Option Investor
Newsletter

Daily Newsletter, Tuesday, 8/2/2016

Table of Contents

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

Market Wrap

Transport Crash

by Jim Brown

Click here to email Jim Brown

The Dow Transports lost more than 2% as the airlines crashed and railroads derailed.

Market Statistics

German carrier Lufthansa warned on passenger volumes because of ISIS fears and Delta said unit revenue fell -7% in July. Delta blamed the decline on a rise in capacity, low fares for last-minute bookings and huge swings in currencies. Lufthansa said recent terror attacks in Europe and heightened global distress had caused a "tangible impact on passenger volumes." The CEO said "our industry has to prepare for a difficult second half-year." "Forward bookings, in particular for our long-haul services to Europe have declined significantly."

Delta (DAL) shares fell -8%, United (UAL) fell -6%, American (AAL) -6% and JetBlue (JBLU) -6.5%. In North America, the airlines are also fighting the Zika epidemic with travel to Latin America slowing over fears of the virus.


The drop in the airlines and continued drop in the railroads because of low oil prices pushed the Dow Transports to a big loss and that weighed on the Dow Industrials and the market in general.


Also complicating the markets for Tuesday was a lackluster stimulus program from Japan. Prime Minister Shinzo Abe announced a $274 billion stimulus program but only $73 billion is actually new direct spending. The 28 trillion yen program is spread out over several years rather than provide a needed immediate injection into the economy. Part of the program is a 15,000 yen ($147) payment to 22 million low-income individuals, an increase in the number of child care facilities for working parents and compensation for employers for longer maternity leaves. The Nikkei fell -1.5% on the news as investors were hoping for a much stronger and more immediate program. This is the 26th stimulus program announced during the current decline in the Japanese economy. There was a new 2-month study commissioned on the impact of Japan's monetary policy after which they could launch a new program. The drop in the Nikkei contaminated the European indexes and there were losses all around.


There were a lot of lightweight economic reports today and none of them were market moving other than the auto sales for June. Sales rose from an annualized 16.66 million pace in June to 17.88 million for July thanks to dealer incentives that were the highest since Nov-2010. Estimates were for 17.4-17.6 million. However, the big three manufacturers struggled to put any gains on the board.

GM sales fell -1.9% in July to 267,258 vehicles. Ford sales declined -3% to 216,479 vehicles. Fiat Chrysler reported only a 0.3% rise to 180,727 vehicles thanks to a 22% increase in fleet sales. U.S. retail sales were down -2% to 155,855.

The NY ISM rose from 45.4 to 60.7 and the highest level since the 62.0 in December. However, three of the four internal components were still in contraction territory under 50. Employment did improve from 35.9 to 45.3 but remains in contraction. The six-month outlook fell from 59.5 to 56.8 but remained in expansion territory.

Personal income for June rose +0.2% and flat with May. Analysts were expecting a +0.3% rise. The PCE Deflator rose +0.1% after a +0.2% gain in May. Gasoline rose 2.4%, housing +0.3% and healthcare rose +0.2%. However, durable goods fell -0.3% and motor vehicles and parts declined -0.2%. The headline PCE inflation over the last 12 months is now 0.9% compared to the Core PCE over the same period at 1.6%. Declines in food prices actually lowered the headline number. Personal spending for June rose +0.3% after a 0.3% rise in May.

Semiconductor billings for June rose +1.1% and the biggest gain since October at +2.0%. Unfortunately this was down -5.8% from the same period in 2015. Weak overseas demand and financial volatility are slowing economic expansion and the demand for semiconductors. Of course, that is all relative since sales for June were $26.4 billion. Sales in the U.S. rose +0.9% but they are down -10.8% from year ago levels. Asia Pacific demand declined -0.8% and is 11% lower from the year ago period. Chinese sales rose 4.1% and they are up +1.7% year over year.

On tap for Wednesday is the ADP Employment report where estimates have declined -10,000 since last week to a gain of only 170,000. The Nonfarm Payroll estimate for Friday has also declined about 10,000 to 175,000 compared to the 287,000 reported for June. These reports will be critical for Fed thinking when they meet again in late September. They will also have the August jobs numbers before that meeting. Various Fed heads are starting to talk about rate hikes again although they are remaining elusive on the timing. I think it is just a conspiracy to try and talk up rates even though they know they will not be hiking until 2017.


Biogen (BIIB) spiked $28 at 2:30 on rumors Allergan (AGN) and/or Merck (MRK) were in discussions about an acquisition. The WSJ said the companies had held talks but they were only in the preliminary stages. Since Biogen had a market cap at the close of $72 billion it would be a whopper of a deal. Merck has a market cap of $162 billion and Allergan $101 billion. One analyst said it was very unlikely Allergan would actually be a strong bidder after they were shot down on the attempted Pfizer acquisition. The rumor and the spike in Biogen shares helped lift the Nasdaq off its intraday lows.


Deutsche Bank (DB) and Credit Suisse (CS) are being dropped from the Stoxx Europe 50 index for the first time since 1998. Both stocks have declined more than 50% this year as a result of negative rates and European economic weakness. The exchange operator said they were being ejected using a "fast exit" rule where a company on the index can be ejected if they fall to 75th or lower in the list of companies being considered for additions. That means there are 75 companies more in favor than DB or CS.


Electronic Arts (EA) reported earnings of 7 cents compared to estimates for a loss of 2 cents. Revenue of $682 million also beat estimated for $651 million. For the current quarter, the company projected a loss of 17 cents on revenue of $1.08 billion. Analysts were expecting $1.11 billion. Shares fell -$2 in afterhours.


FitBit (FIT) reported earnings of 12 cents compared to estimates for 11 cents. Revenue of $587 million also beat estimates for $578 million. They sold 5.7 million units in the quarter. They guided for the current quarter for revenue of $490-$510 million and analysts were expecting $497 million. They guided for earnings of 17-19 cents and analysts were expecting 17 cents. They also expect full year revenue of $2.5-$2.6 billion. Overall, it was a good report but shares only gained 75 cents in afterhours.


AIG (AIG) reported adjusted earnings of 98 cents on revenue of $13.13 billion. Analysts were expecting 91 cents. AIG is in the midst of a restructuring program and the CEO said we "have executed more quickly and smoothly than expected and our confidence in reaching our 2017 financial targets is high as our earnings become more sustainable." The return on equity rose from 6.8% to 8.6% and costs declined -7%. They are targeting a $1.6 billion cost reduction over two years. They bought back $3.2 billion in stock during the quarter for a total of $7.9 billion towards its target of $25 billion. The board authorized another $3 billion buyback for the current quarter and declared a dividend of 32 cents. Shares gained $2 after the bell. The consensus price target is about $65.


Endurance International (EIGI) posted adjusted earnings of 19 cents on revenue of $197.4 million. Analysts were expecting 33 cents on revenue of $299 million. EIGI registers, builds, sells and manages websites and domain names. They offer marketing tools, web payment interfaces and various cloud services, etc. They had 5.48 million subscribers on the platform at the end of the quarter. Shares fell -23% on the news.


Aetna (AET) reported earnings of $2.21 compared to estimates for $2.11. Revenue of $15.95 billion also beat estimates for $15.74 billion. Aetna had 46.3 million people receiving benefits at the end of the quarter. They guided for full year earnings of $7.90-$8.10. However, the company said Obamacare losses rose from $160 million in 2015 to $320 million expected for the full year. As a result, the company is no longer looking to expand into other states but is reevaluating its current participation in the 17 state exchanges it currently serves. With United Health and Humana already pulling out of the program it would leave Blue Cross as the only carrier in multiple states. Cigna is a smaller insurer and despite the expected loss this year they are still considering adding several states to their program but will not make the decision until later this year. Aetna shares gained $1.26 on the earnings.


Dow component Pfizer (PFE) reported earnings of 64 cents on revenue of $13.15 billion. Analysts were expecting 62 cents and $13.10 billion. The company reaffirmed full year earnings forecast of $2.38 to $2.48 per share. Drug sales were challenged and the outlook is for more of the same. Shares fell 2.5% on the news.


Dow component Procter & Gamble (PG) reported earnings of 79 cents compared to estimates for 74 cents. Revenue of $16.1 billion also beat estimates for $15.84 billion. The company guided for organic sales to rise 2% in 2017 and core earnings to grow mid single digits from the current year's $3.67 per share. The company said it was developing new products to specifically fight smells in workout clothes. The new Tide and Downy products will be called the "Odor Defense Collection." Although overall sales were weak last quarter the CEO said he was seeing improvements in China. Sales in China were flat compared to declines in prior quarters. Shares gained only slightly on the report.


Gun maker Sturm Ruger (RGR) reported earnings of $1.22 on a 19% increase in revenue to $167.9 million. The company said its modern sporting rifle, the AR-556, was responsible for one-third of all sales. They declared a cash dividend of 49 cents payable on August 26th to holders on August 12th. The company said gun demand was booming.


The National Shooting Sports Foundation reported today that FBI background checks surged 27.9% to 1,210,731 compared to July 2015 checks at 946,528. With Clinton promising to gut the second amendment, regulate semi-automatic firearms and slow down gun sales in general, you can bet the next 8-12 months will see new sales records set.


Earnings on the schedule for Wednesday will see Tesla, Jack in the Box, Humana, Tripadvisor and Ctrip.com as the headliners. There are no Dow components for the rest of the week and only four left to report.


Crude oil declined to $39.26 midday after a spike to $40.90 shortly after the open. The decline was sharp and there was no specific news. Shares closed at $39.56 but gained 20 cents in afterhours after the API inventory report showed a decline in crude inventories of -1.3 million barrels. Refined product inventories were basically flat.

Ironically, Exxon and Chevron were the top two gainers on the Dow.


Markets

The S&P finally broke out of its recent range from 2160-2180 and dipped to 2,147 intraday. For a few minutes, it appeared the markets were going into crash mode but buyers stepped in and rescued the indexes. The S&P rebounded 10 points to close at 2,157 for a loss of -14 points.

We now have a clear picture of resistance at 2,177 and the majority of support levels are back in the 2100-2128 range with 2,150 the intraday support from today. The market is still very overextended and we could easily continue lower simply from a lack of interest. However, volume was 7.5 billion shares and the highest since July 12th. Much of that was selling with decliners at 5,499 3:1 over advancers at 1,641. The volume was almost identical to the A/D ratio.

Normally this is where I would saw the volume rules. The heaviest volume is typically the indicator for market direction the following day. However, the dip buyers are alive and well even though we are moving into the seasonal weakness in August/September.


The Dow has been the weakest index as post earnings depression settles in on the 26 Dow stocks that have already reported. The earnings excitement has left the index. The Dow closed below support at 18,350 and this was the seventh consecutive day of declines for the index.

The Dow rebounded +67 points from the intraday low at 18,247 but still lost -91 points for the day. The Dow is still overextended and could easily return to support at 18,000 without damaging the current trend. That would only be a 3% decline and normal profit taking. A decline under 18,000 would target 17,400, which would be a 6% decline. We would have to drop back to nearly 16,500 to qualify as a 10% correction. I do not see that happening.



The Nasdaq declined almost to 5,100 before the Biogen spike changed the tone of the market. The index rebounded 28 points very quickly but then went dormant the last hour of trading at 5,140. The index is back in the prior resistance band after coming within 18 points of a new high on Monday. Like the other indexes, the Nasdaq remains overextended and derived much of its gains over the last week from the rally in the biotech sector. As long as that rally continues, it will provide support.

Resistance is now 5,200 and support 5,100.



The Russell 2000 dropped -17 points to close back under prior resistance at 1,205. This could be a launch point for a new rally or a failure point on any further decline. The Russell has risk back to 1,095 on any decline that is not normal profit taking.


I was going to say flat is the new down after three weeks of flat markets but today proved me wrong. I had a reader email me and ask "what happened? I thought the markets only went up." He was of course joking. It is just that we have not seen an actual market drop since June 24th.

While it is fun to joke about nonexistent declines, we should always remember, regardless of how bullish the market appears, it is never more than one headline away from a Jekyll and Hyde character change. The biggest declines are the ones that happen when we least expect them. With everyone expecting a decline into August, I would be very surprised if it was dramatic. Just keep your stop losses in place and prepare to launch new positions if we get an actual dip.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Turnaround Tuesday?

by Jim Brown

Click here to email Jim Brown

Editors Note:

This was the first real market decline since June 24th. Futures are negative suggesting it could continue on Wednesday but we know that could reverse at any time. The markets are still overbought and I would prefer not to add new long plays until we see if a bottom is going to appear. Adding new shorts in potential gap down market is also dangerous. I am not adding any new plays today and review the setup on Wednesday. I am looking for a buying opportunity but I do not think today was it.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Seven Consecutive Days

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow is now down seven consecutive days and the outlook is still lower. The post earnings depression continued to weigh on the Dow and the Dow Transports were a big drag on the market today. The Dow Transports fell -2.1% thanks to an implosion in the airline stocks.

The decline in the Dow shows no signs of recovery and so far the selling has been orderly. There is no sense of panic and that has kept the Volatility Index at a low level with a close at 13 today.

So far, this only appears to be some light profit taking rather than the start of a market crash.



Current Portfolio




Current Position Changes


DIA - Dow ETF

The long put position was entered at the open.


AKRX - Akorn Inc

The long call position was stopped out at $32.85.


ALK - Alaska Airlines

The long call position was stopped out at $65.75.


PVH - PVH Corp

The long call position was stopped out at $98.25.


Z - Zillow Group

The long call position was stopped out at $38.85.


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:

Raymond James downgraded Akorn from outperform to market perform. Shares dropped $1.50 at the open to stop us out for a minor gain.

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:

Closed 8/2/16: Long Sept $35 call @ $1.30, exit $1.75, +.45 gain.


ALK - Alaskan Air - Company Description

Comments:

The company reported a +7.8% increase in traffic for July on a 9.6% increase in capacity. The good news could not overcome the sharp decline in the sector over worries about a drop in traffic to Europe on ISIS fears and Latin America on Zika fears. German carrier Lufthansa warned the terror attacks in Europe had caused a tangible impact to passenger volume. Delta warned there was a 7% decline in revenue in July. We were stopped out on the opening drop.

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

Closed 8/2/16: Long Sept $70 call @ $1.65, exit .90, -.75 loss.


GIII - G-III Apparel Group - Company Profile

Comments:

No specific news. Shares fell -3% in a weak market.

Original Trade Description: July 30th.

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. G-III Apparel Group, Ltd. was founded in 1956.

G-III has been on a buying binge the last several years. They are expanding their brands and expanding the marketing of existing brands with license agreements with other companies.

Last week G-III announced the acquisition of the Donna Karan brand from LVMH for $650 million in a combination of cash, stock and notes. Several analysts immediately downgraded the stock saying they paid too much and it would be dilutive to earnings in 2017. The stock crashed from $50 to $38. The Cowen analyst said the price was too high compared to the brand's potential and return on capital from the acquisition.

Donna Karan has a large international presence and G-III is focused on growing its business in the USA. Analysts thought this was the wrong brand at this time. However, G-III believes they can expand the brand globally and especially in the US. G-III Press release I happen to be familiar with it because it was my wife's favorite brand in the 1980s but she had trouble finding it in the US.

I believe G-III will be successful with the brand but we are talking a couple years. We are not going to hold the stock that long. In the short term the stock is oversold and we are going to enter a position to capture a bounce. G-III has a good reputation and they were in a two-month uptrend when the announcement was made. I beleive that trend will return. If the market rolls over investors are going to be looking for stocks that have already been beaten up as potential safe havens. If the market goes higher, eventually investors are going to be looking for stocks that are not over extended. G-III fits the bill on both counts.

Earnings August 31st.

Position 8/1/16 with a GIII trade at $40.75

Long Sept $45 call @ $1.15, see portfolio graphic for stop loss.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. The rebound from $14 stalled in a weak market.

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 returns.

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. Minor decline in a weak market. Shares still holding at the highs.

Nvidia was nominated to replace Netflix in the "FANG" acronym. Josh Brown said Nvidia could be the Intel of artificial intelligence, virtual reality and graphics processing.

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. Big drop with the market as traders took profits across the board. We were stopped out for a nice gain.

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:

Closed 8/2/16: Long August $90 call @ $4.23, exit $7.80, +$3.57 gain.


TASR - Taser Intl - Company Description

Comments:

No specific news. Earnings on Thursday. Minor 1% decline in a weak market.

Original Trade Description: July 14th.

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

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

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

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

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


XBI - Biotech ETF - ETF Profile

Comments:

No specific news. Shares declined only slightly from the new 6-month high on Monday.

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:

Zillow acquired Bridge Interactive Group, a creator of broker and multiple listing services. Terms were not disclosed. Shares dropped sharply at the open to stop us out. I had moved the stop close to the price because earnings are Thursday and we needed to exit on Wednesday anyway.

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:

Closed 8/2/16: Long Nov $40 call @ $2.30, exit $3.10, +$.80 gain.



BEARISH Play Updates (Alpha by Symbol)

AMCX - AMC Networks - Company Description

Comments:

No specific news. I mentioned on Monday we need to exit the position at the close on Wednesday. With the drop to a new 52-week low today I am reconsidering that plan. Today there was a lot of talk about cord cutting, decline in advertising spending and falling ratings on the cable channels. AMC could be hit hard by those factors and could drop significantly. In the initial play description I wrote about the sharp decline in ratings on the Walking Dead and Fear of the Walking Dead programs and soft ratings on their two new programs.

Given the market weakness and stock weakness today, I am not going to close this position. If you want to make a safe exit I would do so before the close on Wednesday. There is strong resistance at $57 so a gap higher after earnings will not likely be more than a couple dollars. (Famous last words) However, a sharp drop on an earnings disappointment below $53.50 could continue to fall for several weeks with the next support level near $40.

Readers need to decide if they want to exit on Wednesday with a 40 cent gain or roll the dice on a potential larger gain or a loss if the trade goes against us.

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.


DIA - Dow Jones ETF - ETF Profile

Comments:

The weakness in the Dow picked up some speed on multiple events on Tuesday. The transportation sector imploded on worries over ISIS and Zika impacting travel. The Asian markets were down on lackluster stimulus moves in Japan. Earnings failed to excite investors and the Dow has now declined for 7 consecutive days.

Original Trade Description: August 1st.

The Dow posted another lower low as it fades from the 18,622 intraday high set back on July 20th. The last three days the Dow has traded under support at 18,400 only to rebound back over that level at the close. The 18,350 level is secondary support and today's low was 18,355.

All but six Dow components have reported earnings and there are only two reporting this week. Those are PG and PFE on Tuesday. The Dow is experiencing post earnings depression. After a stock reports earnings there is typically a period where it declines as traders leave that stock in search of something else to trade that has not yet reported.

PG 8/2
PFE 8/2
DIS 8/9
HD 8/16
CSCO 8/17
WMT 8/18

The Dow is very over extended, suffering post earnings depression and heading into the two weakest months of the year, which are seasonal decliners.

Bank of America expects a 10-15% decline over the next two months.

Goldman Sachs said this morning they expect a 5-10% decline. Goldman said, rising uncertainty in the U.S. and globally, negative earnings revisions, decelerating buybacks and overly dovish Fed expectations would send the market lower over the next several months.

Jeffrey Gundlach of DoubleLine with $100 billion under management, said "sell everything" most asset classes are "frothy and nothing here looks good." "Stock investors have entered a world of uber complacency." "Investors seem to have been hypnotized that nothing can go wrong." He expects the next big money to be made on the short side.

Peter Boockcar, chief market analyst at the Lindsey Group, said, "Take off the beer goggles, the markets are dangerous. To me, the U.S. stock market is the most expensive in the world."

According to Bespoke, over the last 20 years the Dow has performed the worst in August of any other month.

However, just because some big names and big banks turn negative on the market, it does not mean it is guaranteed to move lower. Markets tend to move in the direction that will confound the most people at any given time.

I believe we should accept the risk and launch another index short using the Dow ETF (DIA) since it is the weakest in August. The Dow has risk to 18,000 and a breakdown there could take it back to 17,400.

I am going to recommend an October put spread so we can capitalize on any decline that lasts into September. Typically market bottoms are in October. If you do not want to use a spread, I would buy the September $182 puts, currently $2.55. Just remember, once we are into September the premiums will decline sharply.

Position 8/2/16:

Long Oct $182 put @ $3.98, no initial stop loss.
Short Oct $172 put @ $1.73, no initial stop loss.
Net debit $2.25


HSY - Hershey Company - Company Description

Comments:

Shares rallied $1.28 in a weak market on no news. Somebody appears to be accumulating the shares and that could mean a new offer is coming. I am recommending we close the position.

CLOSE THE POSITION

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:

Finally a decent decline but we have a long way to go to get back to breakeven. We only have 3 weeks left on this option.

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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