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Dear Fellow Trader:

My indicators are giving neutral to slightly bullish readings this week, a mild upgrade from last week’s neutral readings, as the passage of the tax bill has brought some bullishness back into the market. I mentioned last week that businesses would benefit greatly from the tax bill, and shortly after it was passed, several large companies — including AT&T (T), Comcast (CMCSA), Fifth Third Bancorp (FITB) and Wells Fargo (WFC) — announced that they were either raising wages, giving bonuses to their employees or both.

Most pundits believed that corporations would use their tax savings to buy back their own stock — and they may do that eventually as well — but they are already taking steps toward investing in their workers as well as their businesses, and that tells me that the tax bill is working as intended.

One of the things to be concerned about, however, based on one of my very short-term readings, is that the market is extremely overbought. In fact, according to this indicator, it’s the most overbought it’s ever been, which is obviously not a good sign. This increases the likelihood of a correction, although it’s hard to say when that will happen or by how much. There are certainly some positives from the tax bill that could offset that, and we haven’t seen any sort of crack in the market just yet, but stocks have already run up a great deal over the last year.

On the positive side, one sector of the market that looks interesting right now is the retail sector, which got hit really hard earlier this year. Recently, though, it looks like many retail stocks are in the middle of a big short squeeze, which has sent the SPDR S&P Retail ETF (XRT) up about 20% since it bottomed in August.

In fact, if you look at one of the more profitable retailers — Macy’s (M) — the stock still has a huge short interest of around 23%, which means that the squeeze may not be over. If retail keeps edging up, these shorts are going to have to cover eventually, and that should send the sector even higher, especially if the holiday-sales numbers come in better than expected.

Speaking of the holidays, it seems like we already got our Santa Claus rally earlier this week, although I’m expecting at least some of that bullish action to last into next week as well, when volume will be lighter than usual. After that, I think we should start to get much more cautious, as a selloff could materialize in January.

Some traders talk about the “January effect” and how performance in the month of January can forecast performance for the rest of the year, but my own research has shown that there is no real correlation. So even if we do get a pullback in January, it shouldn’t affect how the rest of the year plays out.

In economic news, the final reading for third-quarter GDP came in at 3.2% this week, which reflects a strengthening economy. I was looking at lumber prices recently, which are a fairly decent indicator for GDP growth, and they are surging to new highs. That tells me that construction should look pretty good next year and that the economy should continue to expand.

Looking ahead, I think we could see growth as high as 4% next year as well as earnings that increase more than the market is anticipating at this time due to the tax cuts. However, as I mentioned above, stocks are already very overpriced, so it is still necessary to exercise caution as we head into the new year. Therefore, we are maintaining a slightly bullish bias this week with four new call options, but we are also buying some insurance in the form of three new put options that will help to round out our portfolio.

This Week’s Trades

Every week, I scan thousands of potential option plays to develop your exclusive list of Power Options. These Power Options rely on a proprietary, scientific approach that removes the guesswork and allows my powerful software to identify the best option buys.

All of these short-term options are actionable for up to three days after they are recommended. You’ll need to watch the stock and option prices to ensure the trades are close to where they were when I made the recommendation. If after three days you still have not gotten the position filled, cancel the order and watch for my new recommendations, as the profit probabilities may no longer be valid.

Buy to open the Target (TGT) Feb (2018) 70 Calls (TGT180216C00070000) at $1.05 or lower. After entry, take profits if the stock price hits $69.90 or the option price hits $2.90. Exit if the stock price closes below $62.90.

Buy to open the General Mills (GIS) Feb (2018) 60 Calls (GIS180216C00060000) at $1.20 or lower. After entry, take profits if the stock price hits $61.90 or the option price hits $2.60. Exit if the stock price closes below $58.30.

Buy to open the Kroger (KR) Feb (2018) 28 Calls (KR180216C00028000) at $0.90 or lower. After entry, take profits if the stock price hits $29.60 or the option price hits $2.10. Exit if the stock price closes below $26.60.

Buy to open the Crown Holdings (CCK) Feb (2018) 55 Puts (CCK180216P00055000) at $1.20 or lower. After entry, take profits if the stock price hits $53.40 or the option price hits $2.70. Exit if the stock price closes above $57.80.

Buy to open the Global Net Lease (GNL) Feb (2018) 20 Puts (GNL180216P00020000) at $0.60 or lower. After entry, take profits if the stock price hits $19.20 or the option price hits $1.20. Exit if the stock price closes above $20.80.

Remember, if a profit target is hit intra-day, exit and take profits immediately. Occasionally, if a sudden profit appears, we may recommend exiting a position early to capture the gains, and my team will alert you during the trading day via email or text message if you have elected to receive them.

If the position closes below the stock-based sell signal price, exit the trade the next morning at the open.

Additionally, if an option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

As always, we’ll let you know when there’s a profit-taking opportunity, and we’ll be back with a look at all of our positions on Wednesday. Have a great weekend.


signed: Ken Trester
Ken Trester and the Power Options Weekly Team

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