Option Investor
Newsletter

Daily Newsletter, Thursday, 8/4/2016

Table of Contents

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

Market Wrap

Consolidation Continues

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market continues to consolidate near the recent highs while we await tomorrow's NFP data. The data will be important for many reasons including but not limited to FOMC rate hike expectations, labor market health, consumer strength and earnings outlook. Today's data points to ongoing recovery in labor but fell a bit short in terms of manufacturing.

Asian markets were mostly flat in today's session but one market, Japan, stood out. The Nikkei rose more than 1% due to a late day weakening in the yen, a weakening that still leaves the USD/JPY hovering near 2 year lows. European indices were a bit more enthusiastic, rising about 0.5% on average but led by a 1.5% gain in the FTSE. Today's gains were driven by the BOE policy statement in which they lowered the key rate to 0.25% and increased bond purchases. Along with the policy changes the BOE says that the Brexit will hurt the British economy but moderate growth is expected in the 2nd half of the year.

Market Statistics

Futures trading indicated a positive open all morning, about 0.25% for the S&P 500. This held steady throughout the morning and was little changed following the 8:30AM release of economic data. After the open the indices drift sideways in mild but choppy trading, hovering around break even levels. The range held all day, leaving the indices near their open at the close of the day.

Economic Calendar

The Economy

The Challeger Gray & Christmas report on planned lay-off's was released at 8:15AM. The July report shows that lay-off's jumped by 19% over the previous month but there are some key points to consider. First, the July figure is -57% below last year's July read, second the YTD total is down -8.7% over the same period last year. Also, the July jump is due to a massive uptick in lay-offs in the energy sector, 17,725, which accounts for 39% of the monthly total. Comparing this year to last year the energy sector is accelerating the pace of lay-offs, up 37% YOY, but this is expected to reverse in the next year or so as a wave of retirements hit the sector. The sector is expected to add 30,000 per year over the next two decades in order to maintain the workforce. The computer sector is the 2nd biggest loser of jobs this month, ytd losses for the sector are up 94% over last year. So, job cuts are up but only in the areas that were already weak, and outlook for job growth in at least one of those sectors is positive into the long term.


Initial claims for unemployment gained 3,000 this week, from last week's not revised figure, to hit 269,000. The four week moving average of claims also rose, gaining 3,750, to hit 256,000. On a not adjusted basis claims fell -5% versus an expected fall of -5.9%. On a year over year basis not adjusted claims are down -1.7%. The states with the biggest increases in claims were Michigan and Illinois with gains of 2,598 and 480. The states with the biggest decreases in claims were New York and Georgia with declines of -7,113 and -4,604.


Continuing claims fell by -6,000, following an upward revision of 5,000 to last week's data which leaves this week's figure near flat at 2.138 million. The four week moving average of continuing claims rose by 5,250 but is trending flat near 2.14 million. This week's data remains low and consistent with labor market health.

The total number of claims fell by -18,043 to hit 2.179 million and is -5.3% lower than this time last year. Even with the recent spike, expected due to seasonal trends, total claims remain consistent with declining unemployment and labor market health. It may not point to new job creation but it does point to higher employment levels. The ADP figure on Wednesday suggest that job creation remains steady near 200K monthly, tomorrow's NFP should confirm. The risk with the NFP is that last month's high number will be revised lower. The expectation is for July NFP to come in around 171,000.


The final read on June factory orders was released at 10AM. The figure came in at -1.5%, slightly better than expected but the second month of declining orders. Shipments however rose, by 0.7%, leading to a decline in unfilled orders, -0.8%, and inventories, -0.1%. Inventories have fallen 14 of the last 15 months.

The Atlanta Federal Reserve revised its 3rd quarter GDP estimate by a tenth to 3.7% from 3.6%. The revision is due to today's slightly better than expected manufacturing data. The range of estimates provided by economists is 1.8% to 2.8%.

The Dollar Index

The dollar strengthened a little today but the gains were minimal. The Dollar Index rose about 0.15% on the BOE announcement but remains below resistance at the short term moving average. The indicators remain bearish and pointing lower although momentum has fallen off. Tomorrow's NFP could be the next mover of the index as it plays into FOMC outlook. If outlook turns hawkish the dollar could rise to test resistance, near $96. If outlook remains dovish a drop looks likely. At this point I think it will take a very strong NFP number to increase expectations of a rate hike and so I expect to see the index move lower to test for support. First support target is near $95, a break below this could take it down to $94.30 or lower. As of today the CME Fed Watch Tool shows only about a 15% chance of rate hike over the next two meetings and only goes up to 30% for the December meeting.


The Oil Index

Oil prices rebound today but the move was more short covering than rally. WTI gained more than 2.5% to trade near $42 and has moved out of bear market territory. Today's move was driven by yesterday's unexpectedly large draw down in gasoline stocks, and by a report that stockpiles in Cushing fell less than expected. Tempering the news however is an ongoing supply glut which is showing little sign of changing. Also capping gains were a statement from an OPEC official revealing the cartel's July production was the highest since January, and data from Singapore showing mid-level distillate stockpiles are at a 5 year high. Today's bounce may continue with upside target near $45, if however data remains tilted toward the supply side any gains will likely be limited.

The Oil Index rose in tandem with oil prices, gaining about 0.25%. The move however has taken the index up to resistance targets near 1,120 and may have already hit its ceiling. A break above this level would be bullish and could take the index up to the 1,175 level but even so, would leave it range bound. A failure to break above current resistance levels, consistent with the mid-point of the four month trading range, is bearish and likely will result in a retest of support near the bottom of the range.


The Gold Index

Gold prices held steady near $1,365 today despite intraday strength in the dollar. The BOE move raised a little fear of Brexit fallout but enough to spark a full on rally. The metal may continue higher in the near term but the real catalyst will be FOMC and rate hike outlook, and the dollar. Tomorrow's NFP will likely move prices but without a real change in outlook gold will likely remain range bound. Resistance is about 1% above today's close, near $1,380, first target for support is near $1,350 with a chance of moving lower to $1,320 depending on how the data plays out over the next week.

The gold miners were able to move higher despite flat performance in the underlying metal. The miners ETF GDX gained a little more than 1.25% in a move that appears to confirm the break out to new highs which occurred earlier this week. Today's action moved higher from the $31 level, previous resistance turning to support, with bullish indications. Both MACD and stochastic are pointing to higher prices but there is a caveat, momentum is still weak and stochastic is not overly strong. If the break to new highs does not hold and the ETF moves back below $31 first target for support is $30 and then $29. If the move holds and is supported by gold prices the index could go as high as $36 in the near to short term.


In The News, Story Stocks and Earnings

Duke Energy reported earnings before the opening bell. The integrated energy utility reported earnings above expectations on revenue that fell slightly short of consensus. Full year guidance was maintained. Special items impacting GAAP earnings are an impairment charge related to South American operations and costs of mergers and other cost saving actions. Looking forward the company is expecting to close the acquisition of Piedmont Natural Gas and the sale of Latin American assets. The dividend remains unchanged at $3.42 annually, or about 4% at today's share prices. Shares of the stock fell about -0.25% today but are basically flat over the last month, trending just below a 15 month high.


Kellog also reported before the opening bell. The breakfast foo giant reported EPS in line with estimates on lighter than expected revenue. Despite the drop in revenue the company was able to post a profit in all segments of business. Looking forward the company has raised full year guidance to a range just above the previous and expects to see a margin expansion of 350 BPS over the next 24 months. Shares of the stock gained more than 1.5% in the pre-opening session, gapped up at the open and then moved as high as +5% during the day before falling back to close near the open.


Priceline reported after the bell, beating EPS estimates by $1.24, or roughly 9%, although revenue fell short. The beat was driven by strong travel demand, up nearly 20% and led by the international segment. Bookings are also up about 20% and expected to remain strong into the 3rd quarter. Guidance for the quarter is bookings up 14% to 19% with a 12% to 17% growth in revenue. Shares of the stock jumped more than 4% on the news.


The Indices

Today's action was light, choppy and held within a very tight range. Basically, more of the same we've been seeing over the past three weeks ever since the SPX first set a new all time high. The markets are winding up, waiting for something, possibly tomorrow's NFP report. Regardless, today's leader was the NASDAQ Composite Index which gained a little more than 0.15%. The tech heavy index created a small spinning top candle, near the recently set high, but does not look like it wants to go higher. The indicators continue to weaken, momentum has retreated to 0 and stochastic has fired a bearish crossover, suggesting the rally has reached its peak. If the index were to break above the current high, near 5,200, it would be bullish in the near term and could lead the index higher. A failure to break above it would be neutral but could lead to a retreat to 5,050 and a stronger support level coincident with the short term moving average.


Runner up in today's session was the Dow Jones Transportation Average which gained barely more than a tenth of a percent. Today's move was very small, price action created a small spinning top doji just beneath resistance at 7,750. This level is coincident with the short term moving average, which is moving lower within a range. The index looks like it has reversed within a trading and is now heading lower with near term target of 7,500. The indicators are consistent with this, both pointing lower, although tomorrow's data could change this. A confirmation of the 7,750 level, the mid-point of the 5 month trading range, would be bearish but may not break the index out of its range. A move above 7,750 would be near term bullish with upside target near 8,000.


The S&P 500 is third in line with gains of only 0.02%. This move creates a near perfect doji and indicates a market in balance. The balance may be tenuous however, both indicators are pointing lower and suggest an underlying weakness is building. Price is above 2,050 and bouncing although the indicators suggest the test of support is not over. First target for suppor is near 2,150 and maybe just a little below, near the uptrending short term trend line. A break below these levels could become bearish and lead to further downside. Next target would be near 2,030 and the previous all time high. Should tomorrows data spark a rally resistance is at the current all time high, a break above that is bullish with upside potential of 1-3%.


The Dow Jones Industrial Average brings up the rear today, posting a loss of -0.02%. This index also created a near perfect doji and is sitting just above support. Support is near 18,350 and is confirmed by the short term moving average. A break below this level could be bearish in the near to short term with targets at 18,000 and 17,750. A bounce from this level may hit resistance at the new all time high depending on how the data comes in. A break above the high is bullish and likely to lead to further upside.


The indices continue to consolidate near their recent highs although drifting lower over the past two weeks. Today's price action was choppyand on low volume, as it has been since the SPX hits it's new all time high. It and the other indices could be preparing to move up to new highs but tepid economic data and declining earnings growth outlook do not support that view.Tomorrow's NFP data could tip the scales one way or the other, but what it will probably come down to is summer seasonality and range bound trading. Will there be enough volume to move the market below support or above resistance, depending on what the numbers say? If not we could be in for a few more weeks of sidewinding.

It'll be another 4 or 5 weeks until full volume returns to the market and until then these small day to day moves are just noise anyway. If there is a sell off it will probably be short term in nature, sharp and quick. The long term moves will probably get started once the fall trading season is under way, now is the time to watch and wait, getting ready for what the market will do this fall. Until then I remain cautious.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Drug of Choice

by Jim Brown

Click here to email Jim Brown

Editors Note:

Fentanyl is becoming the drug of choice for those highly addicted to pain killers and numerous people have died from overdoses. Lannet just got FDA approval to file for production of the transdermal version, which should produce higher sales.



NEW DIRECTIONAL CALL PLAYS

LCI - Lannet Company - Company Profile

Lannett Company, Inc. develops, manufactures, packages, markets, and distributes generic versions of branded pharmaceutical products in the United States. It offers solid oral, extended release, topical, nasal, and oral solution finished dosage forms of drugs that address a range of therapeutic areas, as well as ophthalmic, patch, foam, buccal, sublingual, soft gel, and injectable dosages. The company provides its products for various medical indications comprising glaucoma, muscle relaxant, migraine, anesthetic, congestive heart failure, thyroid deficiency, dryness of the mouth, gout, bronchospasms, hypertension, and gallstone. It also manufactures active pharmaceutical ingredients. Lannett Company, Inc. markets its products under the Diamox, Lioresal, Fioricet, Fiorinal, Fiorinal w/ Codeine #3, Lanoxin, Levoxyl/Synthroid, Salagen, Benemid, Brethine, Dyazide, and Actigall brands.

The company recently received FDA approval to market Paroxetine extended release tablets in various strengths. Sales of the branded drug in the U.S. last year were over $122 million. There is only one competitor in the market for this drug.

The big news came from the receipt of a FDA Acceptable Filing Letter for Fentanyl patches. The letter allows them to file for approval of the 12mcg/hour, 25mcg, 50mcg, 75mcg and 100mcg patches. This is the generic equivalent of Ortho McNeil's chronic pain treatment Duragesic. According to Lannet sales of the transdermal patches in the U.S. in 2015 were more than $650 million. Lannet partnered with Sparsha Pharma, a specialist in tramsdermal systems, to produce the patches.

Lannet is rapidly increasing its portfolio of generic drugs and sales are booming. This will be a short-term play because earnings are August 23rd. I am looking for a ramp into earnings and we will close the position ahead of that event.

The Sept $35 option is too far out of the money for a short-term position. I am recommending the slightly in the money $30 call. With LCI at $31.78 it is already $1.78 in the money.

Buy Sept $30 call, currently $2.60, stop loss $30.65.
That is a tight stop because of the ITM strike price.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Jobs Worry?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market seemed to be afraid of Friday's jobs report as the indexes barely closed positive. Volume was weak at 6.4 billion shares and the lowest in the last 8 days. With Fed heads talking rate hikes again and the jobs report a critical piece of that puzzle it is possible traders were just content with holding their positions.

The Dow gave back 45 points to close slightly negative and the S&P only gained half a point. The Nasdaq could not rely on the biotechs today as that sector gave back more than 1%. The rally is still intact but traders were likely taking profits there ahead of the Friday report.

There were no highlights today with all the markets basically flat. As for stocks Nvidia gained another $1 to a new high ahead of earnings next week. Taser only gained fractionally after the close despite record earnings. I tightened the stop loss again in case there is a sell the news event.



Current Portfolio




Current Position Changes


GIII - G-III Apparel

The long call position was entered at the open.


AAPL - Apple Inc

The long call position was entered at the open.


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


AAPL - Apple Inc -
Company Profile

Comments:

Tim Cook said the App Store had record billings in July thanks to Pokemon Go. The game could provide $3 billion in revenue over the next two years. In 2013-2014 Candy Crush generated more than $1 billion for Apple. The App store gets a percentage of every purchase made and Pokemon Go is racking up the sales.

Original Trade Description: August 3rd.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, education, and enterprise and government customers worldwide. The company offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, iBooks Store, Mac App Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

Multiple leaks from vendors now point to an earlier release of the iPhone 7 on September 7th. That is a week earlier than normal and it stems from the iPhone 7 on the 7th. Pre-orders will start on the 9th and the actual first sale date on September 16th. This will give Apple an extra week of sales in Q3 and help boost their revenue for the quarter. I am sure that was also a motive behind the earlier release date. That will help Apple meet earnings and revenue estimates for Q3. Last time around the iPHone 6S and 6S+ did not go on sale until September 25th.

Other leaks confirm Apple is scrapping the 16gb model. The available memory range will no longer be 16/64/126gb but jump to 32/128/256gb. The prices for the 7 are reported to be $649, $749 and $849. The 7 Plus will be $749, $849 and $949. Those numbers roughly equate to a discount of $100 each over the 6s and 6S Plus models because the base memory increment doubled without an increase in price.

Lastly, there are numerous other leaks that suggest Apple is going to announce a brand new iPhone in September 2017 with a massive number of new design features to commemorate the 10th anniversary of the iPhone product. While that will not impact Apple's share price this season it is something to watch in 2017 and we need to get the trade launched immediately after the July earnings.

For this year, Apple shares spiked to $104 on the better than expected earnings. After spending a week consolidating, the shares are starting to move up again. Typically, they rally from early August until the actual announcement then suffer a sell the news event decline. I am recommending October options so there is still some expectation premium left when we exit in early September.

Position 8/4/16:

Long Oct $110 call @ $2.19, see portfolio graphic for stop loss.


GIII - G-III Apparel Group - Company Profile

Comments:

No specific news. Shares rallied 1.5% as the rebound from the Kate Spade earnings miss wears off.

Original Trade Description: August 3rd.

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 8/4/16

Long Sept $45 call @ 90 cents. See portfolio graphic for stop loss.

Previously closed 8/3/16: Long Sept $45 call @ $1.15, exit .60, -.55 loss.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. Minor loss 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. Shares hit a new high ahead of earnings next week.

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.


TASR - Taser Intl - Company Description

Comments:

Taser reported earnings of 7 cents compared to estimates for 3 cents. Revenue of $58.8 million beat estimates for $53.7 million. Revenue rose 26% and body camera bookings more than doubled. Taser shipped more than 10,000 cameras in July alone with backorders of 14,000. Shares barely moved after the bell and that worries me there could be a sell the news event since the stock has been making record highs by only a few cents each day. I tightened the stop loss again to right below today's low.

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 pulled back slightly from the new 6-month high. It was a weak market.

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.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

The Dow could not hold its gains and slipped back into negative territory at the close after nearly touching 18,400 at the open and a 45-point gain.

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


IWM - Russell 2000 ETF - ETF Description

Comments:

The IWM held its gains from yesterday but only barely positive. The Russell only gained 1 point for the day. 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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