Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/24/2016

Table of Contents

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

Market Wrap

Chop Chop

by Keene Little

Click here to email Keene Little
Today's decline has things looking a little more bearish than they've been the past couple of weeks but in reality all we have is a tight trading range full of choppy price action. We're still waiting for a break out of the range and the return of some volatility.

Today's Market Stats

The stock market is stuck in a rut and neither side has pushed very hard to get the market unstuck. That might not change until we get into September but possibly the Fed's Jackson Hole meeting on Thursday and Friday might provide a reason for one side or the other to get a little more energetic. At the moment there's little interest in the market, although today showed a little more volume than we've seen recently (on a down day so that's not encouraging for bulls).

There was little in the way of economic reports to move the market today but the existing home sales was a little disappointing, especially after the strong new home sales report on Tuesday. The 5.39M annualized sales number was less than June's 5.57M and less than the 5.54M the market was expecting. Following that report at 08:30 the equity futures tumbled lower and we started the day with a gap down. A morning bounce attempt led to stronger selling in the afternoon and depending on the index you look at it looked either bearish or just a continuation of the sideways choppy trading range.

I've discussed in the recent past the enormous support provided to the stock market by corporations and their stock buybacks. Well over $2T has been pumped into the stock market since 2009 thanks to cheap borrowing costs and lack of investments in their businesses. Instead of investing in capital equipment, business expansion or new business ideas we've seen companies instead boost dividends and buy back a lot of their stock. Fewer outstanding shares boosts earnings per share and that has created a false sense of value for these companies.

With earnings declining (6 quarters in a row) and borrowing in decline we're seeing a reduction in stock buybacks as can be seen on the chart below (data from TrimTabs Investment Research). With the drop of support from corporate buybacks it's going to be much more difficult for the remaining bulls to power the stock market higher. We could see more money come in from foreign sources but at this point that's an unknown. What we do know is corporations are cutting back significantly and the stock market is losing that prop. Can the Fed save us now?

Slowdown in corporate buybacks, August 2015 - August 2016, chart courtesy Casey Research

At the same time the market is losing the support that has propped it up so strongly we see bullish sentiment hitting extremes that have led to trouble in the past. Neither of these measures are good market timing tools but it's important to be aware of those times when the market has become more vulnerable to a catalyst that will cause selling.

The chart below is one from Tom McClellan, which tracks the Investors Intelligence report on Bulls minus Bears vs. the S&P 500. This report shows the percentage of bullish vs. bearish newsletter writers. McClellan noted that not only is the difference high (Bulls 56.7 vs. Bears 20.2, for a difference of 36.5) but that it's also above the upper band (one standard deviation away from the 50-dma), each of which is a danger sign for a possible top at any time. What he also noted was the steady increase since the June 27th low and how steady the spread in the bands has remained. It's almost as though the market's been manipulated higher but we know that can't happen (cough) so at this point it's just an interesting phenomenon.

The significance of the way the sentiment picture has developed is that it is high and has gone steadily higher instead of running in fits and starts, which indicates a steady increase in bullish complacency. This is very likely due to the fact that the market hasn't made a move greater than 1% in 33 trading days, counting today. That's nearly 7 weeks where the market has made very small moves and it seems to have lulled most into a false sense of security with an expectation that the rally will simply continue. We all know what happens when the majority believes in one direction for the market. Ah yes, I know, this time is different. The VIX is very low and the Bollinger Bands are very tight -- what could possibly go wrong here?

Investors Intelligence report vs. SPX, chart courtesy Tom McClellan

This market has even sucked me over to the dark side with the bulls (wink) as I think the market has higher to go. But I'm only short-term bullish since I believe September is not going to be kind to bulls and if we do continue to get marginal new highs into a potentially important turn window in the first week of September it would then be a setup for a strong selloff to reverse the rally from June. My opinion is of course subject to change as the market dictates. I could turn bearish tomorrow or not until after the election (some of us believe there's a strong government effort to hold the market up until November to ensure the Democratic party remains in power). Price will let me know when to step off the bull train and get on the southbound bear train but as of right now I don't see the southbound train as ready to leave, although admittedly today has me wondering, as I'll show on the charts.

I'll start tonight's review with the NDX since its price action right here could tell us whether or not to shift over to the bearish side of the fence sooner rather than later. While I feel short-term bullish, based on some timing factors and a lack of a clear ending pattern to the upside, I also know this market is vulnerable to a fast move down and it might be from just a small catalyst that prompts more selling than what catalyst called for. Profit taking leads to stop runs which leads to strong selloffs. Sometimes it's no more complicated than that.


Nasdaq-100, NDX, Weekly chart

For the rally from February NDX would achieve two equal legs up at 4865, less than 30 points above this week's and last week's highs. That projection crosses a trend line along the highs from July-November 2015 next week. Between that and a turn window in the first week of September it would make a good time for a top to form. Depending on the form of the decline (impulsive or corrective), whether from here or from a little higher, I'll get a better sense about when a top is likely in place but so far there's no evidence to suggest we've seen the top.


Nasdaq-100, NDX, Daily chart

The NDX daily chart is the one that's causing me to feel like a top is now in place and while I'm not ready to get aggressively short yet I do have some short positions for my JIC trade (just-in-case). NDX has been struggling to break through resistance at its March 2000 high at 4816.35. After being rejected at that level twice, on August 9th and 11th, it finally closed above it on August 15th. But then it dropped back down below that level the next day. One failed breakout attempt. It then repeatedly banged its head at that level last week before getting back above it yesterday, only to pull back to the line by the close (4818.48). Today it gapped back down below and closed lower than the previous 9 sessions. Two failed breakout attempts and now a double top with bearish divergence. I have to say the price action on the NDX daily chart has me wanting to get aggressively short here. As noted at the bottom of the chart, the oscillators support the idea of a rolling top at major resistance. While I'm aware of a possible high in the first week of September, I'm not feeling the bullish love here.

Key Levels for NDX:
- bullish above 4820
- bearish below 4689


S&P 500, SPX, Daily chart

I've been thinking for the past few days that we might see a rising wedge pattern complete for SPX in another week or two but today's selloff has made that pattern questionable. It could still chop its way higher, which is what I show on the daily chart, but something more bearish could be starting. A continuation lower on Thursday would have me more seriously questioning whether we should expect another new high into next week. Below the August 2nd low near 2147 would be convincing evidence the high is already in place. Like NDX, we have a double top between the August 15th high and yesterday's high, both near 2194. But there's still a chance for a choppy move higher into the first week of September, which could see SPX up near 2215 before the rally will be complete.

Key Levels for SPX:
- bullish above 2194
- bearish below 2147


S&P 500, SPX, 60-min chart

The 60-min chart shows the uptrend line form August 2-17 as the bottom of the rising wedge that I've been watching but today's decline dropped SPX below it, now near 2179. It's possible we're going to get an a-b-c pullback from August 15th, which would have two equal legs down at 2168, and then another rally. Considering the 2168 projection and the August 17th low near 2168 I'd say the pattern turns more bearish below that level. But at the moment I think bears need to be ready for the possibility of another rally to kick off from here or from 2168. The late-day bounce back up today got SPX to close at price-level support near 2175. We've had nothing but choppy 3-wave price action since mid-July and that makes it very difficult to project a price pattern from here. But keep in mind that sharp declines since mid-July have been conclusions to pullbacks and not the start to a more serious decline. The decline from yesterday could be the same thing (to complete an a-b-c pullback from August 15th) and the bounce back up to support near 2175 might be the start of a reversal back to the upside. We should find out quickly Thursday morning.


Dow Industrials, INDU, Daily chart

The Dow has been a little weaker than the other indexes and slow rollover from its August 15th high could be the start of a stronger decline. But as with the others, there's no clear ending pattern to the upside and the pullback from August 15th looks choppy and more like a corrective pullback than something more bearish. It could suddenly break down, which would change the corrective pullback into an impulsive decline but at the moment I don't get a warm and fuzzy feeling for the bears here. As with SPX, an a-b-c pullback from August 15th would have two equal legs down at 18430, 18 points below this afternoon's low and a drop below that level would start to look more bearish. A drop below its May 2015 high at 18351 would have me growing some bear claws but for now I'm anticipating the bears will get another slap in the face with a rally that "shouldn't happen." The bears rightfully complain there is no fundamental reason for the market to rally. But that's like arguing the market should be logical.

Key Levels for DOW:
- bullish above 18,670
- bearish below 18,247


Russell-2000, RUT, Daily chart

I've been tracking the same idea for a rising wedge for the RUT and it continues to hold inside the wedge after today's decline. Yesterday's high was a test of the top of the wedge and today's low was a test of the bottom of the wedge. Yesterday's high fits well as the 3rd wave inside the wedge and the decline from yesterday fits as the 4th wave, which gives us a setup for just one more push higher to complete the 5th wave and for now I show a projection to about 1264 by September 1st. A drop below the August 17th low, near 1222, would have it looking more bearish and above 1267 would be more bullish, although the significant bearish divergence does not suggest a more bullish outcome from here.

Key Levels for RUT:
- bullish above 1267
- bearish below 1221


10-year Yield, TNX, Daily chart

Bonds have been trading in a tight range since the July 21st high for yields (lows for bond prices). TNX and TYX (10-year and 30-year, resp.) have each formed a sideways triangle for their consolidation patterns and they should soon be ready to break out to the upside. The July 6-21 rally has been followed by a sideways triangle, which points to another leg up. For TNX we could see a rally to its broken uptrend line form July 2012 - January 2015 and its 200-dma, which will both meet soon near 1.82%. Another leg up would have it achieving two equal legs up from July 6th near 1.8%-1.82%, depending on where the triangle consolidation finishes. Bonds seems to be waiting for the Fed's Jackson Hole meeting, which starts on Thursday, and at this time it's looking like they might take a hawkish stance and prompt a bond selloff (yield rally). That could actually help the stock market so it will be something else for stock market bears to consider. However, notice the previous sideways triangle in March-May 2016, which led to a breakdown instead of a rally so the only thing we can know at this point is that there's likely to be a big move soon out of this sideways triangle.


Transportation Index, TRAN, Daily chart

The TRAN has been bumping up against resistance since breaking its uptrend line from June 27th last week. In addition to multiple back-tests of the broken uptrend line, yesterday and today it also hit its downtrend line from August-November 2015, near 7950. Since the August 2nd low MACD has barely lifted its head off the mat at the zero line, which is not exactly a sign of strength. If anything, running up to double resistance has it looking like a setup to get short here.


U.S. Dollar contract, DX, Weekly chart

The US$ has dropped down near support at the top of its parallel up-channel from 2008-2011 and the one from May 2011, near 94.35 and 93.65, respectively. In addition to those support levels there is a projection to 93.82 for two equal legs down from July 25th and last week's low was 94.05. So the dollar is down to a support zone and I'm now waiting to see if it will start another rally leg. Depending on what comes out of the Jackson Hole meeting tomorrow and Friday we could see a dollar reaction (hawkish comments would be bullish for the dollar).


Gold continuous contract, GC, Weekly chart

Not much has happened to gold prices since it topped on July 6th at 1377.50. It looks like it might be forming a sideways triangle that could continue for another few weeks before breaking out. A sideways triangle here should lead to one more push higher and that would have it reaching its downtrend line form September 2011 - October 2012, currently near 1404 and potentially higher. A drop below 1307 would be a bearish heads up for at least a larger pullback and potentially something more bearish.


Oil continuous contract, CL, Weekly chart

Last week oil popped above its downtrend line from June 2014, currently near 47.80, but has dropped back down below the line this week, which at the moment leaves a failed breakout attempt. A rally above last Friday's high at 48.75 would be bullish and then it would be more bullish above price-level resistance near 51. But the larger pattern supports the need for another leg down and a drop below its 50-week MA, currently at 41.56, would be bearish, especially a weekly close below that level.


Economic reports

Other than the unemployment numbers tomorrow morning, we'll get the Durable goods orders for July, which are expected to show a reversal of June's numbers. There could be a negative reaction in the pre-market futures if that doesn't happen. On Friday we'll get the 2nd estimate for GDP in the pre-market session, which isn't expected to change much, and then Michigan Sentiment at 10:00, which is also expected to stay steady with July's number.


Conclusion

With a tight trading range and choppy price action for nearly two months we are left wondering if the market is in a topping pattern or just a consolidation before heading higher into the end of the year. We're seeing significant bearish divergences at recent highs compared to the ones back in July but sometimes what appears to be bearish divergence is nothing more than the market relieving the overbought conditions as the market trades sideways. This latter interpretation is quite bullish and therefore the bears need to stay cognizant of that possibility.

Arguing for the bearish case is the high bullish sentiment as the market's momentum to the upside fades. Trading volume has been very light this month (about 30% lighter than the average for August) but today's volume was heavier and on a down day that's not a good sign for bulls. From a timing standpoint there's a potentially important turn window in the first week of September so a continuation of a choppy move higher into the turn window will have me watching carefully for a market top. But stay aware of the potential for this market to break down sooner rather than later. As discussed with the NDX charts, there are enough bearish signs to be extremely cautious about further upside.

As mentioned earlier, I am short-term bullish into the first week of September but only if prices turn back up from here. A further decline would have me wondering if an important top is already in place.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Depression Over

by Jim Brown

Click here to email Jim Brown

Editors Note:

Owens Corning hit a new high on earnings in late July and then traded sideways for a month on post earnings depression. Shares closed at a four week high on Wednesday.



NEW DIRECTIONAL CALL PLAYS

OC - Owens Corning - Company Profile

Owens Corning produces and sells glass fiber reinforcements and other materials for composites; and residential and commercial building materials worldwide. It operates in three segments: Composites, Insulation, and Roofing. The Composites segment manufactures, fabricates, and sells glass reinforcements in the form of fiber; and manufactures and sells glass fiber products in the form of fabric and other specialized products. Its products are used in pipe, roofing shingles, sporting goods, consumer electronics, telecommunications cables, boats, aviation, defense, automotive, industrial containers, and wind-energy applications in the building and construction, transportation, consumer, industrial, and power and energy markets. The Insulation segment manufactures and sells fiberglass insulation into residential, commercial, industrial, and other markets for thermal and acoustical applications; and manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral fiber insulation, and foam insulation used in above- and below-grade construction applications. The Roofing segment manufactures and sells residential roofing shingles, oxidized asphalt materials, and roofing accessories used in residential and commercial construction, and specialty applications.

For Q2 they reported earnings of $1.29 that beat estimates for 85 cents. Revenue of $1.55 billion also beat estimates for $1.47 billion. They repurchased one million shares in the quarter with 2.8 million left on the current authorization. They projected second half shipments of roofing to be flat after a 20% surge in the first six months of 2016. This is a seasonal business. Hail storms that cause roof replacements are heaviest in April-July.

Earnings Oct 26th.

Shares were very volatile after the earnings with a range of $50.88 to $58.69. After the volatility passed the stock found support at $53 and moved sideways for four weeks. This week shares have started to climb out of the consolidation and the stock closed at $54.81 on Wednesday and actually posted a gain in a weak market. That was a four-week high.

This is a low volatility stock and could be a safe location to wait out any market volatility over the next six weeks.

Buy Nov $55 call, currently $2.35, initial stop loss $52.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Waiting Game

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors took profits while they wait for the Yellen speech on Friday. The Dow made a round trip from a resistance test on Tuesday to a support test today. The 18,450 level held and the Dow closed about 30 points off its lows with a 65 point loss.

The Dow actually posted the smallest percentage loss at 0.35% while the S&P lost 0.52% and the Nasdaq -0.80%. The declines were driven primarily by a 3.4% decline in the biotech sector after politicians began attacking high priced drugs, which have been the headline topic for the last week. Mylan is under attack for raising the price of a life-saving EpiPen by 400%. Compounding the biotech crash a court invalidated some patents held by Teva meaning generics could be produced sooner.

I wrote yesterday the failure at resistance could have been a turning point in the market. While that was true today, it is not really a turning point unless support breaks and the indexes decline significantly. Every decline starts somewhere.



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


GIII - G-III Apparel

The long call position was stopped out at $41.50.


IBM - IBM Corp

The long put position was opened at $159.



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


AKAM - Akamai Technologies - Company Profile

Comments:

No specific news. Nice gain in a weak market.

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.


ETN - Eaton Corporation - Company Profile

Comments:

No specific news. Shares dipped back to support in a weak market.

Original Trade Description: August 22nd.

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.

Position 8/23/16 with a ETN trade at $68.05

Long Oct $70 call @ $.99, no initial stop loss.


GIII - G-III Apparel Group - Company Profile

Comments:

There was a bad tick at the open where 5,000 shares were sold in the opening trade at $3.25 under the market. That bad traded stopped us out at $41.50.

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

Closed 8/24/16: Long Sept $45 call @ 90 cents. Exit $1.65, +.75 gain.

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. Shares closed at a new high on Tuesday and gave back a few cents today.

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.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. The decline accelerated after support at $16.25 broke. I am recommending we close this position.

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. Shares gave back some gains in the weak market.

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.


PAG - Penske Automotive Group - Company Profile

Comments:

No specific news. Shares held their recent gains in the weak market.

Original Trade Description: August 10th.

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

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

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

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

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

Update: On August 22nd, Roger Penske bought another 300,000 shares at $42.55 for $12.8 million. No other news and the stock spiked 4%. That raises his holdings to roughly 31.5 million shares and there are only 85 million outstanding. His ownership is now over 37%. He has purchased more than 1.5 million shares in the last month.

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 loss in a weak 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 Dow finally posted a decent decline but the dip was still bought. The Dow was down nearly -100 at the lows but rebounded to lose only 65 points. 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


IBM - IBM Corporation - Company Profile

Comments:

The position was opened when IBM traded at $159 to fall below support. They could continue the decline on Thursday after Hewlett Packard disappointed after the close. HP shares fell about 6% on lowered guidance.

Original Trade Description: Aug 23rd.

International Business Machines Corporation provides information technology (IT) products and services worldwide. The company's Global Technology Services segment provides IT infrastructure services, such as IT outsourcing, integrated technology, cloud, and technology support services. Its Global Business Services segment offers consulting and systems integration services for strategy and transformation, application innovation services, enterprise applications, and analytics; application management, maintenance, and support services; and processing platforms and business process outsourcing services. The company's Software segment provides middleware and operating systems software, including WebSphere software to integrate and manage business processes; information management software that enables clients to integrate, manage, and analyze data from various sources. The business was started in 1924.

This is not a bearish recommendation on IBM's business. This is a trading recommendation based on its chart pattern and the impact on the Dow. IBM has posted revenue declines for 17 consecutive quarters. The business format is changing and IBM is adapting. However, turning IBM around is like turning a VLCC tanker around. They carry 2 million barrels of oil and it takes miles to slow and turn because of their momentum.

IBM is making the turn and their cloud business is growing rapidly but it could take years before the restructuring is complete.

The problem for the market is that IBM is an expensive Dow component. At $160 per share it carries a lot of weight. After they reported earnings showing a big jump in cloud revenue and a major investment from Warren Buffett, the stock rallied to $163 where it stalled for the last two months. At Tuesday's close it was resting on support at $160 and as the Dow dropped to close at the low for the day.

The problem as I see it is this. There is no reason to buy IBM shares. They will post another revenue decline this quarter. That makes it a sell candidate for portfolio managers trying to raise cash for their end of year buys. It is also a high dollar stock so they get a lot of cash back when they sell it compared to selling a GE or a Pfizer. When you need to raise cash you sell the biggest stock with the least promising outlook.

The Dow is the weakest of the major indexes. If the market ever decides to correct over the next six weeks, you can bet the Dow will be the leader to the downside. That means IBM will likely be the leader inside the Dow because there is no real reason to own it when there are so many better stocks in rally mode.

I am recommending we buy the Oct $155 put with an IBM trade at $159. That will be below the support at $160 and potentially the start of a decline that could dip to $150 depending on the market.

Position 8/24/16 with an IBM trade at $159

Long Oct $155 put @ $3.25, see portfolio graphic for stop loss.




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