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Daily Newsletter, Saturday, 12/23/2017

Table of Contents

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

Market Wrap

Headline Evaporation

by Jim Brown

Click here to email Jim Brown

Potential negative headlines are evaporating one by one, as the market prepares to close out the year on a high note.

Weekly Statistics

Friday Statistics

The tax bill was passed and signed and it no longer a potentially negative headline. In fact, it may turn into a once in a generation event for the market. The government-funding deadline was kicked into January as lawmakers opted for another continuing resolution rather than remain in Washington over the Christmas holidays and fighting over a government shutdown. That was another potentially negative headline that evaporated on Friday. The event horizon is now clear of potential problems until the new January 19th funding deadline.

The market is free to move in any direction it chooses over the next couple weeks without any political roadblocks. So, how did the market celebrate on Friday? The Dow dropped at the open to trade down -64 points intraday and move slightly farther away from the 25,000 end of year target.

The small cap Russell 2000, the index that should be leading us higher in December, fell -7 points intraday and slipped farther away from the strong resistance at 1,550.



I believe the market is going to have a banner year in 2018, assuming there is no black swan event, but it may suffer a rough start. The normal Santa Claus rally is the last 5 days of December and the first 2 days of January. Everyone that has been actively trading for any period of time knows to expect gains over the next six trading days. Friday was the first day of the rally but it did not turn out very well.

The Santa rally is thought to be caused by retail investors putting their holiday bonuses to work in the market. Investors are home for the holidays with money burning a hole in their pocket. The first two days of January are normally expected to rise because of year-end retirement contributions hitting those mutual fund trading desks. Since 1896, the Dow has risen 76% of the time over these 7 days. There is also a market saying about the lack of a rally. "If Santa fails to call, the bears will roam on Broad and Wall."

If the next 6 days are normally bullish, why was last week so lackluster? Earlier in the week, it was all about the passage of the tax reform bill. Uncertainty kept the markets in check. On Friday, there was no obvious reason for weakness other than lack of interest and weak volume. Investors and traders were at the mall or home getting ready for that weekend visit to mom's house rather than huddled over their monitors trying to trade stocks. Volume was only 4.8 billion shares and I am surprised it was not lower. Maybe the investor mindset will change next week once all the gift giving and family gatherings are just a fond memory.

There remains a lot of uncaptured profit in the market and once the calendar turns over into 2018 and lower taxes, a lot of that profit could be taken and put to work in different stocks where the corporate tax cuts will be more beneficial. This is the current risk for the market. In 2016, the S&P lost 269 points in about three weeks after hitting new relative highs in December. I am not predicting this for January but it is always a possibility. I definitely do not think we could have a similar major decline because of the once in a generation windfall profits that will begin hitting the earnings guidance in January and the actual earnings in April. This will be a gift that keeps on giving for investors.

However, we could still have a decent dip. I believe it will be a buying opportunity and it could be short, sharp and shallow. We need to be prepared and that means not being fully invested on January 2nd. Keep some cash in your account just in case an opportunity arises.

As of Thursday, the Dow was up 38.6% since the election. The Nasdaq is up +37.9% and the S&P +28.7%. Nobody in his or her right mind would expect the market to continue higher without a decent dip in the coming weeks.


There was a flurry of economic data on Friday. Most of it was positive. Personal income rose 0.3% in November and slightly under the +0.4% expectations. Income is now up +3.8% on a year over year basis. These numbers will rise sharply in 2018 as a result of the tax reform. Personal spending rose +0.4% and the second highest rate since March. The impact of the hurricanes on the data has produced some significant volatility over the last three months. This number will also surge as consumers get more money in their paychecks.

The PCE Deflator, the Fed's favorite inflation indicator, rose +0.2% in November. Most of the gains were related to the 7.0% rise in gasoline after the hurricanes. Goods rose +0.3%, durable goods declined -0.2% and motor vehicles rose +0.3%. Services rose 0.2% and healthcare +0.1%. The core PCE excluding food and energy rose only +0.1%. On a trailing 12-month basis the PCE is up +1.8% and the core PCE is up 1.5%. Inflation remains contained.

Durable goods orders for November rose +1.3% after a revised -0.4% decline in October. Excluding transportation, orders declined -0.1%. Nondefense capital goods orders rose 2.6%. Shipments rose 1.0%. This report was ignored.

The final revision on Consumer Sentiment for December declined from 96.8 to 95.9. Analysts were expecting a rise to 97.1. The decline was caused by a drop in the expectations component from 88.9 to 84.3. The present conditions component rose from 113.5 to 113.8. Despite the decline in the headline number the trend is still higher and once those lower taxes begin hitting consumer paychecks, we should reach a new high.


New home sales for November rose 17.5% from 624,000 to 733,000 on an annualized basis. That was 27% higher than November 2016 and it was the highest month since July 2007. The supply of homes on the market fell from 5.4 months to 4.6 months and the lowest since July 2016. There were 283,000 new homes listed for sale at the end of November, up 23% from 2016. The median home price rose 1% to $318,000. Homes priced under $300,000 made up 45% of the total.


The Kansas Fed Manufacturing Survey for December declined from 16 to 14. New orders declined from 22 to 7 and inventories fell from +2 to -11. Backorders declined from 12 to 6. Anything over zero is expansion so the Kansas area is just expanding at a lower rate. The tax cuts will likely help as manufacturers add more capacity and additional products using the free cash flow from the reduced taxes.


The decline in several of the week's economic reports pushed the Atlanta Fed's GDPNow forecast for Q4 back down to 2.8% from the 3.3% forecast on Monday. The personal spending reduced expectations by -0.2% and the durable goods knocked off another -0.3%. This is a volatile real time forecast so the numbers change weekly.


We have a skinny calendar for next week. The Richmond survey and the pending home sales are the most important. There are no earnings next week.


You probably heard that bitcoin imploded on Friday. The coin hit $19,900 on Sunday and then crashed to $10,400 on Friday. This chart from World Coin Index does not show the $10,400 low because that was on Coinbase. The CME futures do not show it as well because the futures were limit down for a long time. On the CME, there is a trading halt at 7%, 13% and 20% move intraday. If it hits the 20% number on a decline, it cannot go any further that day. The futures can trade higher but they cannot trade lower. That is a killer if the futures are limit down as they were but the coin is trading $2,000-$3,000 lower on some other exchange. On the CME chart, the flat lines are trading halts. The various exchanges have a lot to work out before the coin will actually be liquid without extreme volatility. On the last chart, note how the volume surged after the lows on Friday.

Coinbase Chart

CME Futures Chart

World Coin Index Chart

Nvidia (NVDA) traded sharply lower intraday because of the drop in bitcoin. People need to realize that Nvidia receives no material revenue from bitcoin because it is no longer mined on Nvidia GPUs. Everyone seems to panic whenever bitcoin crashes and they think the Nvidia rally will end. Nvidia is on track to do nearly $15 billion in revenue in 2018 and their revenue is rising about 35% per quarter. In their last earnings call, the CEO downplayed the revenue from all crypto currency mining saying it was less than $80 million out of their $2.65 billion quarter. That would not move the needle even if all $80 million suddenly evaporated because revenue rose $687 million in Q3. Investors need to get over this unrealistic idea that Nvidia is only about crypto currency mining.

Rosenblatt Securities reiterated a buy on Friday with a price target of $250. The analyst said we may look back a year from now and realize that target was too low.


Shake Shack (SHAK) was downgraded by Jefferies to underperform (sell) and a price target of $36. That would be a 22% decline from its current price of $45. The analyst said SHAK may have a bright future but that is already priced into the stock after the latest rally. SHAK shares have a PE of 71 compared to McDonalds at 26. SHAK has 114 stores and McDonalds has 31,230 stores. He also said store traffic is likely to be negative in 2018 due to store cannibalization, high initial volume and a small comp base. SHAK is finding that when they open stores away from the Northeast the volume on those new stores is lower because of traffic density and price points. You can sell a $10 burger in NYC but the same burger in a southern store would be $6. Shares fell 3% on the downgrade.


Jefferies also upgraded the price target on Dunkin Brands (DNKN) saying the company will get a huge boost from the tax reform. Dunkin currently pays about 38% in taxes and that will fall to 21%. The analyst said this would represent an 18% upside to earnings above current estimates for 2018. Many of the franchisees would see the 20% deduction for pass through businesses. This extra free cash flow would allow the company to increase its capex spending in addition to the recent spending announcements. This would provide additional funds for advertising and marketing. They price target was raised from $60 to $68 but shares were already trading at $65.


Apple (AAPL) is now facing several suits for issuing software updates that deliberately slowed response times on older phones. Apple said it was to reduce the load on older batteries that could have been weaker as a result of being recharged hundreds of times. Apple never told users their phones were being progressively slowed, leading them to think the only way to resolve their sluggish phone problem was to buy a new one. Basically, Apple was slowly degrading their phones to the point where an upgrade was the only option. Customers could have just replaced the battery if Apple had told them it was an issue. Apple had recently sent out the software downgrade to owners of iPhone 7s, a relatively new model. Software detectives struggled to find out why their phones had slowed and eventually found the slowdown code. Analysts said the lack of disclosure is what makes it appear criminal. If they had told users about the downgrade and why, with the option to downgrade or not, it would not have been a problem. Now that millions of users have upgraded when they did not really have to, it may cost Apple a lot of money.

For years, it was theorized that Apple had a "kill switch" in its phones that would be activated after 18-24 months to degrade operations and force an upgrade to a new model. These people were considered conspiracy theorists and now they have been proven right.

Analysts are starting to lower their Q4 expectations for iPhone sales. The X is now available in stores for immediate delivery in the US and UK. The surge in sales has faded but it is expected to be steady for the next two quarters. Some carriers have been offering a buy one, get one free promotion for iPhone 8s, suggesting those are not flying off the shelves either.

Apple shares could see some weakness in January as investors take profits from the 2017 gains. That might be the wrong idea since Apple's $265 billion in overseas cash will be eligible to come to the US at a tax rate of 15.5% instead of the 2017 rate of 35%. A lot of that cash will likely be used for stock buybacks and big dividends for Apple shareholders. Both of those options would boost the stock price. It might be worth enduring a little pain in early January in return for long-term gains. Apple is likely to announce its cash repatriation plans with the Q4 earnings on February 1st.


Insurer Chubb Ltd (CB) authorized a $1 billion stock buyback for 2018. The company is trying to defend its stock price while at the same time defending hundreds of homes and businesses insured by Chubb in California. Chubb has even contracted with private firefighters across 13 states to protect homes in danger from wildfires. Chubb sent 11 fire trucks with private firemen to protect more than 500 insured homes from the Thomas fire in California. The idea is that it is cheaper to protect a home instead of rebuild it. One specific home had seen visits from the fire teams on five separate occasions since the fire started. The team installed sprinklers, cleaned out gutters, taped vents shut and removed patio furniture that could have caught fire. On one visit, they found fire already on the property and they put it out before installing hydrating gel in potential risk areas.

This is a great idea for homes still intact but with this kind of active management you have to wonder how many of the more than 1,000 homes destroyed were insured by Chubb. With shares declining, it suggests some investors are not waiting around to find out.


Boeing (BA) is reportedly in talks to take an equity stake in Brazil's aircraft manufacturer Embraer SA (ERJ). Brazilian president Michel Temer said he would veto any complete acquisition but would be open to an injection of foreign capital and a working partnership. The government has what is called a "golden share" of Embraer and enough voting rights to block any transaction. Temer said he would block any plan that gave Boeing control over the military component of the company. Embraer, like Boeing, makes commercial planes as well as military attack and transport aircraft. Embraer is one of the few Brazilian companies that is profitable internationally. The company is preparing to build the Gripen fighter jets with Sweden's Saab AB. They also have a military transport project called the KC-390, which seeks to take over the military transport market previously dominated by the US Hercules C-130. Boeing already has a marketing deal with Embraer on the KC-390. Boeing will help market the plane and then provide support services once they are sold.

With Airbus taking over the production of the small Bombardier C-series commercial jets, Boeing needs the similar aircraft that Embraer produces. This would fill a hole in Boeing's product lineup and be far cheaper and faster than designing, building and testing their own models. A joint venture with Boeing on the commercial jets would instantly give Embraer a global marketing force and the implied stability of Boeing as a partner.


Wells Fargo (WFC) has changed their tune on the market outlook after the passage of the tax reforms. Analyst Scott Wren had been one of the most cautious with predictions of a 4% to 8% pullback and call for a recession in 2019. He has reversed his forecast and currently expects the S&P to reach 2,700 in 2018. That is hardly bullish and Wren said he is currently reworking his numbers because the actual tax package for corporations was more aggressive than previously expected. Now he believes we could see a gain of 10% or more in 2018 but he has not finalized that forecast for 3,000 just yet.

Citi has bumped their estimate to 2,800 and Credit Suisse to 3,000. Canaccord Genuity is currently the highest at 3,100 with JPM at 3,000, UBS 2,900 and GS 2,850.

The passage of tax reform has caused a sudden surge in companies trying to share the wealth with their employees. AT&T said it was giving more than 200,000 employees a bonus check of $1,000 and would increase its capex budget for 2018 by $1 billion. Fifth Third Bancorp (FITB) said it would give more than 13,500 employees a bonus and raise the minimum wage to $15 an hour. Wells Fargo (WFC) said they were boosting the minimum wage to $15, giving employees a bonus and would target $400 million in donations to community and nonprofit organizations in 2018.

Sinclair Broadcasting (SBGI) said it would pay $1,000 bonuses to 9,000 employees. Bank of America (BAC) said it would give $1,000 bonuses to about 145,000 employees in a spirit of "shared success." Western Alliance (WAL) said 900 workers at the regional bank would receive a 7.5% raise on top of their normal annual increases. Boeing (BA) said it would put $300 million into charitable giving and workforce development training to improve the income of its workers. Arizona Public Service said it would pass on the benefits from the tax cuts to its customers in the form of discounts on their bills.

Starbucks said they were not going to pass on the tax benefits to its employees. The official said Starbucks was the first retailer to offer full healthcare benefits even to part time workers and tuition free 4-year degree through the College Achievement Plan. They already have employee stock ownership plans, bonuses and high wages. This might not go over well with the rest of the left coast since they see Starbucks as leader in the fight to improve worker wages.

Southwest Airlines (LUV) said the benefits would allow them to upgrade their fleet and they would share the gains with their employees. Comcast (CMCSA) said it would pay a special bonus to more than 100,000 employees and invest more than $50 billion in infrastructure over the next five years.

FedEx said it would boost capital spending and hire new employees to accommodate the expected increase in package traffic from the economic growth the cuts will promote. Kansas City Southern (KSU) said it would pay a $1,000 bonus to its employees. Rush Enterprises (RUSH) will give a $1,000 bonus to 6,600 employees.

This was just a few of the early reporters planning on sharing the tax proceeds with their employees. This will boost consumer spending in January and once the tax cuts begin in February for everyone, we will see spending surge again. There is a large percentage of the country that does not believe the cuts are real or that it will impact them. It will be interesting to see how the economy performs in Q1/Q2 as all the corporate and consumer benefits begin to appear. In this case, trickle down, should actually work.

Crude prices are starting to tick higher as inventory levels post a seasonal decline. Currently there are about 1.95 million bpd of production outages in addition to the 1.8 million bpd in voluntary cuts by OPEC and Russia. OPEC outages are roughly 350,000 bpd and non OPEC outages of 1.655 million bpd. This includes the 450,000 bpd Forties pipeline that is currently down for repair in the North Sea. The pipeline repair is expected to be completed next week but will not return to full service until mid January. The outage is expected to remove 13-15 million barrels from global inventories.



 

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Markets

For a normally bullish week, the markets lost ground the last four days. The new highs on Monday should have galvanized all the bullish procrastinators into action but all we saw after Monday's open was light selling.

Bank of America said investors pulled out $14.5 billion from equities for the week ended on Wednesday. That was the fourth largest withdrawal on record and the most since the week after the Brexit vote. High yield bond funds saw outflows of $5.3 billion and the biggest in the last year. This was the eighth consecutive week of outflows. Regular bond funds saw outflows of $3.2 billion and the most in a year. BAML said funds exited financials, small caps and value funds. US value funds had outflows of $7.8 billion and small caps lost $5.8 billion, both of those were the most in a year. Those are all sectors that should benefit from the tax cuts. This appears to be a prime example of a sell the news exit on the thoughts that the cuts are fully priced into the market.

A couple weeks ago, I might have gone along with that "all priced in" thought. However, the more I research the potential impact, the more I am convinced we are going to have a good year in 2018.

The new highs on Monday and the limited selling through Wednesday saw another 5.5% of investors convert to a bullish outlook on the AAII survey. This survey ends on Wednesday so there may be fewer bulls today. The last time bullish sentiment was this high was on January 1st, 2015. This is only the 11th week this year that bullish sentiment has been over its historical average of 38.5%. Neutral sentiment has collapsed to only 23.9% and the lowest level since March 9th.

Bullish sentiment hit a bottom on November 16th at 29.3% and has risen for five consecutive weeks. Since the low, bullish sentiment has risen 21.1 points and bearish sentiment has fallen 11.6 points. Bullish sentiment is unusually high and more than one standard deviation above its historical average. Typically when sentiment is this high the market is lower 6 and 12 months later.

I understand why sentiment is breaking out to the upside because we are facing a once in a generation event with the massive corporate tax cuts and earnings boost. That may mean there will be no ill effects in the short term but by the end of Q2 all of the benefits will be priced into the market and the normal summer doldrums could be especially rocky.


The S&P can still reach its year-end target at 2,700 with only a couple decent days. The high was 2,695 on Monday and 2,694 on Tuesday. The index closed 17 points below that level on Friday. The week after Christmas is normally bullish. I think you would agree this is not a normal year. None of the bearish historical trends have worked this year but several of the bullish periods have cooperated. That is not hard to believe with the S&P up 28.7% since the election. It has been one long bullish trend.

Short-term support has appeared at 2,679 with stronger support back at 2,650. If we drop back that far we have bigger problems. The 2,625 level would be the next pause point.


The Dow was listless on Friday for obvious reasons. The lack of volume allowed the few sellers to control the tape. The index target for December is 25,000 but the close was -246 points below that goal. The Dow could still ring that bell at the top but I would expect it to be a fight. The Dow failed at 24,850 on four consecutive days last week. That has turned into serious resistance. Support is around 24,715 and not very defined. A decline below 24,700 could trigger additional selling because it would signify the rally was over for 2017.

If the Dow were able to tag 25,000, I would expect the mother of all sell the news events. That number is so large and so visible, the shorts would be falling all over themselves to short it and the bulls would be taking profits with the obvious target reached. A funny thing happens when a target is hit. If there is no obvious second target, the market loses traction because traders do not know what to do.



The Nasdaq big caps would appear to be evenly matched between the advancers and decliners but the decliners posted bigger losses. Despite those declines, the Nasdaq only lost 5 points on low volume. That is the equivalent of a goal line stand at 6,950. The Nasdaq closed at the low for the week but still gained 23 points for the week thanks to the Monday spike to a new high. The Nasdaq traded over 7,000 intraday on Monday and that was the unofficial target for the month.

The big cap stocks are still showing signs of weakness. Their charts are choppy and more than half closed at the lows for the week. This does not bode well for the rest of the year. They could recover sharply on Tuesday in a normally bullish week but resistance at 7,000 is likely to be strong.




The Russell is still battling resistance at 1,550 but it has a nice pattern of higher lows for the week. This could suggest the Russell will lead us higher next week but I would not count on it. Having the Russell take leadership to the upside could create a broad market rally.


I am neutral for next week. The charts are projecting weakness but nothing that could not be corrected by one good application of bullish sentiment. I am sure there are a lot of shorts already locked and loaded and a sudden surge higher could force them to capitulate.

I would rather not try and predict next week and focus on what to expect in January. The market action next week will be on low volume and that could either increase volatility or turn the market dormant like it was last week. I believe the big cap tech stocks will give us direction. If they appear to weaken further it would suggest sellers are increasing for January. I would also watch Boeing, Caterpillar, Home Depot and McDonalds. Those have been the Dow leaders. If they begin to fade next week, I would expect them to sell off in early January.

If you do not have to be in the market this week, I would recommend watching from the sidelines. It is the next week that will be important. This week is the pregame warm-up.

I would like to take this opportunity to wish everyone a very Merry Christmas. 2017 was our 20th anniversary of producing this newsletter. We started on Thanksgiving weekend 1997. We still have quite a few subscribers who have been with us since 1997 and I thank you for your continued support. We did not archive all the newsletters from the very start but every newsletter starting in 1998 is on the website. You can always go back at any time and read the market commentary for any day where critical events occurred.

I had another anniversary in 2017. I celebrated my 50th wedding anniversary and I could not have produced the newsletter for the last 20 years without the support of my wife.

We would both like to thank you for your continued support and wish you a Merry Christmas.


Jim Brown

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"For the past 50 years or so I have been getting more and more worried about Christmas. Seems we are all so busy trying to beat the other fellow in making things go faster and look shinier and cost less that Christmas and I are sort of getting lost in the shuffle."

Kris Kringle aka Santa Claus, "Miracle on 34th Street" (1947)



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Index Wrap

Hurry Up and Wait

by Jim Brown

Click here to email Jim Brown
Next week is the pregame warm-up event ahead of the real game starting on January 2nd.

The tax reform bill is now law and the government funding shutdown deadline was kicked out until January 19th. There is nothing standing in the way of future market gains other than investor actions.

The week between Christmas and New Years is typically mildly bullish. Since 1950 the S&P has gained an average of 1.3% over the next six days. The last six times the market was negative for those days, it was a bad omen.

That happened in 1994, 2000, 2005, 2008, 2015 and 2016. In 1994, 2005 and 2015 the market was flat in the following year. In 2000 and 2008 there were ugly bear markets and in 2016 there was a major correction of 269 S&P points in less than three weeks.

The market action leading up to this week was not bullish. The major averages set new highs last Monday but failed to follow through and posted declines the last four days. That hardly seems to be suggesting traders are bullish about next week.

With the 30%+ gains since the election and not even a 5% decline since January 2016, it makes sense that traders are concerned about a repeat of that 2016 crash.

If it comes it should be in early January. It should also be short, sharp and shallow. There is too much expectation for a ramp in earnings in 2018 because of the tax cuts. Investors could be mortgaging their kids to buy any January dip. This could be a once in a generation market event.

However, the wild card is the unknown about how much of the expectations have been pulled forward into 2017. The S&P is up +600 points since the election. That is an obscene gain in a single year at the end of a 9-year economic expansion. There will eventually be profit taking and without the lure of future earnings increases, it could have been very ugly.

So now we wait through the next four days of market action in hopes of a buying opportunity in January.

Our canary in the coalmine indicator for the health of the market, stumbled last week. The A/D line on the S&P made a new high on Monday but faded the rest of the week as the markets traded sideways. It is not yet material and this is where you have to take the market fundamentals and give them precedence over the technicals. The calendar is against us for next week. Continued lackluster moves will turn the charts further into negative territory in the short term but the long-term outlook will remain positive because of the tax benefits. The MACD turned barely negative but we have to ignore it this week.


The chart shows the same pause after the S&P stalled at 2,695 twice on Mon/Tue and then faded. The index is still close enough to hit 2,700 by the end of December if sentiment turns positive next week. Support remains 2,650.


The A/D on the Dow took the same stutter step with a minor decline but the MACD turned bearish. In theory, this could suggest a decline but the fundamentals will rule. This is just a calendar pause as investors wait for January.


The Dow failed at 24,850 for four consecutive days. The attempt to get to 25,000 before the end of December has been blunted significantly. The index is 246 points below that level and the tape is weak. It is still possible to reach that level if the historical 1.3% gain is front loaded into the next four days. I would not hold my breath but it is possible. The market could suddenly turn very bullish next week on the tax news and hit that 25K level.


The Nasdaq remains the weakest of the big cap indexes. The A/D chart is significantly different from the Dow and S&P because the biotechs and semiconductors have been trading erratically for the last several weeks.


The index did make a new high on Monday and traded briefly over 7,000 to reach its target for December. It was all downhill from there. The minor decline on Friday gives me some hope that the big cap techs are not going to fall off a cliff next week but once into January, all bets are off.


The Russell 2000 is still stuck under resistance at 1,550. However, there is a pattern of higher lows that suggests buyers are becoming slightly more aggressive but not yet bullish. If we could get a breakout over 1,550 on decent volume, it could energize the entire market. Small caps are supposed to lead and especially in December.


The high yield ETF is continuing to weaken and created a bearish cross over the S&P last week. The correlation declined from more than 90% two weeks ago to -.25%. This is a major warning signal for the market. The S&P typically follows the high yield market.


The semiconductor sector continues to be weak and it is exerting negative pressure on the Nasdaq. The index normally follows the $SOX and we have seen a large bearish cross over the last three weeks. If the SOX continues to be weak, the Nasdaq will eventually fail.


There is no magic chart I can show you to predict market action over the next two weeks. Next week "could" be flat to down but it could also regain its historically bullish trend. It is a coin toss. Once into January I remain concerned we could have a volatility event in the first couple of weeks but I would be a buyer of any dip. I am sure there will be a million other buyers as well so any dip could be short. However, the massive amount of uncaptured profits could produce a major portfolio restructuring event. We just will not know until it happens.

Enter passively and exit aggressively!

Jim Brown

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New Option Plays

Hit the Road Jack

by Jim Brown

Click here to email Jim Brown

Editors Note:

Road warriors still exist and not all of them want to call Uber twice a day. Rental car companies have shaken off the Uber curse and profits are rising again.



NEW DIRECTIONAL CALL PLAYS

CAR - Avis Budget Group - Company Profile

Avis Budget Group, Inc., together with its subsidiaries, provides car and truck rentals, car sharing, and ancillary services to businesses and consumers worldwide. The company operates through two segments, Americas and International. It operates the Avis brand car rental system with approximately 5,550 locations that supply rental cars to the premium commercial and leisure segments of the travel industry; the Budget brand vehicle rental system with approximately 4,050 car rental locations, which serve the value-conscious segments of the industry; and the Zipcar brand, a membership-based car sharing network that provides vehicles to approximately 1 million members. The company also operates the Payless brand, which comprises approximately 240 vehicle rental locations; the Apex brand primarily in the deep-value segment of the car rental industry with approximately 25 rental locations in New Zealand and Australia; and the Maggiore brand that provides vehicle rental services in the commercial, leisure, and insurance replacement/leasing segments with approximately 130 rental locations in Italy, as well as the France Cars brand, which offers light commercial vehicle fleets with approximately 60 rental locations in France. In addition, it is involved in the local and one-way truck rental businesses with a fleet of approximately 22,000 vehicles, which are rented through a network of approximately 1,000 dealers and 480 company-operated locations that serve the consumer and light commercial sectors in the continental United States. Further, it offers optional insurance products and coverages, such as supplemental liability, personal accident, personal effects protection, emergency sickness protection, automobile towing protection, and cargo insurance products. The company was formerly known as Cendant Corporation and changed its name to Avis Budget Group, Inc. in September 2006. Avis Budget Group, Inc. was founded in 1946 and is headquartered in Parsippany, New Jersey. Company description from FinViz.com.

Expected earnings Feb 6th.

Avis Budget reported Q3 earnings of $3.10 that beat estimates for $2.97. Revenue of $2.75 billion also beat estimates. The company guided for full year earnings in the range of $2.45-$2.65 on revenue of $8.8-$8.9 billion. Prior guidance was $2.40-$2.85 on revenue of $8.80-$8.95 billion.

The big drop in the chart in early November is the lowered earnings guidance. Fortunately, for CAR they have already recovered from the drop and are moving higher. Part of the lift came from news their largest shareholder, SRS Investment Management, had boosted their stake by 41% to 12 million shares or 14.7% of the shares outstanding. SRS had previously disclosed a new position with a stake of 10.4% as of September 30th. They are continuing to buy and they already own stakes in other car companies. They have 24 total positions worth more than $5 billion and they are not an activist shareholder. They are a hedge fund.

Shares of CAR made a new two-year high on Monday and drifted lower on Tuesday. After holding their gains for a week, it looks like they will try to make a higher high.

I am trying to recommend a position that should make only a minimal decline if we see some profit taking in January. Big names like Boeing or Home Depot could sell off hard. This is a stock that is recovering from a drop to $21 back in the summer and another $8 drop in November. Any weak holders should have already left.

Buy Feb $46 call, currently $2.35, initial stop loss $39.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Checking Out

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors checked out of the market ahead of the long weekend. Volume was low and stock news was nonexistent. It was a holiday Friday and traders went home early. With only 4 trading days left in 2017, next week could be interesting.



Current Portfolio


Stop Loss Updates

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


Profit Targets

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





Current Position Changes


AMAT - Applied Materials
The long call position was stopped at $51.75.



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

AMAT - Applied Materials - Company Profile

Comments:

No specific news. The semiconductor rally is on life support and AMAT fell sharply at the open to stop us out at $51.75 for a 60 cent loss.

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:

Closed 12/22: Long Feb $52.50 call @ $3.00, exit $2.40, -.60 loss.


CGNX - Cognex - Company Profile

Comments:

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

Comments:

No specific news. Resistance at $160 is proving to be a challenge.

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

Comments:

No specific news. Paycom lost another $1 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

Comments:

No specific news. Holding at the highs.

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

Comments:

No specific news. Paypal is reacting more to movement in the tech sector than the financial sector.

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

Comments:

No specific news. The Semiconductor Index closed fractionally lower after a dip at the open.

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

Comments:

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

Comments:

No specific news. New 3-year high close on Thursday.

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

Comments:

The pror four days the Dow had stalled at 24,850. This appears to be the point where portfolio managers are willing to exit positions or enter new shorts. The Dow did not even come close to that level on Friday.

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

Comments:

The QQQ closed at the low for the week. Half 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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