S&P futures are down -24 thanks to a major meltdown in Asian markets. As I type this the Nikkei is down -2.3%, Kospi -2.3%, Hang Seng -2.03%, etc. The South Korean Kospi is at the lowest level since March 2017. Things are not shaping up for a good open for the US markets.


Rising global tensions from a dozen different reasons were being blamed. The weak us markets, up until recently a strong port in a global economic decline, added to the unrest. If the market in the strongest economy is faltering then weaker global markets have no chance.

We talk about the decoupling scenario all the time when these types of situtations exist. The US can remain decoupled in the early stages but as the global weakness increases the US is eventually dragged into the swamp.

This could be what we are seeing now. I wrote last week about the YTD declines in multiple major markets with countries down 15-17% or more while we were only 2-3% below our highs. We are a lot lower now and should the futures hold overnight we could be setting new zecond half lows on Tuesday.

The Dow was weak on Monday but the Nasdaq managed to close in positive territory. The positive Nasdaq kept the Russell from crashing and it remained near the flatline.


Stressing investors was the slight upward tick on the ten-year yield towards the 3.2% range. With the Fed comments suggesting at least four more quarterly rate hikes the rate worries are growing. The housing market has declined for five consecutive months and retailers that depend on housing are falling sharply. Banks are tanking for no particular reason. The KBE ETF declined 3% on Monday. With rates rising, banks should be doing great.



The S&P closed well below the 200-day average and right on the verge of cracking 2,750 and targeting 2,700. That 2,700 level is a red line for the market. A breakdown there would trigger an entirely new round of selling.


The banks and the industrials tanked the Dow. Multiple comments about tariffs from industrial companies in their earnings commentary, tanked the prices for those companies yet to report. Caterpillar and United Technology are a couple of examples. The Dow is holding over the 200-day at 25,159 with 25,000 as secondary support. A breakdown there would be a major blow to sentiment. Dow futures are down 200 points tonight.



The Nasdaq remained positive and helped to hold up the Russell. Nasdaq futures are down 60 and Russell futures down -12. If these numbers hold overnight we will break some critical support levels on Tuesday.



The Russell is threatening to break critical support at 1,540 and the next target could be around 1,495. This would be a blow to market sentiment and hinder any bigcap rebound attempt.


The Richmond Fed manufacturing Survey is not a market mover unless there is a major miss of forecasts. That is not likely to happen. The Beige Book and the GDP are the two most important events for the week.


There are ten Dow components reporting this week. This could create additional volatility is we ses any post earnings pops or drops.


I am recommending we stand aside until this current bout of market weakness plays itself out. The US economic fundamentals are strong as are the corporate earnings. These will eventually win in the current pricing battle. We just have to wait until the volatility passes and cooler heads prevail.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

With the S&P futures down -24 tonight I am not going to add a new position. There is no telling where we would get filled and the option premiums could be extreme. We need to just stand aside until the market stabilizes.

If you want to try and buy a dip I would look at Home Depot around $172-$175. Those two hurricanes are going to power their earnings for the next three quarters.

I would buy Adobe on any material dip. I hate that we got stopped out the prior week. That is a very strong stock being knocked around by the volatility.

Lastly, the FANG stock everyone loved to hate is Facebook. They have been punished severely since July but shares still refuse to retest $150. There has been a lot of high volume selling but buyers are waiting. Earnings are Oct 30th and there WILL be a big move only the direction is unknown and the option premiums reflect this. I would be a buyer with a short-term option and realize it could go to zero in a heartbeat or be an instant double after earnings.



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


AAPL - Apple Inc
The long position was entered at the open on Tuesday.

SPY - S&P-500 ETF
The long position was entered at the open on Tuesday.

UTX - United Technology
The long position was closed at the open on Monday.


Original Play Recommendations (Alpha by Symbol)


AAPL - Apple Inc - Company Profile

Comments:

Apple posted a decent gain today and is holding well over the support at $117. A flurry of analysts have started recommending buying Apple before earnings because of rising ASP numbers and strong demand for the new product mix. They also have a new product announcement on Oct 30th in New York. That could also lift shares ahead of earnings, which is Nov 1st. Expectations are for $2.90 and $61.41 billion.

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.

Position 10/16:
Long Jan $230 call @ $7.35, see portfolio graphic for stop loss.
Optional: Short Jan $190 put @ $2.90, see portfolio graphic for stop loss.
Net debit $4.45.




QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

The Nasdaq 100 Index has been holding over support at the 200-day. That will probably break on Tuesday with the S&P futures down -22 Monday night. I am leaving off a stop to avoid the volatility. Fundamentals are still strong.

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.




SPY - S&P SPDR ETF - ETF Profile

Comments:

The S&P has been very volatile but the SPY closed today only 1 point from where we entered last week. Tuesday is shaping up to be a very bad day. Maybe we will get lucky and see a capitulation event.

Original Trade Description: Oct 15th.

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.

Position 10/16:
Long Jan $285 call @ $4.45, see portfolio graphic for stop loss.




UTX - United Technology - Company Profile

Comments:

No specific news. Industrial earnings have included warnings or concerns of the impact of tariffs and shares of UTX crashed below support at the open. With earnings tomorrow, investors were running for cover. We closed the position at the open.

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:
Closed 10/22: Long Dec $145 call @ $3.55, exit .55, -3.00 loss.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

The VXX is retaining volatility with the Dow's wild swings. Tuesday could be extreme. 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.

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.