Interest rates, oil prices, housing declines and now international murder mysteries. The global markets declined on the potential impact of sanctions on Saudi Arabia and their claims of stronger retaliation if sanctions were imposed. The Saudi market fell 7% at the open on Sunday but recovered slightly to close with just under a 4% loss. The global markets declined on worries they would spike oil prices in retaliation. One commentary said "if you think $85 oil is bad wait until $100 or even $200 oil." Saudi could easily cause that to happen.

With that backdrop the U.S. markets opened mixed and never managed to rebound much over the flat line. As the day drew to a close, sellers appeared and the big cap indexes declined to close near the lows for the day.

After the bell news broke that Saudi Arabia was going to spin a story claiming the death was an accident that occurred during an interrogation by a rogue cell in the government. They will reportedly say that King Salman did not authorize it and had no knowledge and would take appropriate action on the perpetrators. The futures spiked to +11 on the news.


Also complicating the day was a Goldman warning on slowing sales at Apple. The analyst said overall smartphone sales in China were declining rapidly and this would drag on Apple's earnings since 19% of sales came from China in the same quarter in 2017. Shares declined $4.75 to erase 32 Dow points and 20 Nasdaq points.

Comments out of China that the US negotiating team was very confusing to deal with suggested little progress in the trade talks. That also weighed on the markets.

The economic calendar for Tuesday is led by the NAHB Housing Market Index and industrial production. The housing index could depress the market if it weakened significantly. The big event for the week is the FOMC minutes on Wednesday. As always, the focus on interest rate hikes will be the key.


The Q3 earnings cycle accelerates on Tuesday with Goldman, IBM and Netflix leading the pack. This is an interesting mix of companies this week. Coming up in the following week will be dozens of big cap techs and Dow components. This week is just the pre-show.


The S&P gave back much of Friday's gains thanks to the big cap tech stocks. Amazon, the Google twins, Nvidia, Adobe and Netflix all posted strong losses and all are S&P 500 stocks. The index is holding on the wrong side of the 200-day and we need a strong opening pop on Tuesday to get us back on the positive side.


The Dow has found resistance at 25,500 for the last three days but also support at 25,000. The index is also holding over the 200-day despite not normally being reactive to moving averages. The Dow was handicapped by Apple and Visa and the A/D line was in favor of the decliners. If Apple rebounds on Tuesday, it would help significantly.



It was a negative day for big cap techs and there is no other way to describe it. The biggest of the big caps suffered the most losses. This was a major drag on the Nasdaq indexes even though advancers outweighed decliners 4:3 on the tech index. If the generals are declining the Nasdaq will decline.



The Russell 2000 was the only major index to post a gain. It was not big but it was positive. This was sector rotation back out of large caps with international exposure and into domestic focused small caps and implied safety from geopolitical events in Saudi Arabia.


On a technical basis, I am neutral. I would gladly be a buyer if the Russell 1000 ($RUI) retested support at 1,500 but otherwise there is nothing really supporting the broader market at this level. On a sentiment basis, I am somewhat bullish. We had the big drop, sellers are exhausted, earnings are now in progress and the economy remains very strong. High interest rates are overrated. I would not back up the truck but I would nibble on your favorite stocks.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

AAPL - Apple Inc - Company Profile

Comments:

I added Apple in a similar position in the LEAPS newsletter on Sunday with June strikes. I looked at several hundred other stocks on Monday and this one was still my favorite for risk/reward.

Original Trade Description: Oct 15th.

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 at $216 held after a minor break and it is time to get long. We know when the Nasdaq recovery begins, Apple will be the leader.

Apple earnings are Oct 30th and everyone will be looking for good news about the new iPhone products. Analysts are starting to talk positive about Apple again because of the volume in the new models.

Morgan recently initiated coverage with an outperform rating and the second highest price target on the street at $272. 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.

On Monday, we had a battle of competing analysts. Goldman said Apple earnings could slow because of rapidly declining demand in China. The analyst said there were signs that overall smartphone demand in China could decline by 15%. For the current quarter they are predicting 80 million iPhones, which includes 16% from China, down from 19% in the year ago quarter. He covered himself saying demand for the big screen phones could offset the revenue loss from slower sales.

Also on Monday TF International Securities analyst Ming-Chi Kuo said consumers will be "flocking" to the new XR phone because of the features and lower price. He raised his XR unit estimates for the current quarter by 10% to between 36-38 million. He raised estimates for all models to 78-83 million, up from 75-80 million. He believes the demand for the XR is better than it was for the iPhone 8 last year because of the XRs larger display, longer battery life and new form factor. The $749 phone is cheaper than the $999 starting price on the high-end phones and could attract a much larger upgrade cycle. The phones go on sale on Oct 19th.

Shares declined on the Goldman comments and then rose in afterhours on the Kuo comments.

Premiums are high because expectations are high. I do not want to make this a spread. I expect Apple to be significantly higher in the months ahead. Because of the high premiums we either have to use a spread or offset the position with a short put. That is the strategy I am recommending. This has risk. If Apple dips under $190, we could be put the stock. In order to prevent that we will be using stop losses on the position.

Buy Jan $230 call, currently $6.70, stop loss $211.85.
Optional: sell short Jan $190 put, currently $3.30, stop loss $211.85.
Net debit $3.40.




SPY - S&P SPDR ETF - ETF Profile

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 200-day average and just below support at $270.

I believe the market is going to move higher during the Q3 earnings cycle. Even if we do not see a Q3 earnings rally the longer-term outlook is positive.

The 12 months after mid-term elections have seen the S&P gain an average of 15% for the last 18 midterms. That is 72 years and the S&P has gone up every time. There are almost no trends in the market that repeat 100% of the time.

The three quarters starting with Q4 in a mid-term election year average a 19% gain since 1950.

With the economy growing at more than 4% GDP, unemployment at record lows and Q3 earnings expected to show 20% growth or better, this should be a good opportunity for the trend to repeat.

If we do get a strong rebound rally over the next 3 months that would be 25 SPY points if it only retested the recent high.

Buy Jan $285 call, currently $3.83, no initial stop loss due to market volatility.





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


ADBE - Adobe Systems
The long position was entered on Tuesday then stopped at $242.50.

JD - JD.com
The short position was stopped at $24.55.


Original Play Recommendations (Alpha by Symbol)


ADBE - Adobe Systems - Company Profile

Comments:

Adobe crashed with the market to test the 200-day average, which has been support since January 2016. Today, after high dollar Nasdaq growth stocks were downgraded, the stock declined $11 in regular trading. After the close Adobe affirmed its previously rosy outlook and even increased guidance. Shares rallied $14 in afterhours and will probably rally more on Tuesday. Unfortunately, we were stopped out on Wednesday's market drop.

Original Trade Description: Oct 8th.

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. Its 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, media optimization, digital experience management, cross-channel campaign management, audience management, and video delivery and monetization solutions 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 e-learning 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. The company was founded in 1982 and is headquartered in San Jose, California. Company description from FinViz.com.

Adobe reported a 57.3% increase in earnings to $1.73 in the recent quarter. That was above their own guidance for $1.68. Revenue was $2.29 billion and also beat guidance for $2.24 billion. Digital media segment revenue rose 21% to $1.61 billion. Annually recurring revenue rose $339 million to $6.4 billion. Some 90% of Adobe's revenue came from recurring sources. Deferred revenue rose 23% to $2.71 billion.

They guided for the current quarter for 22% revenue growth to $2.42 billion and $1.87 in earnings. Both numbers were slightly ahead of Wall Street estimates.

Earnings December 13th.

Adobe has a fantastic chart with a steady incline and routine declines for profit taking. The 60-day average has been normal support. However, in the extreme bouts of profit taking the 100-day average has been support since December 2016. The stock penetrated that average intraday on Monday but rebounded to close above it.

I believe this is a buying opportunity considering it was setting new highs last week. Unfortunately, premiums are expensive so we need to make this a spread. We are going to use the December options to maintain that earnings expectation premium but we will not hold over the report.

Position 10/9/18:
Closed 10/15: Long Dec $265 call @ $9.18, exit $6.35, -2.83 loss.
Closed 10/15: Short Dec $285 call @ $4.18, exit $2.39, +1.79 gain.
Net loss $1.04.




QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

The Nasdaq 100 Index posted a sharp decline last week and briefly hit correction territory. The 200-day at 7,041 was broken on Thursday but recovered on Friday. I considered recommending adding a couple additional contracts to this position with the close today at 84 cents. However, the Nasdaq was the weakest index today and I think I will wait until we have a confirmed rebound of more than one day to add to the position.

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.




UTX - United Technology - Company Profile

Comments:

No specific news. United has been riding the Dow roller coaster and is holding at the 200-day average. Earnings are next Tuesday before the open. I am recommending we close the position at the open on Monday.

Original Trade Description: Oct 1st.

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.

Position 10/2:
Long Dec $145 call @ $3.55, see portfolio graphic for stop loss.




BEARISH Play Updates

JD - JD.com - Company Profile

Comments:

Chinese stocks spiked on Friday when news broke that Trump was going to meet with President Xi at the G20 meeting. We were stopped on the spike.

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:
Closed 10/12: Long Jan $23 put @ $1.49, exit $1.56, +0.07 gain.




VXX - Volatility Index Futures - ETF Description

Comments:

Last Monday the VXX was near historic lows at 26 and now we are 9 points higher. This is temporary. The VXX always goes back to single digits when the market is in rally mode.

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.

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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.

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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.