Option Investor

Daily Newsletter, Saturday, 1/27/2018

Table of Contents

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

Market Wrap

Party Like it's 1987

by Jim Brown

Click here to email Jim Brown

The markets are off to the best start in 31 years and the opening gains in 1987.

Weekly Statistics

Friday Statistics

January 1987 saw the S&P gain 13% with the gain over the first three months of the year a 25.4%. It was an outstanding start to the New Year and investors were giddy with their success.

So far in 2018, the Dow it up 7.7%, Nasdaq 9.8% and S&P +7.4%. Those numbers pale in comparison to 1987 but it has still been a good year and it is only four weeks old.

Unfortunately, 1987 is not remembered for the big gains in the first quarter but for the big declines later in the year. After posting a 39.7% gain for the first 9 months, the S&P fell -34% in only 11 days in October 1987. I am not predicting that 2018 will mirror 1987 but euphoric rallies tend to end badly. As you can see in the chart there was no material warning that the bottom was going to fall out. The index was trading within a few points of its highs and 18 days later, it had given back nearly all the gains for the year.

I do not want to be that voice in the wilderness always saying the sky is falling. I am far from bearish. However, as a market analyst for the last 20+ years, I have watched hundreds of cycles where the market has gone up sharply and then retraced those gains. I think analysts get trapped in this cycle fetish. We are so used to watching the repetitive cycle that when a market post gains like we have seen for the last several months, it just seems obvious that profit taking will appear. When days and weeks pass and the upward velocity continues to increase, it only intensifies our natural reaction to try and apply a cycle to it.

Over the last month, I have pointed to early to mid February as a potential rocky period. I have said repeatedly that I expect the market to continue rising through next week. My opinion has not changed.

I got a big kick out of a reader last week. I said something in last weekend's market commentary about the potential for a rocky February and he called me a "leftist liberal fear mongering democrat." I have been called worse but I believe long time readers know that is not my mindset. Another reader said "the Trump rally will be at 30,000 by September. The future is so bright I gotta wear shades!" I sure hope he is right.

Everyone has an opinion, right or wrong, and that is what makes a market. I simply try to keep readers focused on the fact that nothing goes up forever without a pause.

Friday's economic news was weaker than expected. The first look at the Q4 GDP showed 2.55% growth when the consensus was for 3.0% growth. This is the first release and it will be updated twice over the next two months. This was down from the 3.16% growth in Q3 and 3.06% in Q2. Inventory accumulation removed -0.67% and net exports removed -1.13%. Consumption added 2.58%, fixed investment +1.27% and government +0.50%.

We know consumer spending is going to spike higher in Q1 now that hundreds of companies have announced bonuses as a result of the tax reform and consumers will be getting an average of about $100 more in their checks each month from lower taxes.

Hurricanes depressed growth early in Q4 but then accelerated growth late in the quarter as the rebuilding increased in intensity. This will continue in Q1.

The Atlanta Fed real time GDPNow forecast was holding right at 3.4% growth for Q4 on the last update. This suggests the BEA GDP above could be revised higher over the next two months.

The Durable Goods report for December showed a 2.9% rise in orders compared to consensus estimates for 0.9% and the 1.3% reading in the prior report. The gain was powered by nondefense aircraft at +15.9% and defense at +19.5%. Backorders rose +0.6%. New durable goods orders are up 11.5% over the same period in 2017. Analysts are worried that the ultra cold weather in January could have slowed manufacturing with everyone huddled in the common areas to keep warm.

Next week is very busy. This is a payroll week, FOMC meeting, ISM Manufacturing and State of the Union speech. There are a lot of reports that will be competing for headlines along with the very busy earnings calendar.

This is big cap tech week for earnings plus there are 125 S&P companies including ten Dow components. Google, Amazon, Apple and Alibaba will make Thursday the peak day for techs but Qualcomm, Facebook, PayPal and Microsoft will precede them on Wednesday. Conoco, Exxon and Chevron plus about a dozen other energy companies will also report.

As of Friday 24% of S&P companies have reported and 76% have beaten analyst estimates with 81% beating on revenue. The blended growth rate for earnings has risen from 11.7% to 12.0% not including the noncash charges related to tax reform. The blended estimate for revenue growth is 7.0% and rising. According to FactSet, earnings are expected to grow by double digits for the rest of 2018. That is a powerful force for future market expectations. The forward 12-month PE is 18.4, which is above the 5-year and 10-year averages.

The big earnings winner on Friday was AbbVie (ABBV). The company reported adjusted earnings of $1.48 compared to estimates for $1.44. Revenue of $7.74 billion beat estimates for $7.57 billion. They guided for full year earnings in the range of $7.33-$7.43 per share, up from $6.37-$6.57. The FactSet consensus estimate was $6.66. The company said it planned to invest $2.5 billion in US capital projects and a possible expansion to its US facilities. Sales of Humira, Imbruvica, Lupron, Creon, Synagis, Kaletra, Sevoflurane and Duodopa all came in above expectations. Shares spiked $15 on the news.

Honeywell (HON) reported earnings of $1.85 that narrowly beat estimates for $1.84. Revenue of $10.84 billion beat estimates for $10.77 billion. The company guided for full year earnings of $7.75-$8.00 per share on revenue of $41.88-$42.68 billion. That was an increase from $7.55-$7.80. They plan to repatriate $7 of the $10 billion in overseas cash and use it to fund their M&A activities, a competitive dividend and share buybacks.

Lear Corp (LEA) reported record earnings of $4.38 that beat estimates for $4.25. Record revenue of $5.36 billion beat estimates for $5.27 billion. They are projecting 17.4 million in vehicles sales in North America and 23.4 million in Europe and Africa plus 26.5 million vehicles in China. Free cash flow is expected to be more than $1.2 billion. They also announced the acquisition of EXO Technologies. They are a leading developer of differentiated GPS technology providing high-accuracy positioning solutions without the need for terrestrial base-station networks to support autonomous and connected vehicle applications. Shares rallied $6 on the news.

Colgate (CL) reported earnings of 75 cents that matched analyst estimates. Revenue rose 4.5% to $3.9 billion but missed estimates for $3.92 billion. Advertising spending rose 24% to $369 million and they plan to increase spending further in 2018. They guided to mid single digit sales growth in 2018 despite lowering sales prices as much as 2% to drive sales volume. Colgate sales are seen as stagnating in a positive global market and shares declined sharply on the report.

Wynn Resorts (WYNN) shares fell more than 10% after founder and Chairman Steve Wynn was accused of sexual misconduct by an article in the WSJ. The paper said it talked to more than 150 current and former employees and reported details on numerous events. The article alleges Wynn had a pattern of sexual harassment against employees who were paid to perform sexual favors while they feared losing their job. One manicurist settled for $7.5 million after Wynn reportedly forced her to have sex with him in his office even though she repeatedly rebuffed his advances and told him she was married. Immediately after the event, she filed a formal complaint and eventually settled out of court.

The problem mushroomed into a much bigger deal than just paying $1,000 per hour for sexual massages by the hotel's spa employees. The Nevada and Massachusetts gaming boards have opened an investigation saying the accusations would violate the "moral turpitude" clauses in their license requirements and could result in a revocation of their gaming licenses. If these accusations are true, Wynn could be ejected from his company. The board has already opened an investigation. He lost $250 million on Friday as the stock fell more than 10% on 12 times normal volume. The company lost more than $2 billion in market cap.

This kind of an event is a good lesson on why you should always have stop losses.

Boeing (BA) miraculously posted a fractional gain despite an unexpected ruling that Bombardier did not have to face a 300% duty on their CSeries 110-130 seat planes sold in the US. The US International Trade Commission had been expected to rule in favor of Boeing after the company had complained that Bombardier was selling planes in the US under cost at "absurdly low prices." Boeing said Bombardier dumped 75 of the planes in a sale to Delta. The ruling was 4 to zero on the ITC panel. Boeing can still appeal the decision and probably will just to keep the cloud of uncertainty over the sale of Bombardier planes in the US as long as possible. The ITC said Boeing was not harmed by the discounted planes since Boeing does not offer an exact competitor in that class. Boeing is trying to form a partnership with Embraer to offer a competitive plane to the CSeries.

Kroger generated a lot of news last week. Alibaba (BABA) is reportedly in talks with Kroger about an alliance. Kroger officials went to China for the discussions. Kroger has a market cap of $27 billion compared to Alibaba's at $508 billion. For Kroger that would be the equivalent of the lamb walking into the lion's den to talk about dinner. Kroger may be looking for a technology partner to combat the Amazon/Whole Foods acquisition. You know Amazon is going to expand the Whole Foods footprint and could do it through acquisitions. Kroger already opened its 1,000th ClickList location in December and they have a Scan, Bag, Go service in 400 locations.

Kroger has also been in acquisition discussions with online wholesaler Boxed and online retailer Overstock.com. Kroger recently announced a restructuring plan called Restock Kroger where they are going to "redefine" grocery shopping and expand the customer experience. Recent rumors claim Kroger's bid for Boxed.com may have come up short and Amazon could also be in the bidding.

One retail consultant wrote last summer that Alibaba should buy Kroger as a way to enter the US retail market and extend and complement their global retail ecosystem. He wrote that acquisition would be Kryptonite to Amazon Whole Foods and Walmart/Jet.com.

On Friday, we learned that Casey's General Stores (CASY) has reportedly submitted a bid for Kroger's convenience store chains valued at more than $2 billion. Casey's could be looking for a poison pill to push away activist investor JCP Investment Management, which is trying to get Casey to put itself up for a sale. Kroger announced last year they wanted to sell their 780 convenience stored and Goldman Sachs is shopping the assets. The stores go by multiple names like Kwik Shop, Loaf 'N Jug, Turkey Hill Minit Markets, Tom Thumb, Quick Stop, etc. They have accumulated these as they acquired the supermarket chains associated with them over the years.

Kroger is a massive retailer with 2,790 retail food stores in 35 states, 2,266 pharmacies, 1,480 supermarket fuel centers, 785 convenience stores, 306 jewelry stores, 219 retail health clinics and 38 food production plants.

Lowe's Companies (LOW) announced a new $5 billion stock buyback program in addition to the $2.1 billion remaining on their existing program. No date was given for the program, which means it could be a public relations effort rather than a plan to give back to shareholders and lift the stock price. Open-ended plans tend to never be completed. Those companies that get the most bang for their bucks are the ones that put a short fuse on the program as in 3-6 months. Their stock prices tend to rise sharply. However, if Lowe's waits until a market correction appears and then goes all in on the dip, it could keep their shares supported and provide a quicker rebound. There are pros and cons for both methods of buying back stock. Lowe's shares are at historic highs so waiting for a dip would be preferable and a wiser use of capital.

Twitter (TWTR) shares got a boost after noted short seller Andrew Left of Citron Research tweeted he owned Twitter shares and the stock was going to $35. He said engagement levels were rising and Twitter dominates the social media space for news. He said Twitter was a better acquisition target than SNAP and a company like Tencent might be interested in taking a huge position in the US social media market.

Barron's said Twitter could be acquired by Salesforce.com. A CFRA analyst contradicted that scenario saying while there were multiple merger rumors, the bigger news was the company working on a SnapChat clone for easier media sharing in addition to texts and tags.

Overall, there have been numerous positive mentions about Twitter in the last several weeks and shares are rising.

Crude prices closed at $66.24 on Friday and a three-year high. The crashing dollar was responsible for most of the movement over the last week. US producers added 12 oilrigs last week to 759 and the largest weekly gain since March. Gas rigs declined by 1 to 188. Large speculators raised their net long positions in WTI by 7,612 contracts to a new record high at 549,602. The CME said speculators raised their net long positions in Brent crude by 13,912 to a new record of 584,707. That equates to 584.7 million barrels of oil.

With everyone 100% long heading into a normally weak two-month period for crude prices, there could be a monster volatility event in our near future.


The major indexes closed at new highs again but the AAII investor sentiment survey took a major turn lower. This survey ends on Wednesday and the Dow was flat on Tuesday and dipped on Wednesday. The Nasdaq imploded on Wednesday with a major -110 point reversal from the intraday highs. Investors immediately fled the bullish camp thinking the rally was over. Surprise, surprise! The Dow, S&P and Nasdaq all rebounded to close at new highs.

Schwab posted this chart from Bloomberg showing the relative performance of years following years with exceptionally low volatility. 2017 was tied with 1995 for low volatility with the biggest S&P decline at 3.1% for the entire 12 months. I thought the chart was interesting but I do not think it is relative in our current environment. The factors driving the market today, tax reform, rising earnings, low interest rates and strong global economy are likely to continue driving the market the rest of the year. There will be weak patches but we should end the year higher.

Schwab's Liz Ann Sonders tweeted on Friday that the market was the most overbought since 1904. (not a typo).

Schwab also warned that the Citibank Economic Surprise Index was rolling over. This index measures the number of economic reports that are moving higher versus the number of reports moving lower. In theory, this is a leading indicator for a weakening economy. Personally, I believe the economic conditions got ahead of themselves in the optimism department and this weakening is more of a reversion to the norm. For instance, the consumer sentiment indicators have faded over the last two months but are still near record highs. This will be something to continue watching but the index is still well above zero.

Bank of America reported another week of record inflows into equity funds of $33.2 billion. By comparison, a total of $278 billion flowed into equities for all of 2017. Last week equated to 11.9% of 2017 money flows. YTD has seen $77 billion flow into equity funds. At the same time, they warned a significant pullback in "sky-high" markets in the next couple of months was "very likely."

BAML private client equity exposure is rising at the fastest pace in 10 years and cash allocation is at record lows. The BAML "Bull & Bear" gauge has given a sell signal at 7.9 and just under the 8.0 level where BAML recommends selling. The indicator has given 11 sell signals since it began in 2002 and has been 100% accurate all 11 times. The average peak to trough drops in the following 3 months after a sell signal has been -12%. "A tactical S&P-500 pullback to 2,686 (-6%) in Feb/Mar is now very likely" according to BAML. They also warned that a sudden reversal in the dollar's decline could spark a sharp correction. In the note they reminded that the 1987 market crash was triggered by a FX spat between the US and Europe.

Currently the S&P is closing in on 2,900. Three or four more days like Friday and it would be nearing 3,000. There was a blowout on Monday and another one on Friday and the S&P gained 62.5 points or 2.2% for the week. It is now up 7.5% for the year. It should be evident on the chart that the advances are out of character compared to the prior trend. We know the market can continue higher for weeks to come until buyers run out of money or conviction or both. The markets always revert to the mean. Sometimes it just takes a little longer than others for that to happen.

The Dow milestones are flying by faster than mile markets on an interstate highway. The time between 25,000 and 26,000 was only 9 trading days or 13 calendar days. That was a record for the shortest time. The index is already threatening to hit 27,000 next week. Obviously the higher the market goes the faster the milestones will be hit because the percentage difference between the points grows smaller every day. The Dow had to rise 100% to go from 1,000 to 2,000 or 10% from 10,000 to 11,000 but only 4% to go from 25,000 to 26,000. Multiple analysts have said we could see 30,000 before the year is out. The Dow is up 8,729 points or 48.8% since the election.

The Dow components were solidly positive on Friday with the exception of Goldman and Caterpillar. CAT reported earnings on Thursday and is still fighting post earnings volatility. To its credit, the stock is only down about $1.50 from the pre earnings close and that was after a monster gain of 75 points since April.

The Dow continues to accelerate higher and the 26,000 level is now initial support. The index is now 12% above its 100-day average.

The Dow Transports lost -1.6% for the week. This is a sentiment drag on the Dow Industrials but you could not tell it from the Dow's gains.

The Nasdaq had a huge bout of profit taking on Tue/Wed but shook it off and charged higher to close over 7,500 only 4 days after closing over 7,400. The big cap tech stocks are suddenly on fire again and the big group of tech earnings are not until next week. It will be the following week where we could see some weakness.

The Russell was the under achiever last week with a +0.6% gain compared to the 2.1% on the Dow and 2.8% on the Nasdaq 100. The index is holding over support at 1,600 but just under resistance at 1,610. The index has only had three days of strong gains in January.

The trend is your friend, until it ends. I am sticking with my forecast of continued gains next week but a potential rough spot in February as some of the current excesses are removed.

The way the immigration fight is shaping up in Washington the odds are good we are going to get another government shutdown. Like we saw last week, the negative impact to the market was weak and the post shutdown rebound was strong. I would expect that same cycle if another shutdown appears.

The State of the Union speech on Tuesday could be a wild card. We never know what will be said and how it will impact the markets. Comments over trade wars, dollar weakness, treasuries, interest rates, tariffs, North Korea, Russian investigation, etc, could cause ripples in the pond.

I told a couple readers I would try and have the graphic on all the analyst targets done this weekend but it remains incomplete. Many analysts seem to be waffling on picking a target this year. Most claim they want to see how the guidance in Q4 earnings plays out before picking a number and I understand that. I will try to fill in some blanks this week and I will publish what I have next weekend.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


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Index Wrap

Euphoria Accelerating

by Jim Brown

Click here to email Jim Brown
The big cap indexes stumbled on Tue/Wed but recovered to surge to new highs once again.

The Nasdaq dropped -110 points intraday on Wednesday followed by a minor decline on Thursday. That was followed by an explosive move higher on Friday with a 95-point gain. The uncertainty from the middle of the week was just enough to draw the shorts back into the market so they could be squeezed again on Friday.

Despite the big gains, the internals were not overly positive. On the Nasdaq there were 1,700 advancers to 1,123 decliners. Advancing volume of 1.33 billion shares were well over the 567 million shares of declining volume. However, investors always want to see 2:1 or 3:1 advancers to decliners and 5:1 or even as much as 10:1 advancing volume over declining. We were a long way from those metrics.

The gains were strong but that was due mostly to the big cap techs posting big gains ahead of their earnings next week. On the Nasdaq the generals were leading the charge but a lot of the soldiers were AWOL.

The trend is our friend and it appears the trend will continue higher for another week.

For our purposes in examining the major indexes, there was no material change. The A/D line on the S&P closed at a new high because the internals on the S&P were a blowout. The advancers of 409 on Friday swamped decliners of 92. This 4:1 ratio suggests the rally still has legs.

However, the S&P is clearly in euphoric mode as evidenced by the weekly chart. The gains continue to accelerate and the RSI at 88.54 is at a record high. That does not mean the market is going to crash next week but it does suggest there will be a reversion to the historic norms at some point in the future. There is no way an experienced investor can look at this chart and not see a potential correction in the coming months.

The A/D line on the Dow is also at a record high and there is no weakness in sight. However, there are 10 Dow components reporting this week and eventually the post earnings depression cycle will appear.

The RSI on the Dow at 92.03 is at a record high. Note that there have not been any material hiccups on the Dow trajectory since the election in November 2016. There was a minor pause in March/April but then a steady acceleration of gains for the next 10 months.

A record high RSI is an extreme warning signal. This chart is starting to look like a dot.com chart from the year 2000 where gravity was temporarily suspended. It did eventually return and it was very painful.

The Nasdaq A/D was a little choppy because of that midweek plunge. The trend remains higher but it did not close at a new high.

The RSI on the Nasdaq is the third highest in history. In April of 1986 the RSI hit 91.21 and the record high but the index continued higher until late June when a -17% correction appeared. The RSI began to weaken starting on April 20th as the rally turned choppy but the index did not fall until late June.

The second highest reading of 89.21 was July 9th, 1995. The index continued higher until Sept 3rd, when it fell -10.7% over three weeks and then traded sideways until mid January.

The fourth highest RSI was December 26th, 1999. The Nasdaq continued higher after a choppy January to peak on March 5th, 2000 before falling for the next two years.

We obviously do not know what will happen as the RSI peaks again but we have a clue from looking back over the last 45 years at the prior highs.

The RSI tends to peak several weeks before the market rolls over. Light selling appears and the generals probably continue to hold the market up while the foundations erode. What has not happened was an immediate market sell off after a peak. There was a period of time and we could track the deterioration in the RSI as the market internals deteriorated.

Obviously, past performance is no guarantee of future results but the research is not telling us the market is going to crash next week. Nothing prevents it from happening but there is no immediate cause and effect.

I have been forecasting a rough patch for the market in February after the majority of S&P earnings are over. That could begin the first full week of the month and more than likely before expiration Friday. I believe investors will take some profits off the table and then reload into different stocks for the Q1 earnings cycle that begins in April. After the Q1 earnings, I expect the market to weaken again and we could have a rough summer before rebounding again in Q3/Q4.

The small cap stocks have been the weakest index. They are moving higher but at a significantly slower pace. This is a market warning of sorts. The small cap stocks are supposed to lead the market both up and down. They are not leading and should the Russell roll over that could be the early warning signal of a broader market decline.

This is a time for investors to capitalize on the existing euphoria. In a strongly bullish market, the last several weeks tend to be euphoric and that is exactly what we are seeing now. Investors can capture significant gains but they should be constantly wary of the market internals and signs that the buyers may be losing conviction.

There may not be any warning if the market suddenly changes course. We never know what might trigger a reversal. The dip buyers will rush in thinking it is just another dip. If you are going to buy a dip, wait for signs of a rebound. Let someone else step in front of the train and try to halt the slide. If they are successful, there will be plenty of time to buy the rebound.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Mass Saturation

by Jim Brown

Click here to email Jim Brown

Editors Note:

Dollar Tree is Amazon proof and their store count is enormous. With nearly 14,500 stores and a plan to grow to 25,000 they will soon be as common as a Starbucks.


DLTR - Dollar Tree - Company Profile

Dollar Tree, Inc. operates variety retail stores in the United States and Canada. It operates in two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1.00. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables, such as household paper and chemicals, and frozen and refrigerated food; various merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and seasonal goods, which include Valentine's Day, Easter, Halloween, and Christmas merchandise. This segment operates under the under the Dollar Tree and Dollar Tree Canada brands, as well as 11 distribution centers in the United States and 2 in Canada, and a store support center in Chesapeake, Virginia. The Family Dollar segment operates general merchandise discount retail stores that offer consumable merchandise, which comprise food, tobacco, health and beauty aids, household chemicals, paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies; and home products, including housewares, home decor, and giftware, as well as domestics, such as blankets, sheets, and towels. It also provides apparel and accessories merchandise comprising clothing, fashion accessories, and shoes; and seasonal and electronics merchandise, which include Valentine's Day, Easter, Halloween, and Christmas merchandise, as well as personal electronics that comprise pre-paid cellular phones and services, stationery and school supplies, and toys. This segment operates under the Family Dollar brand, 11 distribution centers, and a store support center in Matthews, North Carolina. As of January 28, 2017, the company operated 14,334 stores in 48 states and the District of Columbia, and 5 Canadian provinces. Company description from FinViz.com

In late November, DLTR reported earnings of $1.01 that beat estimates for $90 cents and was well above the 70 cents reported in the year ago quarter. Revenue of $5.32 billion beat estimates for $5.28 billion. For the current quarter, they guided for revenue in the range of $6.32-$6.43 billion and analysts were expecting $6.26 billion. Full year earnings guidance was $4.64-$4.73 and $22.2-$22.31 billion. That is up from $4.44-$4.60 in prior guidance. Analysts were expecting $4.69.

Same store sales (SSS) for the system rose 3.3% and beat estimates for $2.4%. Dollar Tree SSS rose 5.0% and Family Dollar sales rose 1.5%. Next earnings Feb 20th.

After earnings, Moffett Nathanson initiated coverage with a buy. Two weeks ago Guggenheim initiated coverage with a buy rating and $125 price target. The Guggenheim buy rating saw the shares spike from $110 to $115 and then traded sideways to down for a week as traders took the unexpected profits.

Dollar Tree is Amazon proof. With everything in the store $1 or less even Amazon cannot sell and ship items that cheap. Since their acquisition of Family Dollar, they now operated 14,334 stores. This is a retail powerhouse and even if the economy weakens, their business will thrive because of the low price point.

Last week Oppenheimer started DLTR with a buy rating and $130 price target. The analyst said the company is going to grow earnings at a double-digit rate on low single-digit comps. They will benefit significantly from the lower taxes and from consumers having more money in their pocket. The acquisition of Family Dollar in 2014 is still being integrated and the company is remodeling all the old stores using "multiple improvements in merchandising and other improvements that will drive up profitability long term" according to the analyst. They currently have about 14,500 stores and management said they can grow to 25,000 stores.

I believe DLTR is going to break out to a new high.

Buy March $120 call, currently $3.40, initial stop loss $111.50.


No New Bearish Plays

In Play Updates and Reviews

No Fear Here

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap indexes surged to new highs and closed at the highs for the day. There was no intraday weakness or 300 point reversals. The big cap indexes gapped higher at the open and never looked back. The only weak index was the Russell and it gained 6 points but failed to reach Tuesday's high.

Investors are living the dream with the strongest January in a decade.

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

CNI - Canadian National
The long call position was entered at the open.

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

BITA - BitAuto Holdings - Company Profile


No specific news.

Original Trade Description: January 22nd.

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 $35.50.

Expected earnings Feb 19th.

Shares peaked at $38.25 on the 9th and then dropped sharply. They have rebounded and closed slightly over that level at $38.50 today. I am expecting a breakout and a resumption of the prior trend.

Position 1/23:
Long March $40 call @ $2.95, see portfolio graphic for stop loss.

Low open interest because the March strikes are new this week.

FLIR - FLIR Systems - Company Profile


No specific news. New record 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. Shares cannot seem to maintain an uptrend. Minor decline at the open and attempted rebound.

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. Shares exploded higher with a $4 gain.

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.

Update 1/25: Nomura said Red hat could see a total addressable market of $66 billion by 2020. The company initiated coverage with a buy rating and $152 price target. The analyst was very positive. Here is the recommendation. LINK

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. Maybe today's minor rebound is the end of the three day decline.

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.

Update 1/25/18: Target announced same day delivery using Shipt from multiple locations in Florida beginning on Feb 1st. More than 6.3 million Florida residents will be in the covered areas. Shipt, which Target is buying for $550 million, serves more than 30 million households in 70 markets across the country. Customers pay an annual fee of $49 to $99 and shipping is free from multiple vendors in their coverage area.

Position 12/14/17:

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

BEARISH Play Updates (Alpha by Symbol)

AMBA - Ambarella - ETF Profile


No specific news. Only a minor 15 cent rebound despite a strong gain in the chip sector.

Original Trade Description: January 20th.

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.

Position 1/22:
Long Feb $50 put @ $1.40, see portfolio graphic for stop loss.

CNI - Canadian National - Company Profile


No specific news. 73 cent rebound with the Dow Transports up +118.

Original Trade Description: January 25th.

Canadian National Railway Company engages in rail and related transportation business. The company transports cargo, serving exporters, importers, retailers, farmers, and manufacturers. It operates a network of approximately 20,000 route miles of track spans Canada and mid-America connecting the Atlantic, the Pacific, and the Gulf of Mexico. The company serves the cities and ports of Vancouver, Prince Rupert (British Columbia), Montreal, Halifax, New Orleans, and Mobile (Alabama), as well as the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth (Minnesota)/Superior (Wisconsin), and Jackson (Mississippi) with connections to various points in North America. Canadian National Railway Company was founded in 1919 and is headquartered in Montreal, Canada. Company description from FinViz.com.

CN reported Q4 earnings of 94 cents that missed estimates for 98 cents. Revenue of $2.57 billion also missed estimates for $2.61 billion. Earnings rose only 1.1%. Rail freight revenues per carload declined -4%, petroleum and chemicals declined -4%, grain and fertilizer -1% and intermodal volumes declined -5%. Operating income declined -7%. Higher fuel and labor costs were blamed. Free cash flow declined from $777 million to $457 million Canadian. Debt declined slightly to $11.306 billion. They did hike the dividend by 10% to 45.5 cents Canadian payable March 29th to holders on March 8th. They plan to spend $3.2 billion in 2018 on track repair and upgrades and 60 new locomotives and increase that to 200 over the next three years.

Next earnings are April 24th.

Earnings were Jan-23rd and shares began to decline immediately. They have broken support at $78.75. I am recommending we buy an April put option with a wide stop loss.

Position 1/26:
Long Apr $75 put @ $1.35, portfolio graphic for stop loss.

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