Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/6/2016

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Some Volatility Following the Big Rally

by Keene Little

Click here to email Keene Little
Last week the market rallied hard and it was pretty much straight up into last Friday morning's high. Since then we've had a pullback and some large price swings while the market figures out what to do next. The waning momentum (bearish divergence) and price pattern suggest we could see at least a larger pullback correction before heading higher (maybe).

Today's Market Stats

There was a fair amount of trading volume today, which is what bulls want to see for a positive day and the market internals supported the green we saw in the indexes but we're seeing signs of weakening in the rally. Since the June 27th low, even as prices marched strongly higher, I watched the market internals weaken as the week progressed which created short-term bearish divergences. It provided a warning sign that we could be in the process of getting at least a larger pullback before heading higher, or we could be in the early part of what will become a more significant decline. Part of the issue with this week's volatility might be the market simply waiting now to get through Friday's NFP report before deciding what to do next.

Brexit worries resurfaced last night and drove our equity futures lower, which had us starting the day with a gap down. Shortly after the morning low the indexes shot back up and the Dow rallied a little more 200 points into the high just before the close. The turnaround might have had something to do with the Fed's record-setting reverse repo (flipping the expiring bonds) with $83.4B (hat tip to Vincent for that info). The operation completed at 13:15, which is when the market had a little swoon before chopping its way higher for the rest of the afternoon. Without that Fed operation it's anyone's guess what today would have been like.

There was very little news to move the markets, other than the Brexit worries, and the net result after today's price action is a pattern that is difficult to decipher as far as pointing in one direction or the other. All we can do is wait to see if last week's rally will get some follow through or if instead it was a 1-week wonder rally. I'll start tonight's review with the NDX weekly chart.


Nasdaq-100, NDX, Weekly chart

Last week NDX made it back up to three broken uptrend lines, all of had been broken with the decline into the June 16th low. The trend lines were the uptrend line from March 2009 - August 2015, the bottom of an up-channel from 2010 and a short-term uptrend line from February 8 - May 19. Following the June 16th low NDX bounced the next week and back-tested these trend lines before dropping lower into the June 27th low. The strong rally last week brought NDX to within spitting distance of the broken trend lines again and another test from here would be near 4490, which is also the location of the downtrend line from December 2015 - April 2016. If NDX gets above 4490 it will look more bullish, especially if it gets above its June 6th high near 4537. That would be the signal for a potentially strong rally to follow. Notice how MACD is holding above the zero line and a "reset" here followed by a turn back up would be a buy signal (although the last one in late May failed with a lower price high on June 6th). But if the bounce attempt fails and NDX drops below its June 27th low near 4179 I'd look for a drop to the bottom of a possible sideways triangle, which is the uptrend line from August 2015 - February 2016, near 4000.


Nasdaq-100, NDX, Daily chart

On the weekly chart above you can see the effort to hold onto the 50-week MA, near 4408. The daily chart below shows the confluence of the 20-, 50- and 200-dma's at 4404, 4404 and 4416, respectively. That's a lot of moving average S/R and the price volatility in the past two weeks has seen a struggle around these averages. Today it closed above all of them and remains potentially bullish above 4404 (closing basis). Notice too that price-level support at 4375 was tested today and held (this morning's low was 4375.72). At the moment it's not clear what kind of price pattern is playing out and until NDX drops below price-level support at 4282 it remains potentially bullish but be careful about the possibility for a lot of choppy price action between 4200 and 4500. While the weekly chart shows a potentially bullish setup on MACD (rounding back up from the zero line), the daily chart is showing the opposite as it starts to round over from the zero line. Watching to see which one wins...

Key Levels for NDX:
- bullish above 4500
- bearish below 4179


S&P 500, SPX, Daily chart

SPX bounced off support at its 50-dma, near 2077 (with a low at 2074), and ran back up to within a couple of points from closing yesterday's gap down, which is at 2103 (today's high was 2100.72). What for the possibility we'll get a gap close and then back down. I think we'll see at least one more leg down for its pullback from Monday, which is based on a small impulsive move down into this morning's low. That called for a bounce correction and then another leg down, possibly more. Two equal legs down from Monday's high (measured from this afternoon's high) points to 2066 so be careful chasing a decline to that level since it could reverse right back up again. Below 2066 would have it looking a little more bearish.

Key Levels for SPX:
- bullish above 2113
- bearish below 2025


Dow Industrials, INDU, Daily chart

Like SPX, the Dow bounced off support at its 50-dma and made it back up to a downtrend line from April through the June 8th high. So at the moment it's trapped between support and resistance and I'm watching to see which one will break first. It could be bullish above 18000 (more bullish above 18130) and bearish below 17638 (two equal legs down from Monday).

Key Levels for DOW:
- bullish above 18,130
- bearish below 17,140


Dow Industrials, INDU, 60-min chart

A little closer view of the Dow's daily chart can be seen on the 60-min chart below. The move down from Monday is a small impulsive (5-wave) move and that suggests today's bounce should not make a new high and instead turn back down to give us at least an a-b-c pullback from Monday. The projection shown at 17638 is for two equal legs in the pullback and a drop below that level would start to suggest something more bearish, such as a larger 5-wave move down from Monday. We can't know which pattern is more likely (or something entirely different) but this gives us something to watch as a way to see what price tells us (confirms or not).


Russell-2000, RUT, Daily chart

The RUT also held its 50-dma today, breaking it intraday in the morning, like yesterday, and that keeps things potentially bullish. A back-test followed by a rally above its June 23rd high near 1172 and its broken uptrend line from February-May, currently near 1164, would confirm the bulls remain in control. The first sign of bearish strength would be a drop below its 200-dma, near 1114, and then confirmed bearish below 1087. Watch out for the possibility of a lot of chop between the key levels.

Key Levels for RUT:
- bullish above 1173
- bearish below 1087


10-year Yield, TNX, Weekly chart

Last week I showed the TNX daily chart to point out a downside projection near 1.39%, which matched the July 2012 low at 1.394%. Yesterday is closed below 1.394, marking a new all-time low, and this morning it gapped down to open at 1.336. It then immediately bounced back to a high at 1.395 before consolidating and closing at 1.385, leaving a back-test of price-level S/R at 1.394. If it consolidates for a week or two we can expect lower but it's important to recognize this could be a strong support level to launch at least a higher bounce (with selling in bonds).

In addition to the relative weakness of bond yields vs. what we're seeing in the stock market (bearish non-confirmation for the stock market), there are other comparisons to track as a way of identifying additional signs of whether or not the stock market's strength is supported by other market sectors. The first comparison below is a set of three weekly charts with SPX at the top and then in the middle is a chart that shows the relative strength of the Consumer Discretionary sector (XLP) vs. Consumer Staples (XLY). The bottom chart is the relative strength of the banks vs. SPX.


SPX vs. XLP/XLY and BKX/SPX, Weekly charts

The idea here is that in strong economic times people will spend more money on discretionary items (depending on how much discretionary income is left over after paying the bills) whereas in a weaker economy (incomes not keeping up) people will still need the staples (toothpaste, toilet paper, etc.) but will cut back on discretionary spending. That's a sign of trouble for the economy and in turn the stock market. And in a strong market you want to see the banks leading the way, which has not been true since 2010. The relative strength of BKX to SPX is once again testing support from 2011, a break of which would likely indicate the banks are going to drag us lower.

Before leaving the banks, it's important to know what's happening in Europe, even in strong Germany. The banks are crashing and a large part of the blame goes directly to the ECB and their idiotic policies (same with the Fed). Banks can't make money in a NIRP environment and while the banks are being encouraged to lend even more money (or else park it with the central bank and get charged for doing so) they're already dealing with a climbing default rate on current loans. Many banks in the U.S. have even gone back to what got them into so much trouble before 2007 -- sub-prime loans to people who can't afford the loans (it's already being done with auto loans and student loans).

The Italian banks are in serious trouble, which might not be surprising considering it's not much better off than Greece. But Germany's largest bank, Deutsche Bank, is also in serious trouble and this is in the strongest country in the EU! Most of the big banks, including the U.S. banks, have derivatives exposure in the multiples of trillions of dollars. This is a ticking time bomb that the stock market has been ignoring for a long time. Banks stocks have been shunned by investors but U.S. bank stock prices are still closer to the top than the bottom (2009) and yet they're in far worse shape than they were back then. If you want to stay invested in the stock market you should at least be hedged by shorting the banking sector. They'll very likely be one of the leaders to the downside. Keep an eye on the relative strength vs. SPX.

The next comparison is the relative strength of the Transportation stocks vs. Utility stocks and then the RUT's relative strength vs. SPX.


SPX vs. TRAN/UTY and RUT/SPX, Weekly charts

When the economy is contracting there will be fewer shipments of products but people still need to keep paying their utility bills. Investors like the Utes for their relative safety and dividends. When the transports underperform utilities it's a sign the economy is slowing and the stock market will decline. That hasn't happened yet as the market fights to hold onto the highs of the past two years but the message is clear here -- bulls are skating on thin ice. The RUT is likewise underperforming SPX and that's another sign that traders are moving out of the riskier stocks into the relative safety of the big caps. There is always a move to safety by smart money before the stock market starts a serious decline. The amazing thing to me is how long this process is taking but it does support my opinion that the next decline will be far stronger than anything we've seen so far. When it's done most investors will want nothing to do with the stock market (especially since most will be wiped out).

I won't take up more space showing the above charts back in 2007 but I think it's very important to note that the two sets of charts above, into the October 2007 high, looked just like they do now. The bearish divergences have been ignored a long time and could continue to be ignored for much longer. We know the central banks and governments are buying the bond and stock markets (in addition to manipulating currencies) and that's helping (distorting) the stock market but it's also making it much more vulnerable to a downside disconnect (crash). Being long the market right now is much riskier and should be done with the understanding that you could wake up to a very nasty surprise one morning, especially since there's a lot of margin being used at the moment.


Margin Debt vs. SPX, Monthly chart

The chart below shows the amount of margin debt (blue vertical bars) being used to hold stock and you can see how its peaks and troughs coincide closely with the stock market. What's more important to note is that at stock market tops we see less margin being used (the bearish divergences are shown with the black lines). The stock market tops often because it simply runs out of buyers. The officially sanctioned Ponzi scheme, known as the stock market, constantly needs new buyers willing to pay higher prices to those who are selling and when those buyers fail to show up we'll see the sellers start to overwhelm the buyers. Many times there's a catalyst for strong selling but tops are usually associated with waning upside momentum and the drop in margin debt since the peak in 2015 is a big warning sign here -- there are fewer buyers willing to risk margin to buy more. Match this up with the sets of charts above and it doesn't take a rocket scientist to recognize the danger signs for bulls. They're currently ignoring the "Thin Ice" signs and are merrily skating across the pond.


U.S. Dollar contract, DX, Weekly chart

The US$ is consolidating beneath its 50-week MA, near 96.50, but should work its way back up toward 100 over the next couple of months. If it drops below its June 23rd low at 93.02 I'd start thinking a little more bearishly about the dollar but so far it continues to follow my longer-term expectation for a large sideways consolidation before breaking out of the 92-100 range in another rally leg next year.


Gold continuous contract, GC, Weekly chart

Gold appears to be in a mini-blowoff move higher -- higher prices with weakening momentum is typically what happens to the precious metals when the late-to-the-party traders scramble to get aboard the rally (when mainstream publications recognize the trend and urge their readers to buy). If gold rallies much above 1418 I'll be impressed but two equal legs up from its December 2015 low points to 1417.50 and that projection crosses its downtrend line from September 2011 - October 2012 in another couple of weeks. That makes for a great upside target and then a reversal back down for at least a pullback correction before rallying higher. There is still the risk that the 3-wave rally off the December low is just a correction to the longer-term downtrend and once complete we'll see gold head for a new low, possibly below 1000.


Oil continuous contract, CL, Daily chart

For the past several weeks I've shown the oil weekly chart to point out resistance near 51 (price projections, October 2015 high and the broken uptrend line from 1998-2008) and how oil has been consolidating/topping near this resistance. Topping is still a distinct possibility and the choppy pattern off the June 9th high suggests we'll see a fast breakdown if it loses support near 45.80 (today's low was another test of support). But there's a descending wedge that has formed off the June 9th high and that's a bullish continuation pattern. Most times a triangle pattern points to one more leg to complete the larger move, which is up in this case. If the bullish pattern is correct we're going to see a rally up to at least price-level S/R near 58.50 and maybe the May 2015 high at 62.58. This pattern says you don't want to be short oil right here and instead look for a pullback Thursday as a buying opportunity (stop just below 45.80). But if support near 45.80 breaks we could see a very strong decline, in which case you're not going to want to be long.


Economic reports

Tomorrow morning we'll get the ADP Employment report, which is expected to show +152K jobs, a drop from +173K in May. The NFP report on Friday is expected to show +180K, a big improvement from the +38K in May. The actual number may or may not have much of an impact since the Fed has essentially been removed from the equation for the rest of the year.


Conclusion

The stock market continues to hold up in the face of deteriorating fundamentals and as shown on the charts above, in the face of deteriorating technical as well. This can continue for longer than we think possible, especially since central banks have now made it their mission to prevent a stock market selloff. But the market is bigger than the CBs and that's one of the reasons why I think it's so vulnerable now -- faith in the CBs' ability to prop the market up could be quickly dashed in a decline that gets away from everyone. Just as there is only the "good faith of the U.S. government" supporting our dollar, faith in the Fed is waning quickly and the consequences could be severe.

On top of weakening fundamentals and technicals, the worst time for the stock market has historically (since 1950) been between July 17th (July 15th is opex Friday this year) and September 27th. If the stock market holds up into opex next week I'm thinking of stuffing a few put options into my portfolio. I already have some but I want to see how the market performs between now and the 15th before adding to my short position (full disclosure, I am net short the stock market).

Good luck in the coming week and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

 

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New Option Plays

Burger Battle

by Jim Brown

Click here to email Jim Brown

Editors Note:

Hamburger restaurants are popping up in every shopping center as the fast casual burger chains compete for your appetite. Shake Shack, Five Guys, In-N-Out, Smashburger, Fatburger and others are heating up the competition. Unfortunately for the old style family type hamburger restaurants that means falling sales.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

RRGB - Red Robin Gourmet Burger - Company Description

Red Robin Gourmet Burgers, Inc., develops, operates, and franchises casual-dining and fast-casual restaurants in the United States and Canada. As of May 9, 2016, it had approximately 530 Red Robin restaurants, including those operating under franchise agreements. Red Robin Gourmet Burgers, Inc. was founded in 1969.

Lately Red Robin has been trying to rebrand itself as Red Robin Gourmet Burgers and Brews because each store has a sports bar area that is underutilized. The restaurants cater to families with high chairs, booster seats and many still have the arcade to gobble up quarters from children. The bar in the stores I have eaten at was never busy.

Red Robin has a larger footprint for its stores and land is expensive as is the large buildings compared to the smaller stores of its hamburger competitors. Red Robin is on an aggressive growth campaign with a new store and sometimes two opening almost every week somewhere in America. This aggressive expansion requires the outlay of millions of dollars for construction for dozens of stores at the same time. They are also remodeling their existing stores and the capital costs are soaring.

In their Q1 earnings Red Robin lowered guidance for revenue growth from the prior level of 8.5% to 9.5% to just 8%. They also lowered same store sales guidance to flat or slightly negative from the prior guidance of low single digits.

Red Robin has been beating on earnings by an average of 8.4% but analysts have been cutting estimates because of falling guidance. You can always beat estimates if you guide lower every quarter. They also announced the departure of their CFO two weeks ago. That does not normally happen if the company is moving in the right direction. A CFO does not want to have a sinking company on their resume so they tend to exit when the outlook dims.

Earnings August 11th.

Zacks cut RRGB to a sell. Keybanc Capital Markets cut them from buy to hold.

With the market likely to be weak over the next month there is a good possibility RRGB will break below support at $47 and make a new three-year low.

Buy August $45 put, currently $2.10, initial stop loss $51.45.



In Play Updates and Reviews

2,100 Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P dropped to 2,074 at the open but the afternoon rebound lifted it back to 2,100 once again. That level has become a price magnet but it is also very strong resistance. We have been here many times in the past but failed to seal the deal with a big surge over the 2,100 level.

With the various headline events this week we could see a short squeeze higher but it remains to be seen if any breakout would last.

Treasuries hit a new record low today and that is not because people are bullish on stocks. They are afraid of the future and today's rebound was on low volume. The Tuesday decline and today's opening dip were a perfect example of profit taking from last week's rally. The morning dip was bought but momentum died as we approached 2,100. S&P futures are down over 4 points as I type this but that could be erased in an instant if the ADP Employment report on Thursday is positive.



Current Portfolio




Current Position Changes


No Changes


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


CNC - Centene Corp -
Company Description

Comments:

Still no specific news. Minor decline but holding above resistance.

Original Trade Description: June 21st.

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. It operates through two segments, Managed Care and Specialty Services. The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State childrens health insurance program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and x-ray services, home health and durable medical equipment, behavioral health and substance abuse, 24-hour nurse advice line, transportation assistance, vision care, dental care, immunizations, prescriptions and limited over-the-counter drugs, specialty pharmacy, therapies, social work services, and care coordination. The Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; vision services; dental services; correctional healthcare services; in-home health services; and integrated long-term care services, as well as care management software that automate the clinical, administrative, and technical components of care management programs.

On Monday Centene was upgraded by Barclays to overweight (buy) with an $82 price target. They based the upgrade on the growth and valuation potential after the completion of the $6.8 billion Health Net (HNT) merger at the end of March. Health Net had 5.9 million individuals in plans in all 50 states. They also offered employee assistance plans to approximately 7.3 million individuals. The combined companies now insure more than 10 million individuals. Barclays said the combined management team had improved with the merger.

Barclays said, "we believe shares of CNC have simply corrected too far and too long, and now represent a very attractive investment."

Earnings are July 26th.

Shares spiked $2 on the upgrade and failed to pull back on Tuesday. That spike pushed CNC over resistance and any further move higher would be a breakout.

Position 6/22/16

Long August $72.50 call @ $1.97, see portfolio graphic for stop loss.


COST - Costco - Company Description

Comments:

No specific news. Minor rebound in a choppy market.

Original Trade Description: June 11th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo-processing centers, and hearing-aid centers; and engages in the travel business. They operate 690 warehouse stores plus online shopping.

A Costco membership costs $55. It is almost worth the cost if all you bought was gasoline. The store charges 7-15 cents less than the prevailing rates at other local stations. There are normally lines at the Costco pumps because it is a bargain. If you purchased 15 gallons of gas per week and saved an average of 10 cents you would save $78 a year and more than enough to cover the cost of the membership. Multicar families would save even more.

However, Costco to many people means bulk purchases of items too big to store in your normal pantry. The mental image of Costco is someone pushing a cart with cases of toilet paper, paper towels, laundry soap and canned goods. While that may be true for a lot of shoppers there are still bargains on everything else. My son stopped there on Saturday to buy 15 gallons of ice cream, 10 watermelons, scores of picnic plates and plastic utensils for a party he was throwing. I know people who only shop at Costco and do not go to stores like Safeway, Kroger, etc. Once you get the Costco shopping virus it is hard to not go there. You can even by caskets at Costco. Members bought 465,000 cars through Costco in 2015. The warehouse chain is the number 1 seller of organic food at $4 billion in 2015 compared to Whole Foods at $3.6 billion. Costco has 84 million paying members and you can cancel at any time and get a full refund.

This has helped Costco maintain an average annual growth rate of 13% while other stores are lucky to manage 2-4% a year. Walmart only grew at 0.44% last year and Target 5.4%. In the latest quarter adjusted for fuel and currency fluctuations Costco managed only 3% same store sales growth compared to estimates for 4.6%. They blamed the colder than normal April weather and the weak retail consumer. We already know from other retailers that sales were down sharply all across the sector.

They reported adjusted earnings of $1.24 compared to estimates for $1.22. Revenue rose +2.6% to $26.77 billion and missed estimates for $27.07 billion for the reasons I stated above. Analysts expect earnings to grow 12% annually over the next two years.

Earnings are Sept 29th.

Shares spiked up to $154 after earnings on May 26th and then went sideways for a week while those gains were consolidated. Now they are trending higher again and even closed up on Friday in a weak market.

Position 6/13/16:

Long Oct $160 call @ $4.40, see portfolio graphic for stop loss.


GRUB - GrubHub - Company Description

Comments:

No specific news. Minor gain to put it back over resistance at $30.50.

Original Trade Description: June 27th.

I recommended GRUB as a LEAP position in the LEAPS Newsletter on Sunday. With the minor drop back to support today I am recommending it here on a short term option.

GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 44,000 local restaurants with diners in approximately 1,000 cities. It operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, iPad, Android, iWatch, and Apple TV devices; and Seamless Corporate program that helps businesses address inefficiencies in food ordering and associated billing. In addition, it provides Allmenus.com and MenuPages, which provide an aggregated database of approximately 380,000 menus from restaurants in 50 states.

GrubHub is a concept that is catching fire and the bigger they get the more restaurants want to sign on to the service. They now serve 44,000 restaurants. They do not markup prices. Whatever the restaurant charges is what you pay. Diners can customize any order to their own taste specifications and dietary needs.

Restaurants benefit because the service drives more orders. Many people cannot take 2 hours out of their day to go to the restaurant to eat. GrubHub brings the restaurant to them. Restaurants typically see about 30% more takeout orders during their first year when they sign up for the Grubhub service. Delivery fees range from free to $3.99.

GrubHub currently has more than 6.9 million diners. Ordering through the GrubHub online menu is 50% faster than ordering from the restaurant on the phone.

The company recently announced participation with national chain restaurants including Boston Market, Johnny Rocket's, California Pizza Kitchen, Veggie Grill, On the Border and Panda Express. This is a natural for fast food chains. They prepare the food fast and it gets to the diner fast.

An analyst at Moness Crespi Hardt just upgraded them to buy from neutral saying the fundamentals are rapidly improving with the addition of the chain restaurants. Secondly they completely overhauled their tech platform in 2015 and the benefits are rising quickly. They are also integrating POS features including Apple Pay. He also believes they are a potential acquisition target by companies like Amazon, Uber and Postmates. His biggest point is the addition of the chain restaurants. Adding companies with hundreds or even thousands of restaurants will catapult them to the next level.

Earnings August 2nd.

Shares have been rising and they closed at an 8-month high on Thursday. In Friday's market crash they gave back only 1.4%, which was nothing compared to the rest of the market. In Monday's market they dropped back to retest Friday's low but that support held. This is very good relative strength.

Position 6/28/16:

Long Aug $30.00 call @ $2.30, see portfolio graphic for stop loss.


JPM - JP Morgan - Company Description

Comments:

No specific news. Decent rebound but a long way to go.

Original Trade Description: May 11th.

JPMorgan Chase & Co. operates as a financial services company worldwide. It operates through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset Management segments. The Consumer & Community Banking segment offers deposit and investment products and services to consumers; lending, deposit, and cash management and payment solutions to small businesses; residential mortgages and home equity loans; and credit cards, payment services, payment processing services, auto loans and leases, and student loans. The Corporate & Investment Bank segment provides investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication; treasury services, such as cash management and liquidity solutions; and cash securities and derivative instruments, risk management solutions, prime brokerage, and research services. It also offers securities services, including custody, fund accounting and administration, and securities lending products for asset managers, insurance companies, and public and private investment funds.

JP Morgan has 15% revenue exposure to Brexit. That will be the major market mover the rest of the week. They are also expected to increase their capital return percentages for buybacks and dividends. Those will be announced next Wednesday.

I am playing the call side because the potential for a short squeeze on a remain vote or a major buy the dip program on an exit vote. The put options are more than double the call options so it appears everyone is expecting the worst. Shares have declined to the bottom of their uptrend channel.

I am using the August options to capture all the events over the next couple weeks. Earnings are July 14th and we will exit before earnings.

This is probably a 100% loser or a 200% gainer. There is no in between because of the binary nature of the event. We cannot use stop losses on this position because of the potential for opening gaps.

Position 6/23/16:

Long August $65 call @ $1.31, see portfolio graphic for stop loss.


NVDA - Nvidia - Company Description

Comments:

No specific news. Minor gain. Nvidia is expected to launch the Titan video card in August.

Original Trade Description: June 28th.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The companyÂ’s products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

More than 50 automakers are testing the new Drive PX chip for self-driving cars. The chip combines inputs from cameras, lasers, maps and sensors to allow cars to drive themselves and learn from each experience.

Earnings August 11th.

Shares closed at a new high at $48.50 on Thursday. On Friday they dropped to $45.30 to stop us out. That was a $3 drop. Today the stock rebounded off the opening low and only gave back 49 cents. I believe with any market that is not crashing Nvidia will be back at new highs very quickly.

Position 6/28/16:

Long August $47 call @ $2.55, see portfolio graphic for stop loss.


PVH - PVH Corp - Company Description

Comments:

No specific news. Recovered all of Tuesday's loss.

Original Trade Description: June 27th.

PVH Corp. operates as an apparel company in the United States and internationally. The company operates through six segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. It designs, markets, and retails mens and womens apparel and accessories, branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, hosiery, socks, jewelry, watches, outerwear, small leather goods, and home furnishings, as well as other related products. The company offers its products under its own brands, such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warners, Olga, and Eagle; and licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection, and Chaps, as well as various other licensed and private label brands.

PVH has been absolutely crushed in the sell off because they were thought to have as large presence in the UK. Shares closed at a new 9-month high of $102.70 on Thursday. Today they touched $84 intraday for a whopping $18 or roughly 18% decline in two days from a new high.

PVH thought it was important enough that they filed a disclosure with the SEC saying they only derived 3% of their revenues from the UK. Even with the massive drop in the pound the company did not think any UK weakness would be material to their results.

The company has been on a growth spurt by acquiring brands and doing license deals with other brands to improve the variety of its offerings. On June 15th the CEO spoke at a Piper Jaffray Consumer Conference and said business was improving in Q2. He said the problems with other retailers represented an opportunity for the Calvin Klein and Tommy Hilfiger brands. He said the Tommy Hilfiger women's business generates 30% of their revenue and was a growth opportunity since they recently added it to the line. They teamed up with super model Gigi Hadid to make the brand more relative to younger, fashion oriented women.

With their Q1 earnings they raised guidance from $6.30-$6.50 to $6.45-$6.55 a share for the full year. The CEO said the guidance was conservative because this "does not seem like the environment ro tray and be a hero."

Earnings August 24th.

Position 6/28/16:

Long August $90 call @ $4.23, see portfolio graphic for stop loss.


SWHC - Smith & Wesson - Company Description

Comments:

Another new 3-month high on the record pace of firearms sales.

Original Trade Description: June 25th.

Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming again. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or Orlando or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales. The constant gun headlines over the last two weeks have lifted S&W to 3-month highs.

In their Q4 earnings where there was a surge in gun sales after San Bernardino. In their recent Q1 earnings there was no mention of the Orlando shootings because the shooting was only 4 days before their earnings. The Q1 results did not have any sales bump from that event.

In their Q1 report, they posted earnings of 63 cents compared to estimates for 54 cents. Revenue of $221 million also beat estimates for $214 million. They guided for the full year for revenue between $740-$760 million and analysts were expecting $723 million. They guided for full year earnings of $1.83-$1.93 and analysts were only expecting $1.66. Q1 sales rose +22% and the CEO said demand was strong. They forecast current quarter revenue at $190-$200 million and analysts were only expecting $162 million. That is a massive improvement.

Since the Orlando shooting there has been nonstop headlines about gun control. Gun stores are reporting four times the volume in traffic and many stores are having trouble keeping guns in stock. This is going to be a banner quarter for S&W.

Earnings August 25th.

Update 7/5/16: The FBI released the background check numbers for June. They processed 2,131,485 checks for a 39% increase in purchases over 2015. The 2015 number was a 10.5% increase over 2014. For the first six months of 2016 they have processed 13,829,491 background checks which is 60% of all 2015. Assuming nothing changes in the economy we are well on our way to a new record for the year.

Shares have been in constant rebound since the earnings on June 16th erased fears about slowing sales.

Position 6/27/16:

Long Sept $27 call @ $1.70, see portfolio graphic for stop loss.


Z - Zillow Group - Company Description

Comments:

No specific news. Minor gain. Not very exciting.

Original Trade Description: June 29th.

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. It offers a portfolio of brands and products to help people find vital information about homes, and connect with local professionals. The company's brands focus on various stages of the home lifecycle, such as renting, buying, selling, financing, and home improvement. Its portfolio of consumer brands includes real estate and rental marketplaces comprising Zillow, Trulia, StreetEasy, and HotPads. The company also provides advertising services to real estate agents and rental and mortgage professionals; and owns and operates various brands that offer technology solutions to real estate, rental and mortgage professionals, including DotLoop, Mortech, Diverse Solutions, and Retsly.

Back in August 2015 Zillow Group split its stock 2:1 but the new stock had no voting rights. The Class C stock trades under the symbol Z while the Class A stock with rights traded under the symbol ZG. The company did this so the voting rights would not be diluted. Multiple companies have done this including the biggest to date with Google and Facebook. The split has no impact on the company operation except that employees now receive Z shares and any acquisitions will be made with Z shares.

The company acquired Trulia.com for $2.6 billion in 2015 and contrary to analyst concerns the integration has been relatively smooth. There were some hiccups but everything is functioning normally today.

They reported Q1 earnings of 13 cents that beat estimates for a loss of 9 cents. Revenue rose from $127.3 million to $186 million and beat estimates for $177 million. They also raised full year guidance from $805-$815 million to $825-$835 million. Analysts were expecting $794 million. They ended the quarter with $514 million in cash. Marketplace revenue rose 23%, real estate revenue rose 34% and mortgage revenue rose 65%.

Earnings August 2nd.

In early June, the company made a windfall settlement with Move.com for $130 million after two years of litigation. Analysts were expecting $1.8-$2.0 billion. This pending litigation had been a cloud over the stock for the last 8 months. After the settlement shares spiked to $32 and traded sideways for two weeks before moving up to new highs at $35.50. The Brexit crash knocked the shares back to $32.75 but after the last two days of gains it is threatening to breakout once again.

Shares closed at $35 so the August $40 strike is a little far out for a short period of time. I am going to stretch to the November $40 strike, which will have significant expectation premium when we exit before earnings.

Position 6/30/16:

Long Nov $40 call @ $2.30, initial stop loss $32.50.



BEARISH Play Updates (Alpha by Symbol)

HSY - Hershey Company - Company Description

Comments:

Shares declined $1.25 as traders begin to decide a Mondelez deal is never going to happen. An article in Barron's reiterated the fact that political winds in Pennsylvania are dead set against a Hershey sale.

Original Trade Description: July 2nd.

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hersheys, Reeses, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands.

Snack maker Mondelez bid roughly $23 billion for Hershey last week and the offer was quickly refused. Hershey has turned down several acquisition offers since 2002. In 2002 the Wrigley company tried to buy it and failed. In 2007 Cadbury also failed. In 2010 the trust prevented Hershey from bidding to buy Cadbury. The problem with acquiring Hershey is that the Hershey Trust Co. owns 81% of the voting stock and 8.4% of the common stock. Nothing will happen unless the trust approves.

The trust was setup in 1909 to benefit the Milton Hershey School for underprivileged children and the community of Hershey Pennsylvania. The trust has built up a $12 billion endowment for the school and is well liked for the good works done around the community.

The board has also said multiple times they do not want to sell the company.

Another factor is the Pennsylvania Attorney General. Any sale would require the approval of the AG under a 2002 state law. He has the power to overrule the trust if he feels any sale would not benefit the citizens of Pennsylvania.

Here is where the challenge comes in. If Mondelez buys the Hershey Company then the trust gets a lump sum of money but that is all they will ever get. Once they spend it the benefit is over. If Hershey stays independent the trust will remain the benefactor of Hershey PA for another century. The profits from Hershey will continue to flow through the trust to the school and other entities to support the community. Hershey pays out about $500 million a year in dividends. The AG is not likely to allow the golden goose to be sold.

I believe this acquisition bid will fail. Mondelez may raise the offer but I doubt the board, trust or AG will accept it. The spike in the stock to $115 will fail and shares will return to the $95-$100 level where they were trading lat week.

This is a speculative position so do not play with money you cannot afford to lose. I am making this a spread because the put options are expensive for obvious reasons.

Earnings July 28th.

Position 7/5/16:

Long August $110 put @ $5.15, no initial stop loss.
Short August $100 put @ $1.52, no initial stop loss.
Net debit $3.63


IWM - Russell 2000 ETF - ETF Description

Comments:

Traders bought the opening dip and lifted the IWM back into positive territory but resistance at $114 was solid. There was no upward movement after 12:00. S&P futures are down -4 tonight.

Original Trade Description: July 2nd.

The Russell 2000 ETF attempts to track the investment results of the Russell 2000 Index composed of small-capitalization U.S. equities.

The Russell 2000 is facing strong resistance from 1150-1165. The index actually touched 1,190 in early June but I seriously doubt we will see that level again. The S&P closed right at 2,100 and has strong resistance from 2100-2115. The Dow closed only 72 points under the post Brexit close at 18,011.

We recovered from the post Brexit crash on a combination of equity fund window dressing for the end of the quarter and pension funds rebalancing the ratio of bond to equities. Reportedly they had to buy up to $18 billion in equities.

Now we are at resistance and all those uplifting events are over. The uncertainty over the UK exit still exists and the dollar/pound imbalance will cause a significant number of earnings warnings for Q3.

All the fundamentals point to a weak July and the artificial lift from the end of the quarter buying is over.

Note the volume in SPY and IWM puts for August on Thursday. The far right column is the open interest and the second from the right is the volume traded on Thursday. This is about 3 times the number of calls for the same period. The vast majority of traders are expecting a market decline.

I am recommending we buy puts on the IWM because the premiums are cheaper. I am recommending an entry trigger because we could still move higher ahead of the long weekend. S&P future are down -4 but that could be temporary.

Position 7/5/16 with an IWM trade at $113.95

Long August $112 puts @ $2.62. No initial stop loss.




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