Option Investor

Daily Newsletter, Saturday, 2/3/2018

Table of Contents

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

Market Wrap

Investors Wanted a Dip to Buy

by Jim Brown

Click here to email Jim Brown

After surging to the best start for January since 1987, markets posted the biggest decline since January 2016.

Weekly Statistics

Friday Statistics

The Dow closed at 26,472 last Friday with a 7.7% gain for the year. The index closed this Friday at 25,521 and a -4.1% decline for the week. A lot can change in a very few days. Art Cashin said there were $1.7 billion in sell on close orders on the NYSE.

Yields on the 10-year spiked nearly 3% to 2.854% on Friday after the Nonfarm payroll report showed wage growth accelerating to a 9-year high of 2.9%. Inflation has been dormant since the financial crisis but has suddenly rocketed higher suggesting the Fed may be behind the curve and will have to accelerate their rate hikes in 2018. However, frigid weather in January reduced the number of hours worked so the wage gains may be a temporary calculation error. Secondly, the onetime bonuses from the tax reform funds should also spike wages temporarily.

Apple ($AAPL) beat on earnings but missed on units sold and gave weak revenue guidance for Q1. After spiking $5 in the afterhours session the shares collapsed -$7.28 on Friday to close -10.5% below its $179.26 high and in correction territory. Bernstein cut them from buy to neutral and said the stock was fully valued for a slowing sales environment. Chip stocks that feed Apple were crushed with major declines. Apple shares subtracted 33 points from the Nasdaq.

The Nasdaq Composite lost -145 points and the Nasdaq 100 gave back -141 but it would have been worse except that Amazon added 17 points to the Nasdaq and Charter added 3 points. This offset some of the decline from Apple.

The Dow has lost more than 500 points only 17 times in history. There have only been 8 losses before Friday of more than 600 points. The Dow lost -696 at its lows and had it closed there it would have been the third largest point loss in history. Currently the third largest is -680. There was a minor burst of short covering at the close to lift the index off its lows.

Volume of 9.03 billion shares was the heaviest since the quarterly option expiration and index rebalance on December 17th at 10.7 billion. The A/D ratio was 7:1 decliners over advancers. Declining volume was 6:1 over advancing volume. Across all markets, there were 127 new highs and 525 new lows.

I wrote last week that a marker capitulation was normally determined by a significant imbalance in the A/D line of 8:1 to 10:1 with heavy volume. While 9.03 billion shares was high it was only about 15% over the recent average. On a purely technical basis, Friday was a strong retracement but it was not a true capitulation day. There is a stock market adage, "Markets rarely bottom on Fridays." When bearish sentiment appears suddenly, there is always the fear of the unknown over what could happen over the weekend. Markets do bottom on Mondays. It is not unusual after a Friday Flush for the markets to open sharply negative on Mondays and then rebound before the day is over.

If you surveyed traders the prior Friday and asked them what the market needed to do to deflate the overbought conditions and provide a dip to buy, they would probably have said a 3% to 4% decline. Now that we have had a -4.1% decline on the Dow, I did not see a lot of buying at the close. Everybody wants somebody else to go first.

Most of the market commentators were blaming the Nonfarm Payroll report for the sell off Friday morning. However, the S&P futures were down -15 at 4:AM and the Dow futures were down -200 before the payroll report was even released. I wrote about this last week that market commentators will always try to find something to blame for the dip because it makes them look knowledgeable on TV.

I have no doubt the report added to the bearish sentiment but it was not the trigger for the initial decline.

The report showed a gain of 200,000 jobs and slightly over the consensus forecast for a gain of 185,000. The unemployment rate remained flat at 4.1% along with the labor force participation rate at 62.7%.

The killer line item in the report was a +0.3% jump in hourly wages to 2.9% year over year. That is the fastest rate in nine years. This immediately spiked fears that inflation was suddenly accelerating and the Fed would have to hike 4 or even 5 times in 2018 to slow down the economy. The current consensus is for 3 rate hikes in 2018. Bull markets do not die of old age. They are killed by higher interest rates or recessions.

The previously reported December payrolls of 148,000 were revised higher to 160,000. The November numbers were revised lower from 252,000 to 216,000. Construction added 36,000 jobs, food service +31,000, healthcare +21,000, retail +15,000 and manufacturing +15,000. A whopping 518,000 people entered the workforce. Household employment rose 409,000 for January but 318,000 were due to an accounting change.

The NY - ISM report posted a monster rise from 56.3 to 72.5 for January. That is the highest reading since 2006. Employment surged from 42.9 to 58.4. The biggest negative component was the six-month outlook which fell from a 10-yr high of 85.7 in December to a 2.5 year high at 76.1 in January. That took it out of the great category and back down to just really good. The headline number at 72.5 and the six-month outlook at 76.1 are both over 70 for just the second time since 2010.

The final reading of consumer sentiment for January rose from 94.4 to 95.7 and five points below the 18-year high of 100.7 in October. The present conditions component declined from 113.8 to 110.5 and the expectations component rose from 84.3 to 86.3. Of the survey respondents 77% said it was a good time to buy a major household item, 66% said it was a good time to buy a car and 67% thought it was a good time to buy a home.

Factory Orders for December rose 1.7% and the fifth consecutive monthly gain. Three of those months have seen an identical 1.7% increase. Durable goods orders rose 2.8% with nondurables rising 0.7%. Backorders rose 0.6% and defense orders rose 19.2% for the third increase in four months. This report was ignored.

We have a very light economic calendar for next week with only two material reports. There are seven Fed speeches. The biggest event is the government funding deadline on Thursday evening. However, lawmakers are already talking about kicking the can down the road again and putting it off until March 22nd. Several representatives have already said they would not vote for another extension unless there were major changes in the plan. They will probably come around because everyone caught flack from the three-day shutdown two-weeks ago. While they cannot agree on the actual funding and immigration issues, they can agree they do not want their phone lines to light up again with complaints.

March 5th is the deadline for a DACA resolution. That is not likely to happen either. The next two months will be continuous partisan headlines until they wade through some of these issues.

Janet Yellen officially stepped down as Fed chairman on Friday and will begin work at the Brookings Institute on Monday as a fellow in economic studies. She will join Ben Bernanke, Donald Kohn, Alice Rivilin and Alan Blinder, all prior Fed members. Jerome Powell will be officially sworn in as chairman on Monday.

The earnings calendar for next week has very few highlights. There is only one Dow component, which is Disney on Tuesday. Gilead, Tesla, Nvidia and Twitter will be the most watched names. Akamai, Chipotle Mexican, Yum Brands and Activision will probably generate a lot of interest as well.

There are 93 S&P companies reporting, down from the 125 last week. To date, 251 S&P companies have reported with 78.1% beating on estimates and 79.7% beating on revenue. The blended earnings growth estimate for Q4 is now 13.6% and revenue growth of 7.7%. There have been 27 guidance warnings and 27 companies gave positive guidance. The forward PE is 18.4.

With the number of large high profile companies falling sharply from last week, there will be less earnings excitement and anticipation in the market. The coming week is when I expected some profit taking volatility to appear with the following week volatile as well. After the flush last week, the future volatility could fade. Stops have been hit and many of the weak holders have been eliminated.

There were not a lot of earnings on Friday but there were some big names. Dow component Exxon (NYSE:XOM) reported earnings of 88 cents that missed estimates for $1.03. Revenue of $66.5 billion also missed estimates for $71.9 billion. Production of 3.99 million bpd fell well short of estimates for 4.165 million bpd.

In addition, Exxon said it will see a $5.942 billion benefit from tax reform. They are going to launch a $50 billion capex program over the next five years to triple production from the Permian to more than 600,000 bpd, expand operations, improve infrastructure and build new manufacturing sites. The improved infrastructure and additional production will provide a low-cost supply of feedstocks for downstream refineries and chemical operations in Texas and Louisiana. These facilities produce high demand plastics, chemicals and synthetic lubricants.

Dow component Chevron (NYSE:CVX) reported earnings of 72 cents that missed estimates for $1.22. Revenue of $37.62 billion barely topped estimates for $37.55 billion. Production of 2.74 million Boepd was up slightly from the 2.67 million Boepd in the year ago quarter. Their average price received for oil was $50 in Q4, up from $40 in the year ago period. Chevron said Q4 production was hurt by hurricanes, outages at their massive LNG plants in Australia and asset sales. They added 1.54 billion barrels of proved reserves in 2017 and replaced about 155% of net production for the year. They also announced a major discovery at the Ballymore prospect in the Gulf of Mexico in 6,536 feet of water. The initial exploration well found excellent fluid properties and more than 670 feet of net oil sands. They have a 60% stake in the prospect. It is only three miles from the Blind Faith platform, which will make it easier to commercialize the production.

The company announced a quarterly dividend of $1.12, up from $1.08, payable March 12th to holders on February 16th. Chevron has raised their dividend for more than 25 consecutive years.

Este Lauder (EL) reported earnings of $1.52 that beat estimates for $1.44. Revenue of $3.74 rose 17% and beat estimates for $3.67 billion. They guided for the current quarter for earnings of $1.02-$1.04 and analysts were expecting $1.01. For the full year they guided for $4.27-$4.32, up from $4.04-$4.12 and beat estimates for $4.20. They announced a dividend of 38 cents payable March 15th to holders on February 28th. Shares faded from their opening high in the weak market.

Clorox (CLX) reported earnings of $1.23 that beat estimates by a penny. Revenue of $1.42 billion missed estimates for $1.43 billion. They guided for full year earnings of $6.17-$6.37 per share. Analysts were expecting $6.16. Investors were not happy and punished the stock with a $9.50 drop.

Charter Communications (CHTR) reported earnings of 86 cents that beat estimates by a penny. Revenue of $10.6 billion beat estimates for $10.58 billion. They added 15,000 new video customers, 300,000 new internet customers and 53,000 new voice subscribers. In the world of cable cutting this was an outstanding report. Shares exploded higher for a $16 gain in a weak market and added 3 points to the Nasdaq.

Merck (MRK) reported earnings of 98 cents that beat earnings for 94 cents. Revenue of $10.43 billion missed estimates for $10.49 billion. The company recorded a loss of $125 million as the result of the June cyber attack. Sales of Januvia, Keytruda and Gardasil beat expectations. The company guided for full year revenue of $41.2-$42.7 billion compared to estimates for $41 billion. They guided for earnings of $4.08-$4.34 and analysts were expecting $4.10. They announced plans to invest $8 billion in US capital projects over the next five years with $12 billion planned in total. They also announced bonuses for employees as a result of tax reform. Shares had been declining since the "lower drug prices" pledge by President Trump on Tuesday.

Just when you thought Elon Musk had run out of ideas, he comes up with an even wilder product. Musk sold 20,000 $500 flamethrowers in four days and raised $10 million for his tunnel boring company named The Boring Company. Yes, I said flamethrowers. He joked on twitter that the device was sentient and its safeword was "cryptocurrency" and comes with a free blockchain. Here is a video with Musk demonstrating it. Video Never a dull moment.

Tesla also sold $546 million in auto lease-backed bonds on Thursday. The securities were sold to yield between 2.3% and 5.0%. At the initial prices, the offering was oversubscribed by 14 times. The leases are on its Model X and S vehicles. Since Tesla is expected to burn through $4.2 billion in cash in 2018, the company will obviously be selling more debt in the near future. Tesla plans to become a regular issuer of ABS securities.

The governing body of auto racing (FIA) has approved a series of races where 20 drivers will race the fully race-prepared Tesla Model S P100D in the Electric Production Car Series. There will be a three heat qualifying format and then two 60 kilometer races, one in daylight and one at night. There will be a cap on horsepower at 778 hp and roughly the same level as a Formula 1 car. The cars will have 1,100 pounds of weight removed to make them even faster. Since they can accelerate from 0-60 in 2.2 seconds, I cannot imagine how fast they will be 1,100 pounds lighter. In theory, the Electric Production Car series is to pit cars from different manufacturers against each other but there is a shortage of high performance cars other than Teslas so they will have the track to themselves until other competitors appear.

Musk recently received a new 10-year contract where he will receive nothing in guaranteed salary, options, bonuses, etc. His compensation will be tied to manufacturing goals and company market cap. Tesla has a $60 billion market cap today. For every $50 billion in additional market cap, he will be awarded 1% of the outstanding stock. Today that would be a $584 million award. The goal is to reach $650 billion in market cap within 10 years. If he succeeded in accomplishing that goal along with the manufacturing milestones, his total compensation over that period would be $55 billion. That is a serious goal. Any shares awarded throughout the 10-year contract must be held for an additional 5 years from the date of vesting just to make sure regular shareholders are protected.

Lastly, Musk is negotiating with Anheuser-Busch, PepsiCo and UPS to build on-site charging terminals at their facilities as part of the electric truck project. Pepsi has committed to buy 100 Semis and UPS ordered 125 as a test project. Tesla is trying to get these companies to install Tesla Solar and commercial Powerwall installations to recharge the trucks. The solar would recharge the Powerwall batteries during the day and the Powerwalls would recharge the trucks at night. This would significantly reduce the electrical cost to power the trucks and improve the operating metrics. That would be a win-win for Tesla to convince companies to buy all three products. If it works as expected, it could set the pattern for new purchasers for years to come.

So, the key question today is whether investors buy Tesla shares in hopes that Musk accomplishes his goal and boosts the market cap from $60 billion to $650 billion within 10 years. That would take the shares from $345 today to $3,450 by 2028. Any takers?

It was a rough week in crypto currencies. More than $100 billion in market cap was erased from the crypto market. Bitcoin declined from $12,000 last weekend to $7,900 (-33%) intraday on Friday. That was down from $19,000 in December. India said they wanted to eliminate the use of digital currencies in criminal activities suggesting much tighter regulation was coming. South Korea, China and others are also pursuing everything from strict regulation to outright bans.

There is also a considerable amount of worry over Tether. This is a digital currency that is supposedly pegged to the US dollar. One tether equals one dollar. For that to work, Tether Limited would have to have $2.2 billion dollars on deposit somewhere to offset the 2.2 billion tether tokens. Tether Limited has supplied what it called "proof of deposit" confirmations but the names of the banks were blacked out so there is no way to prove those are real.

The actual problem for the crypto community is that tether is being used as a currency to buy other currencies like bitcoin. Holding fiat cash in a currency exchange is dangerous so people immediately buy tether since it is a $1 for $1 exchange rate. They do not have to worry about the coin fluctuating significantly. Then they can use their tether to transfer from exchange to exchange and buy other currencies. Numerous analysts have pointed out that new "grants" of tether coins always seem to occur when bitcoin is hitting its highs. The Bitfinex exchange is owned by the same people that own Tether Limited. In January alone Tether Limited has released 850 million new digital tokens into the Bitfinex wallet and the release dates tend to coincide with bitcoin highs. Critics claim Tether Limited is using the tether coins to prop up bitcoin and thereby support the entire crypto currency market. One analysis showed that 48.8% of the rise in bitcoin prices occurred in the two-hour periods following the arrival of 91 different tether grants to the Bitfinex wallet.

The CFTC has subpoenaed Bitfinex and Tether Limited and there has been no further news on that investigation. According to Coindesk, Friedman LLP, the accounting firm that previously audited Tether Limited/Bitfinex has cut ties with the companies and said the two parties had dissolved their relationship.

The problem could be huge. If tether has been propping up bitcoin and is now having financial problems and the investigations cause traders to be alarmed, they could try to redeem their tokens for dollars and basically cause a run on the tether bank. That would prevent tether from propping up the bitcoin market and the market in general and the entire crypto currency balloon could implode. Because these headlines and stories are becoming more common, we could already be seeing a run on the entire currency space. Bitcoin declined 33% last week to levels not seen since November. With no inherent value in crypto currencies, there is extreme risk of bad actors perpetrating all kinds of schemes. If you have crypto currencies, watch the headlines very carefully.

Crude prices only declined 74 cents on Friday but the energy sector was one of the biggest decliners with a -4.2% drop. The key was obviously the missed earnings by Chevron and Exxon but the sector drop began last Monday as investors worried about the approaching seasonal weakness. The US added 6.8 million barrels to inventory and the first addition since November 17th. Inventories typically rise over the next two months and prices decline.


The AAII Sentiment Survey that closed on Wednesday saw only a minor change in bullish sentiment but neutral investors were rapidly moving to the bearish camp. The Dow fell -177 points on Monday but the bulls were sticking it out. It will be interesting to see next week's survey after the Dow lost nearly 1,100 points for the week.

Bank of America reported another $25.7 billion in inflows to equity funds in the week ended on Wednesday. Equity and index ETFs garnered $22.4 billion of those funds. That brought the total for January to a record $102.7 billion. Citigroup said ETFs pulled in a record $79 billion in January including $42 billion into stock funds. That is not a typo; the totals for BAC and C do not match.

The money flows confirmed the Bank America, Merrill Lynch sell signal on their Bull/Bear Indicator. The indicator triggered a sell signal the prior Tuesday and confirmed it last Tuesday. The indicator has given 11 sell signals since it began in 2002 and has been right on every one. This was the 12th sell signal and it was also right. The indicator has a perfect record and we should pay rapt attention the next time it is triggered. BAC is projecting a drop on the S&P to 2,686 or -6.4% in the coming weeks. The S&P was down -3.85% last week so not much farther to go if they are right. The bank has a 3,000 price target for year-end and a bullish case target of 3,100.

The last time the Dow declined more than 600 points was June 24th, 2016 and the day after the Brexit vote. The Dow has only declined more than 600 points on eight prior days. However, the higher the index goes the more common declines of this magnitude may become. The decline on Friday was the fifth largest drop but it was the smallest percentage move. In the future when headlines prompt a selloff we could expect to see larger declines. There are five 7% moves on that list. A 7% decline today would be -1,786 points. We will see that at some point in the future but hopefully not for a long time.

There was no green on the component graphic for Friday. The A/D line was 30:0 decliners to advancers. Goldman cost the Dow nearly 85 points to be the biggest loser but there were a lot of big losers that contributed to the -666 loss. The stock that surprised me the most was Nike with only a 43-cent decline. That stock has been rebounding for three months but apparently, nobody wanted to sell it.

The Dow crashed through 26,000 and appears headed for a test of uptrend support in the 25,250 range. The ideal scenario would be a -250 drop to that level at the open on Monday and then a strong V bottom rebound to close positive. The chances of that happening are slim and none but we can always wish. There is bound to be some dip buying on Monday but there could also be some new sellers. Investors who did not sell on Friday and have had to rethink that 666-point loss all weekend, could decide to bail on Monday.

Even if the Dow does rebound, we should be wary of a new sell cycle on any bounce. A decline this severe is rarely over in one day. The market may rebound but it it not likely to be vertical but days of choppy gains and losses.

The S&P declined 2.1% on Friday and -3.85% for the week. That is the biggest decline since the market collapse in January 2016. The obvious target on any continued decline is the 50-day average at 2,715. When coupled with Bank of America's high profile call for a drop to 2,686, they are both in the same general area. Those would be a 5.5% to 6.4% decline respectively. There is light support around 2,735.

Thank you Amazon and Charter. Without those two stocks, the Nasdaq indexes would have been about 20 points lower. The big cap tech stocks had a rough day but it could have been worse. Facebook only declined -2.80 and Broadcom -3.30. Those are normal declines for those stocks and not a crash. Microsoft was slightly out of character with a -2.50 drop. That stock rarely moves that much in a single day. The last time was December 4th and the time before that was June 9th. With nearly 8 billion shares outstanding, it is hard to generate a big move.

The Nasdaq Composite has multiple areas of light support but the best technical support is the 30-day average. The index has bounced from that level multiple times over the last six months. That is currently 7,203. Below that, there are multiple levels of light support at 7,135, 7,115 and 7,040. I would not expect the index to move that low but anything is always possible.

The Nasdaq 100 tends to over penetrate the 30-day by a few points so that makes the 6,700 level a natural target.

The small cap Russell declined slightly below prior resistance, now support at 1,550 but closed near enough for it to still have an impact. The percentage decline for the week at -3.8% was the same as the S&P so it was not leading the pack but keeping pace. The A/D line on the small caps was almost 11:1 in favor of decliners. They had been weakening for several days.

The US equity markets lost nearly $1 trillion for the week. That is real money and I am sure there are plenty of millennial investors that have never lived through an actual market crash.

Volatility increased significantly with the VIX rising 27% to 17.16. However, the VIX futures ETF only rose 13.5%. The volume was unbelievable. The VXX has roughly 33.5 million shares outstanding. Of those, 32.8 million are short because it is a futures product and it always goes down eventually. The volume on Friday was 130 million shares or 4 times the outstanding shares. The algo computers must have been having a field day because there is no way that came from individual investors.

I would recommend watching the open on Monday. Anything is possible. If you must buy the open, you are probably going to have to go naked and avoid stop losses. Even if the market eventually rallies by day's end, the opening volatility could be huge. We could move in both directions in a hurry. Of course, the Dow has been moving in alternating 250-point intraday moves for a couple weeks so that is not new.

I do believe there will be a tradable move higher before the market finally moves lower ahead of February expiration. The key word there is tradable. While I am going to recommend new positions in the various newsletters this weekend, they are not for the faint-hearted. The only guarantee for next week is that there will be volatility. There is no guarantee of direction.

I am sorry to tell you that Keene Little has been forced to leave Option Investor after 14 years. His dad's health has worsened and Keene has moved to be able to take care of him. The constant daily care has made it impossible for Keene to concentrate on the market and he regretfully had to give up his weekly market commentary for the foreseeable future. I would ask that everyone keep Keene and his family in your prayers in the weeks ahead.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


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Index Wrap

Withdrawal Symptoms

by Jim Brown

Click here to email Jim Brown
Investors suffered withdrawal symptoms as the euphoria evaporated.

There was nothing fun about last week's decline. However, despite the nearly 1,100 point decline on the Dow we only lost two weeks of gains. The Dow is still up 3.2% for the year and the Nasdaq 4.9%. For a normal year that would be a good January. While I expect to see some lower lows in February, that is just my opinion and no guarantee of direction.

For several weeks I have been predicting declines in the first full week of February through option expiration. The rising interest rates simply accelerated that decline by one week.

Actually, it was the excessive euphoria that caused the decline. The interest rates may have gotten the blame but the market was out of control and needed to rest.

I am reprinting these two charts from last week with the RSI on the Dow and S&P at record levels and the charts accelerating into a vertical ramp. Liz Ann Sonders from Schwab pointed out that the S&P was the most overbought since 1904. That is pretty extreme. Nobody looking at the charts below should be surprised that profit taking appeared.

It should also be no surprise that the A/D charts all showed a significant reversal. This is now a following indicator and we need to watch them for signs of an uptick. There will be a rebound and that will give us a little hook on the end of this current down slope. The key point to watch is whether there is another decline that creates a lower low after we get that rebound.

I had been profiling the spread between the 100-day average and the S&P. Last weekend the S&P was 236 points or 9.1% above the average and that has corrected to only 130 points or 4.9% as of Friday's close. This was accomplished by the -110 point decline in the index and the 6-point rise in the average. This is still a much wider than normal spread but it did bring it back into a somewhat normal range.

The RSI has gone from a 22 year high at 86.69 back to 46.08 and almost an oversold level. I discussed last week that RSI oversold/overbought levels tended to not have an immediate impact on the market but in this case, it was dramatic.

It is time to shift from how high can the indexes go to how low could they go. The S&P has multiple lines of converging support just below 2,700 at 2,685. That corresponds with the Bank of America target at 2,686 or a 6.4% decline. I would look for a rebound at the 50-day at 2,715 "IF" we do not get a rebound on Monday.

There will likely be some forced margin selling at the open on Monday and some panic selling from some investors who were not watching the market on Friday. You can imagine their surprise when they arrived home from work and turned on the news to hear the Dow posted the fifth biggest point loss in history. They are probably pacing off their nervous energy all weekend waiting for the market to open on Monday.

The Bullish Percent Index on the S&P declined from 83.2% to 77.8%. That is still elevated but definitely off the near record highs.

The percentage of S&P stocks over their 50-day average fell from 84.2% to 60.4%. That is a monster decline in only five days. The percentage over their 200-day average declined from 82.8% to 76.0%. The longer-term average is always a lot lower and a material change in that chart requires a longer time period.

The Dow is approaching uptrend support at 25,250 with the 50-day average at 25,016. I would be happy with a rebound from either level. That would be a nearly perfect dip to buy and strong support from which to launch the next rally. However, I would expect a lower high and additional selling in February once the earnings cycle is over.

The Nasdaq Composite is nearing the 30-day average where it has bounced the last five times there was some profit taking. However, the average itself is elevated and it may not hold. That is the 7,203 level. On a technical basis, the uptrend support at 7,065 and the 50-day at 7,067 would provide a much stronger base for a rebound. The Nasdaq had gone nearly vertical over the first three weeks of January and there is still a lot of profit to be captured.

The percentage of Nasdaq stocks over their 50-day average took a steep dive from 73.0% to 49.3%. The tech stocks definitely took a beating.

The Semiconductor Index fell -4.6% for the week and was a big factor in dragging the Nasdaq lower. Where the chips go, the Nasdaq will follow.

The small caps continue to underperform the large caps and the Russell 2000 never made the rocket ride spike to super high levels. The Russell chart looks like a normal chart with regular bouts of profit taking. The index closed just 2 points under what should be support at 1,500 and that would be the level to watch on Monday.

Conventional wisdom suggests a decline Monday morning and then a potential rebound later in the day. That assumes the decline last week was a normal garden-variety dip from extremely overbought conditions. In reality we really do not know what caused investors to sell.

What we do know is there are a large number of investors of all types and sizes that have been waiting for a dip to buy. The dip arrived and now it is the moment of truth. Do they go all in or do they run to the safety of cash because the evil market has shaken their convictions? We should know by noon on Monday.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Buy the Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

Buying good companies on a market dip is normally a sound strategy. There is always risk that the dip could continue lower. Buying companies with good relative strength tends to reduce losses if the markets continue to decline.

Nike Inc and Paypal should survive any continue decline with minimal losses.


NKE - Nike Inc - Company Profile

NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers NIKE brand products in nine categories: running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, and other equipment under the NIKE brand for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites, mobile applications, independent distributors, and licensees. The company was formerly known as Blue Ribbon Sports, Inc. and changed its name to NIKE, Inc. in 1971. NIKE, Inc. was founded in 1964 and is headquartered in Beaverton, Oregon. Company description from FinViz.com.

Expected earnings March 22nd.

Nike has defied gravity recently after being severely depressed back in October. There are multiple reasons. They have received upgrades based on their decisions to reduce their SKUs, limit their number of distributors and require retailers to merchandise more effectively. It did not hurt that Bill Ackman took a minority position and is recommending changes. Lastly, all the Olympic athletes, except for the North Koreans, will be wearing Nike clothes and sports gear. Nike will get a big advertising boost from the games.

Nike shares did not decline materially last week when the Dow was imploding. This suggests they should rise again in a positive market. I am picking an inexpensive option and we will not use a stop loss over the first several days just in case the market volatility continues.

This is a risky position because of the market instability. Do not enter this position if you cannot afford to risk the $2.

Buy April $70 call, currently $1.94, no initial stop loss.

PYPL - PayPal - Company Profile

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. PayPal Holdings, Inc. was founded in 1998 and is headquartered in San Jose, California. Company description from FinViz.com.

Paypal shares were crushed last week after Ebay said they were going to phase out the payment processor by 2023. Ebay is going to become the merchant of record (MOR) and handle payments through Dutch payment processor Adyen after 2020. Paypal sold off hard despite the long term transfer.

This is 2018. Nothing is changing for the next two years. In 2021 Ebay will be the "default" payment processor but Paypal will remain an option in the checkout process. Customers with Paypal accounts will more than likely continue to process their payments through Paypal. For Ebay the conversion process is going to take years. Paypal is guaranteed to remain an option on checkout through 2023 or 5 years from now. In reality they will probably always be a payment option on Ebay.

Paypal has more than 200 million users and 18 million retailers that accept Paypal. Ebay cannot just turn them off or purchasers on Ebay would revolt.

The Paypal CEO put it this way. Ebay is 13% of our total payment volume (TPV) and growing at 4% per year. The other 87% of our TPV is growing at 23% per year.

On the positive side once the agreement with Ebay expires in 2020, Paypal can then become the MOR for any number of other retailers. They are currently prohibited from doing that now. The CEO said there are at least 10 top global marketplaces that process tens of billions of TPV per year where Paypal could become the primary MOR. These would be far more valuable than the slow growing Ebay revenue at 4% per year.

The CEO said retailers could now begin to see Paypal take on a more aggressive posture now that the split with Ebay is finally winding down.

Paypal guided for 2018 for revenue growth of 15-17% and earnings growth of roughly 25%. There is nothing wrong with Paypal and the stock was punished unfairly.

Buy April $80 call, currently $2.80, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Correction Ahead?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow declined -666 on Friday and -1,095 (-4.1%) for the week. That is the biggest decline in two years. The market was severely overbought as I have pointed out for the last couple of weeks. The depth and velocity of the decline suggests there could be a quick rebound. Historically, there have been 17 declines of 500 points or more and almost always there was an immediate rebound.

Attention: Newsletter changes starting this week.

Most readers are aware that we publish multiple newsletters with stock picks. The number of positions that must be researched, analyzed and recommended is sometimes overpowering. This means I have to come up with 700-850 new positions every year and then research the news and post updates on each for every newsletter. Obviously there are not 700-850 stocks that are worthy of investment every year.

Annual recommendations:

Option Investor 200-250, average 4-5 per week.
Premier Investor 200-250, average 4-5 per week.
Ultimate Investor 50, average 1 per week.
LEAPS Investor 50, average 1 per week.
Option Writer 150-200, average 3-4 per week.
OilSlick, 50, average 1 per week.

Because Option Investor and Premier Investor are daily, it is very easy to fall into the trap of forcing a new position every day because it is a newsletter day. I have tried to fight that but it has been a problem for years regardless of who was writing the plays.

I am stopping that process this week. We had a writer change last week that means I will be writing market wraps on Tue/Thr/Sat and Tommy will do Mon/Wed.

Market wrap research and preparation is a 6-8 hour process. We don't just sit down and spew out 3500-4000 words of comprehensive research and analysis over a couple hours. There is a lot of research that never makes it to the commentary because of time and space but we have to do it to determine what events are relative and which are not.

Starting this week, I will only be doing play updates on Wednesday and Saturday. Not having to read all the news for every active position and post a daily update will save a lot of time. I will update the daily portfolio graphic and post an update on any closed positions.

I am also going to stop the process of new daily plays. I do not just draw symbols out of a hat. A lot of research goes into each recommendation. The 2-3 hours a day per newsletter that are spent scanning charts, checking earnings dates, looking at option montages and reading hundreds of news headlines makes the play picking process frantic on days I have to write the commentary plus another newsletter.

I believe if I cut the number of new plays down to 2-3 per week on Wednesday and Saturday, 100-150 per year, we will have better quality choices without a lot of forced positions just because it is a newsletter day. The point of investing is to make money not to just trade. Having fewer quality positions will make them easier to manage for both readers and myself.

I am explaining this in depth because I want readers to understand the process and that we do care about the end result, which is making money for readers.

I am going to send out a survey next week with detailed questions about the newsletters. Please take the 2-3 minutes to answer it so I can make sure the newsletter we are providing is the one you want to read.

As always, you can email me directly about the topics above or any topic on your mind and I will respond.

Thank you in advance for your understanding.

Jim Brown

Send Jim an email

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

No Changes

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

No Active Calls

BEARISH Play Updates (Alpha by Symbol)

HOG - Harley Davidson - Company Profile


No specific news. Shares declined with the market and even despite our bad entry the position is in positive territory.

Original Trade Description: January 31st.

Harley-Davidson, Inc. primarily manufactures and sells cruiser and touring motorcycles. The company operates through two segments, Motorcycles & Related Products, and Financial Services. The Motorcycles & Related Products segment designs, manufactures, and sells wholesale on-road Harley-Davidson motorcycles, as well as motorcycle parts, accessories, general merchandise, and related services. It offers motorcycle parts and accessories, such as replacement parts, and mechanical and cosmetic accessories; general merchandise, including MotorClothes apparel and riding gears; and various services to its independent dealers comprising motorcycle services, business management training programs, and customized dealer software packages. This segment also licenses the Harley-Davidson name and other trademarks. It sells its products to retail customers through a network of independent dealers, as well as ecommerce channels in the United States, Canada, Latin America, Europe, the Middle East, Africa, and the Asia-Pacific. The Financial Services segment provides wholesale and retail financing services; and insurance and insurance-related programs primarily to Harley-Davidson dealers and retail customers in the United States and Canada. This segment offers wholesale financial services, such as floorplan and open account financing of motorcycles, and motorcycle parts and accessories; and retail financing services, including installment lending for the purchase of new and used Harley-Davidson motorcycles. It also operates as an agent providing point-of-sale protection products, including motorcycle insurance, extended service contracts, credit protection, and motorcycle maintenance protection. Harley-Davidson, Inc. was founded in 1903 and is based in Milwaukee, Wisconsin. Company description from FinViz.com.

Harley-Davidson (HOG) reported earnings of 54 cents compared to estimates for 46 cents. Revenue of $1.05 billion beat estimates for $1.01 billion. These numbers were up from 27 cents and $933.0 million in the year ago quarter. That is where the good news ends. The company said it was going to incur consolidation costs of $170-$220 million and $75 million in capital costs over the next two years. The consolidation of plants would save them $65-$75 million annually after 2020.

The company said Q4 sales declined 9.6% year over year with sales down -11.1% in the USA. Industry sales were down -6.5%. Overall shipments by Harley in 2017 were the lowest in six years. The company said the customer base was getting older and younger customers were lukewarm to the brand. They lowered 2018 guidance for shipments of 231,000-236,000 motorcycles, down from actual shipments in 2017 of 241,498 and its prior 2018 forecast of 241,000-246,000. Shares fell 8% on the lowered guidance.

The outlook is negative. Higher costs, lower earnings, falling shipments. This should be a cloud over the stock for weeks to come.

Position 2/1/18:
Long March $47.50 put @ $1.99, see portfolio graphic for stop loss.

NTNX - Nutanix Inc - Company Profile


No specific news. Only a minor decline but closed at a 2-month low.

Original Trade Description: January 29th.

Nutanix makes infrastructure invisible, elevating IT to focus on the applications and services that power their business. The Nutanix Enterprise Cloud OS software leverages web-scale engineering and consumer-grade design to natively converge compute, virtualization and storage into a resilient, software-defined solution with rich machine intelligence. The result is predictable performance, cloud-like infrastructure consumption, robust security, and seamless application mobility for a broad range of enterprise applications and services. Company description from FinViz.com.

Expected earnings March 1st.

Nutanix is a good company. They have a great software product. Their challenge is a lot of competition and a rapidly evolving market place. They are faced with educating potential customers about the long-term benefits of the products and then convincing them to lay out a lot of money to change the way they run their server farms.

They are moving into a new layer of software development that will converge all factors of enterprise computing and cloud operations. JP Morgan said that moving to a "new software-oriented model" could "create near-term business disruption" give that it will require operational adjustments for new and existing customers alike. The analyst also warned a recent change to the leadership team might be disruptive as well. Given the recent 4-month rally in NTNX shares, there could be some material impact from implementing the new model.

Shares closed at a two-month low on Monday.

Position 1/30/18:
Long March $30 put @ $2.49, see portfolio graphic for stop loss.

QQQ - Powershares QQQ - ETF Profile


Major 2% decline and closed at the low for the day. I put a stop loss on the position and a profit target at $162. I expect this market decline to be brief.

Original Trade Description: January 31st.

PowerShares QQQ, formerly known as QQQ or the NASDAQ- 100 Index Tracking Stock, is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually. ETF description from Powershares.

The chart on the QQQ has shown several failures lately at the $170 level and the volatility is increasing. Rising volatility (strong reversals) is typically a sign of investor indecision see at market tops and bottoms.

If the tech sector decides to take profit from the nearly 10% gain in 2018, the drop could be significant. Uptrend support is around $162.

This is a speculative position on the potential for a post earnings depression decline over the next three weeks.

Position 2/1/18:
Long March $166 put @ $3.13, see portfolio graphic for stop loss.

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