Option Investor
Newsletter

Daily Newsletter, Monday, 7/25/2016

Table of Contents

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

Market Wrap

Earnings Rally Falters

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market fell ahead of a busy week, the busiest week of the earnings season, but did not fall hard. So far the season is better than expected, the bad news is that forward outlook continues to decline. Along with earnings there is quite a bit of data, a meeting of the FOMC Wednesday and a BOJ meeting on Friday, both giving plenty of reason for caution.

International markets were a bit mixed. Asian indices were mostly flat for the session, barely moving on better than expected Japanese trade data and news from Nintendo it would see little material impact from the success of Pokemon Go. It, Nintendo, owns only about 30% of the Pokemon Company which itself will receive only a licensing fee. Most of the profits will go to game creator Niantic. European indices began the day with gains near 1% but pared those back to break even or lower on weakness in the US market and another drop in global oil prices.

Market Statistics

Futures trading was indecisive in the early hours, mostly indicating a flat to slightly lower open. Nothing in the way of economic data was released pre-opening to affect trading, earning news was dominated by Sprint's beat and Yahoo!'s sale to Verizon. Oil prices did have an affect on early trading and weighed on prices going into the open and early hours of today's session. Spot prices for WTI and Brent hit new 3 month lows on rising fear of over-supply and negative demand outlook. The S&P 500 opened with a loss just over 1 point and then steadily fell to hit a mid-day low near 2,162, about -0.57% below last week's close. This low held while the market bobbed along for most of the remainder of the day. Around 3:30PM the bulls tried to mount a rally and were able to recover some but not all of the day's losses.

Economic Calendar

The Economy

No economic data on the calendar for today but the week is pretty full. Topping the list is the FOMC meeting and policy statement Wednesday afternoon. Tomorrow the Case Shiller 20 city index, consumer confidence and new home sales data will be released. Wednesday is the FOMC, durable goods and pending home sales. Thursday is just jobless claims, Friday closes out the week with the BOJ statement, the 1st estimate for US 2nd quarter GDP, PMI, and Michigan Sentiment. After the FOMC the BOJ and GDP are close seconds. Housing data will also be crucial for the general economic outlook and FOMC rate hike timeline.

Moody's Survey Of Business Confidence continues to fall, shedding -0.6 to hit 23.6. This is the 14th week of near continual decline and the 10th month of downtrend in global business confidence. Mr. Zandi says that geopolitics is driving sentiment and noted the China/Philippines issues again, as well as the Brexit and regional political unrest in South America. US sentiment remains intact and consistent with an expanding economy.


So far this cycle 25% of the S&P 500 has reported earnings with another 20% is due to report this week. Of those who have reported 68% have beaten earnings expectations and 57% have beaten revenue expectations, both above average. The blended rate of earnings has risen in the last week to -3.7%, still deep in negative territory, from last week's -5.5%. The week to week increase is not unexpected, the blended rate tends to rise about 4% from the start of the reporting season to the end making this years final target about -1.5%. The industrials and info tech sectors are leading 5 other sectors in earnings and revenue beats, this week should see the blended rate come up again.


The forward outlook remains muddy. On the positive side, full year 2016 earnings expectations remain positive and steady over the last week at 0.3%. The bad news is that while 2nd quarter earnings growth is not as bad as expected, 3rd and 4th quarter growth have both been revised lower again. Third quarter earnings growth is now negative, as feared, and is likely to go lower over the next week. This makes the 6th quarter of negative growth. Fourth quarter growth is projected at 6.6%, full year 2017 at 13.1%.


The Dollar Index

The Dollar Index held near its 4 month highs while we wait on the FOMC and BOJ decisions. Both are expected to do something, at a meeting in the future, but there is little expectations either will make a move now. Those moves, easing/stimulus in Japan and tightening/rate-hiking in the US are bound to drive the dollar higher in the longer term. In the nearer term the index is trading at a resistance target with divergence in MACD which suggest a move higher may not be coming. Depending on what it is exactly they say, the news may not be enough to move the index above resistance. Resistance is near $97.50, a break to the upside could go as high as $98.65 before hitting next resistance. If the index pulls back from the current levels first target for support is $96.60.


The Oil Index

Oil prices fell again today, dropping more than -2%, to settle near the low of the day. WTI fell about -2.42% to trade just above $43 and a 4 month low. Prices are falling on over-supply worry fueled by rising rig counts in the US and no sign of significant production decreases around the world. This sentiment could persist into the short term or longer if global conditions do not improve. Now that WTI is moving below $45 next target for support is near $40.

The Oil Index moved lower today as well, dropping further beneath the short term moving average and breaking below the mid-point of the three month range. The index looks set to test the bottom of this range, near 1,075, and the indicators are consistent with this. There is little sign of underlying strength in the move, a break beneath the bottom of the range does not look likely.


The Gold Index

Gold prices had a choppy session but held steady near last week's closing prices. Spot gold traded as low as $1,313 but was able to regain most of that loss to settle near $1,320. Gold is testing support, just above $1,300, and this is likely to continue tomorrow at least, an while the Dollar Index is pushing up against resistance. This week may see the metal make another large swing, up or down, depending on the FOMC and how the dollar reacts. First downside target is $1,300, a break below this taking price down to $1,280. First upside target is near $1,350 with $1,375 next target after that.

The gold miners were not able to hold their ground in today's session. The Gold Miners ETF GDX fell about -3.5% in a move that broke below the short term moving average. This move may be a test of support, but if confirmed could lead to significant downside for the sector. The indicators are both bearish and consistent with a test of support but neither are showing unusual strength or indication a break of support is likely. If it holds, based on convergence with MACD, a test of the recent high is likely. Support is near $27.50, possibly as low as $26.85 and dependent on gold prices.


In The News, Story Stocks and Earnings

Yahoo! made headlines today but not for earnings. The company announced that Verizon was the highest bidder and will be taking it over at a cost of $4.8 billion. Verizon plans to merge the business with AOL in effort to make it a top global media company. The deal separates the Yahoo! core business from the Asian equities, Alibaba, it's cash and non-core patents which will be held in a new publicly traded company. Shares of Yahoo! Fell -2.25% on the news, Verizon only about -0.5%.


Sprint was the one earnings report to stand out in the pre-opening session. The company's report was a bit mixed but was enough to send shares skyrocketing 25% after the open. Earnings and revenue fell from last year, earnings more than expected, but a few key statistics helped to erase the sting. Revenue fell less than expected on better than expected increases in post-paid subscriber additions. Post-paid is the largest revenue stream for the company and came in at a 9 year high with churn at historic low levels as well. Forward guidance was maintained at previous levels. Today's action took share prices to a 20+ month high and closed a gap opened October 2014.


Texas Instruments reported earnings after the bell. The chip and circuit maker reported revenue in-line and earnings that came in a nickel above expectations. Results were driven by strength in the automotive, industrial and communication device segments. Forward outlook was reaffirmed in a range above consensus and helped to send the stock up by more than 6% in after hours trading.


The Indices

The indices fell from the recently set highs but did not sell-off hard. Today's action appears more like a move within a small consolidation range and possibly setting up for a pull-back, with this week's schedule of events not surprising. The day's loss leader is the Dow Jones Transportation Average with a decline near -1%. The transports created a medium size black candle moving down from and confirming resistance at the 8,000 level. The indicators remain bullish so this level may get tested again. Declining MACD momentum and a stochastic crossover confirm the presence of resistance at this level, a break above which would be bullish. Upside target should resistance be broken is near 8,250, first target for support should the index pull back is near 7,750. A break below 7,750 would be bearish and could go as low as 7,500 in the short term.


The Dow Jones Industrial Average made the second largest decline in today's session, about -0.42%. The blue chips created a small black candle within a tight consolidation range just below the recently set all time high. Today's action appears to be consolidation, but consolidation for what is the question. On one hand the indicators remain bullish so near term weakness may be entry for bullish positions, on the other near term weakness could be an early sign of correction. A break from the consolidation/congestion band, between 18,490 and 18,510, could move the index as much as 1,000 in either direction. However, should the index break to the downside significant support targets exist well within the 1,000 point range at 18,275 and 18,000.


The third largest decliner in today's session was the S&P 500. The broad market created a smallish black candle with visible lower shadow. The candle is within the 8 day range and gives little sign support is breaking down although the indicators both suggest support could be tested. A break below the bottom of the range, about 2,150, would be bearish in the near term at least and could take the index down to the short term moving average, near 2,030. A break to the upside of this range could lead to a continuation of the Brexit Bounce with upper targets near 2,250 and 2,300.


The NASDAQ Composite made the smallest decline in today's session, only -0.05%. The tech heavy index created a small spinning top type doji just shy of its recently set high and may be cresting a peak. The indicators are still bullish but declining momentum and a crossover in stochastic are consistent with resistance and possible consolidation or correction. If the index is able to move higher upside target is near 5,150, if not first target for support is just below current levels near 5,050.


The indices are in a near term consolidation/congestion pattern following the massive rally from the Brexit Bottom. Better than expected earnings have helped to support the rally and may continue to do so into the near term. The risk is that support for the rally could fade along with forward outlook which persists in year over year declines.

The FOMC may reinvigorate the bulls with their policy statement but that is a wild card, they are largely expected to do nothing except talk so volatility is the most likely result of that event. More important than the FOMC will be the data and any clues it gives to when the next rate hike will be.

If this week's round of releases brings us more of what we've already seen I see little reason for the market to move higher in the short term without some kind other catalyst, such as the data or the FOMC. Longer term outlook for earnings remains positive, strong even, but until we can say for sure that growth is at hand the market is more likely to continue trending sideways than it is to rally on to new highs.

I remain cautious for the near term with an eye on 3rd quarter earnings and the FOMC.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Bad News Priced In

by Jim Brown

Click here to email Jim Brown

Editors Note:

After six months of bad news, this stock is poised for a breakout. The bad news started in December when political candidates began bashing the biotech stocks. After six-months of negative comments the bad news is priced in and the outlook is turning positive.



NEW DIRECTIONAL CALL PLAYS

XBI - Biotech ETF - ETF Profile

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index. The fund is equally weighted unlike the IBB which is market cap weighted.

The biotech sector was crushed back in January when Clinton locked on to high priced drugs as un American and pledged to force companies to sell drugs at reasonable prices. Several other candidates picked up the topic and the sector was trashed. The two remaining candidates have moved on to other issues and Clinton is looking less likely to win. Trump is a businessman and understands companies have to make a profit in order to fund future research. He has made comments about drug prices but he is not expected to actually change anything in that area if elected.

After several false starts the ETF is about to break out to a 6-month high over $60. If the XBI does breakout the next material resistance is $70 and it traded as high as $90 last year before the Valeant disaster.

Fortunately, the XBI is not a stock and does not report earnings so we can hold it through the earnings cycle. Any biotech stocks reporting decent earnings will lift the ETF. I am using the September strike because the next series is December and the options are grossly expensive.

Buy Sept $60 call, currently $2.58. Initial stop loss $55.35.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Not a Material Decline

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P lost -6 points but the end result was never in doubt. The morning decline stopped at 2,161, which is minor support and there was never any selling pressure after that level was hit. The closing rebound recovered 7 points to put the index right back at resistance at 2,168.

This was a simple bout of profit taking and as long as that 2,161 level holds, the dip buyers should remain active. There are a lot of high profile earnings this week that could rock the market and that is the biggest risk.



Current Portfolio




Current Position Changes


RH - Restoration Hardware

The long call position remains unopened until $31.50. High was $31.21.


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. New 7-month high close.

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. 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. We are holding this position over earnings on Wednesday. If you do not want to hold over you need to exit by Tuesday's close.

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:

Nvidia announced two more high-end graphics cards today for the professional workplace. These are for professionals that need extremely high graphics rendering like video editors, photographers, CAD software users, etc. The P5000 handles up to 4 monitors with 16gb of embedded GDDR5X memory. The P6000 also handles up to 4 monitors with 24gb of GDDR5X memory. Another historic high.

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. Now holding above the $100 level.

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.


RH - Restoration Hardware - Company Profile

Comments:

No specific news. Minor gain in a weak market.

Position remains unopened until RH trades at $31.50.

Original Trade Description: July 23rd.

Restoration Hardware Holdings, Inc., together with its subsidiaries, engages in the retail of home furnishings. It offers products in various categories, such as furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company sells products through its stores and catalogs, as well as through its Websites, such as restorationhardware.com, rh.com, rhbabyandchild.com, rhteen.com, and rhmodern.com. As of January 30, 2016, it operated 69 retail galleries that include 53 legacy galleries, 6 larger format design galleries, 4 next generation design galleries, 1 RH modern gallery, and 5 RH baby & child galleries, as well as 17 outlet stores throughout the United States and Canada.

RH surprised investors in early June when they reported an unexpected loss. Shares fell from $36 to $25 as investors panicked. The luxury retailer reported a loss of 5 cents compared to estimates for a 5-cent profit. The CEO said the company "was being pressured by the continued retail headwinds in a market impacted by energy, currencies and a general slowdown in the luxury consumer market." In addition, "the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to impact fiscal 2016 earnings by $.90 to $1.00." However, he said all these factors are short term and performance will improve in Q4 and accelerate into 2017.

Earnings September 8th.

On June 22nd, shares rallied 10% after a BB&T analyst said the company should sell itself or merge with Williams Sonoma (WSM). Several other analysts picked up the thread and agreed it would be a good move. While CEO Gary Friedman may not be ready to join forces, the weak luxury retail market may force him to consider the option. The constant talk could also provide an incentive to other potential acquirers to come knocking on his door. The RH business is a good business. They are evolving and they will be stronger in 2017.

On July 18th Friedman bought 32,918 shares of the stock at an average price of $27.75 or roughly $915,000. He did not need to make this buy since he already owns 2,207,451 shares. A CEO would only buy another million dollars of the stock if he really believed it was going higher. Director Keith Belling bought 4,000 shares on June 28th for $101,000 to bring his holdings up to 18,608 shares.

If the market continues higher I would expect RH to break through resistance at $31.25. Because of the potential for a market decline I am putting an entry trigger on the position. The option is cheap so we will not have much risk.

With a RH trade at $31.50

Buy Sept $35 call, currently $1.10, no initial stop loss.


TASR - Taser Intl - Company Description

Comments:

No specific news. Another new closing high.

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 still trying to break out of consolidation. Saw a slight pullback from Friday't 6-month high close.

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. Only a minor decline in a weak market.

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. Still struggling to avoid a new 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:

The Hershey Trust, which owns 80% of the voting stock in Hershey, reached an agreement in principle with the Pennsylvania Attorney General's office in a long-standing fight. The AG has been trying to change the board rules saying they are outdated and the board members have too much power over finances of the trust. The agreement calls for a ten-year term limit for trustees, which means most of the board will have to be replaced over the next 2 years. NOTHING in the agreement has any impact on the potential sale of Hershey to Mondelez. The AG office also has the last word on any proposed acquisition because it is charged with protecting the residents of Hershey PA and the school that is supported by the $12 billion trust set up by Milton Hershey more than 100 years ago. Shares rallied on the news but it has no immediate impact on any potential acquisition. Maybe by the end of 2017 when six of the board members have been replaced it could change the outlook but not today.

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 IWM continues to have strong resistance at $120 but closed slightly above at $120.18 today.

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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