Option Investor

Daily Newsletter, Thursday, 12/21/2017

Table of Contents

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

Market Wrap

Market Up On Tax Reform Hopes

by Thomas Hughes

Click here to email Thomas Hughes


A number of US large cap companies have pledged to spend tax savings on wages, salaries and bonuses. Among the announcements were plans for new construction and other capex related items. The list is broad in terms of sector including infotech, airlines and banks. Names include AT&T, Wells Fargo, Comcast and NBCUniversal.

International markets were mixed on Congress passage of the tax bill. Asian markets were flat, some up and some down, led by a half percent gain in China. Japan closed with a small loss after the BOJ left rates unchanged and indicated no change to policy should be expected in the foreseeable future. European indices were more positive, getting a lift from US markets, and closed with gains across the board. The FTSE led with a gain of 1.05%, the DAX lagged at 0.30%.

Market Statistics

Futures trading was positive all morning and gained some strength going into the open. The trade was driven by tax reform and the economic boost derived from it as well as a raft of economic data. The SPX opened with a gain of about 3 points and quickly moved higher. There was a quick dip to retest support but that resulted in a bounce from the opening level and a slow, steady march higher. The index moved higher into the early afternoon and looked like it could continue higher. Resistance set in at that point however and capped gains. The markets drift sideways the rest of the day to close very near to the opening level.

Economic Calendar

The Economy

Lots of data today, a bit mixed in terms of expectations but all positive and consistent with underlying trends. Initial jobless claims rose more than expected to 245,000 but remain well below 300,000 and near historic lows. The four week moving average of claims rose a mere 1,250 to 236,000 and is also low relative to trend. On a not adjusted basis claims rose 1.5% from the previous week, the seasonal factors had been expecting a decline near 6.5%. On a year over year basis not adjusted claims are down -8.9% and continue to trend lower in the long term.

Continuing claims rose by 43,000 to 1.932 and a 4 week high. Even so the number of 2nd week claims remains low relative to trend and consistent with labor market health. That being said, signs of bottoming persist in this figure. It suggests this measure of the labor market has ceased improving and/or hit a point of equilibrium. How that reflects on the overall labor market is yet to be seen. It may be the first indication of a “tight” labor market, one ready to sustain above average wage growth.

The total number of Americans receiving unemployment benefits fell -89,915 to 1.901 million. This is in line with seasonal expectations and a precursor to increases we are likely to see in the next month of data points. These gains are seasonally expected, the relevant figure will be the high. As long as the peak remains within the long term trend the long term trend will remain intact. My target is 2.25 million by the last data point for the year. Today's data is for 12/2 and lags initial claims by 2 weeks. On a year over year basis total claims are down 6.7% and show continued, sustained improvement in the labor market.

The final revision to 2017 3rd quarter GDP growth came in at 3.2%. This is a tenth shy of expectations and down from the previous estimate but still strong and expanding from the previous quarter. Considering the Leading Indicators I think we can expect growth to continue as it has been. GDP growth was fueled by PCE, inventories, non-residential real estate investment, exports and government spending.

The Philadelphia Fed Manufacturing Business Outlook Survey shows broad gains in activity. The headline activity index gained 3.5 points to 26.2 with positive contributions from all segments. New orders and shipments both remain positive and continue to expand, gaining 8 and 2 respectively. Employment, unfilled orders and delivery times all remain positive but declined in this month's reading. Employment has been positive for 13 months showing sustained expansion of the labor force. The 6 month forward outlook gained 2.4 to hit 53.5 and is near long term and historic high levels, indicative of continued expansion in the manufacturing sector.

The Index of Leading Indicators came in at 0.4% after rising 1.2% in the previous month. This is the 16 month of expansion in the leading indicators. Analysts at the conference board say the reading indicates solid growth will continue into the first half of next year. The Coincident Index increased by 0.3% after rising 0.3% last month, the Lagging Index gained 0.1% after rising 0.3% in the previous.

The Dollar Index

The dollar gave up a little bit of ground in today's session despite the positive data. While positive and in support of the FOMC time line it does not give reason to expect them to tighten it. The Dollar Index fell less than -0.25% and remains well within the short term range. The indicators are bearish so a move down to the bottom of the range could be expected although economic data or the signing of tax reform into law could alter that outlook. Longer term the index is likely to remain with the range of $91.50 to $95 until something fundamentally changes in the data, the outlook or the central banks.

The Gold Index

Gold prices held steady at a two week high as weaker than expected data left the dollar moving lower. The spot price is now approaching a point of possible significant resistance near $1,275. This target may be tested in the next day or so and, if broken, could lead to further upside although there is still significant resistance possible between $1,275 and $1,300. The risk is tax reform and passage of the bill; if it sends the dollar higher on expected GDP growth it will likely cap gains in gold and send it lower.

The Gold Miners ETF GDX gained 0.62% on the news and is extending a move up from support. Support is near the bottom of a long term trading range and is confirmed by the indicators. The indicators are both bullish and suggest higher prices within the range. Today's action has moved the price above the mid-point of the long term range but faces resistance at the long term moving average. A break above there would be bullish with a target near $24 and $25. If the moving average caps prices and/or should gold prices fall a move back to the recent low should be expected.

The Oil Index

Oil prices moved higher today on continued outages in the North Sea and signs of tightening US supply. Those signs are near term as are today's gains. Gains are capped by the longer term outlook which suggests global oil markets will be well supplied in 2018. Supplied enough to increase global storage levels and drive the price of crude to sub $50 levels by the end of the year. Prices may move higher in the near term but those high prices are likely point of reversal for those with a longer term outlook.

The energy sector jumped on today's rise in oil prices, and forward earnings outlook, tax reform, economic data etc. The Oil Index gained nearly 2% and exceeded by original target of 1,300. This is a strong move, supported by the indicators, and brings new targets into play. My new target is in the range of 1,400 to 1,450 and may be reached by the end of next earnings cycle. Longer term I will be watching for signs of topping and reversal.

In The News, Story Stocks and Earnings

Conagra reported before the bell this morning. The maker of higher end packaged foods grew revenue more than 3% over the prior year and beat expectations. The company reported earnings of $0.55, $0.03 ahead of consensus, and issued positive guidance because of it. The beat is driven by organic sales, up 2.3%, which is expected to continued growing into the coming year. The shadow overhanging share prices is the fact organic net sales are expected to come in flat for the year. Shares of the stock moved higher on the news but resistance pushed them back to break even, creating a large red candle closing with a loss on the day.

Nova Lifestyle, maker of designer and manufacturer of modern home furniture, made a major announcement today. The company will begin taking payments with Bitcoin. Along with this they plan to integrate a network of designers, decorators, users and suppliers built on blockchain technology. Shares of the stock jumped on the news and gained more than 18% by the close. The stock created a large doji candle, possibly a hanging man, just below resistance. Resistance is near $3.00, a break of which would be bullish. Assuming that Bitcoin continues to appreciate as some analysts say it will, and assuming the company actually follows through on the announcement, this could turn into a decent play on cryptocurrency.

Nike reported after the bell and beat on the top and bottom line. Revenue of $8.55 billion beat by $.150 billion, EPS of $.46 beat by $0.06. Sales were driven by international growth as well Nike Direct, offset by an expected decline in US wholesale sales. Although revenue grew year over year diluted EPS did not, hit by declining margins and higher expenses. Looking forward the company is expecting to build on growth but did not give guidance.

The Indices

The indices tried to move higher but did little more than move sideways within what is now a tight 4 day range. This range began on Monday when the market gapped up on tax hopes and has carried through until today. Today's leader is the Dow Jones Industrial Average. The blue chips closed with a gain of 0.22% and created a small doji candle within the four day range. This candle, the past 4 days, can be considered spinning tops as the market is waiting on tax news and etc. They can also be considered a consolidation with uptrend and are one until proven false. The indicators are a little mixed but bullish and in support of rising prices. My new target is 25,500, a move to new all time highs would confirm this outlook.

The S&P 500 closed with the second largest gain in today's tepid session. The broad market also created a small doji candle within the 4 day range and looks like it could move higher. MACD momentum and stochastic are both consistent with the onset of a trend following move higher although there are some warnings signs. Both are showing divergences from the all time highs that suggest an end to the near term portion of the bull market are nearing a point of possible reversal. When that reversal begins is yet to be seen but the possibility is there. A move to new highs would just about hit my 2,700 target. A break above there would be bullish with target near 2,775.

The NASDAQ Composite comes in third with a gain of 0.06%. The tech heavy index created a small doji candle within the four day range and looks like it could go higher. Both indicators are bullish and pointing higher with only resistance at 7,000 to hold it back. A break above 7,000 would be bullish with target at 7,200.

The Dow Jones Transportation Average comes in last with no gain and no loss, it was unchanged. The transports created a small red bodied candle moving down to close at yesterday's close and almost completely within yesterday's upper shadow. The index did create a new all time high. The indicators are bullish and consistent with higher prices although there is a strong divergence from momentum. This divergence is a sign of possible reversal but not a guarantee. A move lower may find support at 10,500 and 10,250 with a possible move lower should sentiment deteriorate. A move higher would be trend following and in line with a recently formed continuation signal, upside target is near 11,500.

The markets have been moving higher but the indications are mixed. There are signs the rally is slowing, divergences suggest correction could come, but this type of thing happens whenever the market sets up for a move higher. The underlying trends remain bullish, earnings outlook remains bullish and today's data supports that outlook so there is no reason for me to bet against it. The near term risk is tax reform and how the market reacts when it gets signed into law. A knee jerk reaction to sell-the-news could turn into the next great entry point for long term positioning. I am cautiously bullish for the near term, firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes



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New Option Plays

Calendar Winding Down

by Jim Brown

Click here to email Jim Brown

Editors Note:

Only 5 trading days left in 2017 and the major indexes have stalled. The Dow has stopped at 24,850 for four consecutive days and sold off on every attempt. The Nasdaq is also failing below the high reached Monday. Friday is going to be extremely low volume and the market outcome is not expected to be any different.

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

Four Consecutive Days

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow has failed at 24,850 for four consecutive days. The index closed 69 points below its intraday high with a gain of 55 points. Since the top five stocks contributed 101 Dow points, it was not a very broad based rally. The advancers/decliners were dead even at 15 each. The Nasdaq gained 4 points but that was 21 points below its intraday high. For the last four days we have seen sellers on every bounce but they are not pushing prices lower. They seem to be content to sell the highs and then wait for the next bounce and do it again.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

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

Credit spreads and naked puts = OptionWriter

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3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AMAT - Applied Materials - Company Profile


No specific news. The semiconductor rally did not last long.

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.

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.

MCK - McKesson - Company Profile


No specific news. Holding at $160.

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 gave up the gains from Monday to close at the low for the week.

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


Shares retraced their gains from the upgrade on Wednesday.

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. Financials were up today but Paypal lagged the group to close flat.

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. New 3-year high close.

Original Trade Description: December 4th.

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

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

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

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

Earnings January 24th.

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

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

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

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

Position 12/5/17:

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

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


The last four days the Dow has stalled at 24,850. This appears to be the point where portfolio managers are willing to exit positions or enter new shorts. We did learn late today that the temporary spending resolution was passed by both the House and Senate so the risk of a government shutdown has been kicked out until January 19th.

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 January market crash 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. Only a very minor 2-cent gain. Ten of the top 15 big cap tech stocks were negative for the day.

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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