Option Investor
Newsletter

Daily Newsletter, Saturday, 8/20/2016

Table of Contents

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

Market Wrap

Wake Me in September

by Jim Brown

Click here to email Jim Brown

The major indexes traded flat for the week with the big cap indexes losing ground after Monday's new high.

Weekly Statistics

Friday Statistics

The Dow made a new high on Monday but lost 24 points for the week. The S&P came ever so close to posting a gain with only a -0.18 point loss. The Nasdaq managed to stretch its winning streak to 8 consecutive weeks and something it has not done since 2010. Option expiration was lackluster with only 5.7 billion shares and the lowest volume I can remember for an expiration Friday in a very long time.

There were no economic reports to give the market direction. The only report was the Regional and State Employment for July and that was ignored. Nonfarm employment increased in only 15 states, declined in only one state, Kansas, and was flat in 34 states. South Dakota at 2.8% and New Hampshire at 2.9% had the lowest unemployment rates. Alaska at 6.7%, Nevada 6.5%, New Mexico 6.4% and Louisiana 6.3% had the highest unemployment.

The economic calendar for next week is headlined by the GDP revision on Friday and while the consensus estimate is for +2.6% the whisper numbers are down in the 1.1% range. The prior reading for Q2 was +1.2% at the end of July. There is a significant potential for another disappointment.

The Janet Yellen speech on Friday is widely expected to set the stage for another rate hike. The various Fed heads made the rounds last week and almost all were saying "September meeting is not off the table" or "expect another hike this year" or even "I could see 1-2 hikes in 2016." There were almost no sentiments for waiting until 2017 for the next move.

Strangely, the odds of a September rate hike based on the Fed funds futures did not move and remained at 18%. The December odds decreased from 55.1% to 53.5% despite the Fed comments. After Yellen's speech, we will monitor the change again next weekend. Yellen has been consistently dovish but in the face of the strong employment numbers, she may begin to move towards a hike but more than likely in December. The title of her speech is "The Federal Reserve's Monetary Policy Toolkit" but she is likely to give a clue as to policy direction. Her two closest allies at the Fed, William Dudley and John Williams, have both raised the possibility of a September hike.



The housing numbers could be market bullish but we are heading into the slow period on the calendar. Consumers wanting to move before school started would have probably purchased in June.

The other reports are not market movers.


There were very few earnings reporters on Friday. I am glad I was not short Foot Locker (FL). Apparently a lot of traders were. The company reported earnings of 94 cents compared to estimates for 91 cents. Revenue of $1.78 billion beat estimates for $1.76 billion. With mall traffic falling everywhere and struggles by Nike and Under Armour, many traders were expecting a weak quarter.

The company said the latest shoes from Stephen Curry and Kevin Durant helped boost sales in the basketball division. Foot Locker posted gains in running and classic footwear as well as apparel. The CEO said "the malls are far from dead." Same store sales rose 4.7% and well over estimates for 3.9% growth. The Sports Authority closing also helped by eliminating several hundred outlets for athletic shoes. Foot Locker saw sales rise 21% on the "red hot" Adidas brand. Shares of Foot Locker rose 11% on Friday to $68.50.


Deere & Company (DE) was another stock rocket on Friday after shares rallied 11% from a four-month low. Earnings expectations were very low. The company reported earnings of $1.55 compared to estimates for 94 cents, yes, 94 cents. Revenue of $5.86 billion missed estimates for $6.04 billion but shorts were crushed anyway. The company defied a global farm recession and actually raised the full year forecast. They raised guidance to $1.35 billion in net income from the prior $1.2 billion they had projected in May. They accomplished this with a 16% reduction in expenses. Deere has been on a major restructuring program since 2013 and it is clearly paying off. The company still predicted a 10% decline in equipment sales in 2016 compared to the 9% forecast from last quarter.

Just to prove how negative expectations are, S&P Global upgraded Deere from "strong sell" to just "sell" after the earnings. The analyst raised his price target from $70 to $80 and the stock closed over $87.


Teen clothing retailer Buckle Inc (BKE) reported earnings of 32 cents that missed estimates for 33 cents. Revenue of $212.2 million matched estimates. Shares rallied 5% despite a -10.8% decline in same store sales. Overall sales have fallen -10.2% for the first six months of 2016.


America's Car-Mart (CRMT) reported earnings of 87 cents on revenue of $145.8 million. Analysts were expecting 51 cents and $158.6 million in revenue. The company killed it on earnings but missed by a mile on revenue. Unit sales declined -2.3% from 12,244 to 11,957 vehicles. The average retail sales price rose 4.3% or +$428 to $10,393. The gross profit margin was 41.8% and that should give you a clue how much room a used car dealer has in his prices. However, since they finance a lot of the cars they sell, the allowance for credit losses rose to 25% of finance receivables. That means one-fourth of the cars they sold, they expect to repossess. I guess as long as you can continue selling them again for a 41.8% profit that is a good business.


Toro Co. (TTC) reported earnings of $1.00 compared to estimates for 99 cents. Revenue of $601 million missed estimates for $623 million as both the professional and residential segments missed their sales goals. The company narrowed full year guidance from $3.90-$4.00 to $3.95-$4.00. The company blamed the slow sales on "challenging weather conditions" in some areas. Shares closed at a new high after a 4% gain. Not bad for only a penny beat and big miss on revenue.


DeVry Education (DV) reported earnings of 65 cents that rose +10.8% and beat estimates for 61 cents. Revenue of $472 million also beat estimates for $463 million. Revenue declined -0.3% and that was much better than company guidance for a 2-3% decline.

Shares were up sharply but I am missing the reason. For the July 2016 session in the business, technology and management segment, total enrollment declined -22.6% and new enrollment of undergraduate students fell -26.2%. Total enrollment for graduate courses fell -19.4%. However, enrollment in the medical and healthcare segment, total enrollment rose 18.9% with new enrollment rising 13.4%. For the full year, revenues are expected to be flat.


The earnings calendar for next week is very light but there are some big names. Best Buy and Toll Brothers headline on Tuesday followed by Ctrip.com and Hewlett Packard on Wednesday. For all practical purposes, the Q2 cycle is over once Cisco reported last week but HPQ could surprise us.


Shopify Inc (SHOP) priced a secondary of five million shares at $38.25 for net proceeds of $191.25 million. They are going to use the proceeds for general corporate purposes and to expand their business model. Credit Suisse reinstated coverage with an outperform rating and $46 price target. Credit Suisse said the funds would increase flexibility in funding future growth strategies. Shares rose 5% on the news.


Restoration Hardware (RH) was upgraded from neutral to "conviction buy" at Goldman Sachs. That is a heck of a jump skipping right over buy. They raised the price target to $40 and shares were trading at $31 before the upgrade. The analyst said RH is operating a "potent franchise with low current expectations, idiosyncratic business drivers, and, we believe, two ways to create value." They expect the retailer to recover from its current weakness in Q4. The company will mail new catalogs this fall, the first since the spring of 2015. They will implement a new pricing scheme. The high demand and always out of stock, "RH Modern" offerings are expected to reach 90% inventory status and the line will finally be in all the stores by the holidays. This means Q4 earnings should be strong. Shares rallied 11% on the news.


Google (GOOGL), now named Alphabet, went public at $85 a share on August 19th, 2004. Friday was their 12th anniversary as a public company. Shares are up +1,779% since the $1.7 billion IPO. That compared to the $16 billion Facebook IPO in 2012. Google split their stock 2:1 in 2012 with the new Class C shares having no voting rights and trading under the symbol GOOG.

Google's market cap of $543 billion is just slightly less than Apple at $588 billion. Revenue has risen more than 20 times since the $3.2 billion when they went public to the $75 billion in 2015. Profits have exploded as well from $400 million in 2004 to $16.3 billion in 2015.

They need to split the stock again if they want the common retail investor to participate. Shares have been stuck at the $800 level for most of the last year. Normal retail investors are not paying $8,000 for 10 shares. There are far better opportunities in the market for that amount of money. Google is a good company but they are old news. A lot of their moon shot endeavors fell flat and many of their previously announced projects were never completed. They need a new headline to rekindle excitement.


Crude prices had an outstanding week with the black gold rising 9% to $48.57. Crude is now up $9 since the $39 low on August 3rd. Analysts appear to be evenly split between the going to $60 and the going to $40 crowd. An Oppenheimer analyst said once oil closes over $50 a barrel again the sky is the limit with a projection of $63 in 2017. He blamed a reversal on the dollar to a two-month low and the now constant chatter about a potential production freeze by OPEC.

John Killduff, an analyst at Again Capital, said fundamentals are going to get worse before they get better. "We are probably going to touch $50 to ring the bell but then head back down to at least $40 or even into the $30s." Killduff said the OPEC chatter is just that, hopeful chatter designed to lift prices artificially in a seasonal period of low demand and high production. "Saudi Arabia is not serious about taking action" and many OPEC producers are working to increase production not freeze it. He said the Saudi Energy Minister's comment last week that the kingdom will discuss coordinating action with other producers was "perfectly well-timed" to impact near record short interest heading into a seasonally weak period for prices. Saudi produced a record 10.7 million bpd in July and said they would hit a new record in August. Oil from northern Iraq began to flow again after a months-long outage. The EIA reported this week that U.S. production jumped +160,000 bpd last week to 8.6 million bpd and the highest level since June 24th.


Active oil rigs have risen +76 to 406 since the low of 330 on June 24th. That is an average of about 10 rigs a week but that rate has accelerated over the last four weeks to overweight the recent gains. If oil prices move over $50 we could see dozens of rigs a week go back to work. Most of the reactivated rigs are working on drilled but not completed wells that can quickly be completed and put into production.


 


 

Markets

The Nasdaq stretched its winning streak to 8 consecutive weeks and something it has not done since 2010. It was close with the Nasdaq only gaining +5 points for the week but it was enough to keep the streak alive.

The semiconductors continued to provide support with a 2.2% gain for the week and a new closing high. The biotech sector lost ground for the second week and probably kept the Nasdaq from even larger gains.



The Nasdaq big cap stocks are weakening. Apple (AAPL), Intel (INTC) and Netflix (NFLX) managed to hold their gains and move sideways but Amazon (AMZN), Google (GOOGL), Microsoft (MSFT) and others have started to lose momentum and drift lower. If that drift contaminates those stocks struggling to maintain their recent gains then the Nasdaq could lose traction and end its winning streak.

However, the index is currently holding just below the recent high at 5,262 and the intraday dip to 5,200 on Wednesday was instantly bought. The support at 5,200 appears to be strong and there is a slight upward bias to the trend with marginally higher intraday highs towards the end of the week.

Regardless of how much investors want the Nasdaq to continue higher, the two-month rally is very unsupported and subject to some serious profit taking at any time. The saving grace is that the index has been consolidating above the 5,200 level for two weeks and prolonged consolidation is just as effective as a 3-5% decline for profit taking.




Converging resistance at 18,625 is keeping the Dow in check and the lack of any headlines for Dow stocks is becoming a drag on the index. All the Dow components have reported earnings and are now in the post earnings depression phase. The results on Friday would have been a lot worse but Nike (NKE) got a boost from the Foot Locker earnings and Caterpillar (CAT) saw a similar boost from the Deere earnings.

Despite the resistance at 18,625, the Dow refuses to decline. The dip to 18,500 at the open on Friday was instantly bought making it a higher low for the week. The dip to 18,469 on Wednesday was also instantly bought. Despite, these rebounds the last four days have seen a series of lower highs. They are buying the dips but they are not making any forward progress to higher levels.



The S&P is trading in a very narrow range roughly between 2175-2187. There was a temporary penetration to the upside on Monday and the downside on Wednesday but in both instances, the index returned to neutral territory almost immediately. When you compare the cluster of candles over the last two weeks to any other period on the chart you can quickly see the difference. The S&P has not gained or lost more than 1% in a single day since July 8th when it gained +1.53% and broke above 2,100. The index is very constrained and normally when this kind of tight range develops, the breakout/breakdown can be very strong.

Bulls have become very complacent and the bears have given up trying to force a correction. Eventually there will be a headline that snaps everyone out of their summer slumber and the results could be dramatic.

Until then we should continue watching those 2,175 and 2,187 levels for a violation.


The Russell 2000 has the same, slightly upward bias as the Nasdaq. It is barely perceptible while the support at 1,221 appears rock solid. Distant resistance is 1,250 and we could easily reach that level if another monster short squeeze appears. I do not know what could cause it but if it were easily identifiable then shorts would have already covered. It is the events that you do not expect that cause the biggest moves.

The Russell 2000 remains our sentiment indicator for the broader market. If the index moves over 1,240 and makes a new high, it could accelerate even higher. The tentative status quo between the buyers and sellers cold turn into a race higher if fund managers thought the market was going to run away from them.

Longer term the Russell is moving steadily higher with 1,244 the next resistance level. The daily chart is bullish and projects a slow climb to 1,250.



Investors are heading into a bad neighborhood with the six most volatile weeks of the year beginning on Monday. Nobody appears to be concerned and volume is very light. Friday's volume was only 5.7 billion shares and the lightest expiration Friday in recent memory.

The only trading strategy that has been working is the BTD strategy. That stands for buy the dip. Those dips are becoming more frequent but less shallow. In theory the market should not increase in volatility until after Labor Day but market theory has failed miserably in recent months. Volume between now and the holiday should continue to decline.

The fork in the road could be the Yellen speech next Friday. She could literally determine the market direction until the Fed meeting on September 21st. Will she continue her dovish ways or move to the dark side of the Fed with her closest allies? Personally, I think the entire rate hike thing is crazy because a 25 basis point hike would have no physical impact on the market. The impact is all psychological. The best strategy could be to sell the rumor and buy the news but it all depends on her guidance next Friday.

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.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now



Random Thoughts


Bullish sentiment finally spiked last week after the indexes made new highs on Monday. Bullish sentiment rose +4.3% with nearly all coming from the neutral camp, which declined -3.9%. The bearish camp is still bearish with only a -0.4% decline. It is tough to convince those hardcore bears there is a rally in progress. In the end, they may be proven right.



Uber rules! Lyft is a competitor to Uber and life must be tough in second place. Lyft reportedly held talks with General Motors, Apple, Google, Amazon, Uber and Didi Chuxing in an effort to sell itself. GM is one of the largest investors in Lyft and discussions reached a serious level but no firm offer was ever made.

Lyft is not in danger of going out of business with $1.4 billion cash in the bank. However, it is proving very expensive to open new markets because of the dominance of Uber. Even Uber is struggling. They sold their Chinese subsidiary to Didi Chuxing and that stopped the bleeding of millions of dollars flowing into Chinese marketing. Didi is the dominant ride hailing service in China and Uber was pouring money into a sinkhole trying to compete. That sale upset a global alliance Lyft had with Didi to compete with Uber. Now Lyft is on the outside again, looking in.

Reportedly, Lyft was valued at more than $5.5 billion after the last round of investments by GM and others in January. In order to make those investors whole, the company would have to be sold at a premium to that valuation.

The ride share companies collect 20-25% of the fare and Lyft drivers are expected to generate more than $2 billion in fares in 2016. That suggests Lyft would generate revenue of $400-$500 million. After subtracting marketing costs, that number would be a lot lower. Also, until recently Lyft has been paying a signing bonus for drivers of $1,250 after the first 50 rides. In highly competitive areas, they even forego their 25% commission on some rides in order to keep drivers. Analysts claim Lyft is not profitable despite the $1.4 billion of cash in the bank. How they are going to get to profitability is the key question. As a startup business they could easily spend more than $400 million a year on marketing trying to generate market share.

Other problems are growing. Both Uber and Lyft exited the Austin Texas market after the city passed an ordinance requiring all drivers to be finger printed and pass a comprehensive background check. The problem is that a lot of drivers are minorities and some are not in the states legally.

Other cities have charged fees, required stringent insurance rules and required the companies to be licensed. Some require limousine licenses.

Wingz, a San Francisco based startup backed by Salesforce.com CEO Mark Benioff, is now active in 12 major cities. They hand pick the drivers and provide a $1 million liability insurance policy. Fasten, a Boston based startup, is specializing on serving college towns. They claim 70% of first time users become repeat customers. There are multiple unregulated networks that use Twitter and Facebook to find rides and customers without paying anyone a commission. Arcade City in Austin has 39,000 members that use the unregulated network using hashtags. They pay with Paypal, Venmo, Square and cash.

Build a better mousetrap and the world will not beat a path to your door. In today's economy, everyone will copy it.


Michael Phelps is the most taxed Olympian in history. Each medal comes with a cash prize. Gold is worth $25,000, silver $15,000 and bronze $10,000. For his 28 total medals, he has won $640,000. They are also taxed on the weight of the medals. A gold medal is actually 98.8% silver and 1.2% gold plated and worth about $565. A silver medal is 100% silver and worth about $315. A bronze medal is 95% copper and 5% zinc and worth about $2.38. Phelps has incurred an additional tax of $13,887 based on the precious metal content in his medals.

Since Phelps has a lot of advertising endorsements, he is probably in the 39% tax bracket making his taxes on winnings of $257,631. "Normal" athletes without endorsements would be taxed about 15% on their winnings.

At Phelps 39% bracket, he would be taxed $9,900 per gold medal, $5,940 for a silver and $3,960 for a bronze. Of course, most athletes will deduct the cost of their training from their income. Swimmer Missy Franklin said she spent up to $100,000 a year preparing for the 2012 Olympics.

Texas GOP Representative Blake Farenthold re-introduced the TEAM Act (Tax Exemptions for American Medalists) to eliminate taxes on medalists but it was not yet passed. The original bill never received a full vote. It is expected to receive a vote later this year.


The SEC halted trade in NeuroMama Ltd (NERO) after it reached $65 on the over the counter market. The regulator said it had concerns including "potentially manipulative" transactions. The company claims it has a search engine based on neural technology, is in talks to license "heavy ion fusion" and sells a line of computing devices. The company had a market cap of about $35 billion when the stock was halted. That is larger than Twitter, American Airlines and Sprint. However, the average daily volume was only 418 shares.

Back in early 2014, the market cap was $4.73 billion with 630.1 million shares outstanding. The company has not filed any quarterly reports since January 2014. The SEC warned about the "accuracy and adequacy" of information on the officers of the company.

The Chairman, Steven Schwartzbard, said the trading halt was caused by short sellers. He said the company was planning on upgrading the listing to the Nasdaq to avoid the regulatory hassles on the OTC. Clearly, he is full of BS.

The SEC previously sued Schwartzbard in 1997 for orchestrating a securities fraud scheme involving boiler-room stock sale techniques. In 2007, he was sentenced to five years in prison after he defrauded investors out of $1.8 million regarding the proposed renovation of a Las Vegas Casino.

This is just another example of when things look too good to be true, they probably are. Source

If that was not enough to convince you this company is a scam, look at their "state of the art" website. NeuroMama.com



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A habit cannot be tossed out the window; it must be coaxed down the stairs a step at a time."

Mark Twain



Index Wrap

China Rising

by Jim Brown

Click here to email Jim Brown
China is showing strength where there should be weakness and that is a good sign for the market.

The U.S. markets and the Federal Reserve have been watching for signs of improving global weakness. The Fed warned about it again in the recent Fed minutes. The Brexit event is behind us and as expected there was no immediate economic impact. The UK Prime Minister said last week they could actually file the papers in April to start the two-year countdown clock.

Europe continues to plod along with lackluster growth and the ECB piling on the QE. Japan remains economic quicksand but it has been flat to recessionary for so long nobody expects anything different. They also continue to load up on QE and buying equity ETFs along the way.

The key country this quarter is China. The economic numbers continue to get worse but with every depressing statistic the chances increase for even more stimulus. This is not lost on the Chinese equity markets.

The Shanghai Composite closed at the high for 2016 last week. The dip to 2,750 in January has been followed by a slow recovery to close at 3,108 on Friday. That is significantly lower than the 5,166 high in 2015 but at least it is moving in the right direction. The chart below is a picture of a market in recovery despite the long road ahead.

Every night that the Chinese markets do not meltdown is another chance for the U.S. markets to rally. The Japanese market is struggling but apparently, nobody cares anymore. The Nikkei was down hard last week and the U.S. markets barely reacted. The Chinese economy, even with the possibly fraudulent government economic numbers, is still the driving force.



The Dow Jones Global Index is in breakout mode and at a 52-week high. It would be very unlikely for the U.S. markets to decline with the global index rising along with the Chinese markets.


The German DAX has broken out to the high for the year and broken through a two-year downtrend. This move is in spite of the Brexit vote.


The FTSE 100 is also in breakout mode and nearing two-year highs. Apparently Brexit had no impact on equities despite all the gloom and doom spread around before and after the event.


In the U.S., the S&P-500 has stalled and is trading in a very narrow range. Normally when tight consolidation ranges appear the pattern ends with a continued move in the original direction. In this case the target would be 2200-2225. About the only thing we can count on is that the breakout/breakdown will occur in a spectacular fashion. There will be a big move, only the direction is unknown. At this point, the most likely direction is higher.


The percentage of S&P stocks with a buy signal on a Point and Figure chart has plateaued at 76%. That is still relatively high and indicates there is good breadth and stocks have not retreated significantly from their recent highs.


The percentage of S&P stocks over their 50-day average has begin to weaken at 68.6% but that is still a healthy number. The lack of upward progress in the market in August has allowed the average to catch up with the price and without a sudden market surge higher, this percentage should decline.


The percentage of stocks over the longer-term 200-day average has reached a two-year high at 81.6%. This is bullish BUT it also signals the market has moved into an overbought range. I have written about this before and it would be very unusual for this indicator to continue higher. If we continue to languish in this tight market range, the average will catch up with the current price eventually and the percentage will weaken. However, at this level it would take a material market decline to cause any severe damage.


The Volatility Index continues to hold at multiyear lows. This is showing extreme complacency because investors are not buying puts as insurance against a future decline. That suggests any unexpected headline could cause a significant decline because there is no insurance and investors are using stop losses instead. Something similar to the Flash Crash could occur because the early stops would be hit causing further selling and a cascading decline. While this has only a remote chance of occurring, there is always a risk.


With no signs of selling, rising global markets, a falling dollar and one candidate well ahead of the other, the uncertainty for the market is minimal. The speech by Janet Yellen next Friday is the next hurdle to cross and assuming she does not go rogue, the market could continue to consolidate into an eventual move higher.

However, the next six weeks are "normally" the most volatile of the year with second half lows made in September and October. Normal seasonal patterns have been absent this year so we cannot simply move to the sidelines and wait for a September decline. I continue to recommend refraining from being overly long and suggest we keep some cash in case a buying opportunity arrives.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Spicy

by Jim Brown

Click here to email Jim Brown

Editors Note:

McCormick & Co sells spices to the world. Regardless of the brand you buy it probably came from McCormick.



NEW DIRECTIONAL CALL PLAYS

MKC - McCormick & Co - Company Profile

McCormick & Company manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in the Americas; Ducros, Schwartz, Kamis, and Drogheria & Alimentari brands, as well as Vahine brand in Europe, the Middle East, and Africa; McCormick and DaQiao brands in China; McCormick and Aeroplane brands in Australia; and Kohinoor brand in India, as well as through regional and ethnic brands, such as Zatarain's, Thai Kitchen, and Simply Asia. This also supplies its products under the private labels. This segment serves retailers, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers directly and indirectly through distributors or wholesalers. The Industrial segment offers seasoning blends, spices and herbs, condiments, coating systems, and compound and other flavors to multinational food manufacturers and foodservice customers.

They reported Q2 earnings of 75 cents that beat by a penny. Revenue rose 3.8% to $1.06 billion and matched estimates. Consumer sales rose 7% to $641.8 million while industrial sales declined -0.7% to $421.5 million. For the full year they guided for earnings on a constant currency basis of $3.68 to $3.75 and analysts were expecting $3.74. Revenues are expected to be $4.34 to $4.43 billion but that was on the low side of estimates for $4.41 billion. They expect sales growth of 5% and EPS growth of 10%. They said they had more confidence they would come in at the high end of their revenue and sales guidance. However, that only matched expectations on earnings and was still light on revenue.

Earnings Sept 29th.

They have several challenges. The quit selling a low cost economy product in India and that reduced revenue. Indians have a very low standard of living and try to find the lowest cost products. The company also warned on currency issues. Total sales growth in Q2 was 3.8% but adjusted for constant currency that would rise to 6%.

They also had an issue with private label customers lowering prices for their products. That means a $2 box of private label pepper is competing with a $2.50 box of McCormick pepper. The company is actually fine with that and encourages private label distributors to adjust prices to whatever price point generates the most sales. Apparently, McCormick is perfectly happy growing market share at a reduced revenue rate. They are still making money on private label products and those products are capturing market share.

Shares sold off from $107 to $100 in the month following the earnings report. After putting in a double bottom at $100 the stock is moving higher and a break over $102 could see the gains accelerate. This is a good stable company paying a $1.72 annual dividend without a lot of drama along the way. I expect it to return to the highs, market willing.

With a MKC trade at $102.15

Buy Dec $105 call, currently $2.35. Initial stop loss $99.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Dow Lagging

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow is struggling to hold its recent gains while the other indexes still have bullish charts. The Dow made a new high on Monday and has faded since that accomplishment. The other major indexes also made Monday highs but despite a slight retracement, they still retain a bullish trend.

This is due to the Dow's narrow 30-component composition. They have all reported earnings and there is nothing left to excite buyers. The Dow stocks are all exposed to Europe and Asia and currency issues. Investors are simply looking elsewhere for investable stocks or taking cash off the table ahead of September.



Current Portfolio


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.


Profit Targets

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




Current Position Changes


ITW - Illinois Tool Works

The long call position was opened at $119.25.


SWKS - Skyworks Solutions

The long call position was opened at $72.05.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates


AAPL - Apple Inc - Company Profile

Comments:

Shares were up after RBC Capital Markets said the upcoming release of a new MacBook Pro could lift revenue. They reiterated their buy rating anf $117 price target.

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 were up 60 cents to a 3-weekhigh close. Waiting on market direction.

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. Minor gain in a weak market.

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.


ITW - Illinois Tool Works - Company Profile

Comments:

No specific news. The position was opened at $119.25 and the stock closed at a new high at $119.64.

Original Trade Description: August 17th.

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Illinois Tool Works Inc. was founded in 1912.

In late July, ITW reported earnings of $1.46 that rose 12.3% and beat estimates for $1.40. Revenue of $3.43 billion beat estimates for $3.40 billion. ITW guided for Q3 earnings of $1.42-$1.52 compared to analyst estimates for $1.46. The company raised full year guidance for earnings by 10 cents to the $5.50-$5.70 range. Analysts were expecting $5.51 per share.

The stock jumped from $111 to $115 on the news and then traded sideways for two weeks on post earnings consolidation. In early August the shares started a slow climb to hit $119 and a new high. Every day I thought about recommending ITW but I kept waiting for a pullback. We saw a minor decline on Tuesday to $118 and a positive gain on Wednesday. This may be our chance to buy a dip, even as small as it was.

Earnings Oct 19th.

Position 8/19/16 with an ITW trade at $119.25

Long Dec $125 call @ $2.05. No initial stop loss.

If you want to buy the $120 strike you could turn it into a spread by buying the Dec $120 and selling the Dec $130. The net debit today would be $3.40. I still think that is expensive and why I recommended the $125 call.


LL - Lumber Liquidators - Company Description

Comments:

Shares collapsed -3% after they announced a new loan agreement for a $150 million credit line. This was a restatement and update of a prior credit agreement. They only have $24 million in outstanding loans under the prior agreement. I do not understand why this was market negative. The new agreement runs until 2021. I suspect the decline was related to the big early week gain and the market weakness on Friday. Traders took profits.

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.


NOW- ServiceNow Inc - Company Profile

Comments:

No specific news and no decline. A minor gain in a weak market suggests the worst is over.

Original Trade Description: August 15th.

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.

Position 8/16/16:

Long Nov $80 call @ $4.70, see portfolio graphic for stop loss.
Short Nov $90 call @ $1.20, no initial stop loss.
Net debit $3.35.


PAG - Penske Automotive Group - Company Profile

Comments:

No specific news. Shares closed at a 7-month high Thursday and declined 35 cents today.

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. Roger Penske acquired another 50,000 shares on August 11th 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.

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.


SWKS - Skyworks Solutions - Company Profile

Comments:

No specific news. The position was opened with a trade at $72.05.

Original Trade Description: August 18th.

Skyworks Solutions, Inc., designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, VCOS/synthesizers, and voltage regulators. The company provides its products for automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable applications.

In other words, Skyworks chips are in quite a few devices in the Internet of Things (IoT). The stock has been punished by investors because of the decline in expectations for Apple iPhone sales. That is a big business for Skyworks but fare from their only business. They also produce chips for phones like the Samsun Galaxy that is taking market share away from Apple. They are losing share for one customer and gaining share at another plus they sell chips for hundreds of other products not related to smartphones.

They reported earnings of $1.24 compared to estimates for $1.21. Revenue of $751.7 million also beat estimates for $750.1 million. They guided for revenue in the range of $831 million for the current quarter and earnings of $1.43.

Earnings Nov 3rd.

CLSA upgraded the stock from underperform to outperform saying the bad news on worried about Apple's sales is already priced in and the CEO gave conservative guidance that should be easy to beat. The company said its flagship smartphone chipset sales were expected to grow 20% in 2016. The analyst raised the target price to $77.

Shares were up strongly on Thursday despite the weak market. They are poised to break over resistance at $72 and retest the $79 level. Because of the gain the option premiums are inflated so I am recommending a call spread. The October strikes will not be available until next week so we have to go with November.

Position 8/19/16 with a SWKS trade at $72.05

Long Nov $75 call @ $3.70, no initial stop loss.
Short Nov $82.50 call @ $1.66, no initial stop loss.
Net debit $2.30.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

The Dow has not made a new high since Monday but it is also failing to decline. The six weeks after August option expiration are the most volatile of the entire 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. New six-month intraday low.

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.




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

subscribe now