The Dow traded in a 900-point range on Monday proving there is still significant indecision. The Dow rose 350 points, then crashed to -550 as headlines and earnings continue to push investors to the sideline. However, the afternoon market crash was very aggressive and short lived and the rebound was equally aggressive. The S&P came very close to touching 2,600 and critical support just above technical level at 2,580.

News that the administration was threatening to add another $267 billion in tariffs on China if the G20 meeting with President Xi did not go well, pushed the market to its lows. This should not have been a surprise since President Trump has been threatening it for the last two months. This just shows how skittish traders are that they would react so violently to old news.

JP Morgan and Goldman Sachs are telling investors to buy the dip but Morgan Stanley came out today saying the current correction was going to turn into a bear market. That was not a trader-pleasing headline.

The Dow rebounded back from its -550 low to lose -245 at the close. The Nasdaq index continue to implode and fall deeper into correction. The sector indexes are rotating daily for the biggest loser spot but they are all movinf deeper into the red.


The calendar is devoid of any material economics on Tuesday but the payrolls and ISM will give analysts something to worry about the rest of the week. Closer to the weekend the angst will begin to rise over the FOMC meeting next week.


The big earnings on tap for Tuesday are GE, FB, MA and PFE. Facebook will get the most headlines by far although GE could be a close second given the new CEO and the restructuring plans. Facebook finally broke support at $150 and traded under $139 intraday. They are extremely oversold and could be due for a monster spike if they beat and guide higher. Analyst worry they are going to guide lower because of added expenses related to hiring 20,000 people to work the fake news problem.


The S&P came very close to the round number support at 2,600 but the real number to watch is the 2,580 support from Feb and April. The S&P was in recession territory at -11.1% today and just barely closed above correction at -9.86%. That is close enough for me but I do not get a vote.


The Dow was crushed by selling in the industrial stocks and Boeing was a major drag with a -$24 drop. That knocked -160 points off the Dow. IBM fell sharply after announcing the acquisition of Red Hat for $34 billion. Apple fell $4 ahead of Tuesday's product event and Thursday's earnings.


The Dow came very close to round number support at 24,000 but the real target on any further decline is 23,500.


The Nasdaq was sinking mostly because of Amazon and Google but Netflix and Nvidia were helping. The index is well into correction territory and the natural target is now 6,800. Earnings from Facebook and Apple will be the big drivers over the next several days. There could be extreme volatility in both directions.



The Russell was the strongest index but it is also the most oversold. It has already reached its critical support from February while the other indexes are still headed in that direction. This was the third day where that level has held. If we could get the Russell to begin leading the charge higher, it could trigger a positive change in sentiment.


The markets are severely oversold. We are due a major bounce but that is exactly what is said at the start of every bear market. While I do not believe this will morph into a 20% decline there is always that possibility. I am an aggressive trader and I would be taking small trading positions on stocks that have stopped declining. I am recommending Home Depot today as one of those stocks. I wanted to buy speculative calls on Facebook but the earnings risk there is too great.

I would urge caution until the market actually turns positive for more thn one day. We know the first strongly positive day is going to produce a major short squeeze but we saw what happened today. The morning rallies have been routinely turned into afternoon declines. Be patient. Wait for the correction to end.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

HD - Home Depot - Company Profile

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.

Home Depot shares have been crushed by the six consecutive months of declining home sales. The rising mortgage rates are also taking a toll. Analysts are worried the remodel boom will stall. This is simply not the case. When homeowners want to move they do buy materials from HD to fix up the house before they sell. However, when they decide they can no longer afford to sell because home prices and interest rates are too high to justify a move they still fix up their homes because they are going to stay there for a while. I cannot quantify the numbers attributable to both scenarios but they are probably not far off. We saw this in the last housing downturn when those not moving decided to remodel instead because it was cheaper.

Analysts should not be worried about Home Depot earnings. The entire Southeast was hit by multiple hurricanes and that means many months of repairs that are far more costly than what homeowners would be spending just to fix up homes prior to selling. There is massive destruction and damage across multiple states and will require millions of pieces of sheetrock, shingles, siding, home appliances, 2x4s, tools, etc. Hurricane Sandy added between $300-$500 million to Home Depot revenue in the short term and we have two different hurricanes in the same area today. This will add to earnings for quarters to come.

Earnings November 13th.

Support at $172 is solid. I do not want to blindly catch a falling knife but this is pretty strong support. Morgan Stanley reiterated an overweight position with a $200 price target. Several analysts have written that the Sears bankruptcy will benefit Home Depot and Lowe's because of the overlap in store footprints. Since Home Depot sells tools, appliances, household items, lawn and garden, etc, they will pick up any Sears customers looking for a new outlet.

Buy Jan $185 call, currently $3.90, no initial stop loss.




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


No Changes


Original Play Recommendations (Alpha by Symbol)


AAPL - Apple Inc - Company Profile

Comments:

Apple continues to be volatile with the market and it will be the earnings leader this week. The company reports earnings on Thursday. On Tuesday they have a product announcement in New York and that is expected to be an updated iPad and Mac computers. It is interesting they chose to do this two days before earnings. Should we derive some sort of message from that scheduling?

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 continues to implode and there is nothing we can do about it. We would need a major six week rally to reflate this position. At the current 23 cents there is no reason to close it. If we could get a week or two of gains we could sell some calls against our long position to recover some money.

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 also been volatile but not as bad as the Nasdaq. We could actually see the S&P recover the $280 level.

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.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

The VXX is retaining volatility with the Dow's wild 900 point swings. 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.

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