Option Investor
Newsletter

Daily Newsletter, Thursday, 7/21/2016

Table of Contents

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

Market Wrap

Some Hesitation Near the Highs

by Keene Little

Click here to email Keene Little
The rally to new all-time highs (for the blue chips) hasn't been on high volume nor has it seen strong follow through and that raises some questions about the breakout (fake-out?). The bulls need to see the consolidation in the past week followed by another push higher to hopefully drag the techs and small caps to follow.

Today's Market Stats

Wednesday's rally looked like it was the start of the next rally leg following the consolidation off the mid-month highs but today's pullback negated most of the rally and now we're left guessing whether the market is ready for at least a larger pullback or if instead the bulls are going to try again from here.

Today's economic reports included unemployment claims data, which were essentially the same as last week's so no big movement there. Existing home sales in June came in marginally better than May but because it's an old report and was basically flat there was no impact on the market. The FHFA Housing Price index for May was marginally lower than April (+0.2% vs. +0.3%, which had been revised higher from +0.2%) but again, old and not much of a change.

Leading Indicators for June showed a turnaround from May's -0.2% to June's +0.3%, which the market expected, but this too is an old report. The one recent report was the Philly Fed index for July, which was a disappointing -2.9 vs. 4.7 for June and not even close to the 5.0 that the market expected. More signs of a slowing economy and that might have had a depressing effect on the market today (although futures were already pointing lower before our day got started).

As we all know, the stock market has ignored signs of economic slowing for a long time. Corporate earnings have been in decline for almost two years and yet the market indexes are pushing to new all-time highs (at least the blue chips are). This has only increased bullish sentiment since most traders now believe the central banks are fully behind a continuing stock market rally because they are very much afraid of a stock market decline. I strongly suspect the bankers have moved away from wanting a higher stock market to stimulate the "wealth effect," to put people into a spending mood, to now wanting to prevent a stock market selloff so as to avoid wealth destruction.

The wealth effect is felt primarily by those who own more stocks as a percentage of their net worth than most everyone else and you can bet they put a lot of political pressure on the Fed to keep things going. Our representatives (and I use that term loosely) tend to get wealthy while in office and they too invest in the stock market so political pressure comes directly from them as well. To say the Fed is not politically motivated is I think somewhat naive, certainly since Paul Volcker back in the 1980s. Our market is clearly motivated by what kind of central banker support it thinks it can expect and the latest rally has been with central bank support out of fear of Brexit and some serious banking concerns, especially in Europe right now but the U.S. is right behind them.

The problem we face, again, is another credit bubble that the Fed has not only encouraged but in fact pushed and the banking system is in far worse shape today than it was back in 2007 before the last market collapse. The banks are heavily exposed to derivatives and have a very low asset/liability ratio, to the point that a 3% decline will wipe out many banks' asset values.

Not helping the banks are the efforts made by central bankers to employ ZIRP and NIRP, which are intended to entice people/businesses/governments to borrow more, which also encourages investors to seek out riskier assets in search of higher yields. When ZIRP wasn't working well enough (as measured by a distinct lack of performance by the economy) the bunch of Keynesian economists thought it simply needed to do more of the same that isn't working. Their theory is that if what they're doing isn't working it's because they're not doing enough of what they're doing and if it is working then they simply need to do more of what they're doing. Heads they win, tails you lose.

NIRP has been the next step by central bankers in Europe and Japan, and now discussed by the Fed, as a way to help "entice" bankers to loan their money instead of holding it. This is now pushing bankers into making the same silly loans that got them into trouble last time. And why not? The banksters made a pile of money off the taxpayer bailouts last time and not one went to jail. Easy money when you can get it. So whether it's the return of subprime mortgages (yes, they're baaaack) or subprime auto loans, all being packaged and sold off in tranches, the same bad behaviors are being fully supported and in fact pushed by central bankers.

While all of this will eventually bite us in that part of the anatomy upon which we sit, all of the money creation from the Fed and banks (lent money is simply created and then it becomes an asset on the banks' balance sheets) goes looking for the highest yields and that's certainly not in bonds. The stock market benefits and it could continue to benefit far longer than we think possible. But again, are we seeing the resumption of the uptrend following the April-June correction or could this be a blow-off top in the making? The answer to that question will be evident later and in the meantime I think we have to be ready for either scenario.

The RUT is showing an interesting setup at the moment and as a good sentiment index I thought it would be good to start with a top-down look at this one first, starting with the weekly chart.


Russell-2000, RUT, Weekly chart

There are a few reasons why 1205-1218 is an important price zone for the RUT and probably why it has been struggling at this level since reaching it on July 12th. On the weekly chart I show price-level S/R near 1215, which starts from the highs in March, July and December 2014 and then acted as support in March-May 2015. The December 2015 high at 1205 is the bottom of the resistance zone and 1217.50 is the 62% projection for the 2nd leg of a 3-wave bounce off the February low. Based on this resistance zone I think the RUT would be more bullish above 1218 and could make a run for 1298 for two equal legs up from February, which would also be a test of its June 2015 high at 1296.


Russell-2000, RUT, Daily chart

The RUT's daily chart shows a sideways consolidation since first reaching the 1205-1218 resistance zone on July 12th. This is bullish until proven otherwise since a consolidation following a trend normally results in the continuation of the trend (up in this case). While it's somewhat bearish with the break of the uptrend line from June 27th, which was broken on Tuesday, it hasn't been followed by a breakdown and therefore still remains potentially bullish. The first sign of trouble for the bulls would be a drop below 1191, which comes from a price projection for the correction pattern since the 12th, a break of which would tell us the pullback is likely more than just a correction. Upside potential is to a trend line along the highs from April-June, near 1228 and it would be more bullish above that level.

Key Levels for RUT:
- bullish above 1230
- bearish below 1191


Russell-2000, RUT, 60-min chart

Between multiple trend lines, price projections and the price pattern it's important for the bulls to power the RUT through it all and keep this rally going. The 60-min chart shows a closer view of the congestion and how today's decline has the RUT dropping out of a parallel up-channel for its rally from June 27th (this after breaking its uptrend line from June 27th on Tuesday) and a point below 1205. If it drops below Wednesday morning's low near 1198 it would give us a bearish heads up but it's possible the leg down from this morning's high is going to complete an a-b-c correction off the July 12th high. A drop below 1191 would suggest it's something more bearish than that and in the meantime it could go either way from here.


S&P 500, SPX, Daily chart

For SPX (and the Dow), there's an uptrend line from February-May that's been in play since it broke in mid-June (and then back-tested until breaking down on June 24th). It rallied back up to the line on July 12th and depending on whether I look at the line using the log or arithmetic price scale you can call it bullish or bearish. Using the log scale it looks like SPX has been struggling to get back above the line. The daily chart below is using the arithmetic scale and it looks bullish as price uses it as support on all small pullbacks, including today's. The intraday chart shows a slight break below the line and then a bounce back up to it at the close and therefore what it does tomorrow will tell us whether or not the line will continue to hold as bullish or instead turn bearish. The other thing I'm watching is the price projection at 2177.67, which is where the 2nd leg of a 3-wave bounce off the February low is 62% of the 1st leg up, for the possible completion of an a-b-c bounce within a larger corrective move down from May 2015. This interpretation says the new all-time high is not bullish but instead is just part of a larger corrective pattern. In other words it could turn into a fake-out instead of a breakout and something to be careful about.

Key Levels for SPX:
- bullish above 2178
- bearish below 2093


Dow Industrials, INDU, Daily chart

Whereas I show the SPX chart above with the arithmetic price scale, the Dow's chart below is using the log price scale. The Dow and SPX look the same relative to their uptrend lines from February-May and notice with the log scale how the uptrend line has been acting more as resistance than support. The Dow (and SPX) have been nuzzling up underneath the trend line (log scale), which has been a common ending pattern in the past. Today's red candle leaves a possible bearish kiss goodbye but a stronger bearish signal would be a drop back below the May 2015 high at 18351. In the meantime the bulls still control the tape.

Key Levels for DOW:
- stay bullish above 18,350
- bearish below 17,900


Nasdaq Composite index, COMPQ, Daily chart

It's looking like the Nasdaq has the March 2000 high, at 5132.52, once again in its sights. This morning's high was about 30 points shy of this level and if it can do better than that we'll probably see the December 2015 high at 5176.77 as the next target. Its all-time high was in July 2015 at 5231.94 so there's a lot of work to be done in order for the Naz (and NDX) to make a new high. So far the new highs have been for the blue chips, which are probably benefitting from a flight to (relative) quality from overseas.

Key Levels for NDX:
- bullish above 5177
- bearish below 4920


10-year Yield, TNX, Weekly chart

For a long time I've been thinking we'll see government bond yields down in the mud before the bull market in bonds completes. With all the talk of negative yields and the fact that the Fed is now considering the same, it's not hard to imagine the 10-year below 1% and the 30-year below 2%. My weekly chart of TNX has consistently show a downside projection to at least 1% and potentially lower (0.50%).

Bill Gross, the bond king, feels bond prices have peaked (yields have bottomed) and last week saw a large bounce back up in yields. His opinion obviously makes me nervous about my projection, especially when I look at the TLT chart, shown further below, but the first thing I'd want to see for TNX, to help confirm something more bearish for bond prices, is a rise above S/R near 1.65%. The next level of resistance would be the downtrend line from November 2015, currently near 1.73%. Above that is its broken uptrend line from July 2012, near 1.81%. So there are a few strong resistance levels to be taken out before the pattern would turn bullish (for yields) but certainly from a bullish perspective the bounce off the July 2012 low at 1.394% must be respected.


20+ Year Treasury ETF, TLT, Weekly chart

The longer-term TLT chart is what has me thinking a little more bearishly about bond prices (in support of Bill Gross's opinion). As can be seen on its weekly chart, squished to show price action since 2007, the July 8th high created a throw-over above a long-term rising wedge following the December 2008 high (with confirming bearish divergence) and a shorter-term rising wedge off the July 2015 low (without confirming bearish divergence). The collapse back down from that throw-over creates a sell signal and since we're looking at the possible completion of rising wedges we could see complete retracements of them in a faster time than it took to build them. The daily chart shows TLT is now oversold and the pattern looks like it should soon be followed by a large bounce correction and that would be a setup to short TLT with a stop at a new high above the July 8th high at 143.62. Assuming we'll get the bigger bounce and then another leg down we'd then have a larger 3-wave pullback in the longer-term bullish pattern or the start of what will become a more bearish 5-wave decline. Figuring that out would have to be done after the 3-wave move down (weeks from now).


KBW Bank index, BKX, Daily chart

Like the broader averages, BKX has been consolidating sideways since first jumping back above its 50-dma on July 14th. Since then it's been chopping between its 200-dma (not quite reaching it, currently at 67.96) and its 50-dma, currently at 67.09. It closed 2 cents above its 50-dma after dropping 4 cents below it this afternoon. As with the others, the sideways consolidation looks bullish and another rally leg would likely see a rally to its downtrend line from July-December 2015, near 70. However, if it breaks down instead it would leave a failed bullish pattern and since failed patterns tend to fail hard, we'd likely see a fast break back below price-level S/R near 66.50.


Transportation Index, TRAN, Weekly chart

The TRAN was relatively weak today (-1.3%) and that has it looking a little more bullish following a test of its downtrend line from August 2015. It had broken its downtrend line from February 2015, currently near 7920, but today it gapped down to it and then sold off some more, leaving a failed breakout into the July 14th high. It is now on a sell signal because of this failed test but it would turn bullish again with a rally above Wednesday's high near 8022, which in turn would be a bullish signal for the broader market as well so keep that level on your alert list.


U.S. Dollar contract, DX, Weekly chart

The dollar climbed back above its 50-week MA at 96.49 and yesterday it bumped into its downtrend line from December-January, currently near 97.40. It looks like it's ready for a pullback but I continue to expect to see the dollar works its way back up to the top of its consolidation range, near 100.


Gold continuous contract, GC, Weekly chart

Gold has not yet reached the upside projection that I thought it could reach, at 1417.50 (for two equal legs up from December 2015), so that remains upside potential if the current pullback gets turned around. Only slightly lower, near 1409, is its downtrend line from September 2011 - October 2012 so there's a relatively narrow target zone to watch if gold rallies a little further. The drop back down below 1347 (the July 2014 high) is a little bearish but so far it's holding its January 2015 high at 1308 (today's low was 1310.70). I think the important thing to keep in mind here is that the bounce off the December 2015 is a 3-wave move and as such it fits as just a correction to its longer-term decline. That could change with a continuation of the current rally but at the moment gold bulls should keep this in mind.


Oil continuous contract, CL, Weekly chart

Oil has pulled back further from its back-test of its broken uptrend line from 1998-2008 and that leaves a more bearish sell signal. But until oil drops back below its 50-week MA, near 41.47, there is still the potential for another rally that will take it above 51, which would be bullish. But for now the larger pattern supports the idea we'll see a drop back down to at least the February low, if not lower (for oil and stocks).


Economic reports

No major economic reports scheduled for Friday.


Conclusion

The stock market has been on a tear to the upside but it hasn't been due to any fundamental changes, which still do not support the current rally. Central bank policies and money supports the market or perhaps more importantly central bank promises support the continued bullish sentiment. But sentiment is a fickle thing and can reverse on a dime. Without fundamental support for the market it is at risk for a disconnect to the downside since we essentially now have a big vacuum underneath the market trying to suck it back down to reality. The one big unknown is how long and how much money will pour in from overseas as it seeks a relatively safer place to park their money. The relative strength in the blue chips reflects this money flow.

The bulls haven't done anything wrong yet and certainly the bears haven't gained any traction to the downside and that leaves things bullish until proven otherwise. Today's decline actually did some short-term damage to the pattern, as small as it was, and if the market continues lower on Friday I'd start to think a little more seriously about the possibility an important high is already in place. We have bullish consolidation patterns from the past week so if they fail we could see a strong spike back down as all the late-to-the-party bulls get stampeded back out of the market and the bears pile back in.

Respect the upside potential while staying wary of the downside risk -- this will remain true for as long as this market continues to push higher.

Good luck 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


New Option Plays

Up or Down?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market decline was minimal but the internals were weak. Is there more to come? I looked at a lot of stocks today and there were some serious decliners. It did not show in the major indexes but quite a few stocks have now rolled over for 2-3 days and the decline today accelerated.

Overall decliners were slightly less than 2:1 over advancers but the amount of the individual declines was notable. Some stocks were off 3-4% on no news. With weekend event risk approaching I am not going to add any new plays today and I will survey the opportunities again this weekend after we see what the market does on Friday.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Not Enough

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes all posted minor losses but it was not enough to entice buyers ahead of the weekend event risk. The Dow lost -77, Nasdaq -16, S&P -8, Russell 2000 -6, Dow Transports -104, but the Biotech Index gained +30 to keep the Nasdaq and Russell from greater losses.

The S&P needs to drop another 20-30 points to energize the dip buyers. A decline to 2,120 from today's close at 2,165 would be great but 2,100 would be better. There is nothing in the internals that suggest a bigger decline is coming but we can always hope for one.



Current Portfolio




Current Position Changes


AKRX - Akorn Inc

The long call position was opened at $32.00.


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


AKRX - Akorn Inc -
Company Description

Comments:

No specific news. Earnings date was changed from the 8th to the 4th.

Original Trade Description: July 20th.

Akorn, Inc. is a specialty generic pharmaceutical company that develops, manufactures, and markets generic and branded prescription pharmaceuticals, as well as private-label over-the-counter (OTC) consumer health products and animal health pharmaceuticals in the United States and internationally. It operates in two segments, Prescription Pharmaceuticals and Consumer Health. The Prescription Pharmaceuticals segment markets generic and branded ophthalmics, injectables, oral liquids, otics, topicals, inhalants, and nasal sprays. This segment's generic products include Atropine Sulfate Ophthalmic Solution; Clobetasol Propionate Ointment; Dehydrated Alcohol Injection; Ephedrine Sulfate Injection; Hydralazine Hydrochloride Injection; Lidocaine Ointment; Methylene Blue Injection; Myorisan Soft Gelatin Capsules; Nembutal Sodium Solution; and Progesterone Capsules. The Consumer Health segment markets branded and private label animal health products, as well as OTC products for the treatment of dry eye under the TheraTears brand name. This segment also markets other OTC consumer health products, including Mag-Ox, a magnesium supplement, as well as the Diabetic Tussin line of cough and cold products.

Akorn has hundreds of existing products and 86 drugs with applications pending with the FDA. Those applications include 27 ophthalmic drugs, 12 topical drugs and 34 injectable drugs with a target market of $9.2 billion. Six of the applications have already been tentatively approved and 50 are currently being approved. At least 25 will be approved by 2017 and they expect to file an additional 20 applications this year. Akorn is targeting generic applications on the highest volume branded prescription drugs. They exclusively file Para IV applications. The first generic company to submit a substantially completed ANDA (Abbreviated New Drug Application) is given marketing exclusivity for the first 180 days on the market. There is no competition in that period and they can get a head start on prescriptions in that period. Most patients never change from the original generic they are assigned.

Revenue rose from $318 million in 2013 to $985 million in 2015. In 2016, the company expects to earn $1.08 billion. The company's guidance is for 80% earnings growth in 2016.

Earnings August 4th.

Shares of Akorn closed at a 7 month high on Wednesday at $31.80. The current uptrend began with the post Brexit low at $26. Resistance is $38.50.

Position 7/22/16:

Long Sept $35 call @ $1.30, see portfolio graphic for stop loss.


JACK - Jack in the Box - Company Description

Comments:

No specific news. Shares added 10 cents in a weak market. This was a new 52-week closing high.

Original Trade Description: July 18th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of February 17, 2016, it operated and franchised approximately 2,200 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada.

Jack in the Box bought Qdoba from ACI Capital, Western Growth Capital and other private investors in 2003. That chain started with the Zuma Fresh Mexican grill in Denver Colorado in 1995. The chain became famous because of the fresh food and fast service even though lines often stretched well out the door. Their claim to fame was the fresh food. They replaced the traditional animal fats with vegetable oils and used fresh vegetables whenever they were available. The name was changed to Z-Teca in 1997 because of trademark claims and then changed to Qdoba in 1999 for the same reason.

They captured another segment of fans in 2014 when they changed the price structure to a fixed price based on the protein and everything else was included. A chicken burrito cost $7.80 and steak burrito $8.49. You can add anything you want for no additional charge.

Qdoba also serves breakfast and some locations are open 24 hours.

Chipotle Mexican (CMG) also started in Denver two years before Qdoba. Chipotle has had multiple food issues over the last three years and business is falling fast. Same store sales have routinely declined more than 10% per quarter. Morgan Stanley penned a brutal downgrade last week and cut the price target from $500 to $405. Maxim Group reiterated a sell with a target of $300. DB is targeting $350. Morgan Stanley surveyed 2,000 customers in June and 13% of those questioned said they would not go back to Chipotle. Another 13% said they have returned rarely compared to frequently before the food problems started. Some 45% said they are eating there less often and 26% said they had not eaten there since the food problems.

Morgan said customers had found alternate dining locations during their abstinence from Chipotle. One of those locations is Qdoba where business has been increasing rapidly.

In their Q1 earnings, the company said they were going to open more Qdoba stores with 50-60 in 2016 and 20 additional Jack in the Box stores. They reported a 39% increase in earnings to 85 cents that beat estimates for 70 cents. Same store sales (SSS) at Qdoba rose 2.1% for company owned stores and 3.1% for franchised stores. The number of transactions increased 3.7%. They guided to SSS at 1.5% to 2.5% for the full year.

Shares popped 12% on the earnings news to $87. Since then they consolidated for a month and are back at a 52-week high at $88.50, which is also resistance. A break over that level could retest the 2015 high at $99.99.

Earnings August 10th.

With a trade at $89.25

Buy September $95 call, currently $2.15, see portfolio graphic for stop loss.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. Support is $16.20.

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 July 27th.

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 July 27th 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:

No specific news. Shares declined $1 on the drop in chip makers Intel and Mellanox.

Original Trade Description: July 19th.

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.

We were stopped out of the August position last week and I said we would be entering a new position on this stock. I am recommending we enter an October position and hold over earnings on August 11th. Nvidia has everything working for it including a string of recent product announcements and earnings should be good and guidance even better.

This is a risk. We all know what can happen if they disappoint. I believe Nvidia will make new highs, market permitting, and we can go along for the ride.

I am recommending the Oct $60 strike at $1.42 because I believe it will be over $60 by then and $1.42 is not too much to risk to hold over an earnings report.

Position 7/20/16 with a NVDA trade at $54

Long Oct $60 call @ $1.55, no initial stop loss.


PVH - PVH Corp - Company Description

Comments:

No specific news. Minor decline after a close over $100.

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.


TASR - Taser Intl - Company Description

Comments:

Queensland Australia deployed 2200 Axon body cameras with a three-year subscription to Evidence.com at $79 a month each. This was their second order after a trial order of 500 cameras. Shares declined only 6 cents in a weak market.

Original Trade Description: July 14th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection.

With all the shootings both by police and at police the need to be able to accurately document the events is becoming even more important. The multiple shootings by police and captures on cell phone video only shows one side of the event. If those cops had body cameras to document what they were seeing, hearing and saying, it would go a long way towards making those events less of a flash point if they can present their side of the event.

Since the Dallas shootings, Taser has won orders for more than 1,591 body cameras from the San Jose Police Dept and the Minneapolis Police Dept along with a 5-year subscription to Evidence.com, Taser's cloud based digital evidence management platform. Taser said demand was growing rapidly and they were in discussions with many more departments about their full range of evidence technology.

According to Taser more than 3,500 agencies and departments from 33 major cities now use their cameras.

The Axon body cameras only cost $399 each but the subscription to Evidence.com is $79 for each camera. The city of Chicago bought 2,031 cameras for $810,369. However, the 5-year subscription to Evidence.com was worth $9.63 million in recurring revenue. Earnings August 3rd.

Shares spiked to $28.50 after the Dallas shootings and then pulled back to $26.50 after the headlines cooled. The news of the big orders lifted shares back to $27.50 and rising. Taser was already in a strong uptrend and the temporary spike has now been digested and the trend is returning.

I am recommending we buy the Sept $29 call, currently $1.60. If the market rolls over as I expect on Friday we could get a better entry on Monday. I am recommending an entry trigger at $27.80, which is above today's high. If the market opens lower, we will not be triggered and we can reevaluate the entry point for Monday.

Position 7/15/16 with a TASR trade at $27.80

Long Sept $29 call @ $1.49, no initial stop loss.


WDC - Western Digital - Company Description

Comments:

No specific news. Shares declined slightly after Intel comments about PC demand. Still locked in a consolidation pattern at $51.50.

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. Earnings date changed from the 2nd to the 4th.

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 4th.

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)

AMCX - AMC Networks - Company Description

Comments:

No specific news. New 4-week low.

Original Trade Description: July 16th.

AMC Networks Inc. engages in the ownership and operation of various cable television's brands delivering content to audiences, and a platform to distributors and advertisers in the United States and internationally. The National Networks segment operates five distributed entertainment programming networks under the AMC, WE tv, BBC AMERICA, IFC, and SundanceTV names in high definition and standard definition formats. This segment distributes its networks in the United States through cable and other multichannel video programming distribution platforms, including direct broadcast satellite and platforms operated by telecommunications providers.

RBS says AMCX is a dead man walking. They downgraded the network to "sell" because some of its most popular shows are seeing their ratings walk off a cliff. The previously popular series "The Walking Dead" (TWD) has declined significantly in the ratings with a 40% drop in the 2016 season. The show routinely kills off cast members that have been with the program for years. The finale for the sixth season saw viewership significantly lower than the prior season finale. Spoiler alert, another prominent cast member is not going to make it through the next season opener. The cliff hanger left viewers unsure which one it will be but all the major players are at risk.

The new show that was spun off from TWD was "Fear the Walking Dead" and it barely made it out of the first half of the second season season alive. AMC has said it will air the second half of season 2 starting on August 21st. if viewership does not pick up fast there may not be a season 3.

Another previously popular show "Better Call Saul" saw "strong double digit ratings declines" while viewership on the new shows "Preacher," "Night Manager" and "Feed the Beast" has been lackluster at 50% less than analysts expected.

UBS is also worried that AMC will be shutout of the skinny bundles that will be offered by Hulu in 2017. That would be a further cash drain on AMC.

Earnings August 4th.

Shares dropped -4% to $56.59 on the RBS downgrade on Friday but that could be the start of a larger decline. The 52-week low was $55 in late June. Morgan Stanley cut AMC from buy to neutral in late June. Shares spiked on the 30th after Lions Gate bid for Stars. AMC was thought to be up for grabs if there was further media consolidation. Since that spike shares have traded sideways despite the strongly bullish market. The drop on Friday killed that sideways trend.

Position 7/18/16:

Long Sept $55 put @ $2.30, see portfolio graphic for stop loss.


HSY - Hershey Company - Company Description

Comments:

No specific news. Traders are still holding their breath in hopes of a higher Mondelez offer.

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 lost 57 cents on a -6 point drop in the Russell 2000. The IWM continues to have strong resistance at $120.

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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