Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/13/2016

Table of Contents

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

Market Wrap

Bulls Hoping for More All-Time Highs

by Keene Little

Click here to email Keene Little
The Dow and SPX have made it to new all-time highs and made new highs again today. But they're alone in doing so and they were the only indexes to hold in the green today. While this can be viewed as bearish non-confirmation, the stock market is bullish until proven otherwise.

Today's Market Stats

For the past three days we've seen the stock market gap up, thanks to an overnight or pre-market rally in the futures, but then chop mostly sideways for the rest of the day. This is frustrating for traders on both sides since there's been very little to trade during the day. It's much easier (cheaper) to manipulate the market higher with overnight futures than it is during RTH (regular trading hours). Holding long positions is obviously the winning position but the risk is what could happen if the big spike up suddenly loses support, especially if this week's rally is more about opex than "real" buying. It's looking like an effort to get SPX above 2150 for a settlement price (assuming it doesn't start back down before Friday morning).

Many are questioning how the stock market could possibly be rallying so strong on what appears to be very weak fundamentals. Since the spike down into the June 27th low (post-Brexit reaction) there's been much speculation that the central banks panicked and injected a lot of liquidity into the markets to prevent a selloff. After all, this has been their mission for quite some time, now readily admitted by them. They certainly succeeded at their mission (again) with the big spike back up this month.

Citi Research published a chart, shown below, showing central bank asset purchases since 2009 and this year's spike in purchases should put to rest any questions about their involvement in the markets, especially by the ECB and BOJ, both of which have been looking for alternative asset purchases and have made it known that they are buying stocks (ETFs, index funds, etc.).

As the chart below shows, CB asset purchases have risen to their highest level since 2013 and have more than compensated for the withdrawals by EM (Emerging Markets, via reserve liquidations). The spike in asset purchases this year (bold black line on the chart) has clearly helped lift stock markets and can be credited for the new all-time highs for the Dow and SPX (CB asset purchases have been focused on big-cap blue chip stocks). The bond market has also rallied and that's driven yields lower. Knowing the CBs have no intention of relaxing their purchases (look for a big announcement from Japan before the end of this month), this will likely be a bullish factor for some time to come (bears beware).

The global banking system is at risk of a systemic failure and there are a few high-profile banks that are being watched carefully. European bank stocks in particular have been pummeled as investors shy away from the fact that many big banks are already insolvent (like the central banks themselves) and they're too big to bail. Look for more bail-ins like what happened in Greece. The threat is that one big failure, like Lehman Brothers in 2007, could lead to a domino effect since the derivative exposure links many of the banks together. Whether it's banks in stronger Germany or banks in weaker Italy, the result is the same. Italy's banks now have about 17% of their loans that are non-performing (NPL), amounting to about $220B and the number is climbing every month.

There's been an effort to paper over the problem by having the banks simply carry the loans as performing ones. Covenant violation? I don't see no covenant violation and I ain't afraid of no ghosts. Many of these banks, including in the U.S., have less than 3% assets vs. liabilities, which was the position Lehman Brothers was in. A 3% decline in value of their assets basically wipes them out and we have a systemic problem with the amount of debt these banks hold and the increasing level of NPLs. This is one reason why the central banks have opened up the fire hoses of liquidity. Unfortunately their policies are hurting banks by driving yields into negative territory (the amount of negative-yielding government bonds has skyrocketed this year).

So it's a natural question by bears as to why the stock markets around the world are rallying. The question of course requires a logical answer and we know there isn't one, other than liquidity of course. The money goes looking for a home that provides at least some return and is relatively safe. The U.S. fits the bill and could attract money for some time to come. As traders we simply have to go with the flow but it's also important to recognize when the flow could reverse. Our best tool, as deficient as it is many times, is the chart of price action. It's kind of like Churchill's description of democracy -- a chart is the worst tool to use, except for all the others. So let's take a look and see what they're telling us.


S&P 500, SPX, Weekly chart

The big celebration this week is the new all-time high for SPX (and the Dow) and if we view the big sideways consolidation since the April 2014 low and May 2015 high the breakout above 2135 could easily be interpreted as a bullish breakout. Certainly bears would be foolish to short this just because it shouldn't be breaking out. Never trade your bias unless you have some evidence, such as a chart pattern, to support it. I can speculate here that the breakout will turn into a fake-out as a throw-over finish to the big consolidation pattern. But at the moment there isn't any evidence (only suspicion) that the breakout will fail. Back below 2135 would be worrisome for bulls but as long as that level holds it will remain bullish. But bulls cannot afford to get complacent here.

The reason I mention complacency and why the bulls can't afford to be smug with the breakout above 2135 is that there are presently a lot of believers in the bullish case. And when too many believe in something, and place their money on that bet, it oftentimes marks the end of a move (the rally runs out of buyers or a decline runs out of sellers). Looking at the CNN Fear & Greed index, it printed 88 yesterday and 86 today. A high level doesn't mean the top will form here and now but it does offer a reason to be cautious rather than complacent about the rally. The FNG index hasn't been this high since July 2014.

CNN Fear & Greed index

A story by Charles Del Valle, Editor, Strategic Investment, had this to say about some other sentiment measures:

"And a major survey by Investors Intelligence (II) found that more than half of all newsletter investment writers are bullish. That hasn't happened since early 2015. More importantly, the number of folks calling for a major correction has dropped to the lowest level in two years. II concluded that 'the bulls have entered the danger-higher risk zone' and noted that sentiment was likely to shift soon."

The VIX is difficult to judge during opex week because of the influence of expiring options along with opex hedging. But the VIX is another reason for caution now that it has dropped down to the 13 area and is again testing its uptrend line from July 2014 - July 2015 (and here we are in July again). We still have two days before the weekly candle finishes but if it forms a small doji at trendline support it could be the middle candle of a reversal pattern (confirmed with a white candle next week). It can always drop lower but as a trader, is that a bet you'd be willing to take here, especially with the significant bullish divergence at the current low? Just be cautious, that's all this chart and sentiment measures are recommending.

Volatility index, VIX, Weekly chart

SPX made it up to 2155 yesterday and 2156 today and there are two reasons why I'm watching the 2154-2156 area very closely for possible trouble for the bulls. One is a Gann Square of Nine level and the other is a Fibonacci extension level. On the Gann Sof9 chart, a portion of which (lower right corner) is shown below, shows the relationship (on the same radial) between 1810-1812 and 2154-2156. The 1812 and 1810 numbers are the January and February lows, respectively, and 2154-2156 are said to "vibrate" off numbers on the same radial and often mark turning points. Therefore a top to the move off those lows could be 2154-2156. Today's high was 2156.45

Gann Square of Nine chart, bottom right portion

The other reason why 2156 could be important has to do with a Fibonacci extension, which I show on the SPX daily and 60-min charts below.


S&P 500, SPX, Daily chart

A 127% Fibonacci extension of a previous move oftentimes marks a reversal level. The previous move in this case is the June 8-27 pullback and the 127% extension of that move points to 2155.60, which is shown on the next two charts but it's easier to see on the 60-min chart further below. The 127% extension only provides a warning of a possible reversal but it's common enough to pay close attention, especially since this one coincides with the Gann level. Tuesday's high was 2155.40 and today's high was 2156.45. At the same time it's back-testing its broken uptrend line and it left a small doji for today's candle. A red candle for tomorrow would create a reversal pattern but it could continue to "ride up" underneath the trend line before letting go. This has been very common but at the moment it's another reason for bulls to be careful about chasing this higher.

Key Levels for SPX:
- bullish above 2156
- bearish below 2108


S&P 500, SPX, 60-min chart

With the rally from June 27th achieving the 127% extension of the 3-wave move down from June 8th we have a possible bearish EW pattern that calls for a sharp decline to complete a larger 3-wave move down from June 8th. The c-wave of this move would be expected to achieve 162% of the first leg down (June 8-27), which points to about 1948. This would result in a test of the February 1st high at 1947. I show the potential for the rally to continue into tomorrow, potentially up to 2175-ish, and maybe higher into next week (they could gun the market tomorrow to get a 2175 settlement price Friday morning for SPX). As long as it holds support at or above 2135 it will remain bullish. But an impulsive decline below 2135 would give us a bearish heads up.


Dow Industrials, INDU, Daily chart

A similar 127% extension discussed for SPX, but starting from the April high for the Dow, is at 18468. It too could ride up underneath its broken uptrend line from February-May, currently near 18440, as it holds up for opex. A close at or below 18470 into the end of the week would have me feeling bearish into next week (but recognizing that all it will take is a Sunday night rally to jump over resistance Monday morning). A rally that holds above 18470 would be reason enough for bears to go home.

Key Levels for DOW:
- bullish above 18,470
- bearish below 18,000


Nasdaq-100, NDX, Daily chart

Today the NDX created a small bearish engulfing candlestick (for an outside down day with a new high and lower close). Today's high was near 4590 and just shy of price-level resistance near 4600 and only in hindsight will we know if this was a good setup for a reversal back down. A drop below its June 6th high near 4536 would be a bearish heads up since that level should now act as support if there are higher prices ahead of us.

Key Levels for NDX:
- bullish above 4600
- bearish below 4453


Russell-2000, RUT, Daily chart

The RUT is battling its December 2015 high at 1205. It rallied above that high yesterday and today with highs at 1211.77 and 1210.38, respectively, but has been unable to hold those highs and today it closed back below 1205. It's another example of a failure to follow through on a bullish break and it's cause for some concern. But it's not clear yet whether we're seeing just a consolidation near the highs, to be followed by another push higher or if we're seeing the RUT top here and now. The first bearish indication would be an impulsive decline below its uptrend line from June 27th, currently near 1183. But for now the bulls rule.

Key Levels for RUT:
- bullish above 1215
- bearish below 1161


10-year Yield, TNX, Weekly chart

Bonds prices had pulled back off their July 6th highs, which created a bounce for yields, but that reversed today. It's too early to tell if the larger trend will resume (down for yields) but that's the potential as I see it. TNX bounced off support at its July 2012 low at 1.394% (it made an intraweek low at 1.336%, which was an all-time low) and I continue to see the potential for TNX to drop below 1% and perhaps down to 0.5% as global bond yields continue to decline. The more outside investors choose U.S. bonds it will continue to drive their prices higher and yields lower. I know the bond king (Bill Gross) and many very well respected investors disagree with me on this, which makes me nervous, but I'll become a believer in the end of the bull market in bonds when the charts tell me so.

One reason why I think bond yields will continue to decline is because the bond market continues to forecast deflation and not inflation like the central banks want (and are desperately fighting for with all their money creation). As much as the central banks want inflation (it helps pay back longer-term debt with cheaper dollars) it's been a losing battle for them since 1997 when money velocity started slowing. No matter how hard the Fed pushes on that string they can't get people to spend more money. Corporations aren't spending except on themselves with share buybacks and other companies. People are living on less and they haven't significantly increased their debt load since 2007 (as opposed to corporations and governments which have exploded their debt levels) and they're not spending as much. The result, as the chart below shows, is a longer-term slowing in money velocity and once it dropped below the historical average of 1.74, in 2010, it has been one of the surest signs of deflation. Stock markets don't do well in times of deflation but you certainly wouldn't know that, yet. The Fed has been papering over the problem with massive QE and cheap money but it hasn't stopped the slide in MV (nor will it for at least a couple more years). When all of this will catch up with the stock market is the big question.

Money Velocity, 1990-2015, chart courtesy St. Louis Fed and Hoisington Investment Management


KBW Bank index, BKX, Weekly chart

The banks have outperformed SPX off the July 6th lows but BKX has significantly underperformed SPX since July 2015 and especially since the end of May. It will be interesting to see what BKX does with price-level resistance at 66.50, a level that has been S/R since 2013. Along with 66.50 S/R it has its 200-week MA at 66.64 just above. Not shown on the weekly chart, BKX is currently struggling with its downtrend line from June 2nd, where it closed today at 66.12, and its bounce off the June 27th low achieved two equal legs up at 66.21 (yesterday's high was 66.35 and today's was 66.43), for the possible completion of an a-b-c bounce correction. I'll be more impressed with its bounce if it can hold above 66.64.


Transportation Index, TRAN, Weekly chart

The TRAN has had a strong bounce off its June 27th low and has made it up to its June 8th high at 7950 with today's high at 7952. At the same time it's now testing its downtrend line from February 2015 - April 2016, currently near 7930, where it closed today. It has a long way to go to confirm the Dow's new all-time high (its November 2014 high was 9310) but it would be at least bullish if the TRAN can break above its April high at 8149 and following a 3-wave pullback from April it at least has a good shot at another rally leg. That would lend credence to the current rally and it would be a strong reason for bears to go back into hibernation.


U.S. Dollar contract, DX, Daily chart

The US$ hasn't done much for the past three weeks but the sideways consolidation is more bullish than bearish. However, on the daily chart it's overbought and showing bearish divergence against its June 27th high so it's possible we're going to see a deeper pullback before heading higher. I'm assuming it will head back up to the top of its 2-year consolidation range and I expect a lot of choppy price action for the rest of this year.


Gold continuous contract, GC, Daily chart

This week we've seen a reversal of last week's rally in gold but there's no confirmation yet that we might have seen the high, although that's the risk as I see it for those chasing gold higher. As noted last week, I see upside potential to its downtrend line from September 2011 - October 2012, which is near the 1417.50 projection for two equal legs up from December 2015. It would be more bullish above that level. Many gold bulls are bullish gold for fundamental reasons, primarily as a hedge against inflation and/or as an alternate currency. I want to be a gold bull for exactly the same reasons and while I own some gold as a currency hedge I'm not ready yet to dive into a big position. As explained earlier, I think we're still in a deflationary environment, contrary to what the Fed wants, and that we'll likely see lower gold prices if that's true. I'm hoping to become a very long-term bull at the next low (end of the year or in 2017).


Silver continuous contract, SI, Weekly chart

Looking to silver to see if there's a different message for the precious metals, I see the potential for a top for silver following last week's spike into a high. It could press a little higher but I see risk in the 20.27-20.93 area. Two equal legs up from December 2015 is at 20.27 and the 2nd leg of a larger 3-wave move up from December 2014 is 162% of the 1st leg at 20.63 (note the 162% projection for the 2nd leg, which is the same pattern, in reverse, that I'm suggesting we might have for the blue chips). And then a 62% retracement of the decline from August 2013 is at 20.93. This 20.27-20.93 area is likely to be strong resistance but would also mean silver would be more bullish if it can hold above 21.


Oil continuous contract, CL, Weekly chart

Oil's pullback from the high on June 9th has been choppy and could indicate it's just a corrective pullback before heading higher. A rally above 51 would be a bullish move but until that happens I think we're seeing the start of the next leg down for oil, one that could drop it below 20. There's lots of time between here and there to help figure out whether or not it could make a new low or simply consolidate sideways for the rest of the year (kind of like the dollar).


Economic reports

There a couple of economic reports Thursday morning, including PPI numbers, and then a bunch more on Friday, including CPI numbers. Friday we'll get several reports that will indicate how the economy is doing but the market is already showing it doesn't care about the economy. As long as the central banks are shooting drug money directly into the markets' veins it's happy.


Conclusion

The central banks blinked and the markets win again. There's a lot of speculation about how the market was "allowed" to decline significantly following the Brexit vote so as to scare the central banks into injecting massive amounts of money and then the big players got to put that money to work buying stocks at cheaper prices. We know the market is massively manipulated and these "conspiracy theories" tend to look a lot more like real stories than they did for most people less than 10 years ago.

But whatever the reason, the stock market has blasted higher and the blue chips have made new all-time highs. There's some concern that the new highs have not been made with high volume and nor have they seen much follow through. There's a lot of disparity between indexes and bullish sentiment has shot up through the roof. All of these things don't prove a market top is right around the corner but we have enough reasons to be cautious and question why just the blue chips are making new highs.

There is money pouring into the riskier stocks, like small caps, but they have a long way to go to catch the blue chips at new highs. Like we saw back in 2007, the new highs in October, following the ones in July, were being led by techs and small caps. They're suspiciously absent this time. Likely the reason is because the central banks are buying blue chip indexes and ETFs, which adds credence to the idea that the new highs are more central bank driven than "normal" buying. How long that can continue is anyone's guess, and certainly a reason for bears to back off until we see better evidence of a top in place. Keep in mind that we could be in the process of finishing the rally with a blow-off top that could go MUCH higher. You don't want to stubbornly hang onto a short position if that happens.

If the rally is being brought to us courtesy of the central banks, the more funny money that props up the market the more vulnerable it becomes to a disconnect to the downside. A major bank failure and a systemic financial system breakdown could be more than even the central banks can contain. Both sides need to trade very carefully here.

Good luck and I'll be back with you next Thursday (Tom and I will be switching Wednesday-Thursday).

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


New Option Plays

Still Holding

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is at a pivotal point with indexes mixed and recent gainers starting to fade. S&P futures are down -3 points and the Dow and S&P only fractionally increased their gains. The small cap stocks began to weaken and there are headline risks this weekend and all next week.

I tried to find some put candidates but everything on the short side is still showing a positive uptick over the last several days. Nothing I found looked like a successful put opportunity. I am really hesitant about adding new longs ahead of the weekend where the event risk is going to be high. I expect profit taking into the weekend. There are times to be aggressive and there are times to be patient. I recommend being patient. We have a lot of successful longs and can afford to wait for a new buying opportunity to appear.

If you just have to play something I would add to the IWM put position for a short term trade.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Holding the Highs

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P managed to post another new high but only by 29 cents. The index closed at 2,152.43 for a new historic high but the other indexes did not participate. The Nasdaq, Russell 2000, S&P-400 and S&P-600 all closed negative. The Dow added a small +24 points and the NYSE Composite +7 points. The Dow added to its new high but the NYSE still has to make up +500 points to reach its old closing high of 11,239.

Falling oil prices hurt the NYSE and small cap indexes on worries about weak demand and rising production.

The closer we get to the weekend the more likely we will see profit taking from the recent rally. Be cautious about adding longs.



Current Portfolio




Current Position Changes


JPM - JP Morgan

The long call position was closed at the open at $63.08.


GRUB - GrubHub

The long call position was stopped at $30.45.


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. No material decline from the 10-month high.

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. Shares closed at another new high.

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. Big drop at the open to stop us out at $30.45 for a minor gain.

Original Trade Description: June 27th.

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:

Closed 7/13/16: Long Aug $30.00 call @ $2.30, exit $2.55, +.25 gain.


JPM - JP Morgan - Company Description

Comments:

No specific news. Earnings on Thursday. We closed this position at the open for a minor loss. When we instituted the position before Brexit I said it would either be a 200% gainer or a 100% loss and nothing in between. We did manage to hold on in the rebound for only a 46-cent loss so I consider the play a winner since it was not a 100% loss. The idea was to capture a bounce in the banks if the UK voted to stay in the EU. When that did not happen shares fell sharply but finally rebounded into tomorrow's earnings.

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:

Closed 7/13/16: Long August $65 call @ $1.31, exit .85, -.46 loss.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. Big 3% decline from the 6-month high.

Original Trade Description: July 7th.

Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.

LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.

On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.

The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.

The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.

LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.

LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.

Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.

While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.

Earnings August 3rd.

LL shares spiked to $16 on the news back in mid June. They moved sideways until the Brexit crash and lost altitude back to $14. Today's close was a six-month high over that headline spike in June. I believe the stock is poised to go higher now that it is trying to pull out of its yearlong consolidation.

I am going to recommend a longer term option and suggest we hold over the August 3rd earnings. They would be hard pressed to say anything more negative than what the market already expects. The potential for good news and positive guidance is very good.

Position 7/8/16:

Long Nov $18 call @ $2.15. No stop loss because of the cheap option and the longer term.


NVDA - Nvidia - Company Description

Comments:

Only lost 2 cents after a spectacular run. Reportedly the new GeForce 1060 GTX will also be offered with 3GB of memory instead of the standard 6GB in order to provide a lower price point for economy gamers.

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 company’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. Only a minor decline in a mixed market.

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.


WDC - Western Digital - Company Description

Comments:

No specific news. A minor gain in a weak market for tech stocks.

Original Trade Description: July 9th.

Western Digital Corporation, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs). The company also offers HDDs embedded into WD, HGST, and G-Technology branded external storage appliances with capacities ranging from 500 GB to 24 TB, as well as using various interfaces, such as USB 2.0, USB 3.0, FireWire, Thunderbolt, and Ethernet network connections.

WDC just completed the acquisition of flash memory maker SanDisk on May 12th and the combination will put it significantly ahead of Storage Technology (STX). WDC can include flash memory into its disk drive products to make them significantly faster as well as expand its offerings in the SSD market. By acquiring the SanDisk product line it provides a large amount of marketing breadth and created the premium data storage company.

Last Wednesday WDC raised adjusted earnings guidance to 72 cents, up from 65-70 cents. Analysts were expecting 68 cents. They raised revenue guidance from $3.35-$3.45 billion to $3.46 billion. Analysts were expecting $3.41 billion. This is the second guidance raise for this quarter. Back on May 26th they raised revenue guidance from $2.6-$2.7 billion to $3.35-$3.45 billion.

Earnings July 28th.

WDC has solid resistance at $51 but a breakout over that resistance could quickly sprint to $60. I am using the October options to avoid the rapid decline in August premium after July expiration next Friday. We will exit before earnings on the 28th. This is a short-term play to capture any continued market breakout.

Position 7/11/16:

Long Oct $52.50 call @ $3.23, see portfolio graphic for stop loss.


Z - Zillow Group - Company Description

Comments:

No specific news. A minor loss from Tuesday's new high.

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:

Another decline. The trend is finally moving in our favor. Moody's said the Hershey offer was negative to Modelez credit rating.

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:

The Russell ETF stalled again at 120 and it is not likely to break higher this week. The closer we get to the weekend the more likely traders will take profits from the market gains.

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.


MEOH - Methanex Corp - Company Description

Comments:

No specific news. Stuck under resistance at $29. I added a stop loss.

Original Trade Description: July 9th.

Methanex Corporation produces and supplies methanol in the Asia Pacific, North America, Europe, and South America. It also purchases methanol produced by others under methanol offtake contracts and on the spot market.

This is a very niche market and methanol prices have been declining. Like oil there is an abundance of methanol.

Earnings estimates are declining sharply. Full year estimates have fallen from a profit of 42 cents to a loss of 3 cents. That is a major drop. For the current quarter estimates have fallen from a loss of 19 cents to a loss of 27 cents.

Earnings July 27th.

Despite the rapidly falling estimates and stock price Raymond James upgraded it to strong buy on May 17th. Shares rallied on the upgrade from $29 to $35 and almost immediately rolled over again. Shares sank to a four-month low last week. On Friday when the market was exploding higher the stock only gained 38 cents. Shorts were not covering in MEOH.

I am picking the August $25 put because it is cheap and I am planning on holding over earnings unless we are really profitable ahead of the event. I believe the earnings will disappoint and we could see a sharp post earnings drop, but I would be wrong. The option is only $1 so the risk is minimal.

Position 7/11/16:

Long August $25 put @ $1.00, no initial stop loss.


SYNA - Synaptics Inc - Company Description

Comments:

No specific news. Shares declined slightly to give back some of Tuesday's gains.

Original Trade Description: July 11th.

Synaptics Incorporated develops, markets, and sells intuitive human interface solutions for electronic devices and products worldwide. The company offers its human interface products solutions for mobile product applications, including smartphones, tablets, and touchscreen applications, as well as mobile, handheld, wireless, and entertainment devices; notebook applications; and other personal computer (PC) product applications, such as peripherals comprising keyboards, mice, and monitors, as well as remote control devices for desktops, PCs, and digital home applications.

Back in mid April Synaptics said it was in active discussions with a state-backed Chinese investment group on a deal that valued the company at $110 per share. The company said it was anticipating a formal announcement at month end when it reported earnings. Shares spikes 7% to $87.

On April 28th the company reported adjusted earnings of $1.21 per share compared to estimates for $1.51. Revenue of $402.5 million also missed estimates for $450.5 million. Shares collapsed $15 on the news to $68.

In early June, the company said it was no longer in active talks with the Chinese group about an acquisition. On June 16th, the company said it was laying off 160 employees and closing some offices. That is about 9% of the workforce. The company will have an $11 million charge for severance and take another $4 million charge for lease cancellation fees on the office rent. Synaptics said the move was to align the company's cost structure close to its revenue. The company said they had experienced a "sizeable revenue shortfall" in Q1 that would carry over into the current quarter. "We saw a precipitous drop in order levels within the smartphone market." They are a supplier to Apple.

Recent reports suggest Apple is still cutting component orders for the next iPhone due out in September so Synaptics revenue should still be in decline.

Shares closed at a 2-year low last week and earnings are July 28th.

I am recommending a September $45 put in order to avoid the sharp drop in front month premiums when July expires on Friday. I do not plan on holding over that earnings report. We are buying time but we are not going to use it.

Position 7/12/16:

Long Sept $45 put @ $3, see portfolio graphic for stop loss.




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