Option Investor
Newsletter

Daily Newsletter, Monday, 8/15/2016

Table of Contents

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

Market Wrap

Melting Up To New Highs

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The summer melt-up continued today, pushing the NASDAQ to new all time highs. Today's trading was lifted by hopes for earnings in the retail sector and rebounding oil prices despite lackluster economic data.

The earnings season is almost over, a little more than 90% of the S&P 500 has reported, but there are still some important names left on the list. This week the retail sector comes into focus with more than a dozen important names on the list including home improvement retailers Lowe's and Home Depot and discount merchandiser's Wal Mart and Target. Last week retail sales figures were weaker than expected, this week started off with a decline in manufacturing data and only mild growth in the housing sector and do not point to robust earnings.

International markets were generally positive although strength was spotty. In Asia weak Japanese GDP dominated the news, driving the Nikkei down by only -0.30%. Japanese GDP grew at only a 0.2% rate in the 2nd quarter, below forecast and suggest that recent stimulus efforts may not be enough. The mainland Chinese markets were today's leader, gaining nearly 2.5% on expectations the Shenzen-Hong Kong Connect stock exchange would open later this year. European indices were mostly positive at the end of their trading day, if barely so. The UK's FTSE 100 led with gains near 0.35% driven by rising oil prices and apparent stability in the post-Brexit era.

Market Statistics

Futures trading indicated a positive open all morning although gains were tempered by economic data going into the opening bell. The indices opened with small gains, about 2 points for the S&P 500, and were then able to drift higher the rest of the morning. By 12:30 they had made the 4th of 4 morning intraday highs and begun to move sideways. Sideways action persisted the remainder of the day keeping the indices in positive territory and within small daily trading ranges.

Economic Calendar

The Economy

Early data, released at 8:30AM, was not good. The Empire State Manufacturing Survey fell -5 points to -4.2, reversing gains made last month and plunging the New York area manufacturing sector back into contraction. Despite the drop the news was not all bad. New orders and labor both held near 0, prices paid fell and shipments jumped 8 points to 9.0. Also, forward outlook remains positive although it has declined the past two months.


The National Association Of Home Builders released their monthly survey of home builder sentiment at 10AM. This month's read shows a 2 point gain over last month after a -1 point revision which leaves the index at 60. This shows a slight pick-up in activity from last month but is flat and near the low end of the range when looking back over the past year or more. Within the report present conditions improved 2 points to 65, the 6 month outlook improved 1 point to 67 and traffic fell -1 point to 44. A spokesperson for the NAHB said that a shortage of homes and regulatory hurdles were affecting the market.

Moody's Survey Of Business Confidence jumped 1.3 points since last week and is sitting at a 2 month high of 26.9. Mr. Zandi says that global business sentiment has bounced back in the last two weeks and seems to have weathered the recent round of geopolitical events.


Tomorrow CPI data is due. Expectations are for consumer level inflation to remain flat and unchanged from last month; hotter than expected will lead to increased rate hike expectations, cooler than expected keeps rate hikes off the table until maybe mid to late next year. Tuesday is also housing starts and building permits, as well as industrial production and capacity utilization. Wednesday is dominated by FOMC minutes. Thursday rounds out the week with jobless claims, leading indicators and Philly Fed.

According to Factset 91% of the S&P 500 has reported earnings so far this cycle. Of those 70% have beaten EPS estimates while only 54% have beaten revenue estimates. The blended rate for earnings growth in the 2nd quarter now stands at -3.5%, better than expected at the start of the reporting cycle but not as much as historical trends suggest we could expect. Based on the four year average the final rate of earnings growth could improve as much as 4% by the end of the cycle which would put the 2nd quarter near -1.5%.


While the market is moving higher, earnings outlook continues to fall. Estimates are falling across the board but the energy sector is still the leader in terms of declines. The sector is expected to post a decline of -62.5% in the third quarter, worse than the -52.6% predicted two months ago when oil prices were holding near $50. Outlook for the entire index has fallen deeper into negative territory for the 3rd quarter, to -2.0%, while 4th quarter estimates fell to 5.5%. Full year 2016 earnings growth estimates have also turned negative and are now -0.4% and likely to fall further over the next week. Full year 2017 remains strong but has also fallen, shedding 0.3% to hit 13.2%.


The Dollar Index

The Dollar Index is struggling with direction. Economic data and the FOMC are giving mixed signals; job data and FOMC intentions seem to indicate a rate hike is near, inflation data and FOMC actions just the opposite. The CME's Fed Watch Tool shows only about a 13% chance of a rate hike at the next two meetings, and only a 45% chance at the December meeting, and yet expectation of a rate hike this year persist. Tomorrow's CPI could alter this outlook, hotter than expected will surely lead to increased rate hike expectations.

Today the Dollar Index held a fairly flat range, creating a small doji candle, near the mid-point of the two month trading range. It is sitting just below the short and long term moving averages, resistance, but also at potential support, near $95.50-$96.00. Coincidentially, near term support is also the lower boundary of the 6 week trading range. The indicators are a bit mixed, momentum is bearish but support is indicated, so nothing definitive there that I see. If support holds a move higher has a target near the upper end of the range, between $96.50 and $97.50, first target to the downside if support fails is near $95 with a chance of moving lower. In the end it will come down to the FOMC minutes on Wednesday, and possibly CPI data tomorrow. Weak CPI and/or FOMC rate hike outlook could weaken the dollar further and send it back to retest the longer term lows near $93.


The Oil Index

Oil prices moved higher today despite lingering oversupply issues. The Russians and Saudis are one reason, a Russian oil minister telling Saudi press that the two countries were in talks over a way to stabilize oil prices. It could be something to keep an eye on but also likely to result in nothing just like it did earlier this year. Another reason is report of a large drawdown at the Cushing supply depot. WTI gained more than 2.5% to trade above $45.50 and has gained more than 10% in the last 3 sessions. Support for oil is apparent and may drive prices higher but with the past week's gains profit taking is certainly a possibility as well. Most obvious target is $50 but resistance may set in as low as $47.50 if supply issues outweigh optimism.

The energy sector was able to move higher today but remains range bound. Long term outlook for earnings growth, 2017 full year is over 200%, is providing support while nearer term earnings growth is providing resistance. The Oil Index gained about 0.45% in today's session, moving up within its range with the chance of gaining another 2.75% before meeting resistance. Resistance target is near 1,175 and likely to hold provided oil prices do not rise above $50.


The Gold Index

Gold prices held flat as traders eye the FOMC minutes and economic data for cues on rate hikes. The spot price held near $1,345 and near the middle of the 6 week range. This range has been in place since the last FOMC meeting and may hold until the next if the minutes and/or data don't break prices free of it. A dovish Fed and weaker dollar could send gold back to the top of the range, near $1,375. A hawkish Fed could strengthen the dollar and send gold prices down to test support near $1,300.

The gold miners are trading near recently set highs but the up trend is showing some signs of weakness. The miners ETF GDX fell -0.75% in today's session, not much but enough to bring it below a long term resistance level. Additional sign of weakness is in the indicators which are both showing divergence from the rally in the short term and bearish crossovers in the near. These signals may merely be a sign of pause within the rally but with the FOMC minutes and CPI data due out could easily lead to deep correction. First target for support should it continue to fall is near the short term moving average, near $30, with next target near $27.50 should first target fail. If first support is confirmed a move higher may follow, if supported by FOMC/dollar/gold outlook, with upside target near $34.


In The News, Story Stocks and Earnings

With the retail sector on tap this week it is appropriate to take a look at the Retail Sector SPDR, XRT. This ETF is a cross section of the retail sector, many components of which will be reporting earnings this week. The ETF has been bouncing higher from a moving average crossover all month. Today it continued this bounce, gaining near a full percent to set a new intraday 5 month high. The indicators are confirming this move, both making bullish crossovers in recent days, so it looks like it could go higher. If the ETF is able to break to new highs next upside target is near $47.50.


Foodservice supply giant Sysco reported earnings before the bell. The company reported EPS above estimates on revenue that fell slightly short, sending shares up nearly 4% in the pre-opening session. Results were driven by strong year over increases in sales, operating income and profits. Shares of the stock opened at a new all time high but sold off during the day, closing with a small loss on high volume. Even so, shares of Sysco remain near all time highs set since the deal to buy US Foods fell apart.


Home Depot reports tomorrow. The home improvement company is expected to post comparable store sales increases of 4.8% and earnings in excess of the consensus due to regional strength in housing markets in which Home Depot has a concentration of stores. Today the stock gained about a half percent while trading within a recent consolidation band. This band is just below the all time high with support near $135. If earnings push share prices below support next downside target is near $130.


The Indices

The indices moved higher today but were not able to close at the highs of the day. Today's leader, and the only index to not set a new all time high, was the Dow Jones Transportation Average. The Transports gained about 0.65% and created a small bodied candle despite being today's leader. Today's candle not only is small bodied, it has a long upper shadow indicative of resistance and warning of potential pull back to support. Support is near 7,750, just below today's close, along the short term moving average. The indicators are mixed, consistent with the 6 month trading range, and do not suggest strength in recent price action.


The NASDAQ Composite comes in a close second with a gain near 0.56%. The tech heavy index did however make a new all time high today although price action was not very strong. Today's candle is a smallish white bodied candle without much meaning in and of itself. Today's action moved up from the previous all time high, set during the tech bubble, and confirms to some extent support near the 5,225 level. The indicators are bullish but showing a growing divergence with price that indicates a growing weakness in the rally, if not an impending correction. While caution is due, the rally is moving higher with next upside target near 5,400.


The Dow Jones Industrial Average made the third largest gain, about 0.32%. The blue chips created a small bodied candle with visible upper shadow while setting another new all time high. Today's action could lead to additional upside for the index but glaring divergence in the indicators give reason for caution. Upside target should the index continue to drift higher is near 19,000. If the index decides to pull back and test for support first target is near the short term moving average and then just below that near 18,250.


The S&P 500 brings up the rear in today's session, posting a gain of only 0.28%. The broad market is drifting higher along with the other indices and like them, is also showing warning signs of weakness. Divergence in both the MACD and stochastic show underlying weakness in the market that can lead to significant correction in the right conditions. Currently, the market is rising on low volume and extended far beyond the moving averages. First target for support is near the short term moving average, about 1.5% below today's close, longer term target is near the 150 day moving average which is about 5% below today's close.


The market is moving higher and you can't argue about that, 3 of the 4 major indices set all time closing highs today. What you can argue about is whether the market should be moving higher, and I still don't think it should be. The reasons are twofold; economic data has yet to show strength in recovery and earnings growth has yet to return to the market. These two factors are the drivers of market value and are as yet absent from this rally. Until they return any move higher runs the risk of moving to far and over extending itself. The further it runs only increases the chances of correction, and the possible depth of that correction once it occurs. I may be over cautious, but protecting capital is never a bad idea.

There are several possible catalysts this week. Tomorrow CPI data will play into FOMC outlook, and how the FOMC minutes will be interpreted when they are released on Wednesday. Retail earnings will also play a role, they could be better than expected but likely not good enough to significantly impact forward outlook in a positive manner. I remain cautious in the near term, the indices still look ripe for profit taking, but following my own advice and trading with the trend.

Until then, remember the trend!

Thomas Hughes

PS. the new momma and baby Parker Mary Hughes are doing fine.


New Option Plays

Cloudy with a Chance of Gain

by Jim Brown

Click here to email Jim Brown

Editors Note:

Earnings and revenue rising sharply and exactly what fund managers are going to be looking for in a Q4 rally.



NEW DIRECTIONAL CALL PLAYS

NOW- ServiceNow Inc - Company Profile

ServiceNow, Inc. provides enterprise cloud-based solutions that define, structure, manage, and automate services in North America, Europe, the Middle East, Africa, the Asia Pacific, and internationally. It offers service management solutions, including incident management, problem management, change management, and request management, as well as service catalog and knowledge base; and information technology (IT), HR, customer service, security operations, facilities, and field service management solutions. The company also provides business management solutions, such as financial management solutions; project portfolio suite that provides capabilities to plan, organize, and manage projects; governance, risk, and compliance solution that provides clarity into compliance and audit initiatives; and performance analytics solutions. It serves enterprises in various industries, including financial services, consumer products, IT services, health care, and technology.

In late July the company posted earnings of 15 cents that beat analyst estimates for 10 cents. Revenue rose 38% to $341.3 million and beating estimates for $334 million. Billings rose 33% to $375 million. Emerging product revenue rose 40%, up from 24% in the year ago quarter. Two-thirds of their customers now license more than one product and 15 of the top 20 new deals included three of more products. They now have more than 272 customers paying more than $1 million each in annual license revenues, an increase of 26 for the quarter.

They guided for revenue in Q3 of $350-$354 million and analysts were expecting $349 million. Full year guidance was for revenue of $1.37-$1.38 billion and above analyst estimates for $1.37 billion. Subscription revenues are expected to rise 40%. Subscription revenue gross margin is expected to be 84%. Total revenues are expected to rise 35%.

Mizuho recently upgraded them from neutral to buy with an $85 price target.

Earnings Oct 26th.

Shares spiked on earnings then declined in the post earnings depression phase. After two weeks of choppy gains they are about to break out to a new 8-month high. Unfortunately, option premiums are high so this will have to be a spread. Shares closed at $76.74 and the $80 strike is $4.70 and the $85 strike at $2.85. I do not really want to just buy the $85 strike because that is $8 OTM. To solve this problem I am recommending we buy the $80 strike and sell the $90 strike, currently $1.35. The stock hit a high of $91 back in December.

Buy Nov $80 call, currently $4.70, no initial stop loss.
Sell short Nov $90 call, currently $1.35, no initial stop loss.
Net debit $3.35.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Trend Change

by Jim Brown

Click here to email Jim Brown

Editors Note:

After four weeks of sideways consolidation, the Russell 2000 is finally catching fire and breaking out. The Russell 2000 small caps gained +12 points for a +1% move while the Dow only gained +0.3%. This could be the start of something big. The Nasdaq also ran for +29 points and it was already at a new high on Friday. This was a major sprint away from the consolidative resistance from the last several weeks. The moves on these indexes are what we have been looking for as a signal the bulls had found some conviction.

At this point, any further gain on Tuesday should begin to draw idle cash off the sidelines and back into equities. I did not think it would happen until after Labor Day but the +2.4% rally in the Shanghai Composite on Monday and the potential for additional Chinese stimulus were the sparks that started the morning rally.



Current Portfolio


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.




Current Position Changes


AKAM - Akamai Technology

The long call position was entered at the open.


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BULLISH Play Updates


AAPL - Apple Inc - Company Profile

Comments:

CEO Tim Cook confirmed that Apple is working intensively on augmented reality programs that interface with your surroundings like Pokemon Go. Apple and Twitter are also in talks about a adding the Twitter app to Apple TV. Warren Buffet increased his stake in Apple shares by 55% to 15.23 million.

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.


AKAM - Akamai Technologies - Company Profile

Comments:

No specific news. Shares posted only a minor gain.

Original Trade Description: August 13th.

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.

Position 8/15/16:

Long Nov $55 Call @ $2.46, 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. Trying to squeeze over that resistance level.

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:

Argus downgraded from buy to neutral on worries about rising labor costs and lower same store sales. I am recommending we close this position. It is a Dow component and has not been performing with the Dow.

CLOSE THIS POSITION

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:

Roger Penske acquired another 50,000 shares on Thursday at an average price of $41.40. He is on a buying binge with new positions every 2-3 days. Just in August he has purchased nearly one million shares for roughly $40 million. That brings his total ownership to 31,066,574 shares. There are only 85 million outstanding. It looks like he may be taking the company private, one bite at a time.

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 but did close at a new high. The Dow closed 32 points off its highs. This is not yet a real breakout but still a minor meltup. 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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