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Daily Newsletter, Saturday, 11/3/2018

Table of Contents

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

Market Wrap

Rotten Apple

by Jim Brown

Click here to email Jim Brown

Apple's decline knocked 100 points off the Dow and 62 points off the Nasdaq.

Weekly Statistics

Friday Statistics

As you probably know by now, Apple beat on earnings but missed on guidance and ticked off analysts and investors alike. They reported earnings of $2.91 that beat the street estimates for $2.78. Revenue of $62.9 billion beat estimates for $61.57 billion. The average selling price rose 28% to $793 and beat estimates for $750.78. They announced a dividend of 73 cents. That was all the good news.

They sold 46.89 million phones and missed lowered estimates for 47.5 million. They guided for the current quarter for revenue of $89-$93 billion and analysts were expecting $93.02 billion. After five consecutive quarters of double digit revenue the company only guided for 1% to 5% revenue growth in Q4. They did $88.3 billion in Q4-2017.

Analysts started worrying when they announced the XR with a sticker price of $795. They said the lower priced phone would help in India and China but it was also a sign that Apple had jumped the shark in terms of iPhone features and prices in their higher dollar phones. The market was no longer consuming every phone Apple made.

They also said they were no longer going to give units sold on phones, iPads and Macs. This was another red flag, especially since they missed estimates on the Q3 unit sales. Not releasing those numbers in the future is an admission that sales are expected to slow. Apple iPhones have peaked.

Apple wants everyone to think of them as a technology company not a phone company. That is a good idea except that all their products revolve around the iPhone, which produces nearly all the revenue.

Apple wants us to focus on their growing services business which has been adding 30 million subscribers a quarter for the last two years. The problem is that new subscribers come from new phone sales. An existing Apple user is already a subscriber. They have to sell new phones to new customers in order to add service subscribers. Currently service revenue accounts for about 15% of total revenue. This was a record quarter with $10 billion in services revenue. Now that phone sales are slowing, new service subscribers are also going to slow.

The slowing phone sales are not just an Apple problem. Smartphone sales in total were down about 12% in Q3. Phones have more features than anyone can use and they are lasting longer than prior generations. The 18-24 month replacement cycle has expanded to 32-44 months or almost twice as long. That means the normally recurring revenue cycle that has benefitted Apple for years is now dying. Add to that the lack of new "must have" features and the smartphone replacement cycle has run its course.

There was a rush of analysts cutting price targets and lowering their ratings and suggesting Apple shares have peaked. The $1 trillion market cap was the top for Apple. If Apple revenues are no longer going to grow in the mid 20% range, as evidenced by their 1% to 5% guidance then Apple will eventually be valued using a different multiple based on their future growth rate.

Apple shares peaked in early October and did not suffer as much as the rest of the big cap tech stocks when the market declined. With weak guidance, they will now be punished. Shares closed at a two-month low at $207 but odds are good we will see a drop back to $190 when the smoke clears. It may be January since there are still millions of Apple faithful investors that do not yet understand the outlook. Some new analyst targets were in the mid $180s.

Apple declined $15 to knock 100 points off the Dow.


I was in shock at the open when the Dow spiked to a +198 point gain despite the 100 points erased by Apple. However, that excitement was short lived. The spike was caused by a Bloomberg story at 1:AM that the US and China were getting closer to a trade deal. The S&P futures spiked from -7 to +15 in about 15 minutes and continued to rise in the hours that followed.

The balloon started losing air about 8:AM when White House staff did not confirm the story. As the morning wore on the denials became more specific and by lunch time the market was in full meltdown mode with the low around 1:PM after Larry Kudlow was interviewed on CNBC and he said there was no truth to the story.

The futures rose again when President Trump reiterated, as he was preparing to board the helicopter for a campaign trip, that he had a long talk with President Xi and China wanted a trade deal as much if not more than the US. He reiterated he was meeting with Xi at the G20 meeting where they would have a long discussion over lunch. The market recovered into the close with the Apple losses about the only lingering after effect.



The market had other news to deal with before the open. The Nonfarm Payrolls for October showed a gain of 250,000 jobs and well over the final consensus for 188,000. The final revision for August rose to 286,000 jobs, an improvement of 85,000 from the initial release. The September headline number declined from 134,000 to 118,000. This number was low because of the impact of the two hurricanes.

The unemployment rate remained unchanged at 3.7% because of a huge increase in the labor force of 711,000 workers. The availability of jobs and the rising wages are pulling people back into the job market. Average hourly wages rose 0.2% (5 cents) and the average workweek rose one tenth to 34.5 hours. This suggests current employees are working longer because of the shortage of available applicants. The labor force participation rate rose 2 tenths to 62.9%.

The rise in hourly earnings brought the trailing 12-month increase to 3.14% and the strongest wage growth since before the recession. The critical 25-54 age group, the prime working age, saw the employment to population ratio increase to 79.7% and very close to the prerecession peak of 80.3%. Work force participation in that group rose to 82.3% and 1% below the prerecession peak.

This was a very strong report and well out of the Goldilocks zone. This porridge was far too hot and it locks the Fed into its current rate hike plans.


Currently there is a 76% chance of a rate hike in December, 56% chance for March and 51% chance for September. Those numbers had been declining as the market corrected and some of the recent economic reports had shown slight weakness. With the FOMC meeting next week, we can expect to see some hawkish comments in the post meeting statement and future minutes of the meeting.

The yield on the ten-year rose to 3.21% and only about one basis point from a seven-year high. This put pressure on equities and we are likely to see that high next week.


Factory orders for September rose 0.7% and slightly higher than expected. The driver was aircraft orders. The September gain lifted the 12-month total to 11.5%. The report was positive but boring and it was ignored.

The NY ISM for October slipped from 72.5 to 69.8 but remains at the sixth highest level since 2011. The employment index rose sharply from 73.8 to 82.1 and a second consecutive record high. Even more shocking was a sharp drop in the prices paid index from 75.0 to 67.6. Inflation is declining in New York, not rising.

The calendar for next week is light with the ISM Nonmanufacturing the only material report until Thursday's FOMC announcement. The JOLTS on Tuesday covers September and will make a headline but it does not move the market.

The Fed is not expected to raise interest rates but their statement could have some clues as to their thoughts on the market correction and the blowout jobs numbers. That will be the most important economic event for the week.


This is a very busy week for earnings with nearly 500 companies reporting. The most watched names will be Booking Holdings, formerly Priceline, Match.com, Monster Beverage, Qualcomm, AstraZeneca and Disney. There are 74 S&P-500 companies reporting this week.

So far this quarter blended earnings are expected to rise 27.1% with more than an 8% revenue rise. On average companies are beating earnings estimates by 6.5%. Of the 376 S&P companies already reported 77.9% have beaten earnings estimates and 60.6% have beaten revenue estimates. There have been 37 guidance warnings for Q4 and 20 guidance upgrades. The current forward PE for the S&P is 15.8.


Apple was not the only company making big moves on Friday. Starbucks (SBUX) reported earnings of 62 cents that beat estimates for 60 cents. Revenue rose 11% to 6.3 billion and matched estimates. Same store sales rose 3% worldwide and 4% in the USA. The commentary was positive and the CEO was plugging the Global Coffee Alliance with Nestle and the good work by the 350,000 Starbucks employees in their nearly 28,000 stores. Shares spiked 10% and well over resistance at $60. They spiked on the reversal of the pitiful same store sales the prior quarter at 1% with a -2% decline in China. The sales in China were being hurt by cannibalization because of the volume of new stores being opened. Starbucks claims China is their most important market. However, for the fourth consecutive quarter there has been a decline in total transactions. The revenue increase has been through price hikes and the addition of food items, not a surge in traffic.


Alibaba (BABA) reported earnings of $1.39 that beat estimates for $1.08. Revenue rose 54% to $12.4 billion but missed estimates for $12.57 billion. Monthly active users rose 5% to 666 million. Cloud revenue rose 90% to $825 million. The company revised its 2019 revenue forecast -6% to RMB375 billion to RMB383 billion and below consensus for RMB396 billion ($57.43 billion). Prior guidance was 60% revenue growth and it was cut to 53% growth. Shares fell $3.66 to $147.50. The stock is down 17% over the last three months. Analysts believe the lowered guidance is due to the impact of the tariffs on China. Vice chairman Joseph Tsai said consumers are seeing uncertainty and they are cutting back on big-ticket items like autos, home appliances and consumer electronics. We are only a week away from the big Singles Day promotion on 11/11. Tsai said it would be bigger than ever with new shopping categories. Last year shares declined on 11/11 and the following two days. In 2015 and 2016 they suffered the same 3-day decline. Buy puts on the 10th?


Newell Brands (NWL), maker of Elmer's Glue, Sharpie markers and dozens of other products, reported earnings of 81 cents that beat estimates for 65 cents. Revenue of $2.28 billion missed estimates for $2.35 billion. They raised guidance for the full year from $2.45-$2.65 to $2.55-$2.75 with revenue of $8.7-$9.0 billion. Shares spiked 15% on the earnings beat and guidance raise.


KraftHeinz Co (KHC) shares fell to a new historic low after reporting earnings of 78 cents, only a penny better than the year ago quarter, that missed estimates for 81 cents. Revenue of $6.37 billion beat estimates for $6.31 billion.

Warren Buffett had a very bad day on Friday. Berkshire Hathaway owns 27% of KraftHeinz and with the $5.47 drop that equates to about a $1.8 billion loss for Berkshire. KHC is down more than 46% over the last 18 months costing Berkshire a lot of money and leaving KHC with a market cap of $62 billion. In round numbers that would be about a $14.2 billion loss.

In addition to Friday's KHC loss, Berkshire lost more than $4 billion on the drop in Apple shares. It was not a good day for Buffett.


Berkshire Hathaway (BRK.B) reported earnings on Saturday of $2.79, up from $1.40 in the year ago quarter. That equates to a profit of $6.88 billion in operating earnings. Revenue rose from $59.5 billion to $63.45 billion. Not included in the operating results was an $11 billion gain on the value of Berkshire's investments compared to a $423 million gain in the year ago quarter. Burlington Northern added $1.4 billion in profits.

Berkshire is currently holding more than $100 billion in cash and used $928 million to buy back 225 Class A shares and 4.1 million Class B shares. Buffett has always said he would buy back stock if the price declined below book value. It also says Buffett cannot find anything else to buy that he considers fairly valued. Berkshire currently owns more than 90 companies and has investments in dozens more.


WW, formerly Weight Watchers, (WTW) reported earnings of $1.00 that beat estimates for 99 cents. That was up from 65 cents in the year ago quarter. Revenue rose 13% to $366 million but missed estimates for $379 million. The company said active subscribers rose 25% to 4.2 million. However, they boasted 4.5 million three months ago so membership declined 300,000 in the quarter. They raised guidance for the full year from $3.10-$3.25 to $3.15-$3.25. Shares fell -30% on the drop in subscribers.


Fortinet Inc (FTNT) reported earnings of 49 cents that rose 75% and beat estimates for 42 cents. Revenue of $453 million rose 21% and beat estimates for $450.6 million. The company guided for Q4 earnings of 50-52 cents on revenue of $490-$500 million and analysts were expecting 50 cents and $492 million. Shares imploded because the guidance was for a 19% increase in revenue and 60% increase in earnings, which was lower than Q3. This is an amazing chart but you have to admit it was due for a correction.


Chevron (CVX) reported earnings of $2.13 that more than doubled from the $1.03 in the year ago quarter and beat estimates for $2.06. Revenue of $43.987 billion missed estimates for $46.672 billion. Production averaged a record 2.96 million Boepd, a 9% increase. Cash flow from operations of $9.6 billion was the highest in five years. The average sales price for a barrel of oil was $62, up from $42 in the year ago quarter. In Q4, it should be significantly higher after the spike to more than $75 in WTI and over $80 for Brent.


Exxon Mobil (XOM) reported earnings of $1.46 that beat estimates for $1.22. Revenue of $76.61 billion rose $15 billion and beat estimates for $75.68 billion. Liquids production increased 6% and dry gas production declined -4% due mainly to divestments. Total production rose to 3.8 million Boepd. They bragged on new discoveries and rapidly increasing production in the Permian. They paid $3.5 billion in dividends in the quarter. Shares rallied slightly.


AbbVie (ABBV) reported earnings of $2.14 that beat estimates for $2.01. Revenue rose to $8.236 billion and narrowly beat estimates for $8.233 billion. Sales of Humira rose 9% to $5.124 billion. The company raised full year guidance from $7.76-$7.86 to $7.90-$7.92. They raised their dividend from 96 cents to $1.07. The company said earnings in 2019 would grow by double digits despite the launch of biosimilars to Humira in Europe. The company said the strong pipeline and coming product launches would allow AbbVie to "grow through" the impact of generics overseas. AbbVie has made multiple agreements to numerous drug companies that prevent the competition from selling the generic Humira in the USA until 2023. AbbVie has as many as 10 drugs with billion dollar potential in the pipeline.


Crude prices continued their plunge on rising inventories and assurances by Saudi Arabia that they will produce enough oil to offset any export decline from Iran. Saudi Arabia raised production by 150,000 bpd to 10.68 million bpd and the most since 1962. Analysts are saying $60 is possible but Iranian sanctions to go into effect next week and I would expect President Trump to make them painful. However, the 6% decline for the week came on news the US had given exemptions to eight countries including Japan, India, China and South Korea to let them continue buying Iranian oil. The exemptions are good for six months and amount to about 2.0 million bpd. Those exemptions caused the market drop because that suggests there will be no shortage of oil since Iran is still going to be an exporter.


On Friday, President Trump tweeted a picture using the font from Game of Thrones saying "Sanctions are coming." This is a play on the tag line in the series claiming "Winter is coming." In the series, this is the motto of the House of Stark and the meaning behind the words is one of warning and constant vigilance. HBO immediately got their panties in a twist that Trump was using their font without permission.


Within hours, this picture of Putin was posted by his aides using the same font but I could not translate it. Google translate was stumped.


Not to be left out an Iranian general, Qaesem Soleimani, chief of the elite Quds Force of Iran's Revolutionary Guard, tweeted his own Game of Thrones themed picture saying "I will stand against you" meaning Iranian forces will fight the sanctions.


I realize these are powerful people and there will be a showdown in the future. However, I actually got a kick out of seeing the exchanged tweets and the originality. Not to be outdone, the author and creator of the Game of Thrones, George R.R. Martin took a shot at Trump with his own tweet.


Last but not least, Jon Cooper, Chairman of TheDemCoalition tweeted his meme. I could go on because memes take on a life of their own and each spawns dozens more but these are the best.



Markets

It was a wild week of triple digit swings but we escaped with an average gain of 2.5% on the major indexes. The S&P-600 gained 4.37% and the Russell 2000 gained 4.3%. Banks rallied 4.79%, biotechs 5.8% and housing 6.4%. Clearly, it was a rebound from very oversold conditions and the most oversold saw the largest rebounds.

Friday's decline was supposedly triggered by Apple and headlines on China but there was a lot of simple profit taking after three days of sharp gains.

The S&P hit the 10% correction level on Monday's afternoon drop to 2,603 only to be instantly bought and rally 153 points over the next four days to touch 2,756 on Friday morning. This was a nearly textbook V bottom reversal and monster short squeeze.

Now that the short squeeze is over, we will see if the real buyers return in volume on Monday. Friday's volume of 8.8 billion shares was the lowest volume since October 22nd. The A/D volume was almost even but declining stocks beat advancers slightly at 3,922 to 3,514. Weekend event risk and the impact from Apple kept the big cap indexes from returning to positive territory.

The S&P successfully rebounded over the 2,700 level and managed to stay above that level on Friday but only by 0.44 of a point. There will be significant resistance at the 200-day at 2,764. We are not out of the woods yet despite the perfect trend over the last 72 years.

In 18 of the last 18 midterm years, the markets roared higher in the two months after the election with an average gain of more than 10%. Obviously, every year is different but over the last 72 years, that trend has overcome a lot of different market conditions. Let's hope it continues unbroken.

The consensus is that tipping the house into democrat hands by a small margin will produce gridlock and nothing will change over the next two years. The market should move higher. The small margin is critical. If there is a large margin, there will a greater chance of an impeachment move against Trump and Kavanaugh and that will poison sentiment and the market may not move lower but any move higher will be blunted.

The consensus is that republicans retaining control of both the house and senate would result in another rally because it would cement the regulatory changes and usher in another tax cut for the middle class along with additional cuts to regulations and pro business initiatives. It would also prevent any impeachment activities and months of negative headlines.

Depending on the outcome of the election, it is entirely possible to see 3,000 on the S&P by the end of 2018 but I would not bet on it. The correction has caused significant uncertainty and damaged portfolios. This triggers the "if my stock just gets back to $NNN, I am cashing out" syndrome. Investors were caught off guard, did not have stop losses and now they are underwater. If they can get back to where they were or just close to even, they will flee to the sidelines to lick their wounds. That means any move over 2,800 is going to face stronger resistance with every tick higher. Moving over 2,900 is going to be nearly impossible.


The Dow was handicapped by Apple and Boeing but did recover from a drop to -302 intraday. The breakdown in the China trade deal story was the culprit that knocked the Dow 500 points below its intraday high. Chevron and Exxon helped keep the damage to a minimum.

The Dow is back over the critical 25,000 level and now fighting resistance at the 100-day and the 25,500 level. The moving average is the least of the Dow's problems since the index is not normally reactive to moving averages. If you look back over the last year any reaction was probably coincidental.

The next resistance will be around the 25,800 level and the high for mid October.



The Nasdaq struggled because of Apple, which knocked 62 points off the Nasdaq 100 index. Thursday's close at 7,435 is now the resistance to watch. Apple shares are likely to be volatile for a while as investors try to decide what the future holds for the stock. We will probably see more selling since it is a very widely held stock but some analysts are calling this a buying opportunity. Since they already had buys on Apple they may be just protecting their rating by trying to pump shares back up again. The expected volatility in Apple will translate into volatility for the Nasdaq and Dow but the big move is over. Future moves will probably remain in low single digits.

I am grateful that the tech sector did not decline even more on the Apple news. Since all but three of the Nasdaq big cap tech stocks are still in correction territory, investors were probably more focused on buying the dip instead of selling more stock.




The Russell 2000 overcame the downdraft in the tech sector and posted a minor gain. This was actually bullish since the index had been up sharply the prior two days and the urge to take profits was minimal. A strong Russell should lead to a continued market gain.


Next week is a Fed meeting with the announcement on Thursday instead of Wednesday. Normally there is an uptick in the market the day before the announcement. I do not know how that is going to play out since the Fed meets after the election. The election will have far more market impact and the Fed statement could simply be ignored unless there is a significant change in outlook.

Halloween was the end of the fiscal year for mutual funds. Any portfolio adjustments they wanted to make as in tax loss selling, would have to have been completed before Oct-31st. This suggests that they are now free to add to or create new positions for the 2019 fiscal year.

This is also a high activity buyback period. Companies that have reported earnings are now free to act on their buybacks. With stock prices in correction territory, this would be an ideal time for companies to get the most bang for their bucks.

The bottom line is that the market should have a positive bias unless the election goes badly.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Interesting - I used a Mac to help me design the next Cray."

Seymour Cray (1925-1996) when he was told that Apple Inc. had recently bought a Cray supercomputer to help them design the next Mac.


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Index Wrap

October Finally Over

by Jim Brown

Click here to email Jim Brown
October is known as the bear killer month because so mand market declines are reversed in that month. We can chalk up another win for October in two areas. The decline appears to have ended when the S&P fell to 2,603 and 10% correction territory on Monday October 29th. That adds to the historical count of major declines ending in October.

October is also known for setting the market lows for the second half of the year. When we were at 2,940 and a record high on October 3rd I wrote that I did not expect the historical trend for second half market lows to occur this year. Boy was I wrong. In only three weeks the market imploded with the Nasdaq and Russell falling in the 15% range and the S&P hitting 10%.

I really hope those were the second half lows and October historians and put another checkmark next to that trend. I do not want to see any lower lows in over the next two months. Unfortunately, what we want does not matter to the market.

The S&P rebound was not strong despite the 150+ point rebound as of Friday's high. The A/D line improved but the acceleration was muted. More than 70% of S&P stocks are still in correction territory. They are rebounding but investor sentiment is still lacking.


Despite the major decline only 42% of the S&P stocks have buy signals on a point and figure chart. The market has a lot more healing to do before we can call it a rally. This is still just a rebound.


Only 23% of S&P stocks are back over their short-term 50-day average. The low last week was just over 10%. This shows how brutal the sell off actually was and how little the majority of stocks have recovered. The percentage over the long-term 200-day average rose to 44.6% after being as low as 34%. This percentage is stronger than the 50-day because a lot of stocks never fell below their 200-day.



The S&P is facing resistance at the 200-day at 2,764 and then again at 2,800 and 2,816. This next 100 points could be a tough battle.


The Russell rebounded over 4% and moved closer to the Dow, which rose just over 2%. The Russell is normally the leader both up and down and a continued strong rebound in the Russell would be beneficial to the entire market.



The Nasdaq and the Semiconductor Index are moving in lock step. Rarely do we see correlations this tight and this enforces the relationship between the two indexes. The $SOX is the leader for the entire tech sector.


The FANG stocks also completed their move back into correlation and were EXACTLY correlated on the 29th. As you can see by the chart this has not happened in the last six months. Now we just need to see the FANG stocks move higher in unison and the Nasdaq would soar.



As you can imagine the sentiment reversed from bearish to bullish but it is not overriding bullish. The bulls are slightly ahead but the wild swings in the market are keeping many investors on the fence.


If the 72-year trend holds, the two months after the election will be strongly bullish. However, that does not mean we will only go straight up. There is plenty of uncertainty remaining in the market and there will be plenty of sellers at the various recovery points along the way. There is always the chance the trend will fail. In 2018, almost no trends have been followed. Nearly everyone has been busted. While I really hope this trend reappears, there are no guarantees. As your positions rise, please add stop losses just in case "this time it is different."

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Beat and Raise

by Jim Brown

Click here to email Jim Brown

Editors Note:

Beating earnings estimates and raising guidance is always a recipe for future stock gains. F5 Networks did both and then added another $1 billion stock buyback or 10% of the company's shares.

 

New positions are only added on Wednesday and Saturday except in special circumstances.


NEW DIRECTIONAL CALL PLAYS

FFIV - F5 Networks - Company Profile

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. The company's primary application delivery technology is Traffic Management Operating System (TMOS) that enable company's products to intercept, inspect, and act on the contents of traffic from virtually each type of Internet Protocol-enabled application. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers, as well as Link Controller. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; BIG-IP Virtual Edition software platform; and management and orchestration software platform. The company sells its products to enterprise customers and service providers through distributors, value-added resellers, and systems integrators in the Americas, Europe, the Middle East, Africa, Japan, and the Asia Pacific Region. F5 Networks, Inc. was founded in 1996 and is headquartered in Seattle, Washington. Company description from FinViz.com.

F5 reported earnings of $2.90 that beat estimates for $2.63. Revenue rose to $562.71 and beat estimates. These numbers were well over the year ago quarter of $2.44 and $538 million. Q4 revenue growth of 5% was driven by demand for their software solutions for security in multicloud environments. This produced record earnings and rising margins.

They guided for Q4 for revenue of $543-$552 million and earnings of $2.51-$2.54. They have beaten on earnings and revenue for each of the last four quarters.

Shares spiked on the earnings and then spiked again on Oct 31st when they announced another $1 billion in stock buybacks in addition to the $573 million still unspent on the last authorization. That is 14% of the outstanding shares.

The stock has rebounded from the 200-day average and could be on track to retest the late September high of $199.

Earnings January 23rd.

Buy Dec $190 call, currently $3.30, stop loss $173.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Much Needed Rest

by Jim Brown

Click here to email Jim Brown

Editors Note:

Apple's decline gave the market a much-needed rest after three days of strong gains. The tech leader became a tech laggard and the $15 decline knocked 100 points off the Dow and the index closed with a -110 point loss. Investors had a chance to take profits at the open and then establish new positions in the afternoon. We could now be poised for a decent start to next week.



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


AAPL - Apple Inc
The position was closed at the open.



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

Credit spreads and naked puts = OptionWriter

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Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.


BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

Apple shares crashed as expected but closed at the $207 level and the same closing low from Thursday's afterhours session. We exited the position at the open with a minor loss.

I am betting that Apple declines further from here. Ending the process of giving guidance on units sold was met with a lot of complaints and warnings from analysts. This almost guarantees that Apple is expecting slower growth or actual unit declines. This means we could have seen the peak in Apple shares.

Original Trade Description: Oct 6th

Apple Inc. designs, manufactures, and markets mobile communication and media devices, and personal computers to consumers, and small and mid-sized businesses; and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. Company description from FinViz.com.

Support held and it is time to get long. We have been short Apple for the post announcement decline but support held and the Nasdaq looks like it wants to rally.

Apple earnings are Oct 30th and everyone will be looking for good news about the new iPhone products. Since support held, I a recommending we take a short term November position and try to catch the earnings run.

Morgan initiated coverage with an outperform rating and the second highest price target on the street at $272. That would be a 21% gain from Friday's close. The analyst believes the service business is growing faster than people expect and the average selling price will also be higher. He thinks Apple Music will contribute $30 billion in revenue by 2025 and Apple Pay will contribute $6 billion. The average price target is $232.13.

Premiums are high because expectations are high. I am using two different entry triggers and strike prices in order to not be forced into a spread. ONLY enter whichever trigger is hit first. Do NOT enter both.

Update 10/20: Wedbush initiated coverage with an outperform rating and $310 price target. That is 40% over the current price. Apple also announced a new launch event for October 30th with no hint of what it is going to unveil. It could be any number of new product refreshes from iPads, laptops, Mac Mini, AirPods, etc. This announcement should be good for the stock price because it will keep Apple in the headlines.

Update 10/31: Apple shares rallied big with a $5.56 gain ahead of earnings. This stock could move $10 on Friday morning and it could move in either direction. We are fractionally profitable with the Dec $225 call and $6 OTM. The wise move would be to exit at Thursday's open since the futures are up strongly tonight. You could pocket some change but you would take the $7.15 premium out of play. If Apple crashes and burns on Friday, that premium will evaporate in a heartbeat. I am recommending we stay in the position but sell a December $240 call, currently $2.80. This will limit our upside to $7.85 but protect our premium if the stock crashes. Since the prior high was $233, the odds are good the stock will not move much over that level if at all. We will decide Thursday night if we are going to exit at the open on Friday or continue holding the position.

Update 11//1: Apple earnings are likely to tank the market on Friday. Apple shares represent around 20% of most tech ETFs and a significant weighting in the Dow and Nasdaq. Apple beat on earnings but missed on revenue, the number of phones sold and lowered guidance for Q4. In addition, they said they would no longer disclose the number of phones sold and that was very negative for sentiment.

Apple shares fell $15 in afterhours. After reading a dozen commentaries, mostly negative, I believe our first loss may be the smallest loss. Apple shares could easily continue lower. We sold a short call at the open to hedge against a decline but a $15 drop is still going to be painful. We know premiums are going to drop at the open but there may still be some investors expecting a rebound and holding their positions. I am recommending we close the long position at the open and the short position a minute later. We want to capture any remaining bullishness on the opening print but then let that expectation decline on the short call.

Position 10/11/18:
Closed 11/2: Long Dec $225 call @ $7.15, exit $3.49, -3.66 loss.

Position 11/1/18:
Closed 11/2: Short Dec $240 Call @ $2.86, exit .66, +2.20 gain.
Net loss $1.46.

Previously closed 10/10: Long Dec $235 Call @ $6.33, exit $5.21, -1.12 loss.


CAT - Caterpillar - Company Profile

Comments:

No specific news. Excellent rebound from support at $112.50.

Original Trade Description: Oct 31st

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for construction, resource, and energy and transportation industries. Its Construction Industries segment offers asphalt pavers, backhoe loaders, compactors, cold planers, compact truck and multi-terrain loaders, forestry excavators, feller bunchers, harvesters, knuckleboom loaders, motorgraders, pipelayers, road reclaimers, site prep tractors, skidders, skid steer loaders, telehandlers, track-type loaders, wheel excavators, and track-type tractors. The company's Resource Industries segment provides electric rope and hydraulic shovels, draglines, track and rotary drills, hard rock vehicles, large track-type vehicles, large mining trucks, longwall miners, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, landfill compactors, soil compactors, machinery components, electronics and control systems, select work tools, and hard rock continuous mining systems. Its Energy & Transportation segment offers reciprocating engine powered generator sets; reciprocating engines; integrated systems used in the electric power generation industry; turbines, centrifugal gas compressors, and related services; integrated systems and solutions for the marine and oil and gas industries; remanufactured reciprocating engines and components; and diesel-electric locomotives and components, and other rail-related products and services. Its All Other operating segments manufactures filters and fluids, undercarriage, tires, rims, ground engaging tools, fluid transfer products, precision seals, and rubber sealing and connecting components; parts distribution; and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Deerfield, Illinois. Company description from FinViz.com.

Caterpillar shares were crushed after earnings. They reported a 47% increase in profits but that was not good enough. In Q1 earnings rose 99% and 120% in Q2. Expectations were high. Earnings per share were $2.86, up from $1.95 but just barely over estimates for $2.85. The company affirmed their full year guidance of $11-$12 saying nothing had changed since the last quarter. That should be good news. Any changes would have been expected to be negative. They said the China market remained healthy and produced a 40% rise in excavators in 2018. They previously guided for a $100-$200 million hit from tariffs and said with the year 75% over it looked like the impact would be at the lower end of the range.

In any normal period a 47% increase in profits would be outstanding. Given the sharply declining market and the dumping of anything related to China and tariffs, CAT shares were crushed.

Deutsche Bank issued a buy rating because of a rising equipment upgrade cycle in mining and energy. The analyst said an above average upgrade cycle could lead to a 30% increase in revenues in coming quarters with oil and gas revenues rising 10%. The analyst said CAT was trading at a 45% discount to the S&P and the biggest discount in 20 years. This was BEFORE they reported earnings.

I think CAT has been severely oversold. The stock has found support at $112.50 and actually rallied 3% on Wednesday.

Earnings January 22nd.

I am recommending we buy a February option to get behind the earnings event and retain expectation premium.

Position 11/1:
Long Feb $130 Call @ $5.70, see portfolio graphic for stop loss.


CSCO - Cisco Systems - Company Profile

Comments:

No specific news. Holding at resistance at $46 while Nasdaq remains volatile. The company said they would hold an investor event on Nov 27th at 3:PM ET.

Original Trade Description: Oct 13th

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry worldwide. The company offers switching products; routing products that interconnect public and private wireline and mobile networks; data center products; and wireless access points for use in voice, video, and data applications. It also provides collaboration products comprising unified communications, TelePresence, and conferencing, as well as the Internet of Things and analytics software. In addition, the company offers security products, including network and data center security, advanced threat protection, Web and email security, access and policy, unified threat management, advisory, integration, and managed services; and other products, such as service provider video software and solutions, and cloud and system management products. Further, it offers technical support services and advanced services; and hyperconvergence software, cloud calling and contact center solutions, and AI-driven relationship intelligence platform. The company serves businesses of various sizes, public institutions, governments, and service providers. It sells its products directly, as well as through channel partners, such as systems integrators, service providers, other resellers, and distributors. The company was founded in 1984 and is headquartered in San Jose, California. Company description from FinViz.com.

Cisco shares made a new high on Oct 3rd then followed the Nasdaq lower for more than a 10% drop. There is nothing wrong with Cisco. This was strictly a market meltdown and prodit taking on the major tech stocks.

Earnings November 14th.

Position 10/15/18:
Long December $47 call @ $1.33, see portfolio graphic for stop loss.


MSFT - Microsoft - Company Profile

Comments:

Shares are still weak after the company closed the Github acquisition for MSFT stock. Insiders at Github were dumping shares. On Tuesday, there was a 52 million share block being shopped and that depressed the price significantly. Those pressures appear to be continuing.

Original Trade Description: Sept 29th

Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates through Productivity and Business Processes, Intelligent Cloud, and More Personal Computing segments. The Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, such as Office, Exchange, SharePoint, Skype for Business, Microsoft Teams, and related Client Access Licenses (CALs); Office 365 consumer services, including Skype, Outlook.com, and OneDrive; LinkedIn online professional network; and Dynamics business solutions comprising financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and medium businesses, large organizations, and divisions of enterprises. The Intelligent Cloud segment licenses server products and cloud services, such as SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; enterprise services, including premier support and Microsoft consulting services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions, as well as providing training and certification to developers and IT professionals on Microsoft products. The More Personal Computing segment offers Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, and MSN display advertising; devices comprising Surface, PC accessories, and other intelligent devices; Xbox hardware and software and services; and Bing and Bing Ads search advertising. The company markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.

This is a no brainer recommendation. If the market is going to rise over the next two months, the Nasdaq is likely to be the leader. Microsoft has no skeletons in the earnings closet and hardly a day goes by without some new announcement.

Earnings are Oct 22nd and we will exit the day before.

Shares have been consolidating at the recent highs just under $115. A breakout in a positive market should hit $120 relatively easy. In theory we should wait and buy a dip to the 30-day but with a market rally potentially imminent we should take a chance now.

Update 10/13: Microsoft was upgraded by Macquarie from hold to outperform. They raised the price target from $106 to $121. The analyst said after two quarters of robust earnings they expect the trend to continue. Sarah Hindlian said the cloud would be a $277 billion market by 2021 and gaming would rise to $180 billion. Both will offer significant opportunities for Microsoft. Shares rallied $3.66 on Friday.

Update 10/24: Microsoft reported earnings of $1.14 that beat estimates for 94 cents. Revenue of $29.08 billion beat estimates for $27.89 billion. All the major segments reported huge revenue and earnings gains. Shares recovered from the $6 drop in the normal session to rebound to $104.40 in afterhours.

Position 10/5/18:
Long Dec $120 Call @ $1.98, see portfolio graphic for stop loss.

Position 10/11/18:
Long Dec $110 Call @3.20, see portfolio graphic for stop loss.

Previously closed 10/4: Long Dec $120 call @ $2.27, exit $1.98, -0.29.


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

Shares are still holding at $170 thanks to Friday's weak Nasdaq. The 200-day is $172.18

Original Trade Description: Oct 6th.

Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 Index®. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq declined -3.2% or -257 points last week. The Nasdaq Composite broke through the support of the 50-day but honored the 100-day when it came within 2 cents at the low for the day.

I believe investors will buy this dip just like they bought the multiple dips over the last six months. Tech stocks are the highest growth stocks and the least impacted by tariffs.

Position 10/8/18:
Long Dec $187 Call @ $3.00, see portfolio graphic for stop loss.

Position 10/11/18:
Long Dec $177 Call @ 4.18, see portfolio graphic for stop loss.




SPY - S&P SPDR ETF - ETF Profile

Comments:

The SPY faded on Friday thanks to Apple and China. The market was due for a rest and those were convenient excuses.

The 200-day average is now 276.19 and should be resistance.

Original Trade Description: Sept 26th

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol SPY. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest ETF in the world.

The SPY has pulled back to the 30-day average and actually a steeper decline than the S&P-500. The SPY is near support at the 30-day average.

I believe the market is going to move higher during the Q3 earnings cycle. Once we are out of this quarter after Friday's close, we could see the market begin to turn higher with just two weeks before the Q3 cycle begins.

This may seem counter intuitive with the market weak over the last several days but the fundamentals remain strong. We just need to get past the various headlines and out of the quarter. Thursday will be an especially bad headline day so expect some volatility.

Position 10/5/18:
Long Dec $295 Call @ $3.97, see portfolio graphic for stop loss.

Position 10/11/18:
Long Dec $285 Call @ $4.18, see portfolio graphic for stop loss.

Previously closed 10/4: Long Dec $295 Call @ $4.38, exit $3.65, -.73 loss.


XLC - S&P Communication Services ETF - ETF Profile

Comments:

No specific news. The XLC floundered with the Nasdaq with a log of help from Google posting big losses.

Original Trade Description: Sept 22nd

The Communication Services Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Communication Services Select Sector Index (the "Index"). The Index seeks to provide an effective representation of the communication services sector of the S&P 500 Index. Seeks to provide precise exposure to companies from the media, retailing, and software & services industries in the U.S. and allows investors to take strategic or tactical positions at a more targeted level than traditional style based investing. Description from State Street Global Advisors.

With FB, Alphabet, ATVI, NFLX, EA, TWTR, TTWO and TRIP all moving to the previously dormant XLC sector ETF, the odds are good that a lot of portfolio managers will shift investments to the ETF in order to be exposed to those stocks.

The downside to this theory is the 15 or so unwanted telephone, newspaper and TV stations in the same ETF. Fortunately, those stocks I listed above make up 59.5% of the ETF so they should control the direction. After seeing the big cap techs decline for no particular reason over the last two weeks it seems obvious now that they were victims of the S&P/MSCI index/ETF restructuring.

I am going to recommend an inexpensive November option because a rebound, if it is going to happen, should be relatively quickly.

Position 9/24/18:
Long Nov $50 Call @ $1.30, see portfolio graphic for stop loss.

Position 10/11/18:
Long (2) Nov $50 Calls @ .40 each.

Average cost in position = 70 cents.


BEARISH Play Updates

No Current Puts