Option Investor
Newsletter

Daily Newsletter, Monday, 8/22/2016

Table of Contents

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

Market Wrap

Floundering Around

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market floundered for another day, just below the recently set all time high. There was very little to move the market today, and little this week, so listless sideways trading could persist into the near term. Earnings season is largely over and economic data is very light all week so the market will struggle for direction and focus on what it can, oil prices and the Jackson Hole conference. Oil prices seemed to have topped out again, WTI fell more than 3% today. The Jackson Hole conference promises at least more Fed Speak, Janet Yellen is scheduled to deliver her address on Friday.

International markets were mixed, anticipation for the Jackson Hole conference and Yellen's speech dominating sentiment. Asian indices were mostly flat, where one index fell a quarter percent another rose a quarter percent. In Europe trading was little more dour, indices made small losses across the board. The slide in oil prices helped EU markets fall and will likely have an impact on the Asian trade when it opens in the overnight session.

Market Statistics

Futures trading indicated a mildly negative open all morning, about -0.25%. The operative word though was mildly as that word could be used to describe trading for the rest of the day. At the open the indices were mildly lower, they then mildly rallied, and then mildly sold off again... mildly trending sideways all day and into the close of the session leaving them with little to no change.

Economic Calendar

The Economy

There was no economic data released today and there will be very little released this week. In all, there are about 8 reports worth tracking including weekly jobless claims. The important, most important, are new and existing homes sales, durable goods orders and the 2nd estimate for 2nd quarter GDP. The estimate is expected to be revised lower by a tenth. Next week is the turn of the another month, if you can believe it, which means a whopping dose of monthly macro-economic data including NFP and unemployment.

Stanley Fischer spoke to a conference in Aspen, CO Sunday and says that a rate hike is near and that the economy has nearly reached the Fed's goals in terms of employment and inflation. His comments fueled rate hike speculation and drove the dollar higher despite the fact they seem to contradict the FOMC's official stance. Regardless, Fed Speak could continue to support the dollar into the near term with next week's data deluge a potential catalyst to affirm or refute Fisher's take on the economy. The CME's Fed Watch Tool rose on the news, but only slightly, to 18% chance of rate hike next month and 22% chance the month after that.

My take; they've (The FOMC together and by it's individual members) been saying a rate hike is close for a long, long time and employment data has been at healthy levels for just about as long . . . inflation on the other hand has not yet risen to target levels and doesn't look like it will soon so it's hard to argue for a rate hike. I think this is evident in conflicting viewpoints expressed by the individual members, they never seem to agree and one of them always seems to be in the news. Fischer is hawkish today, one of them will be dovish tomorrow. Yellen is set to speak later this week, be sure every nuance of her words will be studied for meaning.

Moody's Survey Business Confidence fell by a full point last week to 25.9. Based on Mr. Zandi's remarks it seems as if global business is cautious in the wake of a number of global events including Zika, Brazil and Venuzuelan politics, Brexit and the Turkish coups. Sentiment is also generally positive and consistent with an expanding economy. South America is worst, North America is best (go USA!) and improvement is expected in 2017.


Earnings season is just about over and, as expected, is better than expected at the beginning of the cycle but not as much better than expected which might be a problem. Let me put it like this. Over the course of the past 4 years the average amount of change between the expected rate of growth at the beginning of the reporting season and the actual amount of growth at the end of the reporting season has been about +4%. The week Alcoa reported, regarded as the start of the earnings cycle, the expected rate of earnings growth for the entire S&P 500 was -5.6%. which makes -1.6% the end-of-cycle target rate for earnings growth, give or take. So, -3.2% is better than expected, but it's not as good as it should be.


Looking forward earnings growth outlook held steady over the past week. The bad news is that 3rd quarter outlook held steady at -2%. If this is as low as it gets we can expect the final amount of 3rd quarter growth to be at least positive, if not above 1%. The 4th quarter projection held steady at 5.5%. Full year 2016 earnings growth estimate came in at -0.4%, unchanged from last week and the third week of negative reading. Next year is still expected to see strong growth, 13.3%, but that's still a long way off.


The Dollar Index

The dollar strengthened in early trading, driven by Stanley Fischer's comment's, but was not able to hold the gains. Today's action created a pinbar doji/shooting star and shows a market that may have made a knee jerk reaction to comments and then decided the news may not be as important as first thought. It also shows a market with some support at the $94.31 level, near the 78.6% retracement level, although the move is tentative and faces at least a little resistance. The indicators are bearish, near term trend is down, but they also suggest some support is present at current levels. A break below support would be bearish, downside target near $93. A bounce, or a continuation of this bounce, would be bullish with upside target between $95.60 and $96.50. Tomorrow's New Home Sales data could move the needle, or more Fed speak.


The Oil Index

Oil prices fell hard today, more than -3%. The rumors surrounding a possible OPEC production freeze are evaporating, and support for oil along with it, while increased expectation for renewed output from Nigeria and disputed fields in Iraq add to over supply worry. One analyst says the OPEC comments were "well timed", hinting as I've suspected that they are merely trying to talk the market higher. WTI fell below $37 and looks like it is headed back to $45 or lower. Today was the expiration of the front month contract which may have added to volatility, tomorrow the new contract begins trading as the front month.

The Oil Index fell in today's action, pulling back from the top of its 5 month trading range. The index shed -1.16% but found support at the short term moving average, near the middle of the trading range. The indicators are rolling over, consistent with the top of a trading range, and suggest a move lower is coming. If support is broken a move to the bottom of the range, near 1,075, is likely. Support is in the range of 1,120 to 1,150.


The Gold Index

Gold prices wobbled a bit as the dollar moved on Fischer's comments. Spot price fell about a half percent to $1,338 but recovered most of the loss. Despite the narrow daily range gold hit a two week low today, but remains above near term support levels. Prices could move down to $1,320 before hitting critical support and may do so if data and/or Fed speak points to rate hike.

The gold miners fell in today's session. The miners ETF GDX fell more than -1.5%, trading beneath the short term moving average with bearish indicators. The move shows a bit of choppiness in the market that has been growing over the past few months. This is the 5th time the ETF has traded below the short term moving average since the uptrend began 7 months ago, the first 4 times provided nice trend following entries. This may do the same but as yet there are no confirmations of support. Both indicators are bearish and gaining strength so I would expect to see a test of support at these levels, near $29.50, before any move higher occurs. A break below support would be bearish and could take it down to $27.50 before hitting next support. If support at/near $29.50 is confirmed the bounce could take the ETF to new highs above the $31 long term resistance line.


In The News, Story Stocks and Earnings

Pfizer announced it was buying Medivation this morning before the opening bell. The deal is worth $81.50 per share, $14 billion, and brings a portfolio of drugs that Pfizer says will add at least $0.05 to earnings in the first year. Deal price is a 20% premium to Medivation share prices, which saw substantial gains in today's session. Pfizer however lost about -0.40% to trade near a two month low.


Shake up at the Williams Companies continues. Management company Corvex says it plans to nominate 10 of its own employees to the board at the next shareholder meeting, Williams Companies calls this an unfortunate event. Shares of Williams Companies fell nearly -1.0% on the news and is trading just below a 9 month high.


Valeant Pharmaceutical announced the appointment of a new CFO. Paul Herendeen, formerly of Zoetis, was tapped for the position. This is the second major executive suite change this year as the company tries to recover from recent lows. Shares of Valeant gained more than 8% on the news to close at a 3 month high.


The Indices

The market really didn't do much today, just another day trading in a tight range below recent highs. For the most part the indices closed flat on the day, most in negative territory but one was able to pull off a small gain. The NASDAQ Composite gained 0.12% in a move that created a very small white candle. Today's action did not set a new high but is very close to the current all time high, and sitting on support at the previous all time high. The index could be consolidating for a move higher but bearish and weakening indicators suggest a test of support at least should be expected. A break below support, near 5,220, would be bearish in the near term and could take the index down to the short term moving average near 5,150 or lower.


The index with the biggest loss was the Dow Jones Transportation Average. The transports fell -0.45% in a move that created a very small black candle testing for support just above the short term moving average. The index is drifting sideways, just below the upper end of a 6 month trading range, with indicators consistent with range bound trading. Support is just below today's level, near the short term moving average, and then just below that near the mid-point of the trading range at 7,750. If the index is able to stage a rally resistance is just above today's close near 8,000.


The S&P 500 made the smallest loss in today's session, about -0.06%. The broad market created a very small doji like candle within the two week consolidation band. It is above the short term moving average, closest support, and could be preparing to move higher but divergences in the indicators continue to persist. These divergences, particularly in the stochastic, are pronounced and typically lead to some kind of market weakness. A break below support, near 2,165, would be bearish in the near term at least and could take the index down to 2,120 or lower. I know I've been harping on potential market weakness for months, I have to because the charts show it. The caveat is that chart weakness doesn't always equate to correction.


The Dow Jones Industrial Average fell -0.12% and created a very small doji candle, below support, and looks set to pull back. The indicators have rolled into a bearish signal in the near term, confirming a significant divergence from prices in the short. First target for support is the short term moving average, near 18,400, with next target just below that near 18,300. A break below 18,300 could lead to a deeper correction down to 18,000 or lower.


The market melt-up may have run its course. It pushed the indices up to new highs, in most cases, but hasn't been able to do much since. There is optimism for the future, earnings growth is expected to return next year, but plenty of reason in the near term to be cautious. My number one concern is earnings growth and outlook into the end of the year but there are others, the FOMC and rate hikes, longer term impact of the Brexit, volatile oil prices and generally tepid global growth to name a few. These may just be bricks in the wall of worry but maybe not, without a catalyst to drive the market higher they may provide enough resistance to keep the market from moving higher. The near term trend is up, but I have to remain cautious until divergences in the charts play out, and the market quits floundering around.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Component Manufacturer

by Jim Brown

Click here to email Jim Brown

Editors Note:

We all use Eaton's products in our daily life but we never give them a second of thought. They manufacture electrical components, like fuse boxes, electrical boxes and connectors, etc. This is an indispensible company with products in every home and business but nobody knows their name.



NEW DIRECTIONAL CALL PLAYS

ETN - Eaton Corporation - Company Profile

Eaton Corporation operates as a power management company worldwide. The Electrical Sector is a global leader in power distribution, power quality, industrial automation and power control products and services. Products include circuit breakers, switchgear, UPS systems, power distribution units, panelboards, loadcenters, motor controls, meters, sensors, relays and inverters. The principal markets for the Electrical Americas and Electrical Rest of World segments are industrial, institutional, government, utility, commercial, residential, information technology and original equipment manufacturer customers. In California's aerospace industry, the Eaton Corporation manufactures and markets a line of systems and components for hydraulic, fuel, motion control, pneumatic systems and engine solutions. Eaton is a manufacturer of systems and components for use in mobile and industrial applications. Markets include agriculture, construction, mining, forestry, utility, material handling, machine tools, molding, power generation, primary metals, and oil and gas. The Hydraulics group also includes Eaton's Filtration, Golf Grip and Airflex industrial clutch and brake businesses. The Vehicle Group comprises the company's truck and automotive segments. The truck segment is involved in the design, manufacture and marketing of powertrain systems and other components for commercial vehicle markets. Key products include manual and automated transmissions, clutches and hybrid power. Eaton’s automotive segment produces products such as superchargers, engine valves, valve train components, cylinder heads, locking and limited-slip differentials, fuel, emissions, and safety controls, transmission and engine controls, spoilers, exterior moldings, plastic components, and fluid connectors. The company was founded in 1916.

For Q2 the company reported earnings of $1.07 that beat estimates for $1.05. Revenues of $4.08 billion beat estimates for $4.05 billion. Revenues were down -5.4% due to lower sales to the automotive sector and a decline in sales to the oil and gas sector. Currency issues also removed -1% from revenue. The company narrowed its full year guidance from $4.15-$4.45 to $4.20-$4.40 per share. They still expect revenues to decline 2% to 4% for the full year because of the drop in oil and gas sales and the weak global economy and a currency impact of $225 million.

Next earnings Nov 1st.

Argus said the company was doing well in a tough environment and they expect the oil and gas sector to rebound in 2017. They said Eaton was selling at a discount to its peers and raised their rating from hold to buy. Eaton has been restructuring since 2013 and Argus expects that to bear fruit in the year ahead with earnings rising appropriately.

Eaton shares rallied for two weeks after the August 2nd earnings and then went sideways with the market over the last week. Shares closed on Monday at a 52-week high at $67.72. Resistance is $73.50.

If the market rallies as expected after Labor Day, I would expect Eaton to move higher to test that resistance. This is a quality company with low volatility and they pay a $2.28 dividend for a 3.37% yield.

With a ETN trade at $68.05

Buy Oct $70 call, currently $1.00, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

BTD

by Jim Brown

Click here to email Jim Brown

Editors Note:

Traders continue to buy the dips and the indexes recovered from significant early morning losses. The Dow and S&P posted decent rebounds but neither could claw their way back to positive territory at the close. The Dow was down nearly -100 points at the open and managed to close with a loss of only 23. The Nasdaq turned in a much better performance with a minimal decline and a 6 point gain at the close. The biotech sector provided support and gained almost 3% after Pfizer said it was buying Medivation.

The Russell 2000 also squeezed out a 3-point gain thanks to the biotechs. The Russell is nearing the 52-week close at 1,241 from last Monday with a close at 1,238 today. This is bullish for the broader market.



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


MKC - McCormick

The long call position was opened at $102.15.


AAPL - Apple Inc

The long call position was stopped out at $108.25.


NOW - Service Now

The long call position was stopped out at $71.45.



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:

Apple shares dipped $1.50 intraday to hit our stop loss at $108.25. There was no specific news but a bunch of minor headlines. Two workers died at the Foxcon assembly plant for Apple phones and there were several articles talking about a lack of features on the phone to be announced next month. Shares have gone mostly sideways for the last two weeks. I had tightened the stop to take us out with a profit if the weakness continued and that happened today.

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:

Closed 8/22/16: Long Oct $110 call @ $2.19, exit $2.56, +.37 gain.


AKAM - Akamai Technologies - Company Profile

Comments:

No specific news. CEO bought 19,003 shares on August 15th at $52.61.

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. Entire sector was weak with the only news the companies dropping support for the disgraced Olympic swimmer.

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 stock closed at a new high at $119.75.

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:

No specific news and only a 9 cent loss in a mixed market.

We entered this as a long-term position with the November call. I wish the Q2 earnings were better but that is behind us now. We are going to hold the position and hope the pre earnings rally returns.

Original Trade Description: July 7th.

Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.

LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.

On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.

The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.

The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.

LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.

LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.

Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.

While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.

Earnings July 27th.

LL shares spiked to $16 on the news back in mid June. They moved sideways until the Brexit crash and lost altitude back to $14. Today's close was a six-month high over that headline spike in June. I believe the stock is poised to go higher now that it is trying to pull out of its yearlong consolidation.

I am going to recommend a longer-term option and suggest we hold over the July 27th earnings. They would be hard pressed to say anything more negative than what the market already expects. The potential for good news and positive guidance is very good.

Position 7/8/16:

Long Nov $18 call @ $2.15. No stop loss because of the cheap option and the longer term.


MKC - McCormick & Co - Company Profile

Comments:

No specific news. The position was opened with a trade at $102.15 and shares continued to close at a 5-week high.

Original Trade Description: August 20th.

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.

position 8/22/16 with a MKC trade at $102.15

Long Dec $105 call @ $2.40. See portfolio graphic for stop loss.


NOW- ServiceNow Inc - Company Profile

Comments:

No specific news but shares fell -3% to stop us out at $71.45.

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:

Closed 8/22/16: Long Nov $80 call @ $4.70, exit $2.55, -2.15 loss.
Closed 8/22/16: Short Nov $90 call @ $1.20, exit $1.10, +.10 gain
Net loss $2.05.


PAG - Penske Automotive Group - Company Profile

Comments:

No specific news since August 15th. Shares closed at a 7-month high Thursday and declined 30 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 and a minor gain in a mixed market.

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 DIA only declined 20 cents but closed at a 2-week low. Traders are still buying the dip but in less volume. 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:

A woman was hurt on a Six Flags roller coaster and shares dropped sharply on the news. The rebound was just as quick to close positive for the day. It was a 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.




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