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Daily Newsletter, Monday, 1/1/2018

Table of Contents

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

Market Wrap

Record Market Gains

by Jim Brown

Click here to email Jim Brown

2017 will go down in the history books as a banner year for nearly all investors.

Weekly Statistics

Friday Statistics

When you look at the weekly graphic above, the gains/losses for last week were unexciting but the YTD numbers in the center column are outstanding. The Dow may have closed the year in negative territory but gained 25% for the year. This was a great year for the Dow but it only ranks 24th in percentage terms. I looked up all the years with a 25% gain or more since 1897 and 2017 came in at the bottom. I doubt anyone reading this commentary is complaining about "only" a 25% gain.


Since the election, the Dow has gained more than 6,856 points. On Thursday the Dow was up more than 5,000 points in a single calendar year for the first time ever but Friday's selloff reduced that to 4,956. This was still the largest yearly point gain in Dow history.

Since the election:

Dow closed over 19,000 on November 22nd.
Dow closed over 20,000 on January 25th.
Dow closed over 21,000 on March 1st.
Dow closed over 22,000 on August 2nd.
Dow closed over 23,000 on October 18th.
Dow closed over 24,000 on November 30th.

The Dow reached these levels because of several stocks with monster gains. Boeing was the undisputed leader and contributed 953 points, more than twice as many as the next largest contributor, CAT at 444 Dow points. The biggest losers were GE, no surprise there, IBM, XOM and MRK. Exxon was the surprise for me but they closed 2016 at $90 and fell to $76 in August. The rising price of oil has lifted them back to $84 but the stock is still sluggish.

2017 Dow Contributors

The Dow is up 18,250 points (+282%) since the 6,469 low on March 6th, 2009. More than 25% of that gain was in the last 13 months. The index has gone nearly vertical since the election. Many claim we have reached the euphoria stage and it would be hard to argue that using this chart.


Over the same period, the Nasdaq Composite has risen from 1,265 to 6,903, or 5,638 points or a 446% gain.


The S&P has gained 2,007 points since the devilish 666 low in March 2009. That is just over a 301% gain.


The Dow was targeting 25,000 in late 2017 but the resistance at 24,850 was too strong. That resistance was likely the point where portfolio managers had decided to draw the line and exit profitable positions. Professional traders like to slip in their sell orders just before major milestones in order to beat the rush. The 25,000 level was such a large round number that it was bound to be sold when hit. There were enough sellers just under that level to prevent it from happening in 2017. I have no doubt it will be hit in 2017 but there may be some significant volatility ahead.

I personally believe the Friday sell off was prompted by one or more fund managers selling futures ahead of next week. The closing decline happened in less than 15 minutes. In that period somebody sold more than 300,000 contracts of the S&P futures. That was 56% of the day's total volume in less than 15 min. In the Nasdaq futures more than 34,000 contracts were sold which was 25% of the daily volume total. On the Russell there were nearly 8,000 contracts sold representing 39.5% of the total volume.

I will be the first to agree that some of this volume was traders jumping in front of a falling market. However, I think you will agree that given the very low market volume in the last 30 minutes ahead of a holiday weekend, the sudden unexplained spike in the futures volume is the equivalent of a smoking gun.




The markets have been trading sideways for the last two weeks. Volume has been very light and the prior momentum and excitement had evaporated. Investors and portfolio managers appeared to be holding their breath and waiting for the tax year to end.

If you were a large portfolio manager with billions of dollars of stocks in your portfolio, selling futures on Friday could have helped you in two ways. First, that would hedge you against any market decline in early January. Your portfolio would take losses but the futures gains would offset some of those losses. That would be one potential reason for the futures activity. Secondly, if that same manager knew he was going to be taking profits on a large portion of his portfolio next week, then selling the futures was a hedge against the market damage from selling out of his own portfolio. There are a lot of portfolio managers with more than $100 billion in equities under management. They all have the same problems and goals. Make money and hedge against losses.

It has been 547 days since the market has had a 5% decline. The last one was the first three weeks of 2016 when the S&P dropped -269 points. While that is not likely to happen in 2018, there is always the risk. Since that 1,810 low in early 2016, the S&P has gained 865 points or 47.8% without even a minor correction. Trees do not grow to the sky and markets always cycle. Given the recent market gains, we are due for some volatility. Next week is a likely location IF it is going to happen.


If we do see some volatility in January, I would expect it to be short, sharp and shallow. For every investor wanting to take profits in big cap techs, industrials, etc, there are probably two investors hoping for a big drop as a buying opportunity. Many stocks like Boeing have had such a big rally there has not been any material buying opportunities. If you wanted to buy Boeing, you had to close your eyes and hope you were not buying a top.

While I am dreading the next correction because I know I will lose a lot of good positions when their stops are hit, I am also looking forward to the buying opportunity. Readers should decide to either ride out the potential volatility in hopes of seeing new highs later in the year or tighten up your stops and be ready to jump back in when a bottom appears.

My only caution is this. If the stock you are holding declines 10% how long do you think it will take for it to recover that 10% and return to the highs? That is your risk. If you are trading in a taxable account, you also have to weigh the tax cost of closing the position and reopening it again.

I do not want to get too deep in the predictions here but the general consensus is that we will see higher market highs in Q1 and then a decline later in the year. Those expecting the same thing in 2017 were disappointed.

Hedgeye Cartoon

Analysts expect companies to raise guidance when they report Q4 earnings in late January, early February. They will be announcing their tax benefits, dividend increases and new stock buybacks. Investors will want to be fully invested before those earnings begin. That gives us about two weeks before the earnings begin. After the Q4 cycle, the market should be stable on expectations for the actual improved earnings in the Q1 reporting cycle in Apr/May. However, after that cycle peaks, there could be some selling of the news because all the expectations will already be priced into the market.

That analyst consensus and $5 will buy you a coffee at Starbucks but that is the only guarantee. Markets are notoriously unpredictable and rarely conform to the conventional wisdom of analysts.

One potential flaw in the scenario is the actual costs associated with the tax reform. Several companies have already reported major hits to earnings because of the way the laws were changed.

Goldman Sachs (GS) warned of a $5 billion hit to earnings in Q4 as a result of profits held overseas. Goldman and hundreds of other companies have billions in profits held overseas. Previously, they did not have to pay the 35% tax unless that money was brought back into the US. Under the new law the companies are required to pay 15.5% on that cash held overseas regardless of whether that money comes back to the US or not. It is a double-edged sword. The money can come back at a cheaper tax rate but it is still taxed even if it is left overseas. On the plus side, the law allows them to stretch out the tax payments over the next 8 years and they will not be taxed on future international earnings, within limits. This is a giant win for future earnings.


Amgen (AMGN) has warned of a $6 billion hit. Citigroup has said it expects to book a $20 billion charge against Q4 earnings and Bank of America will take a $3 billion charge against Q4 earnings.

Nobody knows how these sweeping tax law changes will impact each US corporation because it is complicated. Until companies report their Q4 earnings and guidance, it is a big unknown and investors do not like uncertainty. This uncertainty could contribute to volatility in early January.


 

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The economic calendar kicks off with a bang next week with the ISM reports and the ADP and Nonfarm payroll reports. Unless there is a major miss from the forecasts, they should not be market movers. The FOMC minutes of the Fed meeting in December, could cause some market indigestion if they appear to contradict the expectations for 2-3 hikes in 2018. Analysts have toned down their expectations somewhat and as long as the Fed is still "slow and steady" the market will be fine. The new Fed Chairman, Jay Powell, is a follower of Yellen's policies and he is not likely to make any changes to the outlook in 2018 unless the data changes dramatically.


The earnings calendar for next week is highlighted by Rite-Aid and Walgreens. Monsanto (MON) and Constellation Brands (STZ) get honorable mention. There is a trickle of earnings between now and mid January but the deluge begins on the 16th with Citi, Morgan Stanley, UnitedHealth and others. That gives us about 10 trading days between now and the 16th.


Apple (AAPL) is trying to head off the class action suits by apologizing for batterygate and offering big discounts on new batteries on iPhone 6 and later models. They are cutting the price for a replacement battery from $79 to $29. The problem arose when it was discovered Apple was cutting back processing power by 50% on older phones when the batteries dropped to less than 80%. That means everyone still using the older phones were in restricted mode nearly all the time because the older the battery the less power it will retain after a charge. They have even offered to upgrade some iPhone 6S models for free. There is a serial number check online to see if your phone qualifies.

By dramatically cutting the price of the batteries, they will blunt some of the criticism but the suits will continue. People, who got fed up with their slow phones and bought a new one to solve the problem, have a valid right to sue. They may find it will take a very long time and all they are likely to get is a discount coupon for an iPhone 12.

Apple shares are still declining after the Taiwan Economic Daily News story on slashing iPhone sales projections. It will be a month before we know the real facts but I suspect Apple shares will be sold next week by investors not wanting to take the risk of holding to see the news article proven wrong.


Netflix (NFLX) changed its pay structure for top employees as a result of changes in the tax laws. Under the old laws, salary was taxed at one rate and performance based conditional bonuses of stock at a different rate. Under the new law, there is no difference between cash salary and stock compensation so they are switching the compensation back to cash. For example, Chief Content Officer Ted Sarandos will get a raise from $1 million to $12 million in salary instead of stock bonuses. Sarandos earned $9 million in bonuses in 2017 and $4 million in bonuses in 2016, in addition to his $1 million in annual salary. He will still receive stock compensation in 2018 but under a different program.

CEO Reed Hastings will receive $700,000 in salary and $28.7 million in stock options. Chief product officer Greg Peters will jump from $1 million in salary to $6 million along with $6.6 million in stock options. I think I need to dust off my resume and send it to Netflix for chief newsletter editor and see if I can get in on that fountain of cash.


Huntington Ingalls Industries (HII) is replacing CR Bard (BCR) in the S&P-500 at the open on Wednesday. Becton Dickinson (BDX) is acquiring CR Bard leaving an open spot on the S&P-500. Scientific Games (SGMS) will replace HII in the S&P-400 and Ultra Clean (UCTT) will replace SGMS in the S&P-600.


Tivo (TIVO) reportedly has received multiple expressions of interest from private equity firms to take the company private at just over $20 a share. Shares were trading at $14 before the news broke. Tivo merged with digital entertainment guide provider Rovi Corp in a $1.1 billion deal in 2016. Rovi paid $10.70 per share for Tivo and then kept the Tivo name and symbol. In their last earnings they had $310 million in cash and marketable securities and a market cap of less than $2 billion. This is a very competitive space with companies like Comcast and DirecTV marketing their own DVR products and other companies like Hulu, Amazon, Apple and Google offering over the top streaming services. In December Tivo made a deal with cable operator Altice USA to support their digital offerings. Tivo recently won an International Trade Commission battle against Comcast violating two of Tivo's patents.


Crude prices continue to rise as US inventories decline. Libya said they would begin repairing the damaged pipeline sometime next week. The pipeline was blown up by a rival militia to halt the export of oil. The pipeline carried 90,000 bpd. The pipeline is expected to be back in operation by mid January.

US oil production fell -35,000 bpd last week to 9.754 million bpd. That is the first decline in 8 weeks after posting 7 consecutive weeks of record production.

The active rig count declined -2 to 929. Gas rigs declined by 2 and oil rigs were flat at 747. Seaport Energy said last week there were a record number of drilled and uncompleted (DUC) wells in the US at 7,300. With that kind of backlog there is no reason to activate additional rigs. Add in the holiday disruption and there are not likely to be any rigs added next week.

The analyst consensus is that prices will decline in early 2018 and then rebound into the summer. The problem ahead is the potential for the OPEC production cut to be weakened or eliminated in July. The various global outages have helped to accelerate the global inventory decline and Russia is expected to balk at having the cuts extend past the end of June. Saudi Arabia is expected to fight to keep the cuts in place because of their pending IPO of Saudi Aramco. They need oil prices as high as possible to get the maximum price for their IPO. However, many investors have backed away from the deal after Mohammed bin Salman (MBS) arrested more than 200 people including more than 100 princes in order to solidify his grip on power.

He has been charging these people enormous sums of money to gain their freedom. MBS is reportedly demanding $6 billion from Prince Alwaleed bin Talal, the famous international investor. He is worth an estimated $18 billion but is refusing to liquidate and pay the fine because he has done nothing wrong. If he pays the fine, it would be an assumption of guilt and would hurt his future business dealings.

International investors are backing away from the Aramco IPO because they have been reminded there is no rule of law in Saudi Arabia. Whatever the king wants to do, he does, even if it causes problems in the business community.


Markets

The S&P has been moving sideways and Friday's close was a two week low. There is strong resistance at 2,692-2,694. Support is well below at 2,650 and 2,625. A minor 5% decline would target 2,550 and that is well below Friday's close. The biggest dip we have seen since January 2016 was a -3.1% drop. The market is very overdue for some profit taking. I think everyone would agree that a 5% decline would reset the overbought conditions and allow a new rally to begin. A 3% decline would be 2,610.

The Santa Rally has two more days to run. The S&P needs to close above 2,685 on Wednesday or the rally will have failed. "When Santa fails to call, the bears will come to Broad and Wall."

The S&P saw 62 days with a record high in 2017.


The selling at the close was very broad and that also suggests it was futures related. The Dow declined to just above short-term support at 24,720. A break below 24,700 should trigger additional selling with an initial target of 24,100. A 3% decline would be to 24,092 so that 24,100 support should be critical. A 5% decline would take the index to 23,600. The resistance at 24,850 remains very strong and has been an immediate stop with every test.

The Dow posted 71 days with a record high in 2017.



The Nasdaq has been the weakest index. The big caps have been choppy with a downward bias with the exception of only a couple stocks. The index closed at a two-week low and below initial support. The 6,785 level would be a 3% decline with a 5% drop at 6,650. With Apple on the edge of a breakdown and the chip sector negative for the last several weeks, the Nasdaq could be the index that leads the market lower. Tech stocks are not going to benefit from the tax reform as much as industrials. Techs have the lowest effective tax rates of all 10 S&P sectors. This could cause some selling next week as investors rotate into tax benefit sectors.

The Nasdaq Composite had 72 new highs in 2017. The index has been up for six consecutive years and has not done that since the streak in 1975-1980.

The Nasdaq 100 is now up for nine consecutive years and that is a record.




The Russell 2000 tried valiantly to break through the strong resistance at 1,550 but did not succeed. Friday's close was a two week low. A 5% decline would take the index to 1,471 and a 3% drop would target 1,502. That is a nice round number that has been defended in the past.


If the retail herd is normally wrong about direction, the AAII survey results are a bad omen. Bullish sentiment has not been this high since November 13th, 2014. Bearish sentiment has not been this low since November 4th, 2015. Bullish sentiment has risen 23.3 points since the recent bottom at 29.3% on November 16th. Historically, when sentiment has been this high the market under performs in the six months that follow. Obviously, there are fundamental factors that should support the market over the next four months and that is why bullish sentiment is so high. That does not mean there will not be a counter reaction to this bullish move.


This was the fourth consecutive year that the S&P has declined on the last day of December. In 2014, the S&P declined 21 points on the last day and continued to decline another 87 points on the three days that followed for a total drop of -108 points. In December 2015, the S&P declined 20 points on the last day and continued to decline another 231 points in the 12 days that followed. In December 2016, the S&P declined -10 points and then rebounded 43 points over the next four days. Just because the last day of trading is negative, it does not mean the next week will be negative. In December 2013, the last day was positive but the S&P still declined -31 points over the next 8 days. Then, after a week of minor gains, the index fell -103 points over the next 8 days.

If this minor bit of research tells us anything is that January has posted losses more often than not in recent years. 2012 was the exception. After a -27 point drop in mid December 2011, the S&P rocketed higher in January for a 214-point gain through the end of March.

There are exceptions to every trend. Hopefully, January 2018 will be an exception and the market will continue higher. Unfortunately, hope is not a trading strategy and we need to be prepared in case the markets take a needed rest. Be prepared with cash in your account to buy the dip. Actually, I prefer to say buy the rebound because picking bottoms is a dangerous way to trade. Look for a strong rebound on decent volume and then enter your new positions. Entering too late is always preferable to entering too soon.

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Jim Brown

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New Option Plays

Keep China Rolling

by Jim Brown

Click here to email Jim Brown

Editors Note:

Internet advertising in China is a complex proposition. Bitauto excels in marketing to potential auto buyers. The auto sector in China is exploding as the middle class become invested in the automobile movement.

I really did not want to recommend a position this weekend. I expect a gap open on Tuesday and it could be up or down. There is so much uncertainty that anything is possible. The most likely direction is lower. BITA has withstood the recent market volatility because they were hammered for a $25 loss in early December. I would like to think that our downside risk in BITA is minimal unless the market implodes.



NEW DIRECTIONAL CALL PLAYS

BITA - BitAuto Holdings - Company Profile

Bitauto Holdings Limited provides Internet content and marketing, and transaction services for the automotive industry in the People's Republic of China. The company operates in three segments: Advertising and Subscription Business, Transaction Services Business, and Digital Marketing Solutions Business. The Advertising and Subscription Business segment provides advertising services, including new automobile pricing and promotional information, specifications, reviews, and consumer feedback to automakers through its bitauto.com and taoche.com Websites, as well as mobile applications. It also provides Web-based and mobile-based integrated digital marketing solutions to automobile dealers. The Transaction Services Business segment operates automotive transaction services platform that provides e-commerce transaction services to automobile dealers; and offers online automotive financial platform services to consumers and financial institutions, including banks, auto finance companies, and insurance companies. The Digital Marketing Solutions Business segment provides one-stop digital marketing solutions, such as Website creation and maintenance, online public relations, online marketing campaigns, and advertising to automakers. The company also distributes its dealer customers' automobile pricing and promotional information through its Internet service provider partners. Bitauto Holdings Limited was founded in 2000 and is headquartered in Beijing, the People's Republic of China. Company description from FinViz.com.

For Q3 BITA reported earnings of 23 cents that missed estimates for 33 cents. Revenue of $352.4 million rose 54% and beat estimates for $334 million. They guided for Q4 revenue of $360.7 to $368.3 million, a 51% increase, and that was well above estimates at $331 million.

Shares were crushed on the earnings miss despite the 54% increase in revenue and strong guidance. Their Yixin website generated approximately 140,000 automobile transactions in Q3. Active monthly users rose to 51 million and they have more than 15,000 dealerships in the network. Transaction services rose 145.7% in Q3. Advertising and subscription service businesses saw revenue rise 19.3%. The company ended the quarter with $487 million in cash.

Their Yixin subsidiary IPOed on the Hong Kong exchange on Nov 15th and that raised a significant amount of money that will allow them to rapidly expand that portion of the business. The perceived dilution was also a factor in the stock decline.

The company is growing rapidly and guidance was very strong. There is no reason why the shares should not continue rebounding. There is strong support at $28.50.

I am recommending a February option because it is cheap. Normally I would reach out to the next month to capture the expectation premium of their Feb 19th earnings but the options are twice as expensive and with potential market volatility in January, i would rather risk less with cheaper options.

Buy Feb $35 call, currently $1.60, initial stop loss $27.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Setting the Stage

by Jim Brown

Click here to email Jim Brown

Editors Note:

A monster sell program in the last 15 min of trading crashed the indexes. A sell program in the S&P futures knocked -100 points off the Dow and -30 points off the Nasdaq. This could have been a major fund manager setting up for an expected decline next week. By selling futures instead of stocks, they can profit from any decline in the market while keeping their stock holdings intact. OR, they are protecting themselves from expected losses when they sell their own portfolio next week.

Nobody can foretell what will happen next week but that flurry of selling in the futures at Friday's close, is a good indication of what fund managers are expecting.



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


CAR - Avis Budget
The long call position was reentered at the open.



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BULLISH Play Updates

ARNC - Arconic Inc - Company Profile

Comments:

No specific news. Shares declined sharply with the market at the close.

Original Trade Description: December 27th.

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 of they will be the nex 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.

Position 12/28/17:

Long July $30 call @ $1.50, see portfolio graphic for stop loss.


CAR - Avis Budget Group - Company Profile

Comments:

No specific news. Shares spiked at the open to give us a less than desirable fill and then crashed at the close with the market. I am wishing we had not reloaded now but the stop is tight and we will exit on any further decline.

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 12/29/17:

Long Feb $46 call @ $1.85, see portfolio graphic for stop loss.

Previously closed 12/28: Long Feb $46 call @ $2.50, exit $1.65, -.85 loss.


CGNX - Cognex - Company Profile

Comments:

No specific news. Shares fell with the market to close 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.


PGR - Progressive Corp - Company Profile

Comments:

No specific news. Monir decline in a weak market.

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. Shares fell back to short-term support in the weak market.

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. Target was one of the few stocks to close with a gain on Friday.

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. Minor decline from the 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:

The Dow tried to spike at the open but resistance at 24,850 was rock solid. The index fought to stay in positive territory but a huge sell program at the close knocked it for a -118 loss. Is this a preview of coming attractions?

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.


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

The Nasdaq closed at a two-week low after a big drop in the last five minutes.

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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