Option Investor
Newsletter

Daily Newsletter, Thursday, 8/25/2016

Table of Contents

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

Market Wrap

The Yellen Effect

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market held tight, all eyes are on Janet Yellen and her speech tomorrow at the Jackson Hole Conference. Neither Fed Speak nor economic data could move the market today as anticipation for clues to future Fed moves overshadowed all. Her speech is expected to lay out the framework for rate hikes and will be closely watched for any indication of when the next will come but in reality is not an official policy statement and unlikely to be very revealing. At least two Fed members made comments in the news today, both of course indicating the nearness of a rate hike in once sentence then hedging that statement in the next.

Esther George, Kansas City Federal Reserve President and voting member, says a rate hike is due but the pace should be slow and gradual, nothing new about that. She went on to say that she does not favor a hike, and that recent economic data has given the committee pause. Despite the economic hiccup she still thinks 2nd half growth will be strong enough to sustain 2% annualized GDP. Robert Kaplan, Dallas Federal Reserve President and Alternate Member, says that the expectations of growth are a challenge, that we've made progress on the employment front and are "moving toward" a rate hike.

Market Statistics

International markets were flat to negative in the early hours of the morning as traders around the world await the words of Janet Yellen. Losses in Asia were minimal, led by a -0.57% decline in mainland China shares driven on liquidity fear only a day after the PBOC injected another round of cash into the system, the first cash support provided by the bank since February. Losses in Europe were a little steeper, led by a near -1% drop in the DAX. Caution ahead of tomorrow's speech as well as weakness in oil and health care helped to drag on the indices.

Futures trading indicated a mildly negative open for the US market all morning. Economic data helped provided some support but did not serve to spark a rally. The indices posted small losses at the opening bell, about -0.25%, but were able to recover that loss by 10AM. Once the indices reached yesterday's closing levels already low volume quieted further and sideway's trading ensued for the next 45 minutes. By noon a new intraday high had been set, and then began a slow retreat back to test the days opening levels and slightly lower. These levels held but no late rally followed, leaving the indices at or near their lows of the day at the close of the session.

Economic Calendar

The Economy

Initial jobless claims fell -1,000 was last week's not revised figured to hit 261,000. This is the 77th week of claims below 300,000, the longest streak since 1970. The four week moving average of claims fell -1250 to 264,000. In both cases claims are trending near the 40 year low and consistent with ongoing labor market recovery. On a not adjusted basis claims fell -1.3% versus an expected -0.7% and are -4.4% below last year at this same time. Not adjusted claims are trending below last years levels despite a narrowing of the spread in recent months and are just off the 43 year low set 11 months ago.


Continuing claims for unemployment benefits fell -30,000 to hit 2.145 million. The four week moving average rose 250 to hit 2.155 million. This week's change in continuing claims is minimal and leaves both the headline and moving average trending near the long term low and consistent with general labor market health.

The total number of Americans receiving unemployment benefits fell -25,731 to hit 2.122 million. This is the 5th week of decline since total claims hit its seasonal peak and consistent with historical trends. We can expect to see this figure continue to decline over the next few weeks and possibly fall sharply going into September. On a year over year basis total claims are down -3.8% and consistent with labor market recovery.


Durable Goods came in much better than expected but when considering last month's -4.2% decline and the four month string of declines leaves them less than flat for the trailing three months. So, on the headline durables rose by 4.4% versus an expected gain of 3.5%. Transportation led the overall increase in orders, up 10.5%. Ex-transportation orders rose 1.5%, ex-defense up 3.8%.

Today's data is positive but does little to move the needle in terms of FOMC expectations although a small rise in probability did occur. The CME's Fedwatch tool is now showing a 24% chance of rate hike in September, up from 18% a few days ago, with a 30% chance in November. Tomorrow's data will likely be a non-event as well, revisions to 2nd quarter GDP and Michigan Sentiment, unless revisions to GDP are large. Next week however will be a different story, lots of data including the monthly NFP and unemployment figures.


The Dollar Index

The Dollar Index held firm today on data and Fed Speak as we await Yellen's speech. The index gained a little more than a 0.02% in a move that continues the small bounce from and consolidation above the $94.31 support level. This consolidation has begun to look like a wind-up within a near term down trend that may result in further downside. This is of course dependent on how the market reacts to whatever it is Yellen will say tomorrow. Regardless, the index remains range bound in the short to long term. First target to the downside is the support line at $94.30, the 78.6% retracement level. A break below that could go as low as the bottom of the 4 month range near $93. If Yellen does indicate that tightening is at hand and the dollar strengthens upside targets exist at $95.60, $96.50 and $97.50.


The Oil Index

Oil trading was a bit choppy today as prices hovered around the $46.75 level. Early in the session it looked as if over-production/over-supply was going to dominate sentiment. That changed shortly before lunch when speculators drove prices back above break even, near to $47, on renewed hope next month's OPEC meeting will result in some kind of price stabilizing move. OPEC may freeze output, but they won't cut, so I am not expecting much from the meeting other than near term support driven by news and rumors. Until then supply is high, demand is low so I expect to see prices remain under pressure. Support for WTI seems to be near $45, slightly above, with upside target near $49 should today's intraday bounce prove to be more substantial.

The Oil Index gained about a quarter percent in today's action. The candle created was very small and trading was very light, just above support at the short term moving average. The index remains range bound and may attempt to test the top of the range again, near 1,175. The indicators are bullish but weakening in the near term. MACD was not very strong to begin with and stochastic is in overbought territory for a range bound stock so a break out of the range does not look likely at this time.


The Gold Index

Gold prices fell slightly in today's trade but did not break support levels. Spot prices shed about -0.5% to make a small intraday bounce from $1,325. The market is cautious with Janet Yellen set to speak tomorrow, any indication of policy is sure to move gold prices. Recent Fed Speak has already had an impact on spot price, driving it down toward the low end of the 2 month range where it is now trading. Prices could move down to $1,318 without breaking critical support should tomorrow's talk send gold prices lower. If Yellen sends gold higher price could move up to $1,350 fairly quickly with a chance of moving higher. Regardless, without an actual change to policy, here or abroad, or a significant change in economic activity gold is likely to remain range bound.

The gold miners are suffering from the recent decline in gold prices and a renewed fear of impending interest rate hike. Fed Speak and data have the market ducking in search of strong support levels. Today's candle opened flat to yesterday's close and was able to move higher following a brief test of support but it looks like this move could be short lived. The indicators are both bearish and pointing lower, consistent with lower prices, while the ETF trades beneath resistance and below the mid-point of yesterday's larger than usual black candle. Next target for support should the ETF move lower is near $26 with a possible move down to $24.75, depending on gold, Janet Yellen, other Fed speakers, economic data etc. A break above resistance, just above today's close, would be bullish and could take the index up to retest the recent highs.


In The News, Story Stocks and Earnings

Mylan was in the news again today as the Epipen saga unfolds. Shares of the stock were up more than 3% in early premarket trading on news the company was widening it's discount plans in efforts to cut prices for the medication. Later, shares took a hit after the company CEO appeared on TV and did a less than stellar job defending the price, her basic argument is that it is the systems fault. The company does indeed charge a lot for the pens,it's a business after all, but about half the cost consumers see is added on by middlemen. An association representing pharmacy and insurers responded by saying blaming them is a red herring, the fault lies elsewhere. No doubt this isn't over. By end of day shares lost about a half percent to close at the low of the day and at near the low set yesterday, indicating potential support near $43.00.


Dollar Tree And Dollar General both reported earnings before the bell and both missed expectations, horribly you might think, and saw share prices plummet. The caveat is that this is a case of two companies producing good results, just not as good as expected. Dollar Tree delivered EPS of $0.72 per share, driven by the acquisition of Family Dollar, reversing a loss of ($0.46) in the same quarter last year. On a core comp store basis, sales still rose 2.7% which isn't too bad in today's environment. Dollar General did even better although it still wasn't enough for the market, improving last years EPS by 13.5%, announcing a new repurchase plan and confirming full year guidance. Dollar General also got hit hardest by the market, shares fell nearly 20%.


The VIX had, until recently, been trading at two year lows. In the past couple of days it has begun to rise and is now showing signs of a possible spike higher. The fear index is still below near term resistance at $14.25 but a bullish crossover of the moving average confirmed by a rise in momentum and a strong stochastic signal suggest it will be tested if not broken. A breakout of volatility could easily take the VIX up to 20 or 25 in the near term and would likely accompany a quick, possibly sharp, drop in the S&P 500.


The Indices

Today's action was light and more sideways than not. Most of the indices closed with losses near -0.2% but one, the Dow Jones Transportation Average, fell nearly -0.7% and closed at the low of the day. The transports fell the furthest but remain above the short term moving average. The moving average is first target for support should the index continue to move, which is indicated by both MACD and stochastic. A break below the moving average would be bearish in the near but likely to hit next support at 7,750. This index appears to be range bound over the short to long term, between 6,750 and 8,250.


The Dow Jones Industrial Average made the next largest decline, just under -0.20%. The blue chips created a very small black candle that fell to the short term moving average and looks like it may fall through, if on a lack of volume if nothing else. The indicators are both bearish and moving lower, suggesting support will at least be tested. Support is roughly today's closing level, near 18,450, with next target near 18,250.


The S&P 500 fell only -0.14% in today's session, creating a very small spinning top doji sitting just above the short term moving average. This is indicative of support but that support may be tenuous. The indicators are both bearish and moving lower in the near term,suggesting deteriorating market conditions, and divergent in the short term suggesting a weak, fragile market. A break below the moving average may find support near 2,150 but more likely not until about 2,030.


The NASDAQ Composite made the smallest decline, only -0.11%. The tech heavy index created a very small doji candle just below yesterday's close and just below resistance at the previous all time high. This close could easily lead to further downside if the upper side of resistance is not regained. The indicators are bearish and pointing lower however so it looks like a move down to the short term moving average could be coming, a drop of roughly -1%.


The market is hanging on the FOMC and what Janet Yellen says tomorrow but the indices may already be pointing the direction. While index prices languish near all-time highs the indicators continue to deteriorate. Significant divergences exist on all the charts, momentum has shifted to the downside and the fate of the rally, apparently, now dependent on a speech. Regardless of what she says tomorrow, the duel mandate is not met. Labor markets are healthy, but not healthy enough to drive the economy and inflation at the macro level, at least not yet. Until then I think we should expect rate hikes to be few and far between.

As for the market, we're approaching the end of the summer season with the indices trading near all time highs. These highs represent significant gains for positions entered in February, May and June, attractive gains for short, medium and longer term investors. I'm not saying we're facing a major correction or even a minor sell-off but I am saying the signs are there a correction of some form is brewing. Whether or not it comes these signs match with market seasonality and shouldn't be ignored so I remain cautious for the near term. Long term I am a buyer on any dips, when they come, and expect to see a continuation of the secular bull later this year.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Spectators

by Jim Brown

Click here to email Jim Brown

Editors Note:

We do not always have to be participants. Sometimes we should be spectators. Tonight is one of those times. With the market poised for a big move in either direction based on the Yellen speech on Friday, it makes no sense to initiate new plays. That would be like trying to cross a freeway blindfolded. Regardless of the play direction we choose it could be the wrong direction depending on Yellen's comments. We are better off letting the event play out and adding new plays this weekend.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Poised for a Move

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow closed fractionally under resistance as did the S&P. They are poised for a Yellen move. The Dow closed at 18,448 and 2 points under support. The S&P closed at 2,173 and 2 points under support. Volume was very light at 5.5 billion shares and advance/decline internals were almost dead even. Traders have placed their bets and now we wait for Yellen.

With four of her closest Fed heads advocating for a rate hike it will take a strong will to remain dovish or flat in her speech. The talk is supposed to be on Fed policy tools but there is significant pressure on her to make some kind of statement to prepare the market for the September FOMC meeting. If she says nothing it will be perceived as remaining dovish. If she makes dovish comments the market will assume no hike and should be positive. If she says anything hawkish the market is likely to react negatively.



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


OC - Owens Corning

The long call position was opened at $54.71.


LL - Lumber Liquidators

The long call position was closed at $15.75.



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 still holding over support.

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.


ITW - Illinois Tool Works - Company Profile

Comments:

No specific news. Shares closed at a new high on Tuesday and gave back a few more 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:

The position was closed at the open as recommended in the prior newsletter. The positive momentum failed.

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:

Closed 8/25/16: Long Nov $18 call @ $2.15, exit .80, -1.35 loss.


MKC - McCormick & Co - Company Profile

Comments:

No specific news. Zero movement in a 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.


OC - Owens Corning - Company Profile

Comments:

No specific news. Position was entered at the open.

Original Trade Description: August 24th.

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.

Position 8/25/16

Long Nov $55 call @ $2.35, see portfolio graphic for stop loss.


PAG - Penske Automotive Group - Company Profile

Comments:

No specific news. Shares posted a minor gain 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 strong gain to a 4-month high 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:

Another minor decline ahead of Yellen's speech. The next four days could be exciting. 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:

IBM declined slightly but market volume was weak and there was no conviction in either direction. Yellen's speech could be a pivotal event.

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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