The Dow rebounded from two days of declines to close at a new high. The other indexes rebounded as well but they closed just short of their recent highs. The volume returned and the overall market was positive. The Nasdaq posted a minor gain of 7 points with the majority of the big cap techs in negative territory. The market is still just passing time until the earnings begin. Wal-Mart was the big gainer and added 24 Dow points.
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.
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
MU - Micron Technologies
The long call position was entered at the open.
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BULLISH Play Updates
ADBE - Adobe Systems - Company Profile
No specific news. Minor gain to a two-week high but we have not reached resistance at $152. Future gains could be slower unless the Nasdaq explodes higher.
Original Trade Description: Sept 27th.
Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.
Adobe reported earnings of $1.10, up 47%, on record revenue growth of $1.84 billion, up 26%. Analysts were expecting $1.01 and $1.82 billion. The company said they added a record number of new subscribers for Creative Cloud during the quarter. Deferred revenue rose to a record $2.2 billion.
The stock was up 52% for the year prior to earnings. Shares were crushed because they had the audacity to guide for the current quarter for revenue of $1.95 billion which matched analyst estimates.
Keybanc reiterated their buy rating and $174 price target. Canaccord Genuity reiterated a buy rating and raised the price target to $170.
Expected earnings Dec 19th.
Shares have begun to rebound from the $144 post earnings low. They were $156 before earnings. The risk here should be minimal.
Long Nov $150 call @ $2.89, see portfolio graphic for stop loss.
ADI - Analog Devices - Company Profile
No specific news. New closing high.
Original Trade Description: Sept 30th.
Analog Devices, Inc. designs, manufactures, and markets a portfolio of solutions that leverage analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems. It offers data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; high-performance amplifiers to condition analog signals; and radio frequency ICs to support cellular infrastructure. The company also provides MEMS technology solutions, including accelerometers used to sense acceleration, gyroscopes to sense rotation, and inertial measurement units to sense multiple degrees of freedom. In addition, it offers isolators for various applications, such as universal serial bus isolation in patient monitors; and smart metering and satellite applications. Further, the company provides power management and reference products; and digital signal processing products for high-speed numeric calculations. Its products are used in electronic equipment, including industrial process control systems, medical imaging equipment, factory automation systems, patient monitoring devices, instrumentation and measurement systems, wireless infrastructure equipment, energy management systems, networking equipment, aerospace and defense electronics, optical systems, automobiles, and portable electronic devices. The company serves clients in industrial, automotive, consumer, and communications markets through a direct sales force, third-party distributors, and independent sales representatives in the United States, rest of North/South America, Europe, Japan, China, and rest of Asia, as well as through its Website. It has a collaboration with TriLumina Corp. to provide illuminator modules for automotive flash LiDAR systems. Analog Devices, Inc. was founded in 1965. Company description from FinViz.com.
Expected earnings Nov 29th.
ADI is a 52-year-old chip company. Yes, they had chips in 1965. The company is doing great and tends to make chips nobody else is making and that gives them an edge. They reported Q2 earnings of $1.26, which rose 54% snf beat analyst estimates at $1.15. Revenue of $1.43 billion rose 65% and beat estimates for $1.40 billion.
They guided for the current quarter for earnings of $1.29-$1.43 and analysts were only expecting $1.25. Revenue guidance was $1.45-$1.55 billion and analysts were expecting $1.46 billion.
Shares gapped up on the late August earnings then worked through the post earnings depression cycle before moving higher. They closed at a new high on Friday.
Last week IBD raised their composite rating from 93 to 96, which means ADI is outperforming 96% of all stocks in terms of fundamental and technical stock ranking criteria. The stock has an EPS rating of 97 with moderate institutional buying over the last several weeks.
I believe the breakout will continue and we could see $90+ before earnings in November. Options are still cheap because ADI is not a high profile stock.
Long Dec $90 call @ $1.95, see portfolio graphic for stop loss.
CAT - Caterpillar - Company Profile
Goldman reiterated an outperform rating and raised their price target to $158. The analyst expects $8.8 billion in free cash flow over the next two years with most used on stock buybacks with a 12% dividend increase. They are expecting EPS to rise from $10.50 to $11.70.
Original Trade Description: Aug 29th.
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. Company description from FinViz.com.
CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.
The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.
In December they guided for full year 2017 revenues of $38 billion "as a reasonable midpoint expectation." Analyst estimates for earnings of $3.25 were "too optimistic" according to CAT.
In January they guided for $36-$39 billion in revenue and $2.90 in earnings.
In April they guided for $38-$41 billion in revenue and $3.75 in earnings.
In July they guided for $42-$44 billion in revenue and $5 in earnings.
In April they guided for revenue from construction at flat to 5%. In July they guided for 10% to 15% growth.
In April they guided for revenue from mining at 10% to 15%. In July they guided for 20% to 25% growth.
In April they guided for energy revenue at flat to 5%. In July they raised it to 5% to 10%.
After the devastation in Houston, there were new estimates from analysts today for 17% or higher revenue growth in construction equipment.
Shares spiked at the open to a new high before fading slightly with the market. I believe revenue estimates will continue to rise because they are running out of year and their conservative guidance will have to become more accurate.
Earnings October 24th.
CAT is reactive to Dow movement but shares have ignored the recent Dow weakness. Today's close at $116.01 is a record high.
Update 9/13/17: In Tuesday's investor day meeting the new CEO said they were targeting $55 billion in revenue in 2018 with margins of 14%-17% compared to 12% in 2017. That would take them back to 2014 levels before the bear market in commodity/energy began. That is 28% above 2017 levels. He was careful not to call it a target but said that level was achievable if the current rebound in mining, energy and construction continued.
Update 9/18/17: UBS upgraded CAT from neutral to buy and raised the price target from $116 to $140. The analyst said the growing cash position, rising earnings and revenue projections were all bullish. CAT is expected to produce $10 billion in free cash flow over the next two years and return most of that to investors. UBS said a survey of 50 mining companies found that 60% expected to hike new equipment budgets in 2018 and 50% expect to rebuild their entire fleet.
Update 9/21/17: CAT reported a global increase in machine sales of 11% for August, down 1% from July. Total sales in Asia and the Pacific surged 44%, down 1% from July. Despite the minor declines, the business is very strong.
Long Nov $120 call @ $2.75, see portfolio graphic for stop loss.
HRS - Harris Communications - Company Profile
No specific news. New closing high.
Original Trade Description: Oct 2nd.
Harris Corporation provides technology-based solutions that solve government and commercial customers' mission-critical challenges in the United States and internationally. The company operates in three segments: Communication Systems, Electronic Systems, and Space and Intelligence Systems. It designs, develops, and manufactures radio communications products and systems, including single channel ground and airborne radio systems, 2-channel vehicular radio systems, multiband manpack and handheld radios, multi-channel manpack and airborne radios, and single-channel airborne radios, as well as wideband rifleman team, ground, and high frequency manpack radios. The company also offers secure communications systems and equipment, including Internet protocol based voice and data communications systems, as well as single-band land mobile radio terminals and multiband radios comprising a handheld radio and a full-spectrum mobile radio for vehicles. In addition, it provides earth observation, environmental, exploration, geospatial, space protection, and intelligence solutions, such as sensors and payloads, as well as ground processing and information analytics for security, defense, civil, and commercial customers; and positioning, navigation, and timing products, systems, and solutions. Further, the company offers electronic warfare, avionics, surveillance and reconnaissance, command, control, communications, computers and intelligence, and undersea systems and solutions for aviation, defense, and maritime applications. Additionally, it provides managed services that support air traffic management; engineering support and sustainment for ground-based systems; and information technology and engineering managed services to government and commercial customers. The company was founded in 1895. Company description from FinViz.com.
Harris is a very strong defense company. As the description above states, they are very active in defense communications. This is a rapidly growing sector because of eavesdropping, jamming, spoofing or hacking into military communications as a clandestine attack in preparations for times of war. With the advent of drones this is becoming an even bigger area of trouble because a hacked drone can be stolen or even worse, used against friendly forces or population centers. Harris has 17,000 employees and nearly 8,000 engineers and scientists.
Harris shares exploded higher starting on the 14th and topped at $131 on the 20th. The stock is Dow reactive. When the Dow began to dip last week, Harris moved sideways. Shares broke out of consolidation on Monday to close at a new high. With North Korea stirring the pot, defense stocks are being bid higher.
Earnings Oct 31st.
I would not normally recommend a stock with this kind of short-term gain but the new high breakout could be the start of a new leg higher.
Update 10/3/17: Harris was awarded a $765 million contract to provide radios to the Navy for the next 5 years. Two months ago, they won a contract for $255 million to build radios for the US special operations forces. Last year they won part of a $12.7 billion 10-year contract to build radios for the Army.
Long Nov $135 call @ $2.40, see portfolio graphic for stop loss.
HTZ - Hertz Global - Company Profile
Hertz announced a new rewards program where Gold Plus Rewards customers can win up to 1 million rewards points with more than 1,000 runner-up prizes. Shares rose 73 cents to a new 10-month high.
Original Trade Description: Oct 7th.
Hertz Global Holdings, Inc., an airport general use vehicle rental company, engages in the vehicle rental business in North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East, and New Zealand. The company operates in three segments: U.S. RAC, International RAC, and All Other Operations. It offers vehicle rental services approximately from 1,600 airport rental locations and 2,600 off airport locations in the United States; and 1,400 airport rental locations and 4,100 off airport rental locations internationally to business and leisure customers. The company operates the Hertz, Dollar, and Thrifty vehicle rental brands in approximately 9,700 corporate and franchisee locations; and sells ancillary products and services. It also owns the vehicle leasing and fleet management business that operates the Firefly and Hertz 24/7 car sharing rental business in international markets; and sells vehicles through its Hertz Car Sales. As of December 31, 2016, the company operated a rental fleet of approximately 515,900 vehicles in the United States and 196,600 vehicles in international operations. Company description from FinViz.com.
Not only are used cars in short supply but the rental car business is hot in Texas and Florida because of all the insurance agents and construction crews that were imported from all over the country. Carpenters, electricians, home repair people of all types have migrated to the disaster areas. Consumers waiting on insurance proceeds need a way to get around town. Rental cars are scarce.
Not everyone is feeling the love for Hertz. Morgan Stanley recently downgraded the stock to underweight, which was good for a $4 drop but the rebound was quick and the stock closed at a ten-month high on Friday. The investing public sees the demand and they are picking up shares in expectations of good earnings.
Earnings Nov 7th.
I have to reach out to January to get the right option strike. There is no $27.50 for November. Just because we buy time, does not mean we have to use it.
Long Jan $27.50 call @ $2.90, see portfolio graphic for stop loss.
IIVI - II-VI Inc - Company Profile
No specific news. Still cannot break free from prior resistance.
Original Trade Description: Sept 28th.
II-VI Incorporated develops, manufactures, and markets engineered materials, and optoelectronic components and devices worldwide. The company's II-VI Laser Solutions segment provides optical and electro-optical components and materials for use in high-power CO2 lasers, and fiber-delivered beam delivery systems and processing tools, as well as offers direct diode lasers for industrial lasers under the II-VI HIGHYAG and II-VI Laser Enterprise brands; compound semiconductor epitaxial wafers for optical components, wireless devices, and high-speed communication systems applications; and 6-inch gallium arsenide wafers for use in production of high performance lasers and integrated circuits under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brands. Its II-VI Photonics segment provides crystal materials, optics, microchip lasers, and optoelectronic modules for use in optical communication networks, and other various consumer and commercial applications. This segment also offers pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers for terrestrial and submarine applications. The company's II-VI Performance Products segment provides infrared optical components and high-precision optical assemblies for military, medical, and commercial laser imaging applications; and engineered materials for thermoelectric and silicon carbide applications. It serves OEMs, laser end-users, system integrators of high-power lasers, manufacturers of equipment and devices for the industrial, optical communications, military, semiconductor, medical and life science markets, consumers, U.S. government prime contractors, various U.S. Government agencies, and thermoelectric integrators. Company description from FinViz.com.
Expected earnings Nov 6th.
In their recent earnings II-VI reported 50 cents that more than doubled and beat estimates for 35 cents. Revenue rose 13% to $273.7 million and beat estimates for $250 million. More importantly, order backlogs rose to more than $1 billion for the first time. Bookings rose more than 50%. The company guidance was also higher.
Lasers are being used for more applications every day from etching chips in the manufacturing process, producing faster communications in data centers, 3D sensing for autonomous driving and of course Star Wars like directed energy weapons.
Shares closed at a new high on Thursday after a double top in Feb/Jul. With the strong earnings, this breakout to new highs should continue.
Long Nov $45 call @ $1.25, see portfolio graphic for stop loss.
LOW - Lowes Companies - Company Profile
No specific news. Shares saw more weakness with a lack of hurricanes in the forecast.
Original Trade Description: Oct 3rd.
Lowe's Companies, Inc. operates as a home improvement company in the United States, Canada, and Mexico. It offers a line of products for maintenance, repair, remodeling, and decorating. The company provides home improvement products in various categories, such as lumber and building materials, tools and hardware, appliances, fashion fixtures, rough plumbing and electrical, seasonal living, lawn and garden, paint, millwork, flooring, kitchens, outdoor power equipment, and home fashions. It also offers installation services through independent contractors in various product categories; extended protection plans; and in-warranty and out-of-warranty repair services. The company sells its national brand-name merchandise and private branded products to homeowners, renters, and professional customers; and retail customers comprising individual homeowners and renters. As of March 24, 2017, it operated 2,365 home improvement and hardware stores. The company also sells its products through online sites comprising Lowes.com and Lowesforpros.com; and through mobile applications. Company description from FinViz.com.
Earnings Nov 22nd.
Home Depot (HD) is setting new highs every day and it is too late to take a position in that stock. We already have one in the LEAPS newsletter. Lowes is in the same business and is on the verge of clearing resistance to make a four-month high. They will benefit as much as Home Depot in the post hurricane rebuilding boom.
Lowes reported earnings that missed expectations because of some unusual events and they provided weak sales guidance. This was the week before Hurricane Harvey. Shares fell 6% on the news. Credit Suisse said despite the earnings miss there were bright spots and the miss was due to a calendar quirk that reduced sale days in the quarter. Earnings still rose 14%.
Credit Suisse reiterated an outperform rating and $95 price target. Again, this was before the hurricanes. Sales should be significantly higher for Q3.
Shares have rebounded to resistance at $81.50 and should continue to move higher as investors begin to look for underperforming stocks after the big market move higher. Rather than buy stocks at new highs after the big gains they will look for promising stocks with room to run.
Long Jan $85 call @ $1.89, see portfolio graphic for stop loss.
MU - Micron Technology - Company Profile
Shares of Micron rallied more than $1 in the regular session bur fell $2 in afterhours. The company announced a $1 billion secondary offering after the close. The proceeds will be used to pay off debt including $476 million of 7.5% secured notes and various other notes and credit lines. This should be positive for Micron because interest costs will decline but it will add approximately 25 million shares to the float.
Original Trade Description: October 9th.
Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.
Micron is on a roll. Analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.
For Q2, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.
For the current quarter, analysts are expecting $2.14 in earnings on a 60% increase in revenue. They are likely to beat those estimates.
Despite the strong earnings and forecasts, the company trades at a PE of 8.7 when the S&P is trading at 18.0. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.
Shares spiked on earnings and ran up to $40.50. There was a three-day decline of about $1 to consolidate those gains and the stock surged again to close at a new high on Monday. I was hoping for a deeper pullback to buy but it never happened. If we do not buy this breakout, we could still be waiting after it runs up another $5.
I am using January options to capture the earnings expectations in December.
Long Jan $43 call @ $3.05, see portfolio graphic for stop loss.
TER - Teradyne - Company Profile
No specific news. Resistance at $38 was broken with a decent gain. Let's hope this holds.
Original Trade Description: Aug 30th.
Teradyne is a leading supplier of automation equipment for test and industrial applications. Teradyne Automatic Test Equipment (ATE) is used to test semiconductors, wireless products, data storage and complex electronic systems which serve consumer, communications, industrial and government customers. Our Industrial Automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality and increase manufacturing efficiency. In 2016, Teradyne had revenue of $1.75 billion and currently employs approximately 4,400 people worldwide. Company description from Teradyne.
For Q2 they reported earnings of 90 cents compared to estimates for 86 cents. Revenue of $696.9 million beat estimates for $684.2 million. They raised revenue guidance to $455-$485 million and analysts were expecting $445 million.
In just the last 30 days analyst estimates for Q3 have risen from 38 cents to 43 cents. Full year estimates have risen from $1.88 t $1.97 per share. Zacks rates the Electronics Testing Equipment sector as #6 out of 250 industry sectors. Every new electronic device manufactured needs a new set of testing equipment.
Earnings October 26th.
Shares have been stuck under resistance at $35 for six weeks and broke out today. Analysts believe they will continue higher and make new highs. The $36 level is the next resistance.
Long Oct $37 call @ .90, see portfolio graphic for stop loss.
TTC - Toro Co - Company Profile
No specific news. Rebound has faltered. Close the position.
Original Trade Description: October 4th.
The Toro Company designs, manufactures, and markets professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products worldwide. Its Professional segment offers turf and landscape equipment products, such as sports fields and grounds maintenance equipment, golf course mowing and maintenance equipment, landscape contractor mowing equipment, landscape creation and renovation equipment, rental and construction equipment, and other maintenance equipment; snowplows, salt and sand spreaders, and related parts and accessories; sprinkler heads, electric and hydraulic valves, controllers, computer irrigation central control systems, and micro-irrigation drip tape and hose products, as well as professionally installed lighting products. This segment markets its products to professional users engaged in maintaining golf courses, sports fields, municipal properties, agricultural fields, residential and commercial landscapes, and removing snow through a network of distributors and dealers, as well as directly to government customers, rental companies, and retailers. The company's Residential segment provides walk power mowers, riding mowers, snow throwers, replacement parts, and home solutions products, including trimmers, blowers, blower-vacuums, and underground and hose-end retail irrigation products. This segment sells its products to homeowners through a network of distributors and dealers; and an array of home centers, hardware retailers, and mass retailers, as well as through the Internet. The Toro Company was founded in 1914. Company description from FinViz.com.
Earnings Nov 23rd.
When people think about lawn mowers, the gasoline powered push version is the most common vision. However, you do not see people using those versions when grooming sports fields, apartment houses, city green spaces, golf courses, etc. This is Toro country. The large scale riding mower is the bread and butter for companies servicing those large open spaces.
For Q2, revenue rose 4.5% to $627.9 million and earnings rose 22% to 61 cents. That beat estimates for 57 cents. Revenue matched estimates. Toro's professional segment revenues rose 9.5% to $468.6 million.
However, residential revenues declined -9.3% because the company held its "Toro Days" sales promotion in April rather than May. The shift in timing of sales and revenues caused the decline. Shares were crushed despite the valid reason behind the shift in revenue.
Toro raised guidance for the full year from $2.35 to $2.38 and said revenue would rise "at least" 4.5% up from "about" 4.5%.
Shares are recovering from their post earnings crash and closed at a six-week high on Wednesday.
Long Dec $65 call @ $1.65, see portfolio graphic for stop loss.
VIX - Volatility Index - Index Profile
No missile launch from North Korea and a rally in equities pushed the VIX back to 10.
We still have plenty of time. The president is expected to cancel the Iranian nuclear deal this week and call for more sanctions. North Korea is expected to do something stupid again on the 10th or the 18th.
This is the fourth longest period in history of the markets without a 5% decline. While it does not look likely today, it could happen at any time. It has been 465 days since a 5% decline.
Original Trade Description: July 12th.
The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.
The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.
With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.
The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.
What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.
Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.
There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.
Long Nov $15 call @ $1.85, no stop loss, see portfolio graphic for stop loss.
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