Option Investor

Daily Newsletter, Saturday, 1/20/2018

Table of Contents

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

Market Wrap

Buy the Dip

by Jim Brown

Click here to email Jim Brown

The Senate failed to pass the budget resolution on Friday and the government is in shutdown mode.

Weekly Statistics

Friday Statistics

The market did not seem to care if the government was going to shutdown on Friday at midnight. We have been here before when President Obama weaponized the 2013 shutdown by closing everything possible to inflict pain on voters and have them direct their ire toward the republicans. However, the administration message all day on Friday was for a less stressful event. The Trump administration planed to keep everything open and running as much as possible claiming there is no need for America to stop running just because politicians are in disagreement.

After that message made headlines around lunchtime on Friday, the major indexes began to rebound and the Nasdaq, S&P and Russell all closed at record highs. The Russell was especially bullish with a 1.3% rally. The index rebounded sharply after a minor dip at the open and never looked back. The Dow spent most of the day in negative territory and did not begin rebounding until 2:00.

While the impact of a shutdown on the market is normally minimal, the rebound is normally strong. Kensho reported that the average S&P decline is -0.3% although some have been substantially more. The average rebound after the shutdown is +2.1% on the S&P. Today that would be about 60 points. In the 16-day shutdown in 2013, the S&P declined from 1,682 to 1,656 or -1.5%. The rebound ran from Oct 10th through December 31st where the S&P closed at 1,848 for an 11.6% post shutdown gain. This suggests that any decline next week should be bought. There is no guarantee the market will continue significantly higher but it should continue for the next couple of weeks until after the big cap tech earnings have been released.

The market did not get any help from the economic reports on Friday. The Consumer Sentiment for January declined for the third consecutive month falling from 95.9 to 94.4. The peak was a multiyear high at 100.7 in October. The present conditions component declined from 113.8 to 109.2 and the lowest level since November 2016. The expectations component rose slightly from 84.3 to 84.8. Of the respondents, 34% mentioned the tax reform unprompted and 70% said they expected a positive impact to incomes. Some 56%, up +3%, expect the economy to do well over the next 12 months.

The industry GDP rose from 2.74% in Q2 to 3.28% in Q3. Private industries added 3.3% while the government only accounted for 0.07%. Because this is a lagging report, it was ignored. The actual GDP for the entire US will be out next week and a 3% growth number will be the third consecutive quarter of GDP growth over 3% and this has not happened since early 2005.

The calendar for next week has a lot of reports but none are expected to be market moving. The new and existing home sales will continue to tell us that business is good. The Chicago, Richmond and Kansas reports should be in line with estimates and show continued expansion. The GDP is likely to get the most press if it is over 3% growth.

The earnings calendar will be more important to the market than economics. With eight Dow components reporting we could see additional Dow volatility. Thursday has CAT and MMM before the open and that could generate a downdraft if they do not post outstanding results. Intel reports after the close and there are worries they could guide lower because of the Meltdown and Specter hacks that still require active patching both to old chips/software and design changes to new processors.

As of Friday, 11% of the S&P has reported with 68% beating on earnings and 85% beating on revenue. However, the blended earnings growth for Q4 declined sharply from 10.8% to -0.2%. The reason was the big charges taken in the financial sector related to the new tax law. The financial sector alone accounted for a drop in S&P earnings of -$29.2 billion. This is the only sector that posted earnings declines last week.

This is going to be a problem in the future. As a result of the tax changes the earnings reports are going to be messy. These are all non-cash charges and gains but they will make comparisons to prior quarters nearly impossible. Each individual stock will rise and fall on its own merits based on the adjusted earnings numbers but the official GAAP earnings are going to be a witch's brew of charges.

Bank of America reported that $58 billion in cash has flowed into the market in the four weeks ended on Wednesday. That is the highest pace ever since records have been kept. That has powered the Dow to a 5.5% gain for the year, Nasdaq 6.7%, S&P 5.1% and Russell 4.0%. Equity ETFs saw inflows of $38.2 billion with mutual funds garnering $5.6 billion.

Last week $23.9 billion flowed into equities and that was the 7th largest inflow ever. Unfortunately, those money flows are not going to continue forever.

One challenge is the sudden rebound in yields on treasuries. The yield on the ten-year closed at 2.637% and the highest level since June 2014. At some point, investors are going to decide the equity market is grossly over extended and the yield on a treasury would be a good place to park their cash until the equity market corrects.

Conversely, Bill Gross proclaimed the end of the multi-decade bull market in treasuries and said a new bear market had begun. With bonds/treasuries suddenly selling off, those investors are looking at equities as a better opportunity.

I know those two scenarios contradict each other but there is a point where treasuries will become attractive again. Analysts believe that is the 3% yield level. They do not see yields spiking much over 3% with central banks still overly accommodative. That means yields will probably peak around the 2013 highs at 3.0% and hold there until the Fed executes a few more rate hikes this year.

In the short term, funds are coming out of treasuries and into equities. That is helping prevent any material market declines.

Monday will be a record 395 trading days without 5% drop on the S&P. That is the longest streak in history with records dating back to 1929 according to Goldman Sachs. The current economic expansion is nine years old and the second longest on record. After multiple quarters of earnings declines, we have seen six consecutive quarters of earnings growth. Despite all this bullishness, the median analyst price target for year-end is only 2,855.

The Investors Intelligence poll of professional newsletter editors rose to 66.7% bullish versus 12.7% bearish. That is the widest spread since April 1986.

The AAII sentiment survey of individual investors saw a rebound in bullish sentiment to 54.1% while bearish sentiment declined to 21.4%. This was still below the extreme readings of 59.8% and 15.6% from two weeks ago. That was the most bullish since December 2010 and the most bearish since November 2014.

Individual investor sentiment is still rising but at a slower pace after the multiple days of whiplash volatility over the last week. Some of the "over extended" comments by analysts may be taking hold.

The dollar is continuing to decline and that remains positive for commodities. Gold rose again and is likely headed back to the $1,365 resistance from mid 2016.

In stock news, Facebook (FB) was making waves again saying they were going to prioritize "trustworthy news" based on user surveys. Users rather than moderators, experts or Facebook executives would determine which of more than two million news sources had accurate news stories. Zuckerberg said the change would eventually shrink the amount of news on Facebook by 20% to about 4% of all content. As users answer survey questions about what they read, the system would prioritize the most trusted sources and reduce exposure to those with the worst reviews.

I am sure you can see where this is headed. Trump's base will be clicking "fake news" on every mainstream media site and democrats will be giving Fox news negative reviews. It will turn into the website with the least negative reviews winning the rating race rather than the website with the most positive reviews.

Since Facebook has already been found guilty multiple times of suppressing conservative news and promoting liberal views, it is questionable at best on how this new system will work out. This is their third plan over the last year on trying to deal with fake news such as the Russian spamming that was heavy during the election. Newscorp pledged to look for "any signs that the weighting of news sites is politically motivated." Good luck with that.

Wynn Resorts Ltd (WYNN) said a group of people, including employees at the Wynn Macau had stolen $6 million in chips. One dealer and several accomplices were arrested. Wynn said they were still unclear on exactly how the group got the chips out of the casino. One theory is that the group accumulated the chips in a VIP room and just stuffed them into a bag and walked out with them. This is not exactly an Ocean's Eleven type of operation but more than likely a simple crime of opportunity. They may have distracted casino officials in order to get their loot out the door but the cameras do not lie. Once the chips went missing, a review of the security footage provided the suspects.

Wynn shares did not react negatively to the news. Shares are up $17 over the last week to close at a new high. Jefferies added a boost on Friday when they initiated coverage with a buy rating. Earnings will be released before the open on Jan 22nd. Puts anyone?

Protection One (ADT) went public on Friday and nobody protected their stock. They tried to price it between $17-$19 but at the last minute changed it to $14. The stock opened at $12.65 and dipped to $12 just before the close. The company raised $1.47 billion with 105 million shares. PE firm Apollo Global Management retained 84.87% of the company. ADT has 7.2 million customers and handles about 15 million alarms a year. They have about 30% share in this increasingly competitive sector. Revenue over the last nine months was $3.21 billion, up 69% with more than 90% coming from monthly monitoring subscriptions.

The challenge for ADT is their enormous debt load and the surge in Ring Central, Nest Security, Stanley Convergent Security, Vivint, Tyco, Arlo security cameras and dozens of other lesser-known competitors. The sector is booming with the do it yourself home security systems.

Shares of Chipotle Mexican Grill (CMG) gained $6 on Friday after Raymond James upgraded them from sell to hold. That is hardly a strong upgrade and the analysts said they no longer see any downside risks to 2018 estimates. Obviously that is different than saying the outlook is good. They warned that CMG was "not out of the woods" yet because of poor traffic flows in Q4.

At the same time Cowen reiterated an underperform saying Facebook check-ins suggested traffic trends were still falling. The Cowen analyst said comps for Q4 would be flat and could lead to disappointing 2018 guidance.

Jefferies upgraded Kohl's (KSS) to a buy with a $100 price target. The analyst said Kohl's is sleeping with the enemy (AMZN). In October, the retailer began selling Amazon's smart home products and accepting returns on Amazon products. The pilot program has been a success and the analyst expects it to roll out to all of the Kohl's stores. The retailer has also been ramping up its "ship from store" capability that allows them to sell to people that are not close enough to drop by but still in the retailer's area. Kohl's is also planning on adding groceries to its larger stores. The company is shrinking its retail space and reducing the number of skus they are carrying in inventory. This leaves them with 10-15,000 sqft of unused space and by partnering with a grocery retailer, they can benefit from the daily traffic generated by the grocer.

McCormick & Company (MKC) was downgraded by Deutsche Bank from hold to sell with the price target cut from $103 to $98. There does not appear to be a lot of analyst confidence in that call with only a $5 spread. However, the stock closed at $103 on Thursday and hit $98.57 on Friday. Time to buy now? I would probably wait for a dip to $94.

Crude prices fell $1 for the week despite an unexpected decline in inventories. Inventories should have risen last week but instead declined -6.9 million barrels. Refinery utilization fell sharply from 95.4% to 93%. With the extremely cold weather in most of the nation in January, gasoline and diesel demand is falling. This will add to inventories in the weeks ahead. Active rigs declined by -3 after a +15 gain the prior week. That was also unexpected given the oil prices near $65 and at $70 for Brent.


The S&P posted a decent gain of 12 points to close at a new high and become even further over extended. Markets can continue to maintain directional momentum far longer than anyone expects. The government shutdown could be a drag next week but I would expect another rebound once the shutdown is over. It is not that the event will impact the economy in a material way but the post shutdown rebound is just a relief rally that nothing serious happened.

The uptrend resistance is around 2,750 with a potential pause point at 2,774.

The Dow is starting to run into some trouble. With eight Dow components reporting next week there will be volatility. Whether it will impact direction is unknown. We do know that by Feb 2nd, more than two-thirds of the Dow will have reported and post earnings depression will be a factor. Even if a company spikes higher post earnings they tend to fade within a week. That suggests the Dow could peak over the next ten trading days.

Some of the big gainers are already starting to slow and once CAT, MMM and UTX report next week, they could add extra drag. Boeing does not report until the 31st.

The Nasdaq continues to make new highs despite choppy performance by the big cap tech stocks. Only half were positive on Friday but other than Priceline and Broadcom the rest were only fractionally negative. Google was leading the pack with new highs and Nvidia was dragging the chip sector higher with its new high.

The Nasdaq has a 13-day rally going and that is the second longest streak without profit taking since April. The 2-3 week cycle should be coming to an end sometime in early February.

Support is back at 7,200 followed by 7,110.

The Russell 2000 was a shock on Friday with a 1.3% rally and a new high close. Uptrend resistance at 1,600 is just ahead and it was solid on the last two attempts. The small caps should be in rally mode but they have only been able to post three solid single day gains since mid December. I wish Friday was the start of a new leg higher but the government shutdown could impact the Russell more than the big cap indexes.

As of late Saturday, the government shutdown appears likely to extend into next week. As I have written several times over the last two weeks, the two sides are growing farther apart rather than closer together. Now that the shutdown has occurred, they have hardened their positions in an effort not to appear weak and conciliatory. Both sides have solidified their positions on illegal immigration with the democrats claiming they will not approve funding for anything until the 850,000 illegal DACA immigrants have been given some sort of amnesty. The republicans, from the White House on down have said they will not negotiate on DACA or any immigration points while the democrats are holding 330 million Americans hostage with their immigration demands. Democratic senators are blocking all attempts to bring new votes to the floor. The senate will reconvene again on Sunday but the outlook is grim.

The house was supposed to be out of town this week. In the calendar below the yellow is when both the house and senate are in session. The blue is when only the senate is in session. Many house members had already left for their home state when the senate vote had stalled. The few members remaining have already prepared for an accelerated voting process if the senate were to pass a funding bill.

The farther this shutdown progresses, the more heated it will become. That means the market is more likely to be impacted by the events. However, the instant there is daylight at the end of the process, the market should move higher in a relief rally. I would recommend buying any dip for a short-term bounce.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


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Index Wrap


by Jim Brown

Click here to email Jim Brown
Lawmakers have fought to a stalemate and nobody is capitulating.

The fight between the two parties has reached a stalemate with each side resorting to name calling and competing hash tags. Nobody knows how long this shutdown will last because both parties have hardened their positions.

The market did not appear to be concerned on Friday with three of the top four indexes closing at record highs. However, they may be more concerned on Monday if it appears the political fight is going to be prolonged.

At this point, any decline would be a buying opportunity. Post shutdown markets normally rebound sharply. The key word there was normally.

With our markets up so strongly in 2018, there may not be a lot of gas left in the tank. I personally believe we are going to see some prolonged weakness in early February after the majority of the S&P has reported earnings. That is just my opinion and not a guarantee.

Every recent dip has been quickly bought. Money inflows are at record levels. Investors are going all in on fear of missing out or FOMO. That is not likely to change because of the shutdown in Washington. The sharp increase in earnings expectations should overrule the shutdown headlines but there could be some initial weakness. Since there have only been four shutdowns in the last 25 years this is somewhat of a rarity and many investors have not seen this before.

The S&P continues in its vertical climb and closed at a record high on Friday at 2,810. That is only 45 points from the median yearend target of 18 major analysts. That means some investors will be easing back on their bullishness as that target moves closer. To be fair there are multiple analysts with targets at 3,000 and above so there are still carrots on the proverbial stick.

For the last three weeks I would have just reused the prior A/D chart. With the market continuing to set new highs the A/D line is also setting new highs. The daily new highs from S&P stocks are running about 10:1 over new lows. On Friday, there were 107 new highs and 9 new lows. Back on Mon/Tue it was closer to 15:1. On December 9th it was 40:1 with 121 new highs to 3 new lows. There is no weakness to be seen in the market internals other than just day to day volatility.

The S&P remains very over extended and at the widest divergence from the 100-day average that I have seen with my charts dating back to 1976. Every week I mention the overbought conditions and they just become more overbought. We know that eventually the S&P will return to touch the 100-day as it did in August. It is just a matter of time.

The Dow A/D line is no different. The majority of the Dow stocks remain in a positive trend but there are 8 reporting earnings this week. We could be approaching a turning point once post earnings depression appears.

The Dow is now 10.7% above its 100-day average and well outside its prior uptrend channel. The index did not close at a new high on Friday despite the records on the Nasdaq, S&P and Russell. This could be a sign of exhaustion ahead of the Dow earnings cycle.

The Nasdaq A/D chart stumbled early in the week as the big cap tech stocks turned choppy once again. They finished the week with the index at a high but only half of the big caps were positive.

The Nasdaq was volatile early in the week but moved over those tall candles to close at a new high on Friday. The index is now 605 points or 9% over the 100-day average. There is no way anyone can look at the chart below and not see an impending decline. The Nasdaq has cycled every 2-3 weeks over the last six months and it has now gone vertical for three weeks. There is a decline in our future, probably in early February if we can get by the shutdown without a dip.

The Russell was a strong performer on Friday but it has only posted large gains on three days since early December. The index has lagged but may be preparing to lead again. The tax reform will help small businesses significantly but the shutdown could hurt sentiment. Next week should be critical with strong resistance at 1,600.

I am not going to bore you with a lot of additional charts today because I covered must of the usual suspects in the Option Investor commentary. The bottom line to the market forecast is that a short-term shutdown should not impact the markets and could actually provide a buying opportunity. A longer term shutdown complete with a couple weeks of negative headlines could be a cloud over the market that keeps it from moving higher as earnings are released.

I am looking for a prolonged period of weakness beginning in early February as guidance becomes fully priced into the market and post earnings depression begins to drag stocks lower. We will know by the February option expiration if I am right.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Down for the Count

by Jim Brown

Click here to email Jim Brown

Editors Note:

This company's biggest customer is throwing in the towel. GoPro is getting out of the drone business and that is bad for Ambarella.


No New Bullish Plays


AMBA - Ambarella - ETF Profile

Ambarella, Inc. develops semiconductor processing solutions for video that enable high-definition (HD) video capture, sharing, and display worldwide. The company??s system-on-a-chip designs integrated HD video processing, image processing, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable sports cameras, automotive aftermarket cameras, and professional and consumer Internet Protocol (IP) security cameras, as well as cameras incorporated into unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market. The company sells its solutions to original design manufacturers and original equipment manufacturers through its direct sales force and logistics providers. Ambarella, Inc. was founded in 2004 and is headquartered in Santa Clara, California. Company description from FinViz.com.

Ambarella was a big manufacturer in the action camera sector. Last week GoPro said it had cut prices significantly on the Hero line of cameras and the company announced it was exiting the drone business. This is especially bad for Ambarella since the drones had multiple cameras, some as many as a dozen. GoPro also indicated they were going to explore strategic alternatives including the sale of the company.

GoPro represents more than 20% of Ambarella's business. That means the dramatic reduction in GoPro products will mean an equal reduction in Ambarella sales.

Ambarella has been rapidly diversifying into other areas including security cameras and cameras for self driving vehicles. That will protect them in the long term but in the short term sales are going to stumble because of GoPro.

Earnings are March 1st.

Shares fell sharply on Jan 10th after the GoPro announcement that earnings would be significantly below expectations. Ambarella had posted a big earnings beat in Q3 of 75 cents compared to estimates for 66 cents. However, without reorders from GoPro in Q4, they could be facing lower guidance and a possible earnings miss when they report March 1st. Investors are selling the stock ahead of the potential lowered guidance, which could appear at any time.

There are no March options yet and May strikes are too expensive. I am using the February strike even though there are only 4 weeks left. It is only $1.36 OTM so we should be ok as long as the stock continues to decline.

Buy Feb $50 put, currently $1.85, initial stop loss $56.

In Play Updates and Reviews

No Material Fear

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes showed only minor concern over the potential for a government shutdown. Apparently, investors were expecting a last minute reprieve or the administrations assurances that it would not be "weaponized" set their minds at ease. After some early morning declines, the major indexes posted decent gains to end the week. The S&P, Nasdaq and Russell 2000 closed at new highs but the Dow was the laggard.

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

ARNC - Arconic
The long call position was stopped at $29.85.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

ARNC - Arconic Inc - Company Profile


The company announced a 6 cent dividend payable Feb 25th to holders on Feb 2nd. Shares dipped on the announcement to stop us out for a small gain. Apparently, investors were hoping for a larger dividend.

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.

Update 1/8/17: Arconic said it was freezing the pension plans at current levels for 7,900 employees and would make contributions to 401K plans instead. This will save them $140 million.

Position 12/28/17:

Closed 1/19: Long July $30 call @ $1.50, exit $2.62, +$1.12 gain.

CGNX - Cognex - Company Profile


No specific news.

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 Feb 15th.

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.

FLIR - FLIR Systems - Company Profile


No specific news. Nice gain to a new closing high.

Original Trade Description: January 10th.

FLIR Systems, Inc. develops, designs, manufactures, and markets thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions worldwide. The company operates in six segments: Surveillance, Instruments, Security, OEM and Emerging Markets, Maritime, and Detection. The Surveillance segment provides enhanced imaging and recognition solutions for various military, law enforcement, public safety, and other government customers for the protection of borders, troops, and public welfare. This segment also develops hand-held and weapon-mounted thermal imaging systems for use by consumers. The Instruments segment offer devices that image, measure, and assess thermal energy, gases, electricity, and other environmental elements for industrial, commercial, and scientific applications. The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home monitoring applications. The OEM and Emerging Markets segment provides thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops and manufactures intelligent traffic systems; imaging solutions for the smartphone and mobile devices market; and thermal imaging solutions for commercial-use unmanned aerial systems. The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market under the FLIR and Raymarine brands. The Detection segment offers sensors, instruments, and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives threats for military force protection, homeland security, first responders, and commercial applications. The company was founded in 1978 and is headquartered in Wilsonville, Oregon. Company description from FinViz.com.

The short description is that FLIR makes night vision equipment for the military. They are the primary provider of these high tech night vision systems and they are very expensive. With the military budget being greatly expanded in 2018 and probably 2019, FLIR is going to be getting a lot more contracts for new equipment and for replacement equipment and parts.

For Q3, FLIR reported earnings of 52 cents that beat estimates for 48 cents. Revenue of $464.7 million rose 14.7% and easily beat estimates for $446 million. The surveillance segment revenues rose 7.6%, instruments rose 10.5% and OEM and emerging markets revenues rose 39.1%. Detection systems revenues rose 18.9%. The security segment sa revenues rise 16.5%. The marine segment was the slacker with only a 4.2% increase. Order backlogs rose 10.1% to $709 million.

The company guided for full year earnings of $1.83-$1.88 up from $1.81-$1.91 with revenue of $1.78-$1.83 billion.

Earnings February 14th.

Shares rallied last week to close at a new high at $48.25 and just over two-month resistance at $47.90. They spiked again on Monday when they announced a high-resolution camera kit for self-driving cars. If this breakout continues, it should produce some short covering given the long period of consolidation after the spike from Q3 earnings in October.

I am recommending an inexpensive February ATM option with earnings on the 13th. I intend to hold this position over earnings unless we have profits to protect by that date.

This is also a longer-term position in the LEAPS newsletter.

Position 1/11/118:
Long Feb $50 call @ $1.55, see portfolio graphic for stop loss.

PLAY - Dave & Busters - Company Profile


No specific news. Excellent rebound to a 2-week high close.

Original Trade Description: January 13th.

Dave & Buster's Entertainment, Inc. owns and operates venues that combine dining and entertainment in North America for adults and families. It offers food and beverage items combined with an assortment of entertainment attractions, including skill and sports-oriented redemption games, video games, interactive simulators, and other traditional games. The company operates its venues under the names Dave & Buster's and Dave & Buster's Grand Sports Caf. As of June 17, 2014, it had 69 company-owned locations in the United States and Canada. The company was founded in 1982 and is based in Dallas, Texas. Company description from FinViz.com.

On Monday January 8th, Dave & Busters revised earnings guidance for fiscal 2017 from $110-$112 million to $108-$110 million. That $2 million adjustment caused the stock to drop from $56 to $44. They also lowered revenue slightly from $1.148-$1.155 billion to $1.138-$1.142 billion. Same store sales was reduced to -1.0%-0.7%, down from +0.75%.

They had previously warned in the Q3 conference call that Q4 started slow. They expected it to pick up in December, which is normally a busy month but revenue never caught up with the slow start in October. Quarter to date through Jan 6th, same store sales were down -5.1% with the end of year bad weather causing people to stay home. They also suffered from the lack of interest in the NFL games in Q4.

They were positive on their new format stores. They expect to open 14-15 new stores in 2018 and the same class of store in 2016 returned 54% one-year cash on cash returns in 2017. This was an improvement on the returns on their 2014-2015 class of stores. With each generation they are improving the returns.

Expected earnings March 6th.

The sharp decline last week was very overdone for the minimal decline in earnings expectations. Shares are already rebounding and with two months before earnings they have plenty of time for a decent rebound. For Q3 they reported earnings of 29 cents that beat estimates for 23 cents and shares were on an upward trajectory until Monday's guidance warning.

With so many stocks in blowout mode and not currently buyable, investors are going to be looking for less risky buying opportunities and PLAY could be the perfect answer.

Position 1/16/18:
Long April $50 call @ $3.40, see portfolio graphic for stop loss.

RHT - Red Hat - Company Profile


No specific news. Consolidating at the $126 level.

Original Trade Description: January 11th.

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in hybrid cloud environments; Red Hat Satellite, a system management offering that helps to deploy, scale, and manage in hybrid cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications; integrating applications, data, and devices; and automating business processes in hybrid cloud environments; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to manage large, unstructured, or semi-structured data in hybrid cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Red Hat, Inc. has a collaboration with Wipro Limited to set up a cloud application factory that offers developers and IT teams a methodology for application modernization across public, private, and hybrid clouds. The company was formerly known as Red Hat Software, Inc. and changed its name to Red Hat, Inc. in June 1999. Red Hat, Inc. was founded in 1993 and is headquartered in Raleigh, North Carolina. Company description from FinViz.com.

Linux has always been immune to most of the attacks on the internet but Red Hat has taken that to a new level. There are multiple versions of free Linux versions but free means little support and questionable fixes. Red Hat has taken their Linux product and built it into multiple enterprise versions for individual applications and cloud use on virtual machines with an entire suite of applications.

In the Q3 earnings the company reported 73 cents that beat estimates for 70 cents. Revenue of $748 million beat estimates for $734.4 million. They guided for Q4 for revenue of $758-$763 million and that beat estimates for $754.7 million. They guided for $2.88 for full year earnings and revenue of $2.91 billion. Deferred revenues rose 23% to $2.11 billion and subscription revenue from infrastructure offerings rose 15% to $495 million.

The good news on all fronts was not enough and shares dropped $9 intraday after the report. $120 appeared as support and shares have been rising steadily.

Deutsche Bank reiterated a buy with a $150 target saying the new Amazon Linux product was no threat and they were only targeting a fraction of the market for test systems before eventually going live on the Amazon cloud. The analyst said the Amazon Linux competes with Ubuntu/CentOS and not Red Hat. Finally an analyst that actually understands what he is analyzing.

Expected earnings March 20th.

I am picking a March option even though it expires a week before earnings. Those after earnings are far too expensive. I am expecting some serious profit taking in the market after the majority of Q4 earnings are over, probably around the February expiration. That should take us out of this position before well before RHT earnings.

Options are still expensive so I am turning this into an optional spread to reduce the net debit.

Position 1/12/18:
Long Mar $130 call @ $3.40, see portfolio graphic for stop loss.
Optional: Short Mar $140 call @ 90 cents, see portfolio graphic for stop loss.
Net debit $2.50, maximum gain $7.40.

TGT - Target Corp - Company Profile


No specific news. New 52-week high.

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.

Update 1/9/18: Target raised Q4 earnings guidance from $1.05-$1.25 to $1.30-$1.40. Same store sales are expected to rise 3.4% and well above analyst expectations for 1.25%. They guided for 2018 earnings of $5.15-$5.45 and well above estimates for $4.36.

Update 1/13/18: MKM Partners reiterated a buy rating and shares gained another $2.80 to a new 52-week high.

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


Once we see what happens to the potential government shutdown this weekend, I will either close this position or turn it into a spread. If a shutdown lasted a week, the market could decline significantly.

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.

Monte Gore, Mike Brown, Steve Spodyak, Gary Rhoads, John Tighe, Thomas McGraw

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