Nobody knows what the next headline will hold. Is it positive, negative or sudden death? The trade meeting between President Trump and President Xi will be at the G20 meeting this weekend. Tough talk is flying and expectations are slim. Most analysts believe Trump has met his match because the Chinese play the long game as in 10-year increments and Trump is a short term thorn in their side. The key will be whether they are willing to endure even more pain with additional tariffs or will they try to make some small concessions to get the process moving. They understand US politics well and they know Trump needs a win because his time is running out before the Democrats take over the House.

This is a chess game of gigantic proportions. There are hundreds of billions of dollars at stake for both countries. Trump threatened an additional $267 billion in tariffs again this evening and the S&P futures fell -15 points before recovering. We all understand the big threats before a crucial meeting but we do not know how that meeting will turn out.

China is not the only weekend event risk. Saudi Arabia is going to attend the G20 meeting and the Argentinean prosecutors are considering filling murder charges on Crown Prince Mohammed bin Salman. That could really spoil the G20 party. You can imagine the political deal making going on behind the scenes to avoid that potential.

President Trump is also scheduled to meet with Putin and new broke today that the Russian navy had captures three Ukranian ships and they were blocking access to the sea for the Ukraine. The Ukrainian government has enacted marshal law and increased its defense posture on all Russian fronts. The US warned this attack was in violation of international law and warned Russia to back off. The only reason Putin would take this action the week before the G20 is to make a statement and see if Trump or anyone at the G20 would react. This is a global threat to see if anyone is going to stop Putin from taking further actions.

The market could be a dangerous place over the next ten days. There are multiple events that could send it crashing lower or add fuel to the rebound. On Tuesday, Fed Vice Chair Richard Clarida speaks and he is followed on Wednesday by Chairman Jerome Powell. Either one or both could say something to upset the market about the pace of rate hikes. These are critical speeches. On Thursday we have the FOMC minutes of the last meeting but that should be anticlimactic after the two Fed heads speak.


The earnings cycle is winding down but there are still some big names reporting this week. Tuesday has SalesForce.com followed by Dell Technologies and Hewlett Packard on Thursday. However, all eyes will be focused on the Fed and the G20.


The S&P rebounded 41 points after closing in correction territory on Friday. It was a good day and a decent short squeeze. However, that is all it was, a short squeeze. You cannot look at the chart below and get too terribly excited about the rebound. In the greater scheme of things, it was just a minor blip. It could be the start of a bigger rebound but one day does not make a trend.


The Dow chart is similar with a 350-point rebound but it stalled at 24,650 and exactly the same level as the two prior days. We could move higher if investors begin to believe there will be a positive outcome on the trade meeting but the Dow has a long way to go to establish a new trend.


The Nasdaq profited from short squeeze in the FANG stocks. They were the most oversold and therefore the most susceptible to a short squeeze. Nothing changed in the fundamentals and Facebook even had another round of negative press but the shorts were running scared.

Even the news that Tesla came within weeks of bankruptcy back in the spring, failed to dampen its short squeeze gains.

The Nasdaq closed at 7-month lows on Friday and the rebound today still left it more than 200 points into correction territory.



The Russell posted a decent gain but it was half of the percentage gain on the big caps. It is hard to look at the chart below and find anything bullish. It did rebound from the 1,463 support but it is not yet a trend.


I am recommending everyone avoid adding new positions ahead of the G20 headlines. There will always be another day to trade and there will definitely be calmer markets. There is no reason to play in traffic just because you can. Be patient and let's see what the headlines bring us for next week.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

We saw a monster short squeeze today after the S&P closed in correction territory on Friday. The FANG stocks rebounded strongly because they were the most oversold. The Nasdaq gained 3.3%. It was a good day if you were long and a terrible day if you were short.

After the close the S&P futures fell -15 points but have slowly worked themselves back to -5. It is entirely possible we are going to see a rally in front of the G20 meeting but I am not going to bet on it.

I bet on the last rebound and got killed on the second dip. The potential for an irrational move ahead of the G20 is nearly 100% and it could be in both directions. There is no need to jump into a new position only to get blown out again by some random comment on the China trade issue. We have a clean slate and I would rather add positions into a known environment than try to guess on the market reaction before and after the meeting. This time next week we will know the answer and we can make a rational "investment" decision.

No new recommendations today.



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 short call position was entered on Nov 20th.

CGC - Canopy Growth
The long position was stopped on Nov 20th.

HD - Home Depot
The long position was stopped on Nov 20th.

SPY - S&P-500 ETF
The long position was stopped on Nov 20th.


Original Play Recommendations (Alpha by Symbol)


AAPL - Apple Inc - Company Profile

Comments:

We tried to offset some of the damage from the Apple decline by selling a short call at the open last Tuesday. Unfortunately, Apple dropped nearly $11 at the open on Tuesday and killed the value of the short call and removed any remaining value from the long call. The stock rebounded today but every step higher is going to find new buyers who wished they had sold it at that level. I am dropping this position as a total loss.

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.

Update 11/5: This is one rotten apple. The company reported earnings and revenue that beat estimates and raised their dividend. Unfortunately, they missed estimates on units sold, issued weak guidance and said they were no longer going to report units sold. That completely angered investors and analysts alike. There are three things analysts want to know when Apple reports earnings and that is units sold, average selling price and service revenues. The units sold are probably the biggest item because that tells you at a glance if the company is growing or shrinking. If they reported 50 million phones in the quarter last year and 40 million this year the answer is very clear. Apple knows this and that is why they are no longer going to report units. Tim Cook tried to make the case for overall revenue as the key because Apple was involved in so many products. Unfortunately, phones makes up 85% of the revenue and all the other revenue from services comes from phone sales. If they did not sell a single phone in Q4, their services revenue would be flat to down due to attrition. Everything revolves around the number of phones sold because each phone is a cash machine for the services subscriptions.

On Monday, the Nikkei Financial Daily reported that multiple iPhone manufacturers had been told to halt plans to increase production on the XR and stand down. This followed several reports that the XR sales were facing weak demand only days after they became available for sale. Normally, delivery times are pushed out after a new model is announced and demand exceeds supply. There are no reported delays on the XR. That is a first for Apple. Originally, Apple had planned 60 manufacturing lines at Foxconn just for the XR. They are currently using only 45 and not at full production.

Apple shares have fallen $21 in two days. Out long call has evaporated and the short put gained $2. I am recommending we close the put. I am also recommending we turn the long call into a spread and sell a short $215 call against it. This will claw back $4.50 in premium and reduce our loss.

Analysts are targeting the mid $180s for support.

Position 10/16:
Long Jan $230 call @ $7.35, see portfolio graphic for stop loss.
Position 11/20:
Short Jan $210 call @ $1.00, see portfolio graphic for stop loss.

Position 11/6:
Short Jan $215 call @ $4.70, exit $6.30, -1.60 loss.
Short Jan $190 put @ $2.90, exit $4.55, -1.65 loss.




CGC - Canopy Growth - Company Profile

Comments:

Canopy gapped down with the with the 600 point Dow drop on Tuesday to stop us out. There was no news. Just a continued weak market.

Original Trade Description: Nov 5th.

Canopy Growth Corporation, together with its subsidiaries, engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules, and hemps. The company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, and Foria brand names. It also offers its products through Tweed Main Street, a single online platform that enables registered patients to purchase medicinal cannabis from various producers across various brands. The company was formerly known as Tweed Marijuana Inc. and changed its name to Canopy Growth Corporation in September 2015. Canopy Growth Corporation is headquartered in Smiths Falls, Canada. Company description from FinViz.com.

The cannabis sector is on fire and nobody knows how to play it because of the volatility. There will be downs as the rules are drawn and additional countries go all in on recreational use. Canada has approved recreational use starting in October for the entire country. Numerous U.S. states have passed new laws approving the use. Multiple countries have been legal for years but dozens are considering it today.

There are three main companies listed on the US exchanges but there are more than 20 listed on the Canadian exchanges. Obviously the US listings will get the most play.

Tilray (TLRY) is the smallest with 17.8 million shares outstanding. The other two are Canopy Growth (CGC) and Aurora Cannabis (ACBFF). Aurora has 950 million shares outstanding. Canopy has 228 million outstanding.

Aurora is expected to produce 570,000 kilos of weed in 2019 and Canopy is expected to produce more than 500,000 kilos. Tilray said it would only produce 76,000 kilos in 2018 and 150,000 in 2019.

All three of these companies are primarily in weed today but they are rapidly moving to the CBD oils, which have a more mainstream use. Coke is looking at making drinks with CBD oil. Constellation Brands (STZ) is looking at making drinks and edibles with THC, the active ingredient in marijuana. Constellation made a $4.1 billion investment in Canopy with the option to buy more. With big money and big marketing behind Constellation and Canopy I am picking them to be the long term winner.

Look how far the legalization of marijuana has come in just the last two years. Where will the business be two years from now? This is truly a "sky's the limit" potential. The tobacco companies have not yet entered the sector and the most likely entry would be the acquisition of one of these companies. There is eventually going to be a land rush as everyone interested tries to get a piece of this sector starting with the growers.

The recent spike in August was the announcement of a $4.1 billion investment by Constellation. The stock pulled back to uptrend support in the market crash.

Canopy has secured supply contracts for about 35% of expected demand in Canada. Marijuana for recreational uses became legal on October 17th. The current US Farm Bill will legalize CBD and Canopy is one of the largest CBD producers in the world. Two additional states have marijuana legalization on the ballot this week and 8 states have already made it legal.

In the week after legalization news reports from Canada reported that 50-75% of inventories were sold out. In Quebec the government run stores were only open 4 days a week because they ran out of product. Some brick and mortar retail locations were expected to remain closed until further notice because of supply shortfalls by producers. One online store, Ontario Cannabis made more than 100,000 sales in the first 24 hours. Various government run stores said they were only receiving about 40% of the products they ordered. The supply shortage is likely to last. New licenses to produce marijuana are taking about 341 days to process which will then be followed by the grow time to develop mature plants ready to harvest.

Within two weeks of the legalization date in Canada, most pot shops run by the government were completely sold out. This has spiked prices and promises significant profits for growers in coming quarters.

Constellation Brands currently owns 38% of Canopy and has warrants that will allow them to take control with more than a 56% stake over the next three years. Canopy filed a notice of material change on November 2nd indicating Constellation would be a 56% owner when they exercise their warrants.

On November 1st, Constellation completed the investment of $4.1 billion in Canopy with the option to acquire more. With this $4 billion in cash Canopy is going to aggressively build out additional grow farms, research facilities and infrastructure. This gives them a major edge above everyone else.

With Constellation Brands as a backer, Canopy has something that nobody else can match. They have the potential for worldwide distribution both in weed form and in THC infused drinks and edibles. This is going to be so profitable for both companies that I would not hesitate to buy either or both.

Canopy has earnings on Nov 14th. With all their product sold out and backorders for their next six months of supply I cannot imagine that they will not post good numbers.

The dip back to uptrend support in the market crash is a strong buying opportunity.

Update 11/19: Canopy reported a loss of $1.52 against no estimates. Revenue rose 33% to C$23.3 million and well below estimates for C$60.0 million. The biggest challenge is that Canada's legalization did not occur until the middle of October and after this reporting quarter ended. Sales of oils made up 34% of product sold, up from 18%. Kilos of cannabis harvested rose 265% to 15,127 but kilos sold rose only 9% to 2,197 because of the legalization deadline. The average price per gram rose 24% to C$9.87. The number of active registered patients in their medical program rose 34% to 84,400. It was actually a good report with the exception of the date issue.

Position 11/6/18:
Closed 11/20: Long April $45 call @ $7.20, exit $2.74, -4.46 loss.
Closed 11/20: Short April $70 call @ $2.75, exit $.86, +1.89 gain.
Net loss $2.57.



HD - Home Depot - Company Profile

Comments:

HD declined after earnings when Bank of America cut them from buy to neutral. The shares never recovered and gapped lower with the 600 point Dow drop on the 20th to stop us out.

Original Trade Description: Oct 29th.

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.

Position 10/30/18:
Clsed 11/20: Long Jan $185 call @ $3.70, exit $1.16, -2.54 loss.




SPY - S&P SPDR ETF - ETF Profile

Comments:

The S&P gapped lower with the Dow's 600-point opening drop on Tuesday and we were stopped out of this position.

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:
Closed 11/20: Long Jan $285 call @ $4.45, exit 0.93, -3.52 loss.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

The surge to 40 was brief and a couple more days like today and it will be back at 30. It will eventually go to single digits. We just have to be patient.

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.