The resolution of the trade impasse with Canada produced another big cap short squeeze. Most big cap tariff sensitive stocks exploded higher at the open and the Dow sprinted to an intraday high of 279 before traders came to their senses. The short squeeze was sold at noon and the S&P closed 13 points below its intraday high but maintained a healthy 10-point gain.


The trade deal came down to the last minute as political deals normally do. Rarely does anyone capitulate in advance. The party under pressure waits until the last possible minute in hopes of working out a better deal.

The Canadian agreement will be merged with the Mexican agreement and the new USMCA as it is called will be submitted to lawmakers to be approved. While this removes several layers of trade concerns from the market, the biggest problem remains. China is not in any hurry to negotiate and will wait until after the midterms to see if the political winds change.

This did not stop the tariff sensitive stocks from exploding higher. Boeing (BA) jumped on the trade deal and news of a $2.5 billion order of 787-9 Dreamliners from United. The airline plans to have 40 in its fleet by year's end and another 24 on order. The $10 spike in Boeing added 70 points to the Dow.


Tesla shares fell $43 on Friday and rebounded $45 today after Elon Musk announced a settlement with the SEC that will leave him as CEO of the company. Shorts celebrating their good fortune on Friday were crying again at Monday's open.


We have a busy calendar for the rest of the week with Fed Chairman Powell speaking at noon tomorrow followed by the ADP employment report on Wednesday. The Nonfarm payrolls close the week with expectations for just under 200,000 jobs.


This is a light week for earnings with Paychex, Lennar, Costco and Constellation Brands the highpoints for the week. Costco would be my pick for a positive earnings surprise. They seem to be doing everything right.


The S&P briefly traded in new high territory before fading in the afternoon. The index closed at the top of its recent congestion range and well under resistance at 2,950. However, the 30-day average has not been touched since mid August and the positive trend is still intact. With the Q3 earnings cycle just ahead, there is a good chance we will see a continued rally.


There was an interesting group at the top of the Dow leader board. The continued surge in crude prices lifted Chevron and other stocks were spiking on short squeeze pressures. The Dow rebounded from prior resistance, which is now uptrend support. The index came close to a new high but could not seal the deal after sellers returned in the afternoon. I would not be surprised to see the Dow retuen to 26,500 before moving higher.



The Nasdaq 100 large cap index traded at a new intraday high and closed only 15 points below a new closing high. The Nasdaq Composite struggled because of the large number of small cap stocks in decline. They compoetely overpowered the gains from the large caps in that index.

The Nasdaq Composite lost 9 points but the big news was the 70-point decline from the intraday high. This was a massive implosion driven by the small caps.




The Russell 2000 was crushed by investors fleeing the tariff safety of small cap domestic stocks and running towards the beaten down large caps. The Russell lost 23 points and close 30 points below the intraday high. The Russell closed below uptrend support and below the 100-day average. With the A/D line 5:1 decliners over advancers, this could be considered a capitulation day. That does not mean there will not be any further selling but the pace could moderate.


I would continue to recommend cautiously buying the dips. The big cap indexes are right at new highs and with Q3 earnings just ahead the market should continue higher. Headlines wil continue to provide daily direction but the overall trend should remain positive.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

UTX - United Technology - Company Profile

United Technologies Corporation provides technology products and services to building systems and aerospace industries worldwide. Its Otis segment designs, manufactures, sells, and installs passenger and freight elevators, escalators, and moving walkways; and offers modernization products to upgrade elevators and escalators, as well as maintenance and repair services. The company's UTC Climate, Controls & Security segment provides heating, ventilating, air conditioning, refrigeration, fire, security, and building automation products, solutions, and services for residential, commercial, industrial, and transportation applications. This segment also offers building services, including audit, design, installation, system integration, repair, maintenance, monitoring, and inspection services. Its Pratt & Whitney segment supplies aircraft engines for commercial, military, business jet, and general aviation markets; and provides aftermarket maintenance, repair, and overhaul, as well as fleet management services. The company's UTC Aerospace Systems segment provides electric power generation, power management, and distribution systems; air data and aircraft sensing systems; engine control, intelligence, surveillance, and reconnaissance systems; engine components; environmental control systems; fire and ice detection, and protection systems; propeller systems; engine nacelle systems; aircraft lighting and seating, and cargo systems; actuation and landing systems; space products and subsystems; and aftermarket services. United Technologies Corporation offers its services through manufacturers' representatives, distributors, wholesalers, dealers, retail outlets, and sales representatives, as well as directly to customers. United Technologies Corporation was founded in 1934 and is headquartered in Farmington, Connecticut. Company description from FinViz.com.

UTX is acquiring Rockwell Collins (ROK). An analyst at Morgan Stanley said the acquisition of Rockwell Collins is proceeding and should close in Q3. The acquisition increases the potential for restructuring and the potential spin off of non-core assets in order to concentrate on the profitable divisions. The analyst believes Rockwell Collins will help lift earnings to $7.60 in 2019 and $8.20 in 2020. The stock was resumed at Morgan Stanley with an overweight rating and $160 price target. Barclays has an overweight rating and $157 price target.

Last week the company received approval for the Rockwell deal from the Justice Dept but they have to sell two Rockwell businesses. One of them sells de-icer systems and the other sells horizontal stabilizer actuators. The EU approved the deal in May. The last approval needed is from China and that could drag on given the tensions between the U.S. and China. They already killed the Qualcomm/NXP Semiconductor deal through a lack of action.

UTX recently won a $2 billion deal for the propulsion systems on the F-35 joint strike fighter. This is the 11th award and will support all three variants of the fighter. The award is for 135 engines, production support, program management, engineering support, spare modules and spare parts. This contract is expected to reduce the price of the engines by as much as 3.39% compared to the 10th award.

In Q1 United's revenue rose 18% on the commercial segment and 13% on the military segment.

For Q2, UTX reported earnings of $1.97 that beat estimates of $1.86. Revenue rose 9% to $16.71 billion and beat estimates for $16.27 billion. They raised their full year guidance from $6.95-$7.15 to $7.10-$7.25. They raised revenue guidance from $64.0-$64.5 billion to $63.5-$64.5 billion.

Earnings Oct 23rd.

On September 21st, UTX said it was going to acquire S2 Security for $2.48 billion. The company is based in Massachusetts and manufacturers IP-based physical security and video management systems for healthcare, education and manufacturing companies around the world. UTX already has a portfolio of security offerings and this will enhance that business.

Shares declined on the news and traded sideways for a week. There was a minor bump on Monday on the Canadian trade deal. I believe UTX is about to move higher to make new highs after the consolidation.

With earnings only three weeks away we will decide a couple days before whether to hold over or not.

Buy Dec $145 call, currently $3.65, stop loss $137.35.





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


JD - JD.com
The short position was entered at the open on Tuesday.


Original Play Recommendations (Alpha by Symbol)


DLTR - Dollar Tree - Company Profile

Comments:

No specific news. Shares broke below support with the Nasdaq weakness. I had the stop loss too low and I wish we had been stopped out on the break. I raised it to just below Friday's low and will keep moving it higher if the stock continues its rebound. There was no news to cause the drop.

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 100 Index posted a decent gain on Monday as the overall market rallied. The Nasdaq Composite posted a loss as small caps declined. The big caps techs should lead any Q3 rally and the QQQ almost made a new high on Monday.

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 continued moving sideways with the Nasdaq weakness. The stock made a new intraday high on Monday but there is no momentum. The strike at $57 is at the money with a $56.58 close but this is an October option. Without a breakout and a big rally, the premium is going to deflate quickly. I am recommending we close the position. That means it will probably spike 5 points over the next two weeks.

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:

Symantec has given back all the post accounting probe gains. Shares fell -2.3% today with the weakness in small caps. The stock has everything going for it now that Starboard is adding 5 directors. They will either turn the company around or sell it quickly. I am going to stick with it for a couple more weeks.

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.

Update 9/24: 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.

Earnings Nov 1st.

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




BEARISH Play Updates

JD - JD.com - Company Profile

Comments:

Stifel warned of a "long path to a margin ramp, key-person risk and macro uncertainty" as risks to stock performance. They cut the price target to $32 from $39 but the stock has already declined to $25. Shares are not declining but the trend is still negative.

Original Trade Description: Sept 24th.

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.

Position 9/25:
Long Jan $23 put @ $1.49, see portfolio graphic for stop loss.




VXX - Volatility Index Futures - ETF Description

Comments:

The VXX fell to a new 8-month low close and almost a historic close, which is now 25.84. This will go to single digits eventually because of the futures decay.

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.