Option Investor

Daily Newsletter, Saturday, 1/6/2018

Table of Contents

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

Market Wrap

Stampede in Progress

by Jim Brown

Click here to email Jim Brown

The bulls are stampeding and the bears are getting trampled.

Weekly Statistics

Friday Statistics

The last four days were a great start for 2018. Actually, if the percentage numbers in the first graphic were for the full month of January it would still be a great start for the year. Investors are throwing money at the market and there are no signs of selling. The worries were unfounded over an early January bout of profit taking. Other than a few stocks that sold off hard at the open on Tuesday there was no broad market selling. Most of those that did sell off hard at the open rebounded before the day was out.

Hedgeye Cartoon

All the major indexes closed at new highs but the Russell was struggling once it punched through the 1,550 resistance level. While the big cap indexes were surging the Russell put in consecutive 2,3 and 4 point gains starting on Wednesday at 1,552.

Since mid October, with the exception of two weeks in mid November, the big caps have sharply outperformed the small caps. Since October 17th, the Dow has gained 9.9% while the Russell has only gained 4.2%. In theory, December is supposed to be a strong month for small caps but they declined the first two weeks. If the Russell were to accelerate higher next week, this broad market rally could really catch fire ahead of earnings.

On the AAII Sentiment Survey for the week ended on Wednesday, which was before the Dow hit 25,000, the bullish optimism spiked to 58.8% and the highest level in 7 years. The last time sentiment was this bullish was December 23rd, 2010 at 63.3%. The historical average is 38.5%. Bearish sentiment at 15.6% was the lowest since November 6th, 2014 with the historical average 30.5%.

In the 30-year history of the survey, there have only been 46 weeks with bullish sentiment at this level or higher.

It does not take a rocket scientist to figure out that euphoria is overtaking the market. If the herd is normally wrong about market direction then we have trouble ahead.

However, there are so many favorable factors impacting market sentiment, I do not see a major decline ahead. Consider these points.

Earnings are rising.
Economy is improving.
Global economy is rising.
Major corporate tax cut.
Individual tax cut for 80% of population.
Low interest rates.
Fed slow walking rate hikes.
Dividends rising.
Buybacks rising.
Unemployment at 17-year low.
No material inflation.
Business regulations evaporating.

Obviously, the market does not need an excuse to take profits but now that we are out of the first week of January, it is not likely to happen until after Q1 earnings. The first week of 2018 was always the biggest risk but analysts have turned so bullish that investors would be crazy to dump stocks ahead of earnings.

The key point is that companies will give new guidance based on the impact of the tax reform on their earnings. We could see some dramatic earnings upgrades.

Analysts have started calling the market fairly priced where they were calling it expensive a month ago. The difference is the $10-$12 expected gain in S&P earnings to $145 or even $150 according to some analysts. The problem is that applying a PE of 18 to the $145 number and you get 2,610 for the S&P. If you take the top estimate at $150 x 18 you get 2,710 and we are already well over that level.

If you take the most optimistic S&P target on the street, which is Yardeni and Associates at 3,100 and the most optimistic S&P earnings target at $150, that translates into a PE of just under 21 and that is not cheap. Yardeni said this was a classic FOMO (fear of missing out) market.

Eventually, the estimates on earnings and the forecast for the S&P, will have to be reconciled. That is likely to happen after the first three weeks of Q4 earnings when we will have the majority of the new S&P guidance. If that guidance comes in at the $145 level or lower, there will be pain in the market because that will not support a PE of 21.

Fortunately, we have several weeks before the estimates begin to firm up and the bulls are currently in charge. The only obvious pothole ahead is the potential for a government shutdown on the 19th. That is two weeks away and could cause a volatility event if it happens or a positive uptick if it gets resolved in advance.

On the economic front, we are starting to see some slowing. It is not material, yet, but it does exist. This could be the result of weather except that until the last couple of weeks it has been unseasonably warm. It could be residual impacts from the hurricanes but those should be translating into an increase of activity related to rebuilding and replacing items that were destroyed. Temporarily, I am going to chalk it up to just a normal cycle of ebb and flow until it becomes a trend.

The nonfarm payrolls for December came in at 148,000 and well below the consensus estimates for 188,000 and the whisper number at 210,000. The whisper number had risen after the ADP Employment report on Thursday came in hot with a gain of 250,000 jobs compared to estimates for 190,000. The December headline number will likely be revised higher next month.

There was a decline of 9,000 jobs in the revisions. November was revised up 24,000 from 228,000 to 252,000 but October was revised down -33,000 from 244,000 to 211,000. The three-month moving average is now 204,000.

The unemployment rate remained at 4.1% for the third consecutive month. Only 64,000 people joined the labor force and the participation rate was flat at 62.7% for the third consecutive month.

For all of 2017 the economy created 2.055 million jobs, down slightly from the 2.24 million in 2016. It is becoming harder to raise that number since we are effectively at full employment. There are plenty of available jobs but there is a lack of skilled workers. Employers are being challenged to find the most qualified applicant and then provide additional training to bring them up to the level required for the job. Over the long run, this is beneficial for the economy because it means the skills level for the labor force is rising and the average wage will rise as well. This will increase consumer spending and fuel the economy.

Highpoints included 55,000 new goods producing jobs with 30,000 in construction and 25,000 in manufacturing. Education and healthcare added 28,000. The retail sector declined -20,000 with the majority attributed to general merchandise stores.

The ISM Nonmanufacturing Index for December declined from 57.4 to 55.9 with the business activity index falling from 61.4 to 57.3. New orders fell from 58.7 to 54.3. Nine industries reported growth in orders and seven industries reported a decline. The decliners were IT, mining, wholesale trade, educational services, professional services, management support services and construction. The employment component rose slightly from 55.4 to 56.3. The service sector now accounts for 88% of GDP. Any number over 50 in the ISM represents expansion so we are still moving in the right direction but at a fractionally slower pace.

Respondents reported an increase in lumber prices because of the fires and an increase in steel prices because of duties on Vietnam. They were also positive because of an increase in activity in the oil and gas sector that was generating additional service activity.

Factory Orders for November rose 1.3% after a 0.4% rose in October. This was the fourth consecutive rise in orders after a -3.3% drop in July. Durable goods orders rose 1.3% and nondurables 1.4%. Nondefense capital goods excluding aircraft declined -0.2%. Defense orders rose 4.9%. Shipments rose 1.2%. The components important to GDP saw upward gains and that should boost Q4 GDP estimates.

The Atlanta Fed real time GDPNow for Q4 declined from 3.2% growth to 2.7% because the decline in job growth blunted expectations for consumer spending in Q4. The decline in the ISM Services also impacted the forecast. The next update to the GDPNow will be Wednesday.

The economic calendar for next week is pretty busy with the most important report the Philly Fed Manufacturing Survey. This is the most important of the regional reports. The PPI and CPI will be the inflation indicators and the retail sales for December will be important but we already know it was a good holiday shopping season.

The earnings begin to flow on Friday when JP Morgan Chase, Wells Fargo, Blackrock and PNC Financial report their results. That will set the stage for the rest of the financial sector.

Nineteen S&P companies have already reported for Q4. That is a small sample and may not be representative of future results. This is especially true since these companies reported either before the tax vote or too soon afterwards to give comprehensive post reform guidance for 2018. Of those 19 companies 79% beat earnings estimates with 89.5% beating revenue estimates. Q4 earnings estimates are currently 11.4% growth with revenue expected to increase 6.9%. To date there have been 69 earnings warnings for Q4 compared to 42 companies giving positive guidance. There are 7 S&P companies reporting earnings next week and one Dow component (JPM).

Companies giving positive guidance on Friday included KIDS, DPLO, ASGN, OLLI and SIMO. Companies giving in line guidance included STZ, RTIX and GBX. The only company guiding lower was CORE.

The big stock news for the week was a hit to Intel (INTC) after researchers found not one but two major flaws in their chip logic, which would allow hackers to steal user data from unprotected PCs, Macs, notebooks, laptops and smartphones using Intel chips. Any computer produced over the last 20 years was at risk. The two logic flaws were named Meltdown and Specter. Basically, malicious code in an unprotected operating system, could read what was stored in system memory. This was supposed to be protected but under the right set of circumstances, malicious code could extract that information which could include passwords for the system that would allow hackers to come back in with valid login information.

Intel and Microsoft had already put out a series of software patches and browser updates to resolve this hole in the operating system. However, major companies were reluctant to just apply fixes to everything because of the potential errors in the patches. Whenever a fix to a major problem is rushed to the market over several days, there can be unexpected results. The patches are written for normal operating environments. In the real world with more than two billion servers and PCs worldwide, there are lots of operating environments that are not "normal" and they have to test the patches before applying them. Major companies typically have a broad range of operating systems from Windows XP and Windows 2003 server to the latest versions of each. Every system has its own unique update history.

Of course, Intel and Microsoft are urging customers to upgrade to the latest version of each operating system to insure they are protected against all known threats. In the past when a major virus appeared, it sometimes resulted in a surge in earnings for Microsoft because of the wave of upgrades.

Apple quickly issued updates to all their current operating systems and they will be automatic. The Safari web browser requires an update that has not yet been pushed to all devices. Apple said that update would be available next week.

Intel said it has issued software updates for up to 90% of its products released in the last 5 years and should have all covered by the end of next week. Nobody knows how far back in Intel's product cycle they will go to issue updates for their processors. They may depend on operating system updates from Microsoft to cover processors older than five years.

Google said patches for the Chrome browser would be available on January 23rd.

Microsoft Azure, Amazon Web services and Google Cloud have updated most of their servers and the rest should be completed this weekend.

The Intel CEO, Brian Krzanich, is taking a lot of heat. He sold $39 million in stock and options in late November, several months after Meltdown and Specter were discovered but prior to being announced to the public. When a flaw is discovered in some computer software or component, the manufacturers are notified first and the flaw is kept secret until they have a patch for the problem. In this case, Intel was notified months ago and the CEO sold all but 250,000 shares of his stock for roughly $39 million. Officers are required to maintain shares and his contract calls for 250,000 as a minimum. Some analysts claim his sale was prearranged but knowing for months there was a flaw that could tank the stock makes the sales subject to increased scrutiny.

There are some ambulance chasing lawyers already trolling for cases against Intel for releasing the flawed processors. Since there are no records of anyone actually being harmed by either flaw, it could be tough to make a case.

While on the subject of processors and chips, Goldman Sachs said Nvidia (NVDA) was still the best chip stock for 2018. Goldman reiterated a buy rating and $228 price target saying the company would continue to beat earnings estimates as demand for their products increases. Goldman said Nvidia will launch new graphics cards based on their new Volta chip and demand would be high. The bank said their earnings estimates for Nvidia is $6 for the next fiscal year, where the Wall Street consensus is $4.53. Goldman said Nvidia continue to enjoy first mover advantage and the sheer size of their market will lead to positive EPS revisions.

With the annual CES electronics show next week, you can bet Nvidia will get another boost. Intel will be spending all its efforts defusing the Meltdown and Specter headlines while Nvidia will be promoting their next dozen or so products. Intel CEO Krzanich will give the keynote address this year but Nvidia CEO Jensen Huang will take over the Sunday night preshow address and will focus on their progress in virtual and augmented reality, autonomous cars and next generation PCs.

AMD could get a boost if Intel previews their new i7 module that incorporates an AMD Raedon GPU.

Intel will try to prove it is still relevant and Nvidia will try to build on its reputation for being on the leading edge of chip technology. I would love to be in that Nvidia presentation.

Sears Holdings (SHLD) announced they were closing another 103 stores. That will be 64 Kmart stores and 39 Sears stores. Liquidation sales will begin next Friday. Sears announced the closing of 250 stores in 2017 and 216 in 2016. The actual closings will be in March and April. As of the end of October, there were 595 Sears stores and 510 Kmart stores remaining. Shares fell to a new closing low.

Constellation Brands (STZ) reported earnings of $2.00 compared to estimates for $1.89. Revenue of $1.8 billion missed estimates for $1.87 billion. In the year ago quarter they posted earnings of $1.96 and $1.81 billion in revenue. For the quarter beer sales rose 8.0% but wine and spirits sales fell -10.3%. While wine sales were weak, the majority of that decline came from divesting their Canadian wine business in December 2016. The company guided for full year earnings of $8.40-$8.50 and consensus estimates were $8.43. Recently the company announced a $3 billion buyback against their market cap of $38 billion. They also invested $190 million into a 10% stake in marijuana company Canopy Growth. Shares fell $6 on the earnings news.

Excluding charges, Cal-Maine Foods (CALM) reported earnings of 55 cents that missed estimates for 68 cents. Revenue rose 42% to $361.2 million but still missed estimates for $364 million. The company was impacted by a charge of $52.8 million or $1.09 per share for an antitrust settlement. The CEO said the outlook was good with a strong egg market and improved pricing. Shares declined $3 on the news.

Tyson Foods (TSN) was upgraded to overweight at Piper Jaffray with a price target of $94. The analyst said "management was focused on growing more value added products to expand margins and reduce volatility." Shares had been trending slightly lower in December and this could reenergize them.

Netflix (NFLX) shares rallied to a new high after David Letterman announced the lineup of guests on his new talk show "My Next Guest Needs no Introduction." I am not sure what order but President Obama, George Clooney, Malala Yousafzai, Tina Fey, Howard Stern and Jay-Z. I am guessing Letterman's recent gig as a department store Santa left him wanting to do something more. (joke) Netflix shares had been posting gains on the Apple acquisition speculation but they surged higher on the idea that Letterman's show would be another hit for the streaming company.

Diplomat Pharmacy (DPLO) reaffirmed earnings guidance saying they expect to report $4.5 billion in revenue and $102 million in EBITDA. For 2018, the company guided for $5.3-$5.6 billion and EBITDA of $164-$170 million. That is a 60% increase from year ago levels. Diplomat is the largest independent provider of specialty pharmacy services. Shares rallied 11% on the news.

USG Corporation (USG) surged 7% to a new high after Barclays upgraded them from neutral to overweight and RW Baird upgraded from neutral to outperform. The company is experiencing a boom in demand for building products as a result of the hurricanes in Texas, Florida and Puerto Rico.

Crude oil prices rallied for the week despite fading slightly on Friday. Crude closed at $61.93 on Wednesday and held at that level for a short time. Friday's minor 42-cent decline was likely profit taking. Oil inventories declined -7.4 million barrels for the week ended Dec 29th. Inventories have declined -33 million barrels over the last six weeks as refiners tried to process as much oil as possible before the property tax deadline on 12/31. Refinery utilization rose to 96.7% and the high for the year as they pushed as many refined products as possible out of inventory and into the pipelines.

Inventories could begin to rise next week for the week ended the 5th, but definitely the next week and for the next three months. This could put pressure on prices along with the restart of the 450,000 bpd Forties pipeline in the North Sea and the 95,000 bpd pipeline in Libya.



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Euphoria is breaking out all over. The S&P surged through resistance to gain a whopping 69 points for the week or 2.6%. At the risk of seeming pessimistic, that is a lot of points on top of +256 points previously gained since the August lows. I am happy as a litter of puppies about the gains but where are they going to stop?

The S&P has been pausing routinely for consolidation on the way up but there has been very little retracement. I am sure we would all like the market to do this the rest of the year, with minor pauses rather than big volatility events every couple of months. Those pauses have apparently been enough to allow the index to move higher but we all know it will not last.

As I said earlier, the first roadblock would be the potential for a government shutdown on the 19th unless they kick the can farther down the road. The second hurdle would be the passage of Q4 earnings. There could be some profit taking after all the post tax cut guidance is priced into the market. Fortunately, that is six weeks from now. We could be a lot higher by then.

Lastly, the higher we go before there is a material decline, the larger that decline could be. Just bear that in mind over the coming weeks.

For now, investors are content with chasing the new highs in anticipation of massively improved guidance.

The Dow exploded past 25,000 at Thursday's open without even a minor pause until it hit 25,100. The index moved sideways the rest of the day to end at 25,075. Friday's gap higher never looked back as shorts raced to cover and investors chased prices higher as euphoria took over.

Analysts on stock TV were pounding the table on the market and targets were being raised by somebody almost daily.

Boeing has been a major contributor. Their gains on Friday were on news they may be close to a deal to acquire a stake in Brazil's Embraer (ERJ). Reportedly, they agreed in principal on terms that would value Embraer at $28 per share. ERJ was trading below $20 when the news of talks first broke on Dec 21st. The news of a verbal agreement broke Friday and Boeing spiked $12 to add 84 Dow points. Boeing is acquiring a stake in Embraer to offset the new Airbus stake in Bombardier. Boeing is up $114 since early July and has added 775 points to the Dow.

Obviously, the Boeing gains are not going to continue on a daily basis but the Dow has been fortunate that a handful of stocks have outperformed every day to continue pushing the index higher. When these high fliers finally rest, they will have the opposite impact on the index.

The Nasdaq gained 233 points for the week and blew through the 7,000 level and then through the 7,100 level with equal ease. The big cap stocks are suddenly on fire with many of them at new highs. This is a dramatic change from the lackluster performance for the last two weeks of December where most were testing two-week lows. The tide turned and suddenly they are back in favor.

The Nasdaq has been taking periodic rests every 2-3 weeks so it is actually better off for a longer term rally than the Dow and S&P. The decline in late December was the smallest of the last six retracements.

The Russell 2000 remains the laggard. The index is making new highs but with far less enthusiasm. The resistance at 1,550 has broken but there may still be some gravimetric pull that is holding the index back. If the small caps would catch fire, the broader market rally could have further room to run.

It is inevitable that this suddenly vertical rally is going to pause. I still believe that any pullback or pause will be minor because of all the positive points I wrote about earlier. The bulls are in control and sellers are nowhere to be found. They have been flattened by the stampede.

Personally, I would not continue to chase the new highs. I would look for stocks that have not blown out to new highs. Contrary to current sentiment, there is no rush to put all your money into the market. Look for a pause as a buying opportunity.

If you have not taken advantage of the EOY subscription special yet, your time is running out. For one low price, you get four newsletters, two option expiration calendar mouse pads and a genuine Morgan silver dollar. This is the cheapest price of the year and the offer is expiring.

Jim Brown

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"Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth."

Sherlock Holmes (by Sir Arthur Conan Doyle, 1859-1930)

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Index Wrap

Let's Do That Again

by Jim Brown

Click here to email Jim Brown
A 2.6% gain on the S&P and 4.0% spike in the Nasdaq would look even better if we could repeat it this week.

It is amazing to look at the difference from Friday's charts and the charts from the prior Friday. They are night and day different with indexes at 2-week lows the prior Friday and record highs this Friday. The oscillators and the momentum indicators are now significantly bullish.

The charts are blind to past results. They only report what happened in the market. Humans reading the charts assign all the bullish and bearish outlooks as though they were reading tea leaves.

The same is true with the oscillating indicators. They simply react to momentum, volume and moving averages.

After four strong days of gains, we would expect all the indicators to be positive. We have to read those indicators cautiously because a four-day rally is not yet a trend. It may turn into a trend and once it has a track record, the indicators will again be beneficial.

The primary indicator remains the A/D line on the S&P. With the S&P closing at a new high on Friday, the A/D line did as well. No surprise there. A warning signal would be a slowly rising market and a declining A/D line. That is what we will watch for in the future.

An even more bullish chart is the Bullish Percent Index. This is the percentage of the S&P stocks that have a current buy signal on a Point and Figure chart. The BP Index has exploded higher over the last month to the highest level at 82.4% since July 2014. This is a major breakout and very bullish.

The percentage of S&P stocks over their short-term 50-day average rose to 82.8%. The percentage over the longer-term 200-day average rose to 79.8%.

The actual S&P chart has shifted from consolidation mode to breakout mode to overextended in only four days. That 69-point gain last week has put the index in danger once again and in need of another consolidation period. The S&P is now 178 points or 6.9% above its 100-day average. That is an extreme divergence. We have a once in a generation event with the tax cuts and it has produced the largest point spread deviation in history. I do not know if there has ever been a 6.9% deviation in the past. Just trust me when I say it is extreme.

The Dow A/D chart is also at a new high and as you can tell from the last six months it has been the market leader. Even with the big 576-point gain from last week, the MACD just barely turned positive because of the choppy market the prior two weeks. In this instance, the indicators are following rather than leading. The negative cross over at the end of October was a leading indicator. The Dow was trading sideways but the oscillators were sharply negative.

The MACD is just turning positive again despite the monster 4-day gain on the index. The Dow is over extended once again despite the two-week consolidation period. The breakout above the regression channel is a short-term sell signal with the center line back around 25,000 for support.

The Nasdaq Composite A/D line finally broke out but it was a battle. The Nasdaq has been choppy since August. It was acting like an actual market with periodic minor declines every 2-3 weeks all along the way. The A/D reflects this choppiness.

The Nasdaq Composite gained 233 points and the Nasdaq 100 gained 257 points. Both of these were short squeeze rebounds from a two-week low close the prior Friday. A 4% gain for the week on the Nasdaq 100, is extreme and put the index back into over extended status.

The Russell 2000 is still the weakest index with only a minor breakout over prior resistance at 1,550. The index has posted consecutive 2, 3 and 4-point gains over the last three days while the big cap indexes are surging higher.

The correlation between the FANG stocks came back together last week with each of the big caps moving as one compared to their prior divergence. This is why the Nasdaq soared to new highs. When all the generals are charging forward, the indexes will move.

The semiconductor sector also rebounded and allowed the Nasdaq to rally. The chips were led by Nvidia, AMAT and others while Intel was sinking.

I am as thrilled by the rally as any other investor, other than the bears, but we know this cannot continue at this pace. The outlook is still positive but there will be a pause at some point. We saw a month's worth of gains in four days and that is not normal. Even wildly bullish markets can pause for profit taking at any time. Be prepared. Keep your stop losses tight if you do not want to give back your gains.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Acquisition Candidate

by Jim Brown

Click here to email Jim Brown

Editors Note:

The aerospace-defense sector is hot and stocks are breaking out to new highs. Textron is rumored to be a potential acquisition target.


TXT - Textron - Company Profile

Textron Inc. operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through five segments: Textron Aviation, Bell, Textron Systems, Industrial, and Finance. The Textron Aviation segment manufactures and sells business jets, turboprop aircraft, piston engine aircraft, and military trainer and defense aircraft; and commercial parts, as well as provides maintenance, inspection, and repair services. The Bell segment provides military and commercial helicopters, tiltrotor aircraft, and related spare parts and services. The Textron Systems segment produces unmanned aircraft systems; smart weapons, airborne and ground-based sensors and surveillance systems, and protection systems; armored vehicles, turrets, and related subsystems, as well as marine craft; test equipment and electronic warfare test, and training solutions; piston aircraft engines; and intelligence software solutions. This segment also designs, develops, manufactures, installs, and maintains full flight simulators, as well as offers training services. The Industrial segment offers blow-molded plastic fuel systems, windshield and headlamp washer systems, catalytic reduction systems, and engine camshafts, as well as plastic bottles and containers; golf cars, off-road utility and light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment, and turf-care vehicles; and powered equipment, electrical test and measurement instruments, mechanical and hydraulic tools, cable connectors, fiber optic assemblies, underground and aerial transmission and distribution products, and power utility products used in the construction, maintenance, telecommunications, data communications, electrical, utility, and plumbing industries. The Finance segment provides financing to purchase new and pre-owned aircraft and helicopters. Textron Inc. was founded in 1923 and is headquartered in Providence, Rhode Island. Company description from FinViz.com

Expected earnings January 31st.

With Airbus acquiring a stake in Bombardier, Boeing a stake in Embraer, Honeywell, United Technologies, Rockwell Collins, etc, all circling each other like sharks around a wounded whale, Textron is a potential acquisition candidate.

There are no formal rumors but options activity is huge. On Friday there were 5,400 of the Jan $55/$60 calls traded with the $55 calls at $3.50. There were 9,500 of the Feb $60 calls traded at $1.70 against an open interest of 261 contracts.

Textron has lagged the other defense contractors because they are in a contract period where capex is high but the eventual income has not yet appeared.

Last week FedEx (FDX) announced an order to buy 50 of Textron's Cessna SkyCourier 408 aircraft with an option to increase the order to 100. FedEx worked closely with Textron to design the plane for package delivery to small and medium sized markets.

The Textron aviation chief said Amazon was another potential customer because the need to ship express packages to addresses outside major cities was rapidly growing. Textron produces Cessna, Beechcraft and Hawker business jets.

Textron/Bell/Boeing produces the V-22 Osprey aircraft. They just achieved first flight on the new V-280 Valor, which is a new generation tiltrotor aircraft like the Osprey. Bell, as in Bell Helicopter, is the division producing the V-280. The aircraft has twice the speed and range of a conventional helicopter and carries a much larger payload.

The company has so many projects in the works they are right on the edge of a new chapter in their growth. With the $700 billion defense program that passed in September, they will be getting a wide variety of new orders.

There is no way to know if somebody is about to make any offer but the dramatic surge in option volume is typically a sign or rumors making the rounds.

I am recommending the March option to retain premium longer but we will probably exit before earnings on Jan 31st.

Buy Mar $60 Call, currently $2.15, stop loss $56.45.


No New Bearish Plays

In Play Updates and Reviews

Great Month!

by Jim Brown

Click here to email Jim Brown

Editors Note:

If the gains for last week occurred over the entire month, it would be a great month. The market is off to a monster start on an entire list of positive fundamentals. The major indexes closed at new highs and the Dow is now 300 points above 25,000. The Nasdaq is well over 7,100 after failing at 7,000 just a few days ago. Even the Russell posted a minor gain to a new high.

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

JUNO - Juno Therapeutics
The long call position was entered at the open.

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

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Long and short equity trades = Premier Investor

BULLISH Play Updates

AKAM - Akamai Technologies - Company Profile


No specific news.

Original Trade Description: January 3rd.

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution that consists of an integrated suite of Web delivery, acceleration, and optimization technologies; Dynamic Site Accelerator that helps in consistent Website performance; IP Application Accelerator to enable enterprises to deliver Internet Protocol-based applications; Global Traffic Management, a fault-tolerant solution; Image Manager that automatically optimizes online images; and Cloudlets, which provides self-serviceable controls and capabilities. It also provides cloud security solutions, including Kona Site Defender, Bot Manager, Fast Domain Name System, Prolexic Routed, and Client Reputation; enterprise solutions comprising Enterprise Application Access and Akamai Cloud Connect. In addition, the company offers media delivery solutions, such as adaptive delivery solutions, download delivery solutions, media delivery acceleration solutions, media services, media analytics, and NetStorage, a cloud storage solution. Further, it provides network operator solutions, including Aura Licensed CDN suite of solutions, Aura Managed CDN solutions, and Intelligent DNS Solutions; and professional services and solutions. Company description from FinViz.com

Expected earnings Feb 6th.

Akamai reported Q3 earnings of 62 cents that beat estimates for 59 cents. Revenue of $621.4 million beat estimates for $610 million. Web division revenue rose 14% to $328 million. Media division revenue fell -1% to $273 million. Enterprise and carrier division revenue rose 2% to $20 million. Performance and security solutions revenue rose 11% to $381 million. Cloud security solutions revenue rose 27% to $121 million. Services and support revenue rose 12% to $57 million. International revenue rose 18% to $213 million. Cash on hand was $1.4 billion. They repurchased $129 million shares of stock in the quarter.

Shares spiked $4 on the report but faded over the next week. Deutsche Bank reiterated a buy rating and raised their price target to $75. The analyst pointed to what would be monster traffic volumes from the Winter Olympics in Q1 and the World Cup Soccer in Q2.

In October, Akamai announced the acquisition of Nominum, a market leader in DNS and enterprise security solutions for carriers. Akamai also announced the launch of Bot Manager Premier, designed to help organizations manage the impact of bots across their entire digital environment, including websites, mobile applications and wed APIs.

The company guided for Q4 revenue of $638-$656 million with gross margins of 65% to 77%. Earnings are expected to be in the 60-65 cent range after a 4-cent impact from the acquisition of Nominum. They are forecasting 5% to 8% growth for the year with a 64% gross margin. There is nothing wrong with their business.

Akamai said the rapid advancement of video on demand was a strong factor in future earnings since they are the largest provider of content. Also seeing a rapid ramp was the cloud storage business. Akamai has a security hook in that growth and the redundancy of that storage.

Akamai collaborated with Google, Cloudfire, Flashpoint, RiskIQ and the RBI to squash a botnet named WireX that had infected 120,000 Android phones in early August. The bot was generating 20,000 page requests a second against a set of targeted servers in a DoS attack.

Akamai announced it had set a new record for throughput delivered on September 12th with more than 60 terabytes per second (Tbps). That beat the old record of 47 Tbps set on August 29th. Akamai delivers more content on a daily basis than any other content provider. In January 2017, they set a single event record of 8.7 Tbps streaming the Presidential Inauguration. The company has more than 200,000 servers spread across 130 countries to accomplish this record content delivery.

Akamai announced the Content Delivery Network (CDN) capabilities for enterprises are now available on the IBM cloud. The new offering is part of the IBM Cloud Content Delivery Network. Akamai currently provides CDN services on 1,700 networks in 131 countries. That now included IBM's footprint of 60 cloud centers across 19 countries. Akamai has more than 200,000 servers across 130 countries.

In mid December Elliott Management disclosed at 6.5% stake in Akamai saying the shares were significantly undervalued. Elliott said it would attempt to talk with the board, other shareholders and potential acquirers about strategic alternatives. Shares spiked to $67 on the news and have faded only slightly with support appearing at $65.

I have to use the May calls because the February calls have a $1.25 bid/ask spread on a $3 option. Just because we buy May does not mean this is a long term position. We will exit before the Feb 6th earnings. I am just using May because the bid/ask spread of only 35 cents. They should also hold their premium better than the February strikes.

Position 1/4/18P:
Long May $70 call @ $3.20, see portfolio graphic for stop loss.

ARNC - Arconic Inc - Company Profile


No specific news. Wells Fargo initiated coverage with an outperform rating. IBD raised the relative strength rating from 76 to 82.

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.

BITA - BitAuto Holdings - Company Profile


No specific news. Citi initiated coverage with a buy rating.

Original Trade Description: December 30th.

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.

Position 1/2/18:
Long Feb $35 call @ $1.55, see portfolio graphic for stop loss.

CGNX - Cognex - Company Profile


No specific news. Another decent gain. No complaints.

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.

JUNO - Juno Therapeutics - Company Profile


No specific news. Shares spiked at the open but faded in the afternoon. We were filled at the high of the day.

Original Trade Description: January 4th.

Juno Therapeutics, Inc., a biopharmaceutical company, engages in developing cell-based cancer immunotherapies. The company develops cell-based cancer immunotherapies based on its chimeric antigen receptor and T cell receptor technologies to genetically engineer T cells to recognize and kill cancer cells. Its CD19 product candidates include JCAR017 that is in Phase I/II trials for adults with relapsed or refractory (r/r) B cell aggressive non-Hodgkin lymphoma (NHL) and pediatric patients with r/r B cell acute lymphoblastic leukemia (ALL); JCAR014, which is in Phase I/II trials to treat various B cell malignancies in patients relapsed or refractory to standard therapies; and JCAR015 that is in Phase II trials for adult patients with r/r ALL. The company's CD22 product candidate comprise JCAR018, which is in Phase I trial for pediatric and young adult patients with CD22-positive r/r ALL or r/r NHL. Its additional product candidates include CD171, a cell-surface adhesion molecule to treat neuroblastoma; Lewis Y for the treatment of lung cancer; JCAR023, which is in Phase I trial for patients with refractory or recurrent pediatric neuroblastoma; MUC-16, a protein for treating ovarian cancers; IL-12, a cytokine to overcome the inhibitory effects; ROR-1, a protein for the treatment of non-small cell lung, triple negative breast, pancreatic, and prostate cancers; WT-1, an intracellular protein that is in Phase I/II clinical trials to treat adult myeloid leukemia and non-small cell lung, breast, pancreatic, ovarian, and colorectal cancers; and IL13ra2 for treating glioblastoma. Juno Therapeutics, Inc. has collaboration agreements with Celgene Corporation, Fate Therapeutics, Inc., Editas Medicine, Inc., MedImmune Limited, and Memorial Sloan Kettering Cancer Center. The company was formerly known as FC Therapeutics, Inc. and changed its name to Juno Therapeutics, Inc. in October 2013.Company description from FinViz.com

Expected earnings January 31st.

This is a simple story. Juno is developing CAR-T drugs. Their JCAR017 drug treats non-Hodgkin lymphoma. The drug is currently in trials. Two other drugs, Yescarta and Kymriah, developed by other companies are already approved and being marketed.

In the latest JCAR017 trial 80% of patients were in complete response at the end of 3 months. At the end of six months they were still in complete response and after the six month date until the end of the trial, 92% stayed in complete response. That is an amazingly successful trial. In early December Juno reported only a 50% response rate using different term length and dosages and investors were expecting something over 70% based on the early results. Shares were crushed.

In reality, the results are still there. Yescarta and Kymriah only showed a 30% to 40% response rate so even with the downplayed results from JCAR017 it is significantly better. Once the drug is approved it is going to be a major winner in the category.

Investors have begun buying the stock again and shares are up from the $42.50 low to close just under $48 today. This is long term support and the 100-day average.

Position 1/5/18:
Long Feb $50 call @ $3.50, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


No specific news. Another $2 gain to close at a new high.

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


No specific news. Minor rebound in the retail sector. Maybe the rally is not over yet.

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.

Update 1/2/18: Influential tech analyst Gene Munster said he believes Amazon will buy Target in 2018. Target has a market cap of $37 billion but it would require a huge premium to get a deal done, probably something in the $50 billion range. Amazon has a market cap of $573 billion. The deal makes sense in the long run because it would give Amazon 1,802 major store outlets with a huge warehousing system that Amazon could use to its advantage. The addition of Amazon specific products to the already broad range of products offered by Target, would be a major boost to Amazon sales. The stores would function as customer delivery points for Amazon packages and because of the large store footprint it would allow Amazon to expand its same day, next day delivery offering to most of the US.

While it might make sense on paper, I would not hold my breath expecting a deal to be done. That would be a big bite for Amazon and there may be a problem getting regulatory approval. President Trump already believes Amazon is a monopoly with too much power and that could keep a deal from completing.

Position 12/14/17:

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

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


Best first week of trading since 2006. This position is dead unless we can get a 2-3 day decline ahead of the potential government shutdown. If we can get a decent drop, even just a couple days, we can sell a short put to turn it back into a spread and reduce our loss. This is a March position so we have plenty of time for disaster to strike. I believe it is worth the 70 cents to hold it just in case.

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.

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