Option Investor
Newsletter

Daily Newsletter, Thursday, 7/28/2016

Table of Contents

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

Market Wrap

Another Day Of Churn

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market churned near recent highs for another day as it digests central bank news, earnings, economic data and waits for more of each. It's been a full week of data, earnings and central bank news and today was no different. Today is the single busiest day of the earnings season with 65 S&P 500 companies reporting. So far the season is about as expected, bad but not as bad as expected, and that did not change today. Lots of reports, lots of beats and lots of year over year decline.

The FOMC meeting was a non-event it seems, their stance that a rate hike is coming but not just yet is nothing we haven't heard before. Now focus is turned to the BOJ which is expected to produce some form of QE, but maybe less than the market was first hoping for.

Asian indices were mostly flat as traders wait on the BOJ. The bank is expected to match Shinzo Abe's batch of stimulus measures with a small rate hike and an increase in purchases but both are little more than token amounts. The Nikkei led with a decline of -1.13%, driven by a strengthening of the yen. European indices were choppy and flat, earnings and central banks the biggest headlines from the region, closing with losses in the range of -.25%.

Market Statistics

Futures trading indicated a mildly negative open all morning. Neither earnings nor economic data could move the needle, leaving them slightly negative at the opening bell. After the open trading was choppy, the indices fell hard in the first 15 minutes, bounced back to test break even and then proceeded to drift slowly lower from there until retesting the earlier low by 11:15AM. A brief consolidation at the low resulted in another bounce that took the indices back to test the high of the day by 2PM, and then to new highs going into the late afternoon.

Economic Calendar

The Economy

Jobless claims was the only data on the schedule today. Initial claims rose by 16,000 from a -1,000 downward revision to last week's number to hit 266,000. This is the 73rd week of claims below 300,000, and the 4th month of claims trending near the 43 year low. The 4 week moving average of claims fell by -1,000 and is now 256,000. On a not adjusted basis claims fell by -13.8% from last week, the seasonal factors had expected a drop of -18.3%. This week's not adjusted claims are flat to last year, once again erasing the gap in YOY claims and suggesting claims have reached a point at which they are as good as they are going to get. Even so, at these levels initial claims are consistent with labor market health.


Continuing claims rose by 7,000, on top of an upward revision of 4,000, to hit 2.139 million. The 4 week moving average fell by -7,000 to hit 2.135 million. These numbers are consistent with the 3 month trend of claims just above the long term low and ongoing labor market health.

Total claims rose by 129,201 to hit 2.197 million. The gain itself is not surprising but the size of it is. Even so, this week's data is consistent with historical trends and not overly concerning. On a year over year basis total claims are down -4.5%, near long term lows, and consistent with overall labor market health. We can expect to see this figure continue to drift higher over the next 2 to 3 weeks before turning lower once again.


Tomorrow the big headline in economic data will be GDP. The 1st estimate for 2nd quarter GDP is expected out at 8:30AM and the expectations are for 2.5%. Also on tap are Chicago PMI and Michigan Sentiment. Next week is the turn of the month so will be data heavy, ADP, NFP, Unemployment etc.

The Dollar Index

Between the Fed's completely benign policy statement and shifting BOJ outlook the dollar weakened. Today the Dollar Index fell nearly a full percent to test support along the short term moving average, just below the $96.60 target support, and may go lower. If the BOJ doesn't deliver at least as expected the yen is likely to strengthen and this will weigh on the dollar. A break below the moving average will be bearish and could take it down to $95.60 or next target near $94.30. The indicators are consistent with a drop to support and pointing lower so I expect to see $95.60 tested again at least.


The Oil Index

Oil prices fell again today as production and supply overshadow expectations of market rebalancing. WTI fell more than -1.5% and has now entered bear market territory, down more than -20% from its high set earlier this year. Next target is near $40 and that may be hit very soon, a break below this level could send prices plunging back to $35 and if so, would derail hopes of earnings rebound in the sector. The flipside is that gasoline prices are falling back to their lows too, a small boost for the consumer.

The oil sector is slipping on oil prices, the Oil Index falling to a 1 month low. The index fell slightly more than -0.25%, creating a small spinning top doji, to dip tentatively below the 1,100 level. This level is the first target for support along the bottom of the near term trading range, if it does not hold a move down to 1,075 or lower is likely. Extreme low for the range is 1067, so long as that levels hold the range should remain intact. Of course, oil prices may continue to fall and if so could send the index crashing through support.


The Gold Index

Gold prices got a boost from the FOMC if nothing else did. Falling dollar values helped to support gold, lifting spot prices by 1% intraday. Prices are now moving higher, up from support, within the 30 day range above $1300, and look like they could go up to $1375 or so. There are at least two possible catalysts tomorrow, the BOJ and GDP data both have the power to weaken the dollar and support gold.

The miners are rebounding along with gold, up nearly across the board in today's session. The Gold Miners ETF GDX however fell, shedding roughly -1.75% in a move that confirms resistance is present at the $30 level. This level is equal to the tip of a failed flag pattern and could prove to be strong. However, with gold prices on the rise it is likely the ETF will move higher along with it. A break above resistance at $30 level would be bullish and could lead to further upside. Based on MACD peak analysis momentum is convergent with the uptrend so a test of the most recent high, near $30.65, is likely at least.


In The News, Story Stocks and Earnings

Ford shocked the market this morning with its earnings report and may indicate a broader problem in the auto industry and other businesses. The company beat revenue expectations but fell short on the earnings side. Revenue grew year over year, earnings fell, driven by rising costs but the real bad news was expected impact of the Brexit. Company execs expect to see the Brexit cost them $1.2 billion over the next 2 years, news that sent share prices tumbling nearly -10%.


Harley Davidson beat on the top and bottom line but gave cautious guidance. EPS grew 7.6% over last year but slower than expected US sales led them to lower the 2016 delivery guidance. Worldwide sales were down nearly -2%. Softness in the US market and global economic uncertainty were cited several times in the report. Share of the stock fell -5% in the pre-opening session but regained all of the loss and more during the day.


After hours reports from Alphabet and Amazon hit the market with mixed results. Both companies beat expectations top and bottom lines but only shares of Alphabet moved higher. Shares of Amazon fell -3% on a 31% increase in net year over year quarterly sales and guidance for similar next quarter. Shares of Alphabet gained more than 3% on a 21.3% year over year gain in revenue that allays fear of slowing growth.


CBS beat top and bottom, CEO Les Moonves says the core business is strong. Along with the report comes a 20% increase to the dividend and an additional $5 billion to the share buy back program. Shares were mostly flat in after hours trading.


The Indices

Today's session was choppy, indices held within tight trading ranges but were able to close at or near the highs of the day. The session leader was the NASDAQ Composite, driven by gains in Apple and Facebook who reported earnings earlier this week, and by Amazon and Google who reported after the bell today. The tech heavy index was able to close with a gain of 0.30% and set a new 8 month high although it remains more than -1.2% below its all time high. Today's action extends the earnings driven, post Brexit, rally and looks set to drift higher although the indicators continue to weaken. Near term upside target is near 5,200 although tomorrow may see more churn if today's after hours earnings reports are any clue.


The second best performing index in today's session was the S&P 500. The broad market gained just over 0.15% and created a small white bodied candle within the 8 day range. Price action over the past 2 weeks has been weak but holding near the new all time high and may continue to drift higher. The caveat is that MACD momentum has fallen to 0 and crossing over while stochastic is high in the overbought range, an indication of weakness in the market and potential correction. A break to another new all-time high would be bullish, if the index pulls back from the current the high first target for support is near 2,120


The Dow Jones Transportation Average posted the smallest gain, only 0.03%, creating a very small spinning top doji testing support at the short term moving average. Today's move extends the fall from resistance begun earlier in the week and looks set to pull back to test it again. The index is probably range bound, resistance now at 8,000, and support somewhere below. The indicators are consistent with a move lower or test of support, MACD is crossing 0 today confirming a strong bearish crossover in stochastic. First target for support is the short term moving average near 7,750, next is near 7,500, but 7,750 is the important one for tomorrow.


The Dow Jones Industrial brings up the rear in today's action, posting a loss of -0.09%. Today's candle is a small doji spinning top, one in a series, suggestive of indecision in the market. Price action has pulled back from the recently set all time but is above near term support targets near 18,250. The uptrend could continue but near term indications point to a test of support. MACD momentum turned negative today and is accompanied by a rapidly fading stochastic, consistent with a tired bull and possible correction. First target is the short term moving average, about -1% below today's close, near 18,250, with 18,000 as next target should that fail.


The market looks confused. The broad market surged to new high driven on good news and relief, now that the good news has faded it's time to decide what to do next and the available information is not too promising. The Brexit is still an unknown, global growth is slow, earnings are mixed with negative year over year growth predominant, economic data is sketchy and anFOMC rate hike is still lurking in the shadows.. These may be bricks in the wall of worry and if so that's great, the market will keep on drifting higher.

The major indices are set up for a pull back or correction. The indicators are pointing to a test of support that may be nothing more than ongoing consolidation at current levels. They may indicate a consolidation that could last up to 5 weeks, until the end of the summer season. The risk is that consolidation will turn into correction. Looking at a longer term chart doesn't help this view. The weekly view of the S&P 500 shows glaring divergences that make the market look frothy, extended and vulnerable.


First and foremost in my mind, Q3 earnings growth is coming into question. We may be coming out of the earnings recession but it is possible negative growth will persist one more quarter. If so, it will likely weigh on sentiment and possibly cause a shift in the market as managers adjust portfolio's to accommodate. Another concern is oil prices, they had been supporting the rally. Now that oil prices are falling that support is gone. With market support so questionable in the near term I remain very cautious, suspicious of correction. Longer term I am bullish and think any such correction or consolidation, subject to earnings outlook, will be an entry for longer term bullish positions.

Until then, remember the trend!

Thomas Hughes


New Option Plays

What's Up?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Amazon and Google both posted strong earnings and big afterhours gains. Amazon gained +$14 and Google +$40. That should have given the futures a boost but it did not happen. The S&P futures are flat at +1 and the Nasdaq futures are lackluster at +8 and dropping. With today the peak in the Q2 earnings cycle we may be looking at the beginning of the late summer seasonal weakness starting on Friday. I am going to pass on plays today until we see what happens with the Bank of Japan stimulus and European bank stress tests on Friday. Those could be market negative.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Home Runs

by Jim Brown

Click here to email Jim Brown

Editors Note:

Amazon and Google both hit home runs on earnings but S&P futures are flat. Google was up $40 in afterhours and Amazon +$14 but the S&P futures are only up +1 in the evening session. Expectations were high but Thursday was the peak in the Q2 earnings cycle and traders are probably thinking about the seasonal August/September weakness and pulling back on their positions.

The Nasdaq futures are only up +9 and that suggests there are plenty of stocks that went negative after the close to offset those gains in Amazon and Google. I would be cautious about loading up on longs on Friday.



Current Portfolio




Current Position Changes


ALK - Alaska Airlines

The long call position was opened at $68.25.


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. Very minor decline of 3 cents.

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.


ALK - Alaskan Air - Company Description

Comments:

Shares were upgraded to overweight (buy) at JP Morgan.

Original Trade Description: July 27th.

Alaska Air Group, Inc. is the holding company of Alaska Airlines and Horizon Air. The Company operates through three segments: Alaska Mainline, Alaska Regional and Horizon. Its Alaska Mainline segment operates the Boeing 737 part of Alaska's business. It offers north/south service within the western United States, Canada, Mexico and Costa Rica, as well as passenger and dedicated cargo services to and within the state of Alaska. It also provides long-haul east/west service to Hawaii and cities in the mid-continental and eastern United States from Seattle. Its regional operations consist of flights operated by Horizon, SkyWest Airlines, Inc. and Peninsula Airways, Inc. Alaska is buying Virgin America and the acquisition is expected to be completed late this year.

In their recent Q2 earnings the company reported $2.12 compared to estimates for $2.08. Revenue of $1.5 billion rose 4% and was in line with estimates. Available seat miles increased 11.2% to 11,062 million. The load factor was 84.9% and flat year over year despite the sharp increase in miles. Passenger revenue per mile decreased 7.7% to 11.42 cents. Cost per available seat mile excluding fuel declined -3.7% to $7.78 cents. Earnings rose 12% to $418 million while expenses rose only 1%. The average fuel price was $1.53 per gallon, down from $2.12 in the year ago quarter. The company had $1.6 billion in cash at the end of the quarter with long-term debt of only $509 million.

Alaska expects capacity to rise by 8% in Q3 and by the same amount for the full year. They are adding 6 additional Boeing 737 planes to bring the fleet to 147 by the end of 2016. By the end of 2018 they expect to operate 156 planes. Despite the rising capacity the number of passengers is also rising to keep that load factor at a healthy 85%. With fuel prices falling their earnings are going to accelerate.

Earnings Oct 20th.

Shares rose on the earnings on the 21st and have continued to rise as other airlines whine about excess capacity cutting into earnings. Shares closed at a 3-month high on Wednesday and slightly over strong resistance at $67.50. If the breakout continues the next material resistance is $82.

Position 7/28/16 with an ALK trade at $68.25

Long Sept $70 call @ $1.65, see portfolio graphic for stop loss.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. Another 60 cents decline that should find a bottom around $14.

We entered this as a long-term position with the November call. I wish the Q2 earnings were better but that is behind us now. We are going to hold the position and hope the pre earnings rally continues.

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 and minor gain. Holding at recent highs.

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.

Update 7/25/16: Nvidia announced two more high-end graphics cards on July 25th 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. 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 in a mixed market.

Original Trade Description: June 27th.

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

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

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

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

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

Earnings August 24th.

Position 6/28/16:

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


TASR - Taser Intl - Company Description

Comments:

Georgia Dept of Community Supervision deployed 1,210 Taser X26P Smart Weapons. Shares declined slightly in a mixed 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 4th.

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:

WDC reported earnings of 79 cents compared to estimates for 72 cents. Revenue of $3.5 billion beat estimated for $3.45 billion. Shares fell about $2 in afterhours on a sell the news trade.

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.

Update 7/26/16: WDC announced it had developed the next generation 3D NAND technology with 64 layers of vertical storage capability. Initial production is expected later this year and commercial volumes of BiCS3 in the first half of 2017. Initial production will be in 256 Gigabit modules with a range up to 1 Terabit on a single chip. Susquehanna Financial said the new chip could allow WDC to topple the current leader, Samsung, in 3D NAND. 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.


XBI - Biotech ETF - ETF Profile

Comments:

No specific news. Shares declined slightly after Wednesday's breakout.

Original Trade Description: July 25th.

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.

Position 7/26/16: Long Sept $60 call @ $2.41. See portfolio graphic for stop loss.


Z - Zillow Group - Company Description

Comments:

No specific news. Another new high.

Original Trade Description: June 29th.

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

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

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

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

Earnings August 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. Refuses to close down 2 consecutive days. I tightened the stop loss to take us out on any further gains.

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:

Hershey reported earnings of 85 cents that beat estimates for 78 cents. That beat came from a lower tax rate and share buybacks that reduced the number of outstanding shares, which raised earnings per share. The cut revenue estimates again for 2016 citing weak growth in North America and China. Timing issues that reduced earnings in Q1, added to earnings in Q2 and will reduce Q3 earnings. Gross margins fell -120 points, advertising costs rose by 5% and operating margins declined. They cut expected sales growth for the second time in 2016 to only 1% and gross margins are expected to decline again.

Other than the beat on the earnings per share, the rest of the report was negative. The stock price should now begin to decline since they mentioned nothing about Mondelez and the outlook is softening.

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:

Minor decline after Wednesday's breakout. Thursday was the peak in the Q2 earnings cycle and we could see the market decline the following week. If not, this position will expire worthless.

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.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now