Option Investor

Daily Newsletter, Monday, 8/29/2016

Table of Contents

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

Market Wrap

Waiting, Waiting, Waiting

by Thomas Hughes

Click here to email Thomas Hughes


The market moved higher in the wake of Yellen's hawkish sounding comments of last week, but we're still waiting on more data. Yellen, and other FOMC members, made it clear last week that the September meeting is a live one in terms of the possibility of a rate hike, nothing really new since they've all along that each meeting should be considered so. What is new is that she said, much to my surprise, the economic case for a rate hike has strengthened. What she didn't say is that a hike was likely in September, so we're still waiting on more data. Today's round was good, income and spending numbers show improvement in labor and consumer segments but neither hot enough to seal the deal.

Global markets were more flat than not. The Yellen comments dominated news in most regions although falling oil prices also took their toll. In Asia Japan was the stand out, the Nikkei rose 2.3% on dollar strength/yen weakness. European indices were mostly lower but losses were small, in the range of -0.4%. The UK was closed for a bank holiday.

Market Statistics

Futures trading indicate a flat to slightly negative open for the indices during the earliest part of the electronic session. The trade moved to break-even and then slightly higher following the 8:30AM release of economic data. Action at the opening bell was bullish although without much strength, volume was pretty light. The indices gained a quarter percent in the first half hour of trading and then slowly extended the rally into the early afternoon. Intraday high was hit about 2PM and the market drift sideways from there leaving the indices near the highs at the close of the session.

Economic Calendar

The Economy

Personal Income and Spending data was released today at 8:30AM. This is an important release as it is the Feds preferred tool for watching consumer level inflation. Income rose 0.4%, in line with expectations, and the preceding month was revised higher by a 0.1%. Spending rose 0.3%, also as expected and also with a 0.1% upward revision to the previous month. Personal Consumption Expenditures,a measure of the changes of consumer prices, was unchanged from the previous month but the core PCE, ex food and energy, is up 0.3% month to month and 1.6% year over year. All told, this is a decent report showing increases in earnings and spending with inflation running below the Fed's 2% target.

Moody's Survey Of Business Confidence fell -0.9% to 25.0. This the 2nd week of decline since hitting a peak in early August and the lowest level in 5 weeks. Despite a recent rise in confidence it remains low relative to all time highs set last year at this time. According to Mr. Zandi, survey creator, the data shows a global economy that is expanding and has generally shrugged off the series of potentially damaging geopolitical events that unfolded over the summer. The strongest responses are in the US, the weakest in South America.

The 2nd quarter 2016 reporting season is almost over. According to Factset 98% of the S&P 500 has reported. Of those 71% have beaten EPS estimates and 53% have beaten revenue estimates; the former is above average, the latter below average. The blended rate of earnings growth is -3.2%, steady from last week, with 7 of the 10 S&P sectors beating expectations. Even though earnings are better than expected they are not as much better as expected, and the 5th quarter of negative earnings growth since the earnings recession began.

Looking forward the chances we'll see a 6th quarter of negative earnings growth continue to grow. Third quarter estimates for S&P 500 earnings growth fell by another -0.1% to hit -2.1%. At the current rate of decline this could easily hit -4% by the start of the next cycle virtually assuring the quarter's growth rate will end on a negative note. Longer term, growth is still expected to return in the 4th quarter and expand into 2017.

Lot's of data this week. Auto/truck sales, consumer confidence, ADP employment, Challenger job cuts, labor costs and construction spending only a few of what's on the list. All are important for the big picture but the number one release will be the NFP on Friday. Last month's number was fairly strong at 255,000, this month consensus is only about 185,000. The headline number will be important but beware of revisions. A strong number will likely add fuel to rate hike proponents.

The Dollar Index

The Dollar Index extended its gains today but the move was cut short. The index had broken above $95.50 and appeared to be heading higher until midday when it slowly reversed. The early rise was driven by a hawkish sounding Fed but that support did not last long. While hawkish sounding, Yellen's comments only restated what the FOMC has been saying all along, that each meeting should be considered live and that the data is promising but not quite there yet. The comments that conditions had improved are supportive of the dollar but could set it up for a crash if there is no rate hike in September. The CME's Fedwatch Tool has edged higher, showing a 24% chance of rate hike at the next meeting.

Today's move in the Dollar Index confirms resistance exists at the 61.8% retracement level but its strength is questionable. The indicators are both pointing higher, consistent with higher prices, and the short term moving average is providing support so another test is likely in the least. A break above this level, perhaps driven by better than expected economic data, could take the index up to $96.50 or higher. The near term looks bullish for the dollar, risk being weak data, but this move may be setting the market up for a fall later on if there is no rate hike in September, or this year. Short to long term the index appears to be trading within a range with bottom near $94.30 and top near $97.50.

The Oil Index

Oil prices took a tumble today closing with losses near -1.35% after falling as much as -2% intraday. WTI lost -$0.64 to close at $47 and could move lower in light of growing oversupply concerns. The talk of a possible OPEC production freeze was quieted today as production from the cartel swells. Adding to supply concerns are increasing production in Iraq and other areas. Today's move appears to confirm resistance at $47.50 and could lead to a further drop, next target $45.

The Oil Index was able to post gains today despite the decline in the underlying commodity. The index moved up a half percent from the short term moving average and could go higher but remains range bound. Today's action is in the upper half of the 5 month range and could move up to 1,175 although the indicators suggest growing weakness. Stochastic has already made a bearish crossover, MACD is close behind, and suggests support will be tested again. Even if the moving average is broken next support is just below, near the midpoint of the range, at 1,120. Provided oil prices do not fall too sharply the range should hold.

The Gold Index

Gold prices fell earlier, slightly, but recovered all the losses and more, a little, by the end of the day. Today's trading range was very tight, about 0.25%, but held above support at the $1,320 level. This level is likely to be tested in the coming days on a strengthening dollar and could be broken. Next target for support is near $1,300.

The Gold Miners ETF GDX began the day lower, opening with a loss near -2%, only to move up from support and close with a small gain. Today's action began at the $26.70 support line and moved higher, confirming support at this level. The indicators are moving lower suggesting that support will be tested again, it's strength will be dependent on the data, the dollar and FOMC expectations. A break below this level would be bearish in the near to short term and could result in a move down to $22.50.

In The News, Story Stocks and Earnings

Apple was one of few declining stocks in today's action. The tech giant is the focus of a news story and tax probe that could result in over 1 billion euros in back payments. The EU is set to rule on a case in which Ireland is accused of giving undue favoritism to Apple, an accusation both Ireland and Apple deny. If true, the ruling would equal less than .5% of the cash Apple has on hand. Shares of the stock drifted lower in listless trading on the news.

The information technology sector is the one posting the largest beats to earnings. The sector was expected to post an earnings decline near -7% for the quarter but actual results are closer to -0.7%. Looking forward the sector is expected to post positive earnings growth in the next quarter of 0.9% and could do much better. In terms of growth however, the 0.9% expected leaves the sector in 6th place behind Utilities, Health Care, Materials, Consumer Discretionary and Consumer Materials. Growth is expected to continue into the end of the year, full year 2016 estimates are positive, and expand into next. Shares of the XLK Technology SPDR have been riding high on results and expectations and may be setting up for another extended move higher. A break above the current high, which dates back to the 1999-2000 tech bubble, would be bullish and could as high as $53 or 12.7% in the short to long term.

The Indices

The indices made a move higher today but it was not strong, did not break to a new high and leaves them near the middle of very tight congestion bands formed over the past 3 weeks or so. Today's leader was the Dow Jones Industrial Average with a gain near 0.6%. The blue chips created a small white bodied candle moving up from the short term moving average and looks like it might bounce higher. If so resistance at the current all time high, near 18,636. The indicators continue to show divergences indicative of market weakness so I continue to be cautious with my approach. A break below the moving average would find support just below, near 18,280, a break below that level could lead to further downside.

The S&P 500 made the 2nd largest gain in today's session, about 0.53%. The broad market created a small white bodied candle that closed near but not at the high of the day. This upper wick reveals the presence of resistance however small it may be. Today's action is a bounce from the short term moving average following the test of said level last week. This may be confirming support along the moving average but the indicators have yet to confirm it. Both the indicators are pointing lower, and are showing significant divergences, suggesting a possible correction is building. A break below the moving average would be bearish in the near term and could take the index down to 2,150 or 2,125. If the bounce continues resistance is just above today's close near the most recently set all time high.

The Dow Jones Transportation Average made the third largest gain today, about 0.45%. The transports created a small white candle with close above the moving average although today's action began below it. The move above the moving average suggests support, the indicators suggest that support may be week so further testing is likely. A move below the moving average would find next support just below near 7,750, a break below this level could take the index down to 7,500 or further.

The NASDAQ Composite made the smallest gains in today's session, only 0.26%. Today's candle is a small spinning top doji, another in a long series of spinning tops which formed as the market melted higher and began its sideways drift. The index has been holding near the all time highs, generally a positive occurrence, but signs of weakness persist namely divergent indicators. If the index is able to move up from this level it could rally as much as 700 points in the short to long term. A break above the all time high, near 5,250, would be bullish. Support is along the short term moving average and the previous all time high near 5,230.

The market continues to drift sideways, waiting for something to move it. That something may be this week's data, specifically the NFP, but there is no guarantee. There have been multiple potential catalysts over the past few weeks, including Yellen's speech last Friday, and all have failed to inspire more than cursory buying or selling. There is a lot for the market to consider, earnings, economic data and the FOMC, but in the end today's market action comes down to low volume and seasonality. We may see the indices continue to drift sideways, and we may see them test or even set a new all time high, but I remain cautious until after Labor Day and the summer trading season comes to a close. Don't forget, through it all next quarter earnings outlook is poor, and declining.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Go Out to Eat

by Jim Brown

Click here to email Jim Brown

Editors Note:

GrubHub has captured this trend and is growing rapidly.


GRUB - GrubHub - Company Profile

GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 44,000 local restaurants with diners in approximately 1,000 cities. It operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, iPad, Android, iWatch, and Apple TV devices; and Seamless Corporate program that helps businesses address inefficiencies in food ordering and associated billing. In addition, it provides Allmenus.com and MenuPages, which provide an aggregated database of approximately 380,000 menus from restaurants in 50 states.

GrubHub is a concept that is catching fire and the bigger they get the more restaurants want to sign on to the service. They now serve 44,000 restaurants. They do not markup prices. Whatever the restaurant charges is what you pay. Diners can customize any order to their own taste specifications and dietary needs.

Restaurants benefit because the service drives more orders. Many people cannot take 2 hours out of their day to go to the restaurant to eat. GrubHub brings the restaurant to them. Restaurants typically see about 30% more takeout orders during their first year when they sign up for the Grubhub service. Delivery fees range from free to $3.99.

In Q2 net revenue rose +37% to $120.2 million topping estimates for $114 million. Earnings rose 35% to 23 cents and also beating estimates for 19 cents. They guided for the current quarter for revenue in the range of $116-$119 million and analysts expected $113 million. At the midpoint that would be another 37% rise.

GrubHub active diners rose 24% to more than 7.35 million. They added 382,000 in Q2. Ordering through the GrubHub online menu is 50% faster than ordering from the restaurant on the phone.

The company recently announced participation with national chain restaurants including Boston Market, Johnny Rocket's, California Pizza Kitchen, Veggie Grill, On the Border and Panda Express. This is a natural for fast food chains. They prepare the food fast and it gets to the diner fast.

An analyst at Moness Crespi Hardt upgraded them to buy from neutral saying the fundamentals are rapidly improving with the addition of the chain restaurants. Secondly, they completely overhauled their tech platform in 2015 and the benefits are rising quickly. They are also integrating POS features including Apple Pay. He also believes they are a potential acquisition target by companies like Amazon, Uber and Postmates. His biggest point is the addition of the chain restaurants. Adding companies with hundreds or even thousands of restaurants will catapult them to the next level.

Earnings Oct 27th.

Shares spiked to $39 on the earnings and then spent a month in post earnings depression, dropping back below $36 in mid August. The rebound has begun and Monday's close was a new 14-month high. Initial resistance is $41 and our best-case target is $47.

I am using the December option so there will be some expectation value when we close the position ahead of earnings.

Buy Dec $42.50 call, currently $3.10, initial stop loss $35.85.


No New Bearish Plays

In Play Updates and Reviews

Lower High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow rebounded +1-7 points from a lower low but only succeeded in making a lower high as well. The post Fed rebound came on strength in the financial sector and rising expectations for a rate hike. The Dow rebounded from Friday's 3-week closing low but only managed to make a lower high. The majority of the gains came in the opening minutes and the indexes faded in the afternoon. I would not be surprised to see a "turnaround Tuesday" tomorrow.

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

CAVM - Cavium

The long call position remains unopened until $56.40. High today $55.68.

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

Credit spreads and naked puts = OptionWriter

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Long and short equity trades = Premier Investor

BULLISH Play Updates

AKAM - Akamai Technologies - Company Profile


No specific news. Minor decline.

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.


CAVM - Cavium Inc - Company Profile


Raging Capital Management said they acquired 834,925 shares for $32.22 million. Shares posted a minor decline in a mixed market.

This position remains unopened until it moves over resistance and trades at $56.40.

Original Trade Description: August 27th.

Cavium, Inc. designs, develops, and markets semiconductor processors for intelligent and secure networks. It offers integrated semiconductor processors for wired and wireless networking, communications, storage, cloud, wireless, security, video, and connected home and office applications. The company's products also include a suite of embedded security protocols that enable unified threat management, secure connectivity, network perimeter protection, and deep packet inspection. In addition, it provides commercial grade embedded Linux operating systems, development tools, application software stacks, and support and services.

On August 17th, Cavium completes the $1.36 billion acquisition of QLogic. The acquired company has been around a long time and is a leading name in the Ethernet market. As of 2015, QLogic had a double digit market share lead over its peers. Pacific Crest believes Cavium will be able to reduce QLogic's manufacturing costs by 50% and this would help capture further market share gains on cost while expanding into congerged NIC and onboard LAN markets. That could produce another $1 billion in revenue.

Analysts raised estimates for Cavium revenue from $526 million to $957 million and earnings rose from $1.87 to $2.60.

Earnings Oct 26th.

Shares have been moving up since late June when the acquisition was announced. They plateaued at $55 over the last week but could be poised to move higher with resistance at $64.

With a CAVM trade at $56.40

Buy Nov $60 call, currently $3.20. Initial stop loss $52.85.

Optional: sell Nov $70 call, currently 75 cents. Initial stop loss $52.85.

Net debit $2.45

ETN - Eaton Corporation - Company Profile


No specific news. Shares rebounded from support but still stuck in a range.

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


No specific news. Shares closed at a new high.

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.

MKC - McCormick & Co - Company Profile


No specific news. Moving back towards resistance.

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


No specific news. Moving higher towards resistance.

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


No specific news. Another 10-month high close.

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


Nice gain on news Skyworks partnered with LG Electronics for their connected car solutions.

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


Big rebound today BUT still a lower high from a lower low. 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


IBM rebounded with the Dow but stalled at resistance at $160. No specific news.

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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