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Daily Newsletter, Saturday, 8/13/2016

Table of Contents

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

Market Wrap

Volume Drought

by Jim Brown

Click here to email Jim Brown

It was definitely a summer Friday with volume very low despite the major indexes at historic highs.

Weekly Statistics

Friday Statistics

Friday's volume fell to 5.5 billion shares to round out a very light week that averaged only 5.894 billion shares per day. You would not have known it was a record week on the indexes by their gains for the week. The S&P gained only 1 point for the week, Nasdaq Composite 12 points and Dow 33 points. That is not the kind of market movement that inspires bullish confidence.


The economic reports on Friday should have been positive for the market. The bad news should have pushed the Fed even farther into 2017 for the next rate hike. The bad news started with the Producer Price Index for July.

The headline inflation at the producer level fell -0.4% compared to a rise of +0.5% in June and expectations for a rise of +0.1%. This was the first decline since March. Inflation in food prices fell -1.1% and energy prices fell -1.0%. The core rate excluding those items was flat at zero for the second month. If you do not eat or use energy, your inflation rate for July was zero. The rest of us saw a price cut.

Inflation for services fell -0.3% and the biggest drop since March. Inflation for personal consumption items fell -0.4%. Processed energy goods prices rose +0.8% even though energy prices were falling in July.

The drop in inflation at the producer level will be a concern for the Fed and will probably put the rate hike hawks back in their cages for the September meeting.

The Retail Sales report for July was also bad news. Headline sales growth was flat at zero compared to a +0.8% rise in June. Analysts were looking for a 0.4% rise. It should be noted that Amazon's Prime Day shopping spree was in July and even that did not lift overall sales for the month.

The nonstore sales category did rise +1.3% because of Prime Day but it could not offset declines elsewhere. Gasoline stations saw sales decline -2.7% due to falling gas prices. If you exclude this category, the overall core sales would have improved slightly to only -0.1% decline. Sales at sporting goods stores fell -2.2%, grocery stores -0.9%, general merchandise -0.1%, clothing -0.5%, food service/drinking -0.2%, electronics and appliances -0.1%, building materials -0.5% and food & beverages -0.6%. Autos and auto parts was the big gainer at +1.1% growth.

This is going to be a challenge for the Fed. I am sure in Yellen's Jackson Hole speech she will say these items are "transient" and will eventually show growth because consumer was the main driver in Q2-GDP. However, the retail sales reports we saw last week showed that every retailer saw revenue declines as consumers keep their money in their pocket.

The uncertainty of the election cycle is causing all kinds of ripples in the economy. Wendy's and Shake Shack both warned the election cycle was slowing sales of fast food.

Consumer sentiment for August rose only slightly from 90.0 to 90.4 compared to analyst estimates at 91.5. The current conditions component fell from 109.0 to 106.1 but the six-month expectations component rose from 77.8 to 80.3. Apparently, some people believe the political rhetoric about the good things they are going to do for jobs and the economy when they are elected. Those people need a course in government since promises rarely come true and if they do, it is normally years later.

The longer-term path on this chart is lower. Sentiment has been weakening for the last year since the high in January 2015 at 98.1. However, record low mortgage rates are providing support to sentiment or the chart would be a lot worse.


The economic calendar for next week has the FOMC minutes of the last meeting and the Philly Fed Manufacturing Survey. The minutes will be a critical inflection point for understanding Fed policy and how the weak economic data might impact their thinking for the September meeting.

The Philly Fed survey is seen as a proxy for the national ISM report due out in two weeks. If the Philly survey is weak then the ISM is expected to be weak. Analysts are expecting some improvement in the Philly survey from the -2.9 reading in July to a +1.5 for August. Given the recent economic reports, they may be setting their sights a little high for this one.

The Fed's Jackson Hole meeting the following week is always a weak point for the market. When you get that many Fed heads together in one place it is a target rich environment for reporters always looking for that next sound bite that could rock the market. Finding a Fed head accidentally afflicted with foot in mouth disease is always a plus.


It was a quiet day for earnings as the cycle comes to a close. JC Penny's (JCP) reported a loss of 5 cents compared to estimates for a loss of 15 cents. That was significantly better than the loss of 40 cents in the year ago quarter.

Revenue of $2.918 billion missed estimates for $2.933 billion but sales did increase 1.5% over the year ago quarter. Same store sales rose 2.2% after a -0.4% decline in Q1. They ended the quarter with $429 million in cash and $2.981 billion in inventory. The company guided to same store sale growth of 3-4% for the full year and for margins to rise 10-30 basis points. EBITDA is expected at about $1 billion. The company said they were seeing a sharp rise in business at malls where Sears and Macy's were closing stores.

Shares spiked on Thursday on some of the other retail earnings but rose another 6% on Friday on the better than expected report.


Ruby Tuesday (RT) reported earnings of 7 cents on revenue of $296.81 million. Same store sales fell -1.4%. The CEO said, "Our quarter was impacted by the softness in the casual dining industry and increased promotional activity by our peers. Given that we expect the macro environment to remain challenging for some time, we are taking the necessary steps to change the trajectory of our business." The company said it plans to close 95 underperforming restaurants by Sept 5th. Today they have 724 stores in operation. They guided to full year earnings of 5-9 cents and same store sales to be flat to up 2%. They may also close another 5-10 stores as leases expire.

Are we starting to see a pattern here? Nearly all of the restaurants reporting earnings are complaining about weak traffic and all have to resort to discounts and special promotions just to maintain prior sales levels. What does this say about the U.S. economy in general? If consumers cannot afford a hamburger, the economy is not headed in the right direction.


Applied Industrial (AIT) reported earnings of 66 cents that matched estimates. Revenue fell -6.4% to $634 million that missed estimates for $642 million. They guided for full year earnings of $2.40-$2.60 and analysts were expecting $2.66. Shares dropped -5% on the news.


Concordia International (CXRX) reported earnings of $1.38 compared to estimates for $1.42. Revenue was in line with estimates. However, they lowered full year guidance to $859-$888 million compared to estimates for $939 million. They guided for earnings of $510-$540 million and analysts were expecting $575 million. The company also suspended their 7.5-cent dividend in favor of using the money for "long-term value-creating initiatives or debt repayment." The stock crashed -38% on the news.


Acacia Communications (ACIA) reported earnings of 77 cents and revenue of $116 million. Analysts were expecting 30 cents and $85.8 million. Yes, that is not a misprint. They knocked the earnings ball out of the park. Even gross margin rose from 41.9% to 47% and well above the year ago level of 35%. They guided for the current quarter for revenue in the $120-$128 range and earnings of 64-76 cents. Analysts were expecting $92 million and 43 cents. Shares rallied 41% on the news. This company just came public at $30 three months ago and shares hit $98 on Friday.


With 91% of the S&P having reported earnings, the blended decline is now -3.5%. The blended revenue decline is now -0.2% and slightly better than the -0.8% forecast at the end of June. This is the first time the S&P has recorded five consecutive quarters of earnings declines since 2008-2009. This is the sixth consecutive quarter of revenue declines. Of those reporting 70% have beaten on earnings and 54% have beaten on revenue. On June 30th, the forecast was for a -5.5% decline according to FactSet. For Q3, 62 companies have issued negative guidance and 28 companies have issued positive guidance as of Friday.

The trailing 12-month PE is now 19.5 and the highest level since 2010. On December 31st, the trailing PE was 17.9. The forward PE is 17.1 based on the 12-month EPS estimate of $128.11.

Q3 earnings are currently expected to show a decline of -2.0% but Q4 is expected to show earnings growth of 5.5%. Revenue is expected to rise 2.2% in Q3 and 4.9% in Q4. The improvements in both metrics are due to easier comps from the same periods in 2015.

It would appear we have turned the corner in earnings. Typically, earnings come in better than the prediction as earnings surprises appear. That suggests the actual earnings decline in Q3 to be around 1% followed by close to 6% growth in Q4. If you were going to buy stocks, you would like to buy them as they rebound from an earnings recession. That means dips are likely to be bought over the next six weeks.

The earnings calendar for next week is retail oriented once again with DKS, URBN, AEO, HD, LOW, SPLS, TGT, GPD, ROST, SHLD, WMT, FL and HIBB. That is a heavy dose of retail earnings that could further build the case for consumer health or a continued decline.

The last three Dow components report. Those are HD, CSCO and WMT. They are not likely to move the Dow needle unless they post significantly stronger numbers than expected. Home Depot would be my pick for an upside move and CSCO/WMT a tossup for a downside move.


Hewlett Packard Enterprise (HPE) said it was buying Silicon Graphics (SGI) for $275 million or $7.75 per share. This is a great deal for HPE and a good deal for SGI as well. That was a 30% premium and they will do much better under the HPE umbrella. SGI makes high performance computers and the addition will complement HPE's big computer business.


Hain Celestial (HAIN) exploded higher on Friday on no news. Option volume is typically 1,300 contracts a day. By noon, they had traded over 13,000 and by the close, more than 55,000 call contracts traded. Average daily stock volume is 1.2 million shares and they traded 6.5 million on Friday. They report earnings next Thursday but the rumor was a possible acquisition to be announced next week.


Yahoo shares surged 4% to a 52-week high on Friday after blowout earnings by Alibaba caused a $13 surge in BABA shares over the last three days. Yahoo owns 15% of Alibaba, currently worth more than $36 billion. Yahoo's market cap at the close on Friday was $41 billion. Even after Verizon pays roughly $5 billion for the Yahoo core assets, there is still a lot of value left in the corporate shell. Yahoo still owns 35% of Yahoo Japan and that stake is valued at roughly $9 billion. Unlike Yahoo USA, Yahoo Japan has produced record revenue and profits for 18 consecutive years.

The Japanese portal produces more than 4,000 articles a day from its contributors and 300 media partners, has a multitude of online services including a credit-card business, a video on demand service and dozens of popular mobile apps. They generate 63 billion page views a month. They pay roughly $236 million a year to Yahoo USA for licensing and technology. If Marissa Mayer had just copied Yahoo Japan she would be flying high today instead of on her way out the door. Softbank owns 43% of Yahoo Japan.



In a SEC 13-F filing, David Tepper's Appaloosa hedge fund sold $500 million in SPY calls. They added $68 million in shares of WDC, $117 million of Atlantica (ABY) and sold all $418 million in Delta (DAL) and cut their Southwest (LUV) stake by 20%. The fund increased their stake in Allergan (AGN) from $75 million to $300 million. They sold all 1.6 million shares of Facebook (FB), 7.0 million shares of Bank of America (BAC), 2.5 million shares of Pfizer (PFE) and 1.3 million shares Cabot Oil & Gas (COG). Overall, he reduced his stock holdings by one-third to $3.80 billion, down from $5.66 billion in the prior quarter.

The key point in that paragraph for me is closing the SPY call position. He had more than $500 million in S&P calls and now has only $5 million. That suggests he was not confident the market was going to continue higher. Unfortunately, for him, this 13-F filing was for the end of June and the S&P hit its three-month low on June 27th with the SPY at $198. The ETF closed Friday at $218. Of course, the filing does not say when in Q2 he sold those calls or when he bought them. If he bought them in February he was still a big winner.


Maybe this time it is different. A constant stream of headlines from OPEC members suggest Saudi Arabia is ready to actually support a move to stabilize oil prices. Saudi needs crude back over $50. Their increasing debt levels and declining FX reserves have caused a shift in their thinking. OPEC production is at historically high levels with production of 33.11 mbpd in July. That is the highest level since 2008. It would not hurt anyone to actually freeze production and give the market time for demand growth to catch up to production. It would allow the OPEC countries some breathing room if they could get oil back over $50 and that would give them confidence to maintain a production freeze and try to push prices even higher.

Lastly, Saudi production hit a record 10.67 mbpd in July and analysts claim they are pretty close to being at their max production capability. That is another reason to support a freeze. If they cannot produce any more but Iran and Iraq can, then not having a freeze would let those countries continue to grow and win back market share. This time it is different for Saudi Arabia and once they say they will support a freeze, the prices will be over $50 very quickly. It is amazing how quickly the OPEC members turned around the expectations for further declines under $40 after Labor Day. Once the chatter began in earnest, the prices rebounded very quickly.


U.S. producers must believe in the chatter as well. The active rig count rose by 17 rigs last week and 15 of those were oil rigs. That pushes the total oil rigs reactivated to 66 over the last 7 weeks. Obviously, there is a long way to go to get back to prior levels but this is a fast start. U.S. production has declined -1.165 mbpd since early 2015. Current production is 8.45 mbpd and that has not gone down since the low of 8.428 mbpd for the week of July 1st. Production is not rebounding but has apparently found the bottom. Multiple U.S. producers guided for higher production in the second half of 2016 despite the low prices. If prices suddenly rocket past $50 on more OPEC chatter, we could see dozens of rigs reactivated each week.


 


 

Markets

The Nasdaq has posted gains for seven consecutive weeks and that has not happened since 2012. The Nasdaq can thank the biotech stocks and the semiconductor sector for those gains.

Despite that admirable winning streak, the index is still only 14 points over the prior historic high of 5,218 in July 2015. The big question today is whether the Nasdaq and the supporting cast can extend those gains after a 7-week sprint. There have been negative days in that streak but very few and very minor. Whenever we see a streak like that on any stock or index that matches a prior high, the bearish sentiment begins to flow out of the investing forest.

This is the equivalent of standing next to a roulette table and seeing red come up 7 spins in a row. The obvious expectation is that the next spin or at least over the next several spins a black number will appear. I have seen a lot of money won and lost betting those color streaks will come to an end.

I have done it a lot at the craps table. If somebody throws 5 or 6 sevens in a row, I am definitely throwing down black chips to bet against the shooter.

In casino table games, the law of averages always prevails. In the market, those laws do not apply regardless of how much we want to bet with/against them. The market can always continue a streak far longer than we can remain liquid betting against that streak.

For every 1,000 investors betting the Nasdaq cannot go higher, there is another 1,000 betting it will. What decides the outcome is the size of the bets on either side. If I am betting against a continued streak, I can easily become road kill. If David Tepper is betting against it with $500 million in SPY calls/puts, etc, then the market is likely to go in his favor because his volume far outweighs my volume and the other 999 investors on my side.

So here is the challenge. We are entering the six most volatile weeks of the year starting the week after August option expiration. Market lows in the second half of the year are typically set in that 6-week period. Are we going to have a lot of portfolio managers bet on that seasonal streak by either closing positions or actively shorting the market or will there be more managers chasing prices higher? Who has the biggest cash hoard and which way are they betting?

I would hesitate to bet against the seasonal weakness but the trend is our friend until it ends. As of Friday's close, the Nasdaq trend was still intact with a new record high. The Dow and S&P posted minor losses but they are still in the game.

I believe we should be observant and not overly long. I would rather keep some cash on hand in anticipation of a dip but keep some invested in case that dip does not come.

Another part of this scenario is that a lot of portfolio managers and individual investors were caught off guard by this rally. I am sure you have heard this was the "most hated rally ever" in the financial press. Bank of America continued a running scorecard of the 17 consecutive weeks of outflows from equities despite the gains in the indexes.

Now everyone who missed out on the rally will be looking for a dip to buy. While that may not happen in any volume before Labor Day, you can bet that any material dip after the holiday will be bought in volume. Portfolio managers will be back from summer vacation and they will have a limited time to post some gains and try to meet their benchmarks and beat their peers. They need to do this to keep their jobs and earn their bonuses. That means the race will be on once the starters gun sounds. We just do not know when that will be.

Remember, Q3 earnings are just expected to be mildly negative but Q4 earnings are expected to grow 5.5%. That means the earnings recession is nearly over and portfolio managers will be bulking up on equities to capitalize on that rebound.

The fly in our soup is the election. The uncertainty is so bad that fast food restaurants are warning of slowing sales in their earnings reports. With 85 or so days until the election, the mudslinging is going to reach a fever pitch. If the polls remain this far apart in the weeks that follow, the uncertainty may fade. When there is an apparent winner weeks ahead of the election the market tends to charge ahead as though the election was already over.

To summarize, the six most volatile weeks of the year begin after option expiration. There is a massive amount of cash on the sidelines and investor sentiment is still mostly neutral/negative. Fund managers are underperforming and they need to suit up with their shoulder pads and running shoes and get in the game after Labor Day. I am looking forward to September and the potential for a real breakout to new highs. (I am sure I am going to get a ton of emails on this outlook. I do welcome your thoughts by email. We have some smart readers and I learn something every week from our subscribers.)

The Nasdaq closed at 5,232 with a 4 point gain and only 14 points over the prior historic high. That is still not a breakout in my book. It is more of a slow motion resistance test. Initial support remains 5,200 and a critical level to watch. Initial resistance is the intraday highs for the last week around 5,235.



The last three Dow components report earnings next week on three different days. The potential for a market-moving event is slim but always possible. The Dow benefitted from the spike in oil prices on Friday with Chevron and Exxon the biggest gainers on the index. The Dow was flirting with the lows at 18,540 when oil started to spike and the short covering in those two names lifted the Dow back to 18,574 at the close.

The index has developed an interesting chart pattern with multiple lines of resistance all converging right at the 18,600 level. The Dow punched through multiple levels of resistance to get to where it is today and a breakout here would set it free. Support is 18,500 and 18,250.



The S&P refuses to decline more than a couple points at a time and then we get one good day that recovers those losses. The long-term resistance that corresponds to the red line on the Dow is roughly 2225-2230 on the S&P. Initial resistance from the last four days of intraday highs is roughly 2,187 with support at 2,150. I do not really see that support breaking without a major change in market sentiment. Anything is always possible but the dip buyers are alive and well.


The Russell 2000 has not made a new high. The current 52-week high is 1,231.75 with the historic high at 1,295. The Russell has not been moving up as strongly over the last four weeks as it did in the first three weeks of the rebound from 1,095. What we have is a scenario where a few big caps are leading the charge and the troops are lagging behind. This needs to change after Labor Day if the market is really going to move significantly higher.


I think I was clear in my commentary. The market has been successful in bucking the normal seasonal weakness but the momentum has slowed significantly. I do expect some volatility to appear but be tempered by some aggressive dip buying the closer we get to Labor Day. Volume should continue to be very anemic and that favors the bulls in this case, which is unusual.

I prefer to refrain from being overly long and I recommend we keep some cash on hand to buy any material dip over the next several weeks.

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Random Thoughts


Sentiment levels were mostly unchanged last week, which is just one more indication investors are not paying attention to the market. Volume remains very anemic and should decline even more over the next two weeks with the exception being option expiration.

Bullish sentiment rose slightly by +1.5% and it came from neutral investors moving off the fence. Bearish sentiment was unchanged. Sentiment will likely remain unchanged until after Labor Day.



The conventional wisdom is that the markets do poorly in late summer in election years. However, there was an article on Friday that pointed out since 1952 the last 7 months of the election cycle was strong in all but two years. In the 16 presidential election years since 1952, the market only declined twice. August was actually a strong month in election years according to this research. I have not seen the actual data behind the article but I have to admit I was surprised at the headlines.


Another study by Kensho found that the Russell 2000, Nasdaq and Dow posted an average gain of only 0.5% in the month after a triple index high like we saw the prior Friday. The S&P averaged a decline of -0.5%. There were 132 triple index highs since 1986.

That study is not encouraging because it suggests stocks tend to flatten out after a triple index high. On the positive side, the energy sector is up an average of 3.17% and was the leading sector. Apparently, the euphoria over new highs suggested oil demand would rise and push prices higher.

The worst sectors were the consumer discretionary (XLY) at -6.48% and the financials (XLF) at -5.78%. The technology sector (XLK) lost -3.66% and the consumer staples (XLP) fell -3.45%.

The flight to safety trades did poorly as you would expect with stocks making new highs. The dollar and ten-year treasury declined about 0.4% but gold averaged a 0.5% gain.

Mark Twain once wrote, "There are three kinds of lies. There are lies, damned lies and statistics." Another person once said "Statistics can be forced to say anything if you beat then long enough." The point here is that averaging the market performance over the last 132 times there was a triple index high is an exercise in futility because our future on this 133rd high has no relation to the past. There are so many factors that go into market highs that it would be impossible to find an exact match in the past to what we are seeing today. Nowhere in the past was there $13 trillion in government bonds yielding a negative interest rate. Never before was the Japanese government buying $1 trillion in stock ETFs. Never before have we had two presidential candidates as equally disliked, each with 61% disapproval ratings.


A Billionaire Census by Wealth-X found that the world's 2,473 billionaires are sitting on $1.7 trillion in cash of about 22.2% of their wealth. The study found that uncertainties in the economy were weighing on billionaire sentiment.

While that may sound like a lot of cash to hoard on a percentage basis a different study by UBS in July found that "wealthy" Americans were keeping around 20% of their wealth in cash. That was equal to the post 2008 average. UBS said many are considering reducing their exposure to the markets because of uncertainty over the presidential elections.

The Wealth-X report said billionaires were waiting for the equity markets to return to more attractive levels before putting the money back to work.


For you Star Wars fans the new trailer for the next installment in the Star Wars series broke this weekend. The "Rogue One" movie will be released by Disney in December. Darth Vader will return in this episode. You can watch it here.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The future depends on what we do in the present, because Tomorrow is often the busiest day of the week."

Mahatma Gandhi



Index Wrap

Reluctant Rally

by Jim Brown

Click here to email Jim Brown

The most hated rally ever just keeps edging higher but with all the timidity of a sophomore boy at the prom.

The pattern has been five points forward, 3 point backwards, repeat. The Dow only gained 33 points for the week, the Nasdaq +12, the S&P gained +1 and the Russell 2000 lost a point. That is hardly an abundance of conviction and more of an over abundance of caution.

The reluctant teenager is being pushed out onto the dance floor by his peers but immediately runs back to cower on the sidelines afraid to approach the opposite sex. The market is being pushed ever so slightly higher by dip buyers but once that new high threshold is pierced they scalp their gains and run back to the sidelines before the closing bell.

The Volatility Index ($VIX) continues to hover just over 11 and a level not seen since July 2014. The VIX is supposed to look 30 days into the future and if that is the case, traders are expected to be very complacent. That is the perfect setup for an unexpected volatility event that catches everyone asleep.


The S&P only traded in a 15-point range for the week with the highs on Tuesday and Thursday and the low on Wednesday. The momentum indicators recovered after the volatility event on the 2nd but they are still suggesting a lack of conviction. The MACD is still negative despite the new highs last week on the index.


The Dow made a new high over the July 20th high of 18,595 by roughly 18 points. After three weeks of trading at its highs, that is hardly a monster breakout and could just as easily be a double top at 18,635 considering the potential for seasonal weakness.


The Nasdaq finally broke over 5,200 but that is where the momentum died. That short squeeze the prior Friday catapulted the index from 5,166 to 5,221 and the index only added a total of 11 points for the entire week. It did close at a new high at 5,232 and it has been positive for the last seven consecutive weeks. However, the index looks tired. The Nasdaq has been supported by the biotech sector and the semiconductors. After Nvidia's blowout earnings there are no chip stocks of note left to report. That could produce some weakness in the sector and weigh on the Nasdaq. The biotech sector appeared to run into resistance at the 300-day average and came to a dead stop.



The correlation between the $SOX and the Nasdaq is in lock step at 100% and the SOX helped lead the Nasdaq higher. If the SOX weakens we can expect the Nasdaq to follow. Jeff Bailey always called the SOX the head of the snake. Wherever the SOX went the Nasdaq was sure to follow.


The biotech sector needed to rest after it rallied out of the June bottom. It could be in a position to continue higher now that profits have been taken. The 300-day average will be the hurdle it has to cross.


The Russell 2000 small caps lost 1.5 points for the week and is well away from new high territory at 1,296. The Russell 3000, the largest 3,000 stocks in the market, only gained half a point for the week. These significantly broader indexes are showing a serious lack of upward momentum and could roll over at any time.



The negative economics caused another flight to quality in the treasury market with the yield on the ten-year falling to 1.515% at the close for a -3.68% drop after touching 1.48% intraday. Investors from overseas and probably from the U.S. as well are looking for a safe return on their money rather than the potential for loss in the equity markets if the economics continue to weaken.


The percentage of S&P stocks over their short-term 50-day average has fallen from 87.4% in mid July to 71% in August despite the market being at record highs. This is clear evidence that only a few big caps are leading the markets higher while the broader markets are weakening. That is probably a poor choice of words because the market is not weak but the internals are declining despite the new highs.


The percentage of stocks over their 200-day average is holding at 79% but that number has not risen since mid July. This is where the market topped in 2015 and only slightly higher in 2014. As the long term averages move higher to catch up with the current stock price, the overall percentage will begin to decline.


The correlation between high yield bonds and the S&P continues to be right at 100% as the bonds lead the S&P higher. This documents the search for yield where investors are using the HYG ETF to escape the risk in equities. The HYG normally leads the SPX as you can see in the chart. I do not know what could impact that ETF other than an unexpected Fed rate hike but equities could break away and that would make the HYG even stronger.


I am continuing to focus on the broadest indexes in the Russell 3000 and the VTI and neither posted more than a fractional gain for the week. This supports the generals leading, troops dragging behind scenario. When the generals finally fall in battle the troops are going to beat a hasty retreat.

I would remain long until we are forced out of our long trades by tight stops. The markets sometimes moves up strongly in August because everyone was expecting the opposite direction. However, volume is going to decline dramatically over the next three weeks as summer winds down. Low volume means a lack of conviction and directions can become volatile. Be prepared and try not to buy the first dip.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Oversold Tech

by Jim Brown

Click here to email Jim Brown

Editors Note:

All earnings warnings are not created equal. Sometimes the warnings come after an event and do not reflect the future outlook. Stocks are punished for the event even when the future is positive.



NEW DIRECTIONAL CALL PLAYS

AKAM - Akamai Technologies - Company Profile

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers performance and security solutions designed to help Websites and business applications operate while offering protection against security threats. It also provides media content delivery solutions that are designed to deliver movies, television shows, live events, games, social media, software downloads, and other content on the Internet in fixed line and mobile networks; adaptive delivery solutions for streaming video content; and download delivery solution that offers accelerated distribution for large file downloads, including games, progressive media files, documents, and other file-based content.

If you have a large amount of content on the web that is routinely downloaded by thousands or even millions of people around the world, Akamai has the solution. Assume you are a streaming media company with 20,000 downloadable movies. If all those downloads were streamed out of one location to thousands of customers around the world, the bandwidth and server horsepower required at the host location would be enormous. Delays would result when everyone started downloading movies after dinner in the evening.

Akamai solves this problem by cloning your download library and spreading copies around in multiple locations around the world. When a customer clicks on a movie to download, that movie is sent from the location closest to him. In the Internet world distance is time. The farther you are from the website location the longer the downloads will take because they have to pass through dozens of "pipes" and "routers" as they make their way to your. By putting heavily used content in major geographic locations, Akamai shortens the distance for those in that area. Akamai also provides security and redundancy for the companies providing the source data.

In the Q2 report Akamai reported earnings of 64 cents on a 6% rise in revenue of $572 million. Analysts were expecting 64 cents and $575 million. The cloud security solutions unit saw revenue rise +42% to an annualized rate of $360 million. International revenue rose 25% to $177 million.

The problem came from the USA where revenue declined -1%. Two of the company's largest customers, Facebook and Amazon, began remotely hosting more of their own content and that reduced revenue. Those two companies were previously 12% of Akami revenue and they declined to 5%. The company guided for Q3 earnings of 59-62 cents on revenue of $566-$578 million. Analysts were expecting 66 cents on revenue of $590 million.

The key point here is that overall revenues rose 6% despite the sharp decline in revenue from Facebook and Amazon. The second point is that now they are only 5% of total revenue and they cannot decline much farther. Akamai said those two customers were building their own "content distribution network" or CDN, which is a very expensive undertaking and the vast majority of Akamai customers could not afford to do that. Obviously Amazon has AWS with massive datacenters all around the world so it only makes sense for them to clone their own content into multiple locations. That is the same with Facebook. They have hundreds of thousands of servers in secure locations all around the world and no longer need Akamai to handle the bulk of their data delivery.

With Akamai continuing to grow even when 7% of their prior revenue base went away, it shows how strong the business really is today. The rapidly growing cloud security solutions business and the international growth will continue to accelerate.

Akamai shares fell from $58 to $48 on the lowered guidance. After trading sideways for two weeks with no further declines, Wells Fargo upgraded them from neutral to buy on Thursday. I believe they will recover their pre earnings level of $58, which just happened to be an eight month high.

Earnings are October 25th.

Buy Nov $55 Call, currently $2.37, initial stop loss $48.65.


NEW DIRECTIONAL PUT PLAYS

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In Play Updates and Reviews

No Conviction

by Jim Brown

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Editors Note:

The markets were mixed with the Dow giving back 37 points while the Nasdaq scratched out a minor gain. Despite the new highs on Thursday and another high for the Nasdaq on Friday, there is no conviction. This is a low volume melt up that is headed into the six toughest weeks of the year. Next week will be a pivotal one for the markets.

The Dow did pull back slightly but it held just under the high. The bears have no conviction either. The S&P lost less than 2 points after its new high. This was just some consolidation on a summer Friday.



Current Portfolio




Current Position Changes


No Changes


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:

No specific news. Apple shares faded late in the week but are still holding the recent trend higher.

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 on G-III. Shares continued to rally on the retail sector earnings.

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. Rallied back to resistance at $16.25. Waiting on a breakout!

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.


MCD - McDonalds - Company Profile

Comments:

No specific news. Minor gain in a weak market.

Original Trade Description: August 6th.

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 2015, it operated 36,525 restaurants, including 30,081 franchised restaurants and 6,444 company-operated restaurants. McDonalds was founded in 1940 and is based in Oak Brook, Illinois.

McDonalds has been on a roll recently and set a new high in May at $132. Analysts could not say enough about the turnaround the company was making. Since they went to all-day breakfast items in October the customer traffic has exploded. Unfortunately, all those Egg McMuffins had a negative impact on sales.

The company was selling more items but at cheaper prices. Breakfast items are cheaper than Big Macs and other lunch/supper items. The company reported revenue of $6.26 billion and earnings of $1.45. They beat the $1.38 earnings estimate but missed slightly on the $6.27 revenue estimate. Also, same store sales rose only 1.8% in the U.S. compared to expectations for a 3.2% increase.

Analysts credited part of the revenue shortfall with the industry wide slowdown in the fast food sector. YUM Brands and Starbucks also posted sales declines. Others pointed out that McDonalds sales spiked at the same time Chipotle sales plunged because of their food problems.

Analysts were also quick to point out that international same store sales rose 7.7% in the 100 "foundational markets" covering 100 countries.

McDonalds announced it was farther along in eliminating antibiotics from their chicken, previously targeted for March 2017, had removed the preservatives from the Chicken McNuggets and was removing high fructose corn syrup from its hamburger buns in August. The company is moving in the right direction for long-term improvement.

Analysts believe McDonalds will get control of its all day breakfast menu pricing and will benefit from the longer term menu changes.

Deutsche Bank, Credit Suisse, UBS, RBC Capital and Argus all reiterated their buy ratings with price targets averaging $138.

Earnings Oct 21st.

Shares appear to be rebounding from the post earnings crash. I am recommending the October call just in case we need more time for the post earnings depression to wear off. McDonalds is a Dow component so it will be reactive to the gains and losses in the Dow. With August historically the weakest month for the Dow we could see some volatility in MCD and need the extra time.

Position 8/8/16:

Long Oct $120 call @ $2.71, no initial stop loss.


PAG - Penske Automotive Group - Company Profile

Comments:

No specific news. Penske had a good week and broke over resistance. Minor decline on Friday in a weak market.

Original Trade Description: August 10th.

Penske Automotive Group, Inc. operates as a transportation services company. The company operates through three segments: Retail Automotive, Retail Commercial Truck, and Other. It operates retail automotive and commercial vehicle dealerships principally in the United States and Western Europe; and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services primarily in Australia and New Zealand. The company engages in the sale of new and used motor vehicles; and related products and services, such as vehicle service and collision repair services, as well as placement of finance and lease contracts, third-party insurance products, and other aftermarket products. The company also operates 14 dealerships locations of heavy and medium duty trucks primarily under Freightliner and Western Star brand names, as well as offers a range of used trucks, and service and parts. Further, the company distributes commercial vehicles and parts to a network of more than 70 dealership locations, including 3 company-owned retail commercial vehicle dealerships. At the end of 2015 they operated 355 automotive retail franchises with 181 in the USA, and 174 outside the US, primarily in the UK.

For Q2 they reported earnings of $1.11 and beat estimates for $1.08. Revenue rose 6.8% to $5.3 billion and also beating estimates for $5.1 billion. On a constant currency basis revenue rose 9.2%. They sold 115,106 vehicles in Q2. Gross profits rose 5.5% to $771.3 million. Cash on hand rose from $62 million to $97 million.

On July 27th Penske Automotive acquired an additional 14.4% interest in Penske Truck Leasing from GE Capital for $498.7 million. That raised their ownership to 23.4%. They expect this to add 25 cents to earnings on annual basis. In April a Penske subsidiary, Premier Truck Group acquired Harper Truck Centers, a commercial truck dealership in Ontario Canada. The acquisition will add $130 million in annual revenue.

On August 2nd Chairman and CEO, Roger Penske, acquired 710,121 shares for an averge price of $39.10 for a total value of $27,765,730. Since 2010 Roger had sold 501,326 shares in three transactions. That makes his recent buy even more important because if marks a change in sentiment.

Update: On August 10th CEO Roger Penske bought another 151,412 shares for $6 million.

Earnings Oct 27th.

PAG shares are about to break over long-term resistance at $40. Shares closed at $40.20 and that complicates the trade. If we buy the $45 call, which is only $1, the stock has to move $5 to really make a difference in the option price. If we buy the ITM call at $40, which is $2.95 we are paying an ATM premium that will decline as it moves farther into the money. However, for every $1 the stock raises the option will appreciate significantly. Currently the $35 call is $6.30. That is what we could expect the $40 call to be worth if the stock rises to $45. At the same time, the $45 call would rise from the current $1 to $2.95. Do we invest $3 to make $3 or do we invest $1 to make $2? I am going to recommend the $45 call because of the lower cost, lower risk and higher percentage return if PAG rises to $45. The risk is that it stalls somewhere between $40 and $45 and we never reach the ITM premium level before the Oct earnings. I believe this chart is worth the risk. I am going to put a $41 trigger on it to make sure it breaks through that resistance.

Position 8/11/16 with a PAG trade at $41.00

Long Nov $45 call @ $1.35, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

The ETF is still struggling at resistance and the Dow could not hold the minor breakout from Thursday. We are heading into the two weakest months of August and September is the most volatile month of the year.

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


SIX - Six Flags - Company Profile

Comments:

No specific news. Temporary uptick from Thursday starting to fade. I expect a new low next week.

Original Trade Description: July 2nd.

Six Flags Entertainment Corporation owns and operates regional theme and water parks under the Six Flags brand name. The company's parks offer various thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues, and retail outlets, as well as family-oriented entertainment. It owns and operates 18 parks, including 16 parks in the United States; 1 park in Mexico City, Mexico; and 1 park in Montreal, Canada.

In their Q2 report they only generated earnings of 64 cents that missed estimates for 70 cents. Revenue of $407 million was only slightly above estimates for $406.4 million. The company said it sold $300 million in notes in a private placement and would implement a stock repurchase plan.

The problem for Six Flags is that even with low gasoline prices the 2016 attendance only rose 2% in Q2 despite promotions and discounts. People are not rushing out to theme parks this year like they were in the past. Tickets to similar attractions have become so expensive that consumers would rather spend the money on a new cellphone, video game or clothes. Six Flags is currently discounting tickets from $72.99 to $47.99 in an effort to squeeze a few more customers in before Labor Day. Young adult families are faced with spending $400 for 2 adults and 2 kids for a one-day visit including parking and food. Parking is $23.00 and obviously another way to squeeze you for extra money at the gate. $400 is a lot of money in this economy.

Consumers are also staying away from high traffic locations in fear of a terrorist attack and this is not going to change in the near future. In America, we have been fortunate but our time is running out and quite a few consumers are avoiding malls, theaters, concerts and theme parks.

Shares fell $3 on the report and bounced for only one day. A new downtrend has developed and Monday's close was a four month low. Shares have risk to $50 or even $45 depending on the overall market.

Position 8/9/16:

Long December $50 put @ $1.94. See portfolio graphic for stop loss.




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