next week then the 2725 upside target will be in play for a high on January 2-3. But before that level I'll be watching a couple of upside projections for potential trouble.

For the rally from August there's a wave relationship that points to 2704.94, which is where the extended 5th wave would equal the 1st through 3rd waves (noted on the chart). Interestingly, the 5th wave of the rally from 2009 has also extended and it would equal 162% of the 1st wave at 2704.87. On the Gann Square of 9 chart the next important level for SPX is 2704. This confluence of these projections, along with the Gann chart, is potentially very important and a solid reason why SPX will not rally higher than 2705.

Another level of interest, if reached, is 2718, which is where the 5th wave of the rally from February 2016 would equal the 1st wave. These multiple projections give us a relatively wide target zone of 2704-2725 to watch carefully for a top to this rally, with 2704-2705 being especially important to watch. This upside target zone also means SPX would be very bullish above 2725 since it would indicate we are truly into a blow-off move, the top of which would be anyone's guess. But in that case the bears will need to stand back in awe as the bulls ride it for all it's worth before it flames out.

Key Levels for SPX:
- more bullish above 2725
- bearish below 2652

S&P 500, SPX, 60-min chart

The SPX 60-min chart shows the little bull flag for this week's choppy consolidation, which suggests we'll get another leg up in the coming days. The light-green dashed line is a projection to the top of the rising wedge pattern by Friday, finishing near 2705 (to match the first 2704-2075 target zone). A pullback and then larger move higher, shown in bold green, could see a rally at least to 2715 to hit the top of the rising wedge before the end of next week. Only a break below the December 14th low near 2652 would have me turning bearish since it's possible Monday's high was THE high. I consider that to be a lower probability but it's certainly a possibility.

Dow Industrials, INDU, Daily chart

The Dow looks similar to SPX with only small differences. Its pattern supports the idea we'll get a little more of a choppy pullback into the end of the week and then Santa will arrive next week to deliver presents to all the good little bulls who believed. The bears will get their lumps of coal, a kick in the ass and told to go back to their caves. A final rally to the 25200 area by January 2-3. From there the bulls will feel some pain but that possibility will obviously be reevaluated next week. This bullish expectation would have to be seriously questioned if the Dow drops below its December 14th low at 24511.

Key Levels for DOW:
- bullish above 24,500
- bearish below 24,100

Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq looks the same as the others with an expectation for one more push higher to complete the 5th wave in the rally from August. The 5th wave would equal the 1st wave at 7034.71 so that's a level of interest if reached. There's higher potential to the top of its up-channel from August, which will be near 7090 by the end of next week. Much above 7100 would be a bullish breakout from the up-channel (look for an acceleration higher if the breakout is more than a head fake) but a drop below the December 14th low at 6851 would indicate a top is likely already in place.

Key Levels for COMPQ:
- more bullish above 7075
- bearish below 6850

KBW Bank index, BKX, Weekly chart

Keeping an eye on the money (the banks), I find it curious that higher bond yields the past two weeks (Treasuries have been selling off) have not helped the bank stocks and that should be a little worrisome. The past three weeks have left little doji candlesticks for BKX and right at resistance at its trend line along the highs from April 2010 - March 2017.

Short term I see the potential for only a minor push higher, such as 108.50 (maybe $0.50 above yesterday's high). That would complete a small rising wedge pattern for its 5th wave in the rally from November 13th and in turn complete the 5th wave of the rally from last April, which in turn would complete the 5th wave of the rally from February 2016. That in turn will complete the 5th wave of the rally from March 2009 so this is going to be a potentially very important high, one which should lead to a multi-year decline.

The bears will have lots to prove before that bigger bearish picture becomes reality but that's the kind of downside risk I see and why I strongly recommend protecting/hedging long positions.

U.S. Dollar contract, DX, Daily chart

Following last week's back-test of price-level S/R for the US$ (the failed inverse H&S neckline) we've seen the dollar fail to hold support at its 20- and 50-dmas, all of which has the dollar looking weak. A rally above 94 would turn things around and have the dollar looking bullish but at the moment it's looking like the higher-probability move is lower, maybe down to the $90 area.

Gold continuous contract, GC, Daily chart

Today's rally in gold got it above price-level S/R at 1265, which is bullish, but now it's dealing with resistance at its broken 20- and 200-dmas at 1268-1270. Slightly higher is its broken 50-dma, near 1276, and broken uptrend line from December 2016 - July 2017, near 1275. Next Tuesday the broken uptrend line crosses the downtrend line from September at 1276, all of which makes a strong wall of resistance for gold bulls.

The multiple reasons for resistance near 1276 is also why gold would be much more bullish if it can get above it and then hold above that level (long gold would be the play). But if resistance holds and gold drops back below its December 12th low at 1238 we'll likely see it head down to the 1205-1215 area where it would test its uptrend line from December 2015 - December 2016 and the next price-level S/R.

Oil continuous contract, CL, Daily chart

For the past 5 weeks oil has been battling resistance 58.50-59.00, which includes price-level S/R, the 38% retracement of its 2013-2016 decline and its 200-week MA. I continue to see upside potential to the top of a rising wedge pattern, near 62, and potentially much higher if it rallies above 62.50. But the larger pattern for oil suggests we'll see a strong decline into next year once the current bounce completes, either here or I think more likely somewhere in the 62.00-62.50 range.

Economic reports

Thursday and Friday will see several potentially important economic reports but whether anyone will be watching or caring is another matter. I suspect very few will care since end-of-year concerns about portfolio balance/protection will be of greater concern than worrying about the economy. No significant changes from previous reports are expected tomorrow.


The price patterns for the indexes support the idea that Santa will arrive on schedule for all the good little bulls and shower them with more money with which to buy more stocks. The setup is for a rally to begin at any time but I don't think any later than next Tuesday. But as a sick joke, Santa may be getting ready to lure the bulls into a bull trap since the price patterns suggest we'll get just one more leg up for the rally and then a fast and strong reversal back down. January could be a painful time to be a bull. Conversely, if you're a bear and tired of eating grubs and you're ready for some steak tartar you could be very close to getting your opportunity to kick some rump.

Considering how stretched this market is (well above standard deviations), the coming correction could come two ways -- chop sideways and let the overbought condition work its way off slowly or all the excesses are going to get reversed quickly as investors panic out of their positions. Keep in mind that this market has not been tested since the majority of investors moved into passive investing with the multitude of ETFs. When the selling starts in those ETFs we could quickly find a no-bid situation as all those stocks in the ETFs must get sold.

We have a vulnerable market and while a choppy consolidation in January is clearly a possibility (even a continuation of the rally), I think the odds are high for a stronger correction. By this time next week I expect to have a better idea for how January should look. Be careful out there.

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

Listless Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

Wednesday was probably a preview of the next two days of trading. Volume is falling and the opening gap higher was sold hard. Retail investors are more than likely finishing up on their tax loss selling and portfolio managers are prepping for the potential for increased volatility in January. This was the third consecutive day that the Dow opened significantly higher and was hit by immediate selling. This trend is not likely to change this week.

Next week we could see some of the normal post Christmas buying but it may also be minimal. With the markets at historic highs after a monster gain for the year with no material profit taking, there is probably a general consensus that we will see a better buying opportunity in January. There is no reason to put new money to work in an uncertain market with short-term challenges ahead.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Flat on Low Volume

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes traded mostly flat to down on the lowest volume since Dec 11th. The listless market saw the Dow lose 28 points, Nasdaq -3 and S&P -2. This is a holiday week and volume was only 6.2 billion shares and it will only go downhill from here. On the positive side there was no sell the news decline on the successful house vote on the tax reform bill. On the negative side, the Dow gapped open nearly 100 points and gave it all back to post a loss. The selling was immediate. The Nasdaq gapped up +24 points only to give it all back and close with a loss. The market is not likely to rally significantly the rest of the week. If anything, we could see a continued decline on end of year portfolio positioning.

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

GILD - Gilead Sciences
The long call position was stopped at $73.85.

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

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Long and short equity trades = Premier Investor

BULLISH Play Updates

AMAT - Applied Materials - Company Profile


No specific news. Micron earnings lifted the sector but the overall market was flat.

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. Minor decline in a weak market.

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


Credit Suisse downgraded the stock from buy to neutral and it gapped lower at the open to stop us out.

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:

Closed 12/20: Long Feb $75 Call @ $3.45, exit $2.60, -.85 loss.

MCK - McKesson - Company Profile


No specific news. Holding over $160 while it consolidates its recent gains.

Original Trade Description: November 15th

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

Earnings Jan 25th.

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

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

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

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

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

Update 12/18/17: The company said CFO James Beer was leaving and would be replaced by Britt Vitalone, a current SVP. They also reaffirmed their full year guidance for earnings of $11.80-$12.50.

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.

PAYC - Paycom - Company Profile


No specific news. Paycom is still holding the gains from Monday.

Original Trade Description: December 16th.

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.

Position 12/18/17:

Long Feb $85 call @ $3.50, see portfolio graphic for stop loss.

PGR - Progressive Corp - Company Profile


Stock upgraded from sell to neutral by Credit Suisse. 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.

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. Minor decline with financials weak.

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 posted a minor gain thanks to Micron earnings.

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.

TGT - Target Corp - Company Profile


No specific news. New 52-week high close.

Original Trade Description: December 13th.

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.

Position 12/14/17:

Long March $65 call @ $2.90, see portfolio graphic for stop loss.

TRN - Trinity Industries - Company Profile


No specific news. Shares are holding the recent gains.

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


Two consecutive declines on the Dow as yearend tax loss selling overpowers the low volume.

Analysts on stock TV are starting to talk about a potential correction in January. This talk could keep the indexes from moving much higher although Dow 25,000 would still be the sentiment target.

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 now.

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.

Update 12/18/17: The Dow is moving ever closer to 25,000, which could end up being a monster sell the news trigger. The Dow is up 6,900 points since the election. That is 38.5% in 13 months. There is a 100% chance there will be a correction in the future. The only unknown is when.

I am recommending we close the short put side of the spread. That captures that portion of the trade and once the Dow rolls over we do not have to deal with the rise in value in the short put. Secondly, that gives us other options to raise additional premium in the future, including selling a higher put if the index does not decline.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.
Closed 12/19: Short March $210 put @ $1.71, exit .43, +1.28 gain.
Net debit $3.45.

QQQ - Nasdaq 100 ETF - ETF Profile


So far, so good. The Nasdaq has posted two consecutive declined although today was minimal.

Original Trade Description: December 18th.

PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ-100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq Composite hit 7,000 intraday and came to a dead stop. Less than half the big cap tech stocks made a material contribution. The index has gained 260 points in the last two weeks and the majority of those points were the last two days. The Nasdaq has hit long-term uptrend resistance.

The Nasdaq 100 hit round number resistance at 6,500 and stopped. The $NDX is up roughly 300 points over the same two-weeks.

While there is nothing preventing the indexes from moving higher, they are now well into overbought territory. The lack of participation by half the big cap stocks is troubling. Many investors have large gains in tech stocks after the 1,950 points the index has gained since the election. Since taxes will be lower starting on January 2nd, that gives investors an incentive to hold on to their gains until January. That incentive expired on December 31st.

There have been numerous minor dips along the way but those dips have grown progressively shallower in recent months. The Nasdaq rally may be building to a climax over the next several weeks.

The Nasdaq Composite is 12% over its 50-week average and 24% over its 100-week average. Neither have been touched since July of 2016. These are extreme levels of bullishness.

I am recommending we buy a February put on any weakness in the QQQ. I do not want to jump in front of the moving train but I do want to be short if a derailment occurs. Support is back at $152.

Position 12/19 with a QQQ trade at $157.75
Long Feb $156 put @ $2.40. See portfolio graphic for stop loss.

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