The Dow declined sharply but the Nasdaq rebounded from Friday's loss. The Dow was short-term overbought and was due for some profit taking. In situations like that, the talking heads on stock TV will always find something to blame for decline. On Monday they blamed the cancellation of the Chinese trade talks and the warning from China to end the threats or face consequences. I am sure that had something to do with the decline. The Hong Kong index was down the equivalent of -440 Dow points as trade tensions weighed on the Asian markets.

Analysts were calling it a calm decline until the news broke that Rod Rosenstein was on his way to the White House to be fired. The media began running around like their hair was on fire at the thought of a termination of Rosenstein ahead of the midterm elections. Rosenstein appointed Muller and everyone immediately assumed President Trump was firing Rosenstein to put some faithful conservative in his place to end the Muller probe.

After an hour of minute by minute updates, lo and behold, Rosenstein was not fired, Trump was in New York and Kelly and Rosenstein were seen talking calmly at the White House. The DoJ actually had to put out a press release saying he was not fired and he had not resigned.

At a press briefing on UN events President Trump said he and Rosenstein would meet on Thursday and discuss his plans for the future. Everyone was suddenly friends again and the press was scrambling to walk back their earlier reporting.

Investors were not buying any of it and the Dow closed on its lows.

The biggest problem for the market is the impact of the China trade war and the White House political struggles on the midterm elections. A new survey out this week has the democrats retaking the house and senate. That would be a disaster for getting anything else accomplished over the next two years and the impeachment push would be very market negative.

Markets thrive during government gridlock but with the economy doing so well today, nobody wants to see the current environment changed. If the polls continue to show democrats ahead, I would not be surprised to see the market weaken.

The three ring circus that is the Kavanaugh hearings is not helping the overall market. The confirmation process is not normally market moving. It is what the perceived failure will do to the balance of power in the midterm results that will cause trouble.

Politics almost never moves the market for more than a short term volatility event. However, the parties have never been this divisive and it looks like it is getting worse day by day.

Investors hate uncertainty and that is all we have today. The only certainty is the Q3 earnings outlook. Everything else is a swirling caldron of toxic brew.

The S&P was relatively calm. It gapped down 27 points and then traded sideways the rest of the day. Uptrend resistance held and all the activity was at the open. There was no follow through to the selling. Support is well below at 2,865.


The Dow crashed on the impact to the tariff sensitive stocks once again. Boeing, 3M, Caterpillar were at the bottom of the list. Home Depot was a surprising loser on no news. Apple rebounded from the XLK restructure but it is not out of the woods yet. I considered a call play on it today but the options were too expensive.

The Dow was short-term overbought and it was due to rest. Today's decline was not a surprise. We knew late Friday night that the Chinese trade talks had been cancelled. Investors should not have been surprised.



The tech stocks impacted by the restructuring of the S&P SPDR ETFs came roaring back. This is proof the restructuring caused the declines last week. The new weightings of all concerned means index/ETF followers had to bulk up on various big cap techs.

The Nasdaq traded in the middle of its range and neither resistance or support were tested. The Nasdaq is poised to punch through resistance if the Dow will cooperate and not poison market sentiment.



The Russell was a dose of bad news. The Russell traded at a 7-week low intraday and only barely recovered to close back above the 50-day average. A break and close below that level would be a sell signal.


The Tuesday before a Fed meeting announcement is normally positive. However, with President Trump giving a globally televised speech around 10:AM everyone will be on pins and needles worried about what he might say. His last UN speech was relatively calm and I hope this one is perceived the same.


Dow component Nike reports earnings after the close but it will probably get lost in the various political headlines. BlackBerry reports on Friday.


I would continue to cautiously buy the dips until/unless we begin to see some support levels broken. The Q3 earnings and 4.2% GDP should overcome the political minefield we are facing but there is always the chance of a direct hit that knocks us back into last week. Be patient, look for bargains, not just discounted stocks.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

This was one of those days. I looked at nearly 600 charts. The vast majority were bearish. The few decent charts were either up too much over the last couple weeks, premiums were grossly inflated or the bid ask spreads we $2 to $3. I looked at ETFs, index ETFs, energy stocks, small caps stocks, large cap stocks, etc. There was simply nothing I was willing to risk money in a recommendation.


NEW DIRECTIONAL Put PLAY

JD - JD.com - Company Profile

JD.com, Inc., through its subsidiaries, operates as an e-commerce company and retail infrastructure service provider in the People's Republic of China. It operates in two segments, JD Mall and New Businesses. The company offers home appliances; mobile handsets and other digital products; desktop, laptop, and other computers, as well as printers and other office equipment; furniture and household goods; apparel; cosmetics, personal care items, and pet products; women's shoes, bags, jewelry, and luxury goods; men's shoes, sports gears, and fitness equipment; automobiles and accessories; mother and childcare products, toys, and instruments; and food, beverage, and fresh produce. It also provides gifts, flowers, and plants; nutritional supplements; books, e-books, music, movie, and other media products; and virtual goods, such as online travel agency, attraction tickets, and prepaid phone and game cards, as well as consumer electronic products. In addition, the company offers an online marketplace for third-party sellers to sell products to customers; and transaction processing and billing, value-added fulfillment, and other services. Further, it provides online marketing services for suppliers, merchants, and other partners; logistics services for various industries; consumer financing services to individual customers; and supply chain financing services to suppliers and merchants. Additionally, the company offers online-to-offline solutions for customers and offline retailers, as well as online and in-person payment options and customer services. JD.com, Inc. offers its products through its Website jd.com and mobile apps, as well as directly to customers. As of December 31, 2017, JD.com, Inc. operated 7 fulfillment centers and 486 warehouses in 78 cities covering various counties and districts. The company has strategic cooperation agreement with Tencent Holdings Limited and Vipshop Holdings Ltd. JD.com, Inc. is headquartered in Beijing, China. Company description from FinViz.com

According to Jack Ma, JD.com has a flawed business model. The company takes possession of the actual products then ships them all over Asia. Alibaba lets other retailers list products on their websites and just takes a fee.

JD earnings estimates continue to decline. Quarterly earnings estimates continue to decline as JD.com spends more money to develop infrastructure and build out its system.

The founder and 80% owner of JD.com is Richard Liu. He was arrested for rape of a 21-year old student in Minnesota on August 31st. Despite the evidence and complaint by the student, he was let go after 36 hours. The student went to the hospital for a rape test and his DNA was on her sheets. Nobody knows how he managed to get released but being a billionaire has its privileges.

The police dept said it has not decided what charges will be filed and the student has retained a lawyer to sue him. That will be the much better outcome for her.

His arrest caused the stock to drop from $31 to $26 over two days. After trading sideways for three weeks while the parties decide if there will be charges, the stock has begin to decline again. On Monday MKM Partners lowered their price target again and after the incident CLSA downgraded them to a sell.

With profits slipping and the founder in trouble the outlook is fading.

Buy Jan $23 put, currently $1.54, initial stop loss $27.50.





Current Portfolio


Open Positions

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.




Current Position Changes


QQQ - Nasdaq 100 ETF
The long position was entered at the open on Tuesday.


Original Play Recommendations (Alpha by Symbol)


DLTR - Dollar Tree - Company Profile

Comments:

No specific news. Shares rolled over and flattened out with the Nasdaq weakness.

Original Trade Description: September 10th.

Dollar Tree, Inc. operates discount variety retail stores in the United States and Canada. It operates through two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1.00. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables, such as household paper and chemicals, and frozen and refrigerated food; various merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and seasonal goods, which include Valentine's Day, Easter, Halloween, and Christmas merchandise. This segment operates 6,650 stores under the Dollar Tree and Dollar Tree Canada brands, as well as 11 distribution centers in the United States and 2 in Canada, and a store support center in Chesapeake, Virginia. The Family Dollar segment operates general merchandise discount retail stores that offer consumable merchandise, which comprise food, tobacco, health and beauty aids, household chemicals, paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies; and home products, including housewares, home decor, and giftware, as well as domestics, such as comforters, sheets, and towels. It also provides apparel and accessories merchandise comprising clothing, fashion accessories, and shoes; and seasonal and electronics merchandise, which include Valentine's Day, Easter, Halloween, and Christmas merchandise, as well as personal electronics that comprise pre-paid cellular phones and services, stationery and school supplies, and toys. This segment operates 8,185 stores under the Family Dollar brand, 11 distribution centers, and a store support center in Matthews, North Carolina. Dollar Tree, Inc. was founded in 1986 and is headquartered in Chesapeake, Virginia. Company description from FinViz.com.

Dollar Tree posted earnings with a minor hiccup and the stock was crushed. They reported earnings of $1.15 that missed estimates by a penny. Revenue of $5.525 billion narrowly missed estimates for $5.536 billion. Same store sales rose 1.8% to match estimates.

Guidance for the current quarter earnings was $1.11-$1.18 and estimates were $1.16 just barely over the midpoint of $1.15. They guided for revenue of $5.53-$5.64 billion and analysts were expecting $5.58 billon and right at the midpoint. Full year guidance narrowed from $4.80-$5.10 to $4.85-$5.05 and analysts were expecting $5.55. This was the major problem.

However, look at the companies guidance. They had previously $4.80-$5.10 and and they narrowed that same range. It is the analysts that got it wrong. When a company gives guidance and 3-months later reiterates that same guidance, analysts should not be trying to bid up estimates just to play the "mine are bigger than yours" game.

DLTR did what they said they were going to do and they are still forecasting decent earnings for the current quarter. I think they were unjustly the victim of analyst creep. We see this all the time.

Position 9/11/18:
Long Jan $90 call @ $3.30, see portfolio graphic for stop loss.




QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

The nasdaq was volatile last week as S&P restructured their tech ETF the XLK. Volume in the XLK/XLC was multiples of normal. The stocks moving to the XLC ETF and out of the XLK, Google, Facebook and Netflix were all down last week. The change came at the close on Friday. Today, free of the artificial pressures, the Nasdaq rebounded from a dip to the 50-day average at the open and closed positive with the Dow down -181 points.

Original Trade Description: Sept 17th.

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 imploded on Monday with a -114 point decline. The big cap tech stocks were flushed with the emphasis on the FAANG stocks. Since none of those stocks would be impacted by the $200 billion in tariffs, it was an unusual move. However, we did not know until after the market closed that the president had made exceptions for Apple products and some other important tech equipment like Cisco products.

Since we did not know how much the tax would be or what products would be covered, the markets sold off hard into the close. The S&P futures were down over 12 points in the afterhours session but they have recovered to less than -2. The Nasdaq futures were down hard and have rebounded 33 points to currently down -10.

I believe investors will buy this dip just like they bought the dozen or so dips in the long list of tariff headlines. Tech stocks are the highest growth stocks and the least impacted by tariffs.

I am recommending we buy some calls on the QQQ. If the market manages to make new highs over the next 10 days or so, we could be off to the races now that the big $200 billion shoe has dropped and it looks like it will be ignored.

Position 9/18/18:
Long Dec $188 call @ $3.50, see portfolio graphic for stop loss.




SKYY - Cloud Computing ETF - ETF Profile

Comments:

No specific news. Shares moving sideways with the Nasdaq weakness. If we do not get a boost by next week I am going to close this position. I would close it this week but the price is right at the money and the Nasdaq should rally this week.

Original Trade Description: July 9th.

The First Trust Cloud Computing ETF is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before the Fund's fees and expenses, of an equity index called the ISE Cloud Computing Index. The index is a modified equal dollar weighted index designed to track the performance of companies actively involved in the cloud computing industry. To be included in the index, a security must be engaged in a business activity supporting or utilizing the cloud computing space, listed on an index-eligible global stock exchange and have a market capitalization of at least $100 million.

All securities are then classified according to the following three business segments: Pure Play Cloud Computing Companies: Companies that are direct service providers for "the cloud" (network hardware/software, storage, cloud computing services) or companies that deliver goods and services that utilize cloud computing technology. Non Pure Play Cloud Computing Companies: Companies that focus outside the cloud computing space but provide goods and services in support of the cloud computing space. Technology Conglomerate Cloud Computing Companies: Large broad-based companies that indirectly utilize or support the use of cloud computing technology.

The ETF was started in 2011 and now has $1.4 billion in assets. The ETF really took off in 2016 and has been rising steadily. There have been some hiccups recently as some major companies disappointed on earnings and when the Nasdaq corrected in February and March. The ETF has caught fire in the recent tech rebound and with the Nasdaq about to break out to a new high it should continue to do well.

With Q2 earnings over the next six weeks, picking a tech stock gives us a limited time for appreciation and there is always the risk of a disappointment in a stock in the same sector. By using the ETF we can benefit from the tech rally without having too much exposure to a single stock. The idea is to profit from appreciation while reducing volatility.

Shares appear poised to break out to a new high.

Position 7/10/18:
Long October $57 call at $1.25, see portfolio graphic for stop loss.


SYMC - Symantec - Company Profile

Comments:

Today Symantec announced it had concluded the review of its accounting practices and there was no need to restate prior results. The company had seen its shares dropped about 30% when it announced the probe four months ago. The only change in their results was a $13 million sale that was recognized as revenue in Q4 where the audit committee decided $12 million should have been deferred. Shares spiked 4% on the news.

Original Trade Description: August 27th.

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, direct marketing and co-marketing programs, e-commerce and telesales platforms, distributors, Internet-based resellers, system builders, Internet service providers, employee benefits providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Symantec Corporation was founded in 1982 and is headquartered in Mountain View, California. Company description from FinViz.com.

Symantec reported earnings of 34 cents and analysts expected 33 cents. Revenue fell from $1.18 billion to $1.16 billion and barely beat estimates for $1.15 billion. The company guided for Q3 earnings of 31-35 cents and analysts were expecting 37 cents. The guided for revenue of $1.13-$1.16 billion and analysts expected $1.17 billion. The CEO said large multiplatform sales are taking longer to close. Several large deals had been expected to close and it would have lifted them to solid revenue growth. Those deals are still in the pipeline. They signed one deal in Q1 with more than 100,000 users in a single company and there are more to come.

Shares fell -15% on the report. After a minor rebound the shares rolled over again until Aug 16th when Starboard said they had taken a stake and nominated 5 directors. Shares rebounded back to $20 and should continue to creep higher on hopes that Starboard stirs up the board and turns the company around.

Analysts believe there is 30% upside in the stock after the post earnings decline. Having Starboard in the mix could increase that gain. Shares are easing higher after making a 2-year low at $18 in early August. There is limited downside and unlimited upside.

Update 9/17: After the bell today, Symantec named three Starboard nominees to the board. Starboard had nominated 5. The company said it would also negotiate with Starboard for one more seat to be filled at the annual meeting. The managing member at Starboard, Peter Feld, was one of the new board members. Symantec said two current directors would not stand for reelection. When the nominations are completed there will be 13 board members and at least four from Starboard. This should build a fire under Symantec shares. The announcement came too late for the stock to trade in the afterhours session.

Earnings Nov 1st.

Position 8/28/18:
Long Jan $21 call @ $1.26, see portfolio graphic for stop loss.




VXX - Volatility Index Futures - ETF Description

Comments:

The VXX still declined -0.02 today despite the Dow decline. That is pretty remarkable and suggests nobody expects the market to decline.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done five 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a new rally into the Q1 earnings cycle we could see a sharp decline in the VXX over the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

The VXX is hard to short. There are 34.2 million shares outstanding and ShortSqueeze.com says 44.5 million are short. The shares are out there and being traded because the volume on Monday was 46.5 million. More than 221 million traded on Feb 5th. This ETF is a favorite vehicle for the computer traders so the volume is always high. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

Previously: On Feb-5th a reader emailed me saying a friend was short 1,000 shares. When the VXX spiked $21 in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.

We are not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position.

In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better today.

Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!

Position 2/13/18:
Short VXX shares @ $49.16, no initial stop loss.



Prices Quoted in Newsletter

At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.