Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/27/2017

Table of Contents

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

Market Wrap

Santa Struggling

by Keene Little

Click here to email Keene Little
The Santa Claus rally has been essentially a no-show this year and it was hoped he'd show up at least for the final week of the month. But Santa seems to have eaten one too many cookies that were washed down with too much milk and now his reindeer are complaining his round belly has become rounder and fuller. His sleigh seems to be stuck on the ground with the reindeer now struggling to break it free of the ice.

Today's Market Stats

The stock market has been chopping mostly sideways in a consolidation pattern following the December 18th highs, which points higher but this week's lethargy hasn't exactly lit a fire under the bulls. The choppy consolidation continues to look potentially bullish since it fits as a continuation pattern within the larger rally pattern but the very low trading volume and flat market breadth are not helping the bull's cause. It's looking like the bulls are going to have to help the reindeer lift Santa's sleigh off the ground. Can bulls fly? The market has already proven pigs (the lip-sticked variety) can fly so why not.

It was another slow day in a holiday-shortened week and other than the expectation that the market would at least float higher there hasn't been much excitement. The only economic reports this morning were the Consumer Confidence and Pending Home Sales. There's been very little stock news as most companies either shut down between holidays or have people that are thinking more about their long weekends than about work.

The Consumer Confidence was weaker than had been expected for December, coming in at 122.1 vs. expectations for 128.0. It was a drop from 128.6 in November, which was a revision lower from the originally-reported 129.5. The present conditions index remains strong, at 156.6, but the expectations index dropped from 111.0 to 99.1 and the widening difference between the two is a concern, especially since all the talk about the new tax plan included discussions about how it should help the economy and jobs. It would appear many people are not buying into that idea. Worry about the future could dampen bullish sentiment so it's a potentially important leading indicator.

Consumer Confidence, 2002-December 2017, chart courtesy briefing.com

Pending Home Sales for November was an unremarkable increase of +0.2%, which was a significant drop from the +3.5% in October but better than the -0.7% decline that was expected. Home sales in general remain strong enough to support the large industry attached to this market.

It was a quiet day in what has been a quiet week and therefore not much to discuss. The tight doji days are leading to small doji weeks so there hasn't even been much of a change in the charts since this time last week. As I'll point out in the charts, there's still a bullish expectation for the next few days at least and some key levels to the downside that would tell us when the bears are taking over.

The thing to continue to keep in mind is that the current bull market is stretched by most measures, including how far it has stretched above moving averages and adaptive channels, all of which makes the market vulnerable to at least a larger correction. The correction could be a large sideways choppy consolidation (multi-week kind of consolidation) or it could pull back and shake out the weaker holders before continuing its march higher. The more bearish potential is for the bull market to conclude before most are ready for it. It is this latter possibility that I'm thinking could happen.

A chart that I had shown a month ago provided a graphic look at long it's been since the market (S&P 500 index) has corrected 3%. On November 27th the streak was 391 days and I've updated the chart to show it's now been 424 days, significantly exceeding the prior streaks in the past 60+ years. To say this has been a non-stop rally for well over a year is a gross understatement and highly unusual. The only thing that it has me wondering what the coming correction will be like (how strong). The higher and longer this goes, the more vulnerable it becomes.

Number of days without a 3% correction

Jumping into the charts, I'll start with the SPX weekly chart and work down from there. It has pushed up against potentially strong resistance so we wait for either a bullish breakout following the current consolidation or a smack-down after testing resistance.
S&P 500, SPX, Weekly chart

If you squint and use a magnifying glass you can see the little dojis for last week and this week's candle so far. If the bulls can recruit some more buyers I see upside potential to the top of its rising wedge for the rally from February 2016, which is the trend line along the highs since April 2016 - March 2017 and currently near 2722. But there are two price projections below that level that will be important to watch -- near 2705 and then 2718.

As noted on the chart, the 2704.87 projection is for the extended 5th wave in the rally from 2009, which is where it would equal 162% of the 1st wave. This 5th wave is itself a 5-wave move and its 5th wave would equal the 1st wave at 2718.30. In addition to the price projection near 2705, that number is also an important Gann Square of 9 level and the correlation is an important reason to watch it carefully if reached.


S&P 500, SPX, Daily chart

In addition to the large rising wedge for the rally from February 2016 there is also a smaller one for what could be the final portion of the rally from November. The 5th wave of the rally from 2009 is the leg up from February 2016 and its 5th wave is the leg up from August. It too is a 5-wave move and the extended 5th wave would equal the 1st through 3rd waves at 2704.94.

Again, the tight correlation of price projections, plus the Gann level at 2705, makes this a potentially important price level. For now I show a rally to that level in the next few days and then the start of a reversal back down. That of course remains to be seen but at the moment I see significant downside risk in January. But for now there remains upside potential and above 2705 would open the door to 2718 and then maybe up to about 2725 where it would hit the trend line along the highs since September.

The trend line from September crosses the trend line along the highs from April 2016 - March 2017 near 2721 on Friday. The bulls need a lot more interest in this market than we've seen so far this week if they hope to achieve that level in the next two days.

Key Levels for SPX:
- bullish above 2695
- bearish below 2652


S&P 500, SPX, 60-min chart

Moving in closer, the 60-min chart shows the wave count for what should be the final 5th wave of the rally. The sideways consolidation following the December 18th high looks like a bullish continuation pattern but yesterday's break of the uptrend line from November 15th, which was back-tested this morning, looks a little bearish. The decline into this afternoon's low continued to hold at the bottom of the sideways triangle consolidation pattern and the little snap back up into the close could be the bullish start to the next leg up.

Assuming well see a rally on Thursday and into Friday, we'll have to see how it does if and when it nears 2705 and then the higher levels if 2705 is breached. A drop below the December 4th high at 2665 would be the first indication a top is likely already in place.


Dow Industrials, INDU, Daily chart

The Dow looks like SPX with its sideways consolidation over to support at its short-term uptrend line from December 1st (the bottom of a possible rising wedge for the final leg of its rally). As long as it stays above its December 14th low at 24508 it remains bullish for another, and potentially final, leg higher. It closed near a price projection at 24775, where it's been stalled since December 18th, which is where the 5th wave of the rally from January 2016 is 162% of the 1st wave.

Assuming the Dow will be able to push higher, the next level of interest is 25026, which is where the 5th wave of the rally from 2009 would be twice the size of the 1st wave. Stay aware of the potential for only a minor new high above the December 18th high at 24876 to essentially create a small double top before starting down.

Key Levels for DOW:
- bullish above 24,876
- bearish below 24,508


Nasdaq Composite index, COMPQ, Daily chart

Since its December 18th high I've been waiting to see if the Nasdaq will reach a price projection at 7034.71 where the 5th wave of the rally from August would equal the 1st wave. There is higher potential above that level, especially if it heads for the top of its up-channel from August, which will be near 7130 by the end of next week. But as with the other indexes, any new high could be quickly followed by a reversal at any time. And if the Naz drops below its December 14th low at 6851 it would tell us a top is likely already in place.

Key Levels for COMPQ:
- bullish above 7004
- bearish below 6851


Russell-2000, RUT, Daily chart

The RUT has also been consolidating in a bullish continuation pattern and unless it breaks down we should see a move up at least back up to trend line along the highs from December 2016 - October 2017, near 1557, and then maybe 1562. There's higher potential above 1562 to a trend line along the highs from October-December, which will be near 1585 by the end of next week. We'd have the first bearish signal if the RUT drops below its 20-dma and uptrend line from November 15th, currently near 1532 and 1528, resp.

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


10-year Yield, TNX, Weekly chart

Last week TNX broke above its downtrend line from 1988-2007, near 2.41%, and with a high at 2.50 it came very close to a price projection at 2.508, which is where the c-wave of an a-b-c bounce off the June 14th low (the higher low before the September 7th low) is 162% of the a-wave. The significance of this projection is that the a-b-c bounce correction could lead to a strong 3rd wave down in the decline from March and a strong decline in yields would mean a strong rally in bond prices. A strong bond market rally could coincide with a strong stock market decline and hence my reason for watching this so carefully.

The flip side of the pattern for TNX is that last week's bullish break of the downtrend line from 1988-2007 has now been followed by a pullback to the trend line and that gives us a bullish setup for yields (more selling in Treasuries). As long as TNX stays above its November 7th low at 2.3% it will remain potentially bullish, which would be confirmed if it rallies above 2.51. But a drop below 2.3 would also be a confirmed drop back below its 50-dma, currently near 2.32, and that would suggest a stronger decline will follow.


KBW Bank index, BKX, Daily chart

The banking pattern is a bit ugly from an EW perspective but whether or not it will proceed higher following a relatively brief pullback it's looking ready for at least a pullback. The bearish divergence as it chopped higher in a small rising wedge since the December 7th low, followed by Tuesday's break of the uptrend line from November 27th, has it looking like BKX will drop from here. From a short-term pattern perspective I see the potential for one more minor new high but I wouldn't trust it unless it's able to rally stronger above 109.


U.S. Dollar contract, DX, Daily chart

The US$ has dropped a little further since last week and now the test is on -- will it be a double bottom with its November low at 92.43 or is it instead going to break down further. A drop below 92.40 would suggest we'll see a decline at least back down to the top of its broken down-channel, which will be near 91.10 by the end of next week. Two equal legs down for a larger a-b-c pullback from November 7th would see the dollar dropping to 91.57 and another rally leg could start from there. The more immediate bearish potential is for the dollar to drop to the $90 area before setting up the next large rally in the coming year.


Gold continuous contract, GC, Daily chart

Last Friday gold closed marginally back above its broken uptrend line from December 2016 - July 2017 and its broken 50-dma, both near 1276. That was followed by yesterday's rally, which broke through its downtrend line from September-November, near 1278. That's a bullish move and now all the gold bulls need to do is break the shorter-term downtrend line from October-November, where it has currently stalled near 1291, and then get above price-level resistance at 1300. The past two times, in October and at the end of November, gold had trouble with 1300 so it would obviously be bullish above that level. MACD is also making a bullish move back above the zero like so things look good for a continuation of its rally, especially if the dollar breaks down further. Gold's larger pattern leaves a lot to be desired as far as supporting the bulls but for now, as long as gold stays above its nest of 20-, 50- and 200-dma's, all in the 1268-1275 range, it's looking good for a continuation of the rally off the December 12th low.


Oil continuous contract, CL, Weekly chart

Yesterday's strong pop up in oil's price had it breaking price-level resistance near 58.50 and the 38% retracement of its 2013-2016 decline, near 59. The next level of resistance is near 62, which is the current location of the top of a rising wedge for its rally from June and the top of a larger rising wedge for the rally from February 2016. The top of the smaller rising wedge will be near 62.35 by the end of next week. Following the completion of the rising wedges could result in a fast reversal and decline, confirmation of which would be a drop below trend lines and 50-week MA, all coinciding near 51.

Oil would be more bullish above 63.50, in which case I'd look for the next Fib retracements of its 2013-2016 decline (50% at 69.14, 62% at 79.31) and then potentially up to about 85 to meet its inverse H&S pattern that developed 2015-2017 (the neckline was broken in late October).


Economic reports

While Thursday morning will have a few more economic reports than we had on Tuesday and Wednesday, there will be nothing that is market moving. Friday's only report, Chicago PMI, has the power to move the market but probably not this time since no big change is expected or worried about (there's not much worrying this market).


Conclusion

It's been a slow week and that might not change. If the sellers stay away we could see the market at least drift a little higher and then rally a little more strongly for at least the first two days after New Year's. The price patterns support the idea that we'll get a final fling higher from here and maybe into January 3rd. Assuming we'll get another leg up to new highs for the indexes it should be the final one. Whether we'll get just a larger pullback (maybe finally break the record of time without a 3% correction) or something more bearish will have to be determined after we see what kind of pullback/decline develops.

I'll reiterate that I think there's significant downside potential, especially since most market participants have forgotten what a correction even looks like. A 3% correction could scare the hell out of lot of traders and their panic could drive the index/sector ETFs into a no-bid situation as the market crashes lower on automatic computer sell programs. A normal 3% correction could turn into a 10% rout in a heartbeat.

If you're OK with a stronger decline (10%, 20% or 30%) then sit tight through it and look at it as a buying opportunity. Buying following panic selloffs tends to be extremely strong and they can be quite lucrative for quick traders. But for most traders, even if you want to hold onto your longer-term positions, hedging with puts and/or a couple of shorts on weaker stocks or getting some exposure in inverse ETFs could do a nice job protecting your portfolio from a bad fall. Getting more into cash will give you an opportunity to buy back in at lower prices. Buying up here seems to be a high-risk/low-reward kind of setup, something traders should avoid.

Play it safe, enjoy your time in front of the market instead of sweating the moves. If you're losing sleep over worry about your positions then that's your body telling you to lighten your exposure. Quality sleep is far more important than money, especially since lack of quality sleep and too much stress can significantly harm your health, even to the point where you won't be around to enjoy your hard-earned winnings.

I hope everyone had a Merry Christmas and has a better 2018 than 2017. Happy New Year and be careful out there over the holiday weekend.

I'll be back with you next Wednesday.

Keene H. Little, CMT

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


 

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New Option Plays

Buyer in the Wings

by Jim Brown

Click here to email Jim Brown

Editors Note:

Arconic is sleeping with the enemy. Elliott Management has 3 members on the board and is pushing for a sale.



NEW DIRECTIONAL CALL PLAYS

ARNC - Arconic Inc - Company Profile

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company information from Arconic.

Earnings January 22nd.

Arconic was the original Alcoa. They spun off the aluminum business then changed their name to Arconic. This company makes precision aluminum parts for aircraft and transportation equipment. Eliott management has been agitating for change and managed to get the long term CEO Klaus Kleinfeld kicked out and oversaw the five-month process to get 24-year GE veteran Charles Blankenship installed as the new CEO.

Elliott has seen their investment lag for the last year as the spinoff and CEO hunt took the wind out of Arconic's sales. Now they could be reaching the end of their struggle with a potential buyout on the horizon.

One analyst got the fire started a couple weeks ago when he suggested Honeywell was on the prowl and would eventually buy Arconic. Honeywell lost out on Rockwell Collins (COL) when United Technologies bought them for $30 billion or 14 times EBITDA.

Honeywell was under pressure by Dan Loeb to spin off its aerospace unit. Instead, they agreed to spin off the homes and global distributions unit and the transportation business leaving (by the end of 2018) the aerospace unit intact and the surviving business. Now Honeywell needs to bulk up its aerospace business or they will be the next company acquired.

With Dan Loeb on one side urging Honeywell to build aerospace and Elliott Management on the other side urging Arconic to sell itself, this is a match made in heaven and could happen in early 2018 according to the analyst.

Shares have sprinted higher since the news story broke a couple weeks ago. They are very close to a 52-week high over $28 and a move over that level could trigger additional buying and short covering.

I am using a July option to get well past the January and April earnings. We will not hold it that long but the uncertainty surrounding those events should keep the premium up if we have a market drop in January.

Buy July $30 call, currently $1.50, initial stop loss $25.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

No Holiday Excitement

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is acting like Santa left it a pair of socks rather than an iPad. There is no excitement, no volume and no direction. The Dow traded in a 60 point range and the S&P in a 7 point range. The Nasdaq only managed a 24 point range and was negative for much of the afternoon before rebounding 8 points in the last ten minutes to gain 3 points for the day.

The indexes rose at the open but began declining at 11:00 and were it not for the spike in the last ten minutes the S&P would have closed negative as well. The index gained only 2 points after 4 point closing rebound. The Russell 2000, the S&P-600 and S&P-400 did close fractionally negative.

Only four Dow components moved more than $1 and only one component moved more than $1.50. Everyone is holding their breath ahead of next week.



Current Portfolio


Stop Loss Updates

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


Profit Targets

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





Current Position Changes


No Changes



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Long and short equity trades = Premier Investor



BULLISH Play Updates

CAR - Avis Budget Group - Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: December 23rd.

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.

Position 12/26/17:

Long Feb $46 call @ $2.50, see portfolio graphic for stop loss.


CGNX - Cognex - Company Profile

Comments:

No specific news. Shares holding on support.

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.


PGR - Progressive Corp - Company Profile

Comments:

No specific news. New closing high.

Original Trade Description: December 11th.

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

Expected earnings January 16th.

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

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

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

There is no bad news anywhere in their financial disclosures.

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

Update 11/13: Progressive reported results for November. Premiums written rose 20% to $2.022 billion. Premium earned rose 17% to $2.113 billion. Policies in force for autos rose 11%, business policies +20%. It was a very good month for Progressive. Shares closed at a new high.

Position 12/12/17:

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


PYPL - PayPal - Company Profile

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.


TGT - Target Corp - Company Profile

Comments:

No specific news. Minor decline from the 52-week high close on Tuesday.

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.

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:

I think the lackluster market for the last week of the year is telling. The market excitement and momentum have completely faded. This could be setting us up for a rocky first week of January.

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 have 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 posted only a 2 cent gain with the Nasdaq flat. This is telegraphing weakness for January or at least uncertainty about January.

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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