Option Investor
Newsletter

Daily Newsletter, Thursday, 9/1/2016

Table of Contents

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

Market Wrap

Market Wobbles On Data

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

An avalanche of economic data caused a bit of market wobble as FOMC outlook is reevaluated. Last week's speech by Janet Yellen, comments from Fed officials and data earlier this week had combined to spur some expectation the FOMC may raise rates as soon as the September meeting. Today's data nipped that in the bud but doesn't take a hike off the table completely. There are still signs the economy is reaching break out speed, the problem is that the signs remain spotty and the recovery slow.

There was a bit of news from the international scene to affect trading today as well. In China the official PMI was better than expected and above 50, showing signs of expanding activity in the large cap manufacturing sector, while the small/mid cap Caixin PMI came in at a tepid 50. Other news that may have some rippling effects throughout the region, and to a lesser extent the globe, is the collapse of the world's 7th largest shipping concern, Hanjin. The company's demise has led to several ships being seized by China and the risk of similar events elsewhere. Efforts to fill gaps left in global shipping routes are underway. Asian markets were mostly mixed on the news; Japan was up marginally, mainland China fell -0.73%, Hong Kong rose 0.81%

European markets were no stranger to market moving news. Initially higher on better than expected UK PMI the markets closed with losses as plunging oil prices and falling US indices weighed on sentiment. UK PMI needs to be noted, rising from a 3 year low to a 10 month high, the strongest gains in years, in the month following the Brexit referendum vote. The DAX and FTSE both closed with losses near -0.5%, other indices were not hit as hard.

Market Statistics

Lots and lots of information for the market to digest today and that is evident in the price action. The daily range was barely more than 0.75% of opening value but choppy. Early futures trading indicated a positive open for the indices for most of the morning. Lay-off data helped to support futures prices but weak auto sales, labor cost and productivity numbers combined to erase early gains. Trading was quiet at the open, there was some buying and the indices moved up by about a quarter percent but sellers overcame buyers by 9:45AM and sent the indices into negative territory.

At 10AM the selling intensified when construction spending data was released and sent the indices down to the low of the day, about -0.5% from yesterday's close. The market churned at this level for over an hour and then, shortly after noon, a rally recouped most of the early losses although resistance was hit near yesterday's close. Resistance held for the rest of the day although trading kept index prices near the highs up to and until the close of the session.

Economic Calendar

The Economy

Lots and lots of data today, the most in one day I've covered for quite a while. Starting off, the earliest release was the Challenger Gray & Christmas report on planned lay-off's. The number of planned lay-off's fell -29% to the second lowest level this year, 32,188. This is also a three month low, just off the 8 month low and -22% lower than this same time last year. The year to date total is now 391,288, -10% lower than last year at this time. Based on this data employers appear to be at least retaining employees/maintaining employment levels, a positive sign for the labor market.

The computer industry led this month due to lay-off's announced by Cisco. This is a continuation of a trend in lay-offs for the sector which began at the start of last year. Of note, Microsoft and Hewlett Packard are both responsible for thousands of lost jobs. The increase in lay-offs in this sector is not seen as a negative as they are due to restructuring/consolidations that are a net positive. Energy was second in terms of the number of lay-offs although the bulk of lost jobs were in the solar energy sector. Wal Mart announced just today 7,000 job cuts that will be included in the next report.


Initial Claims for unemployment rose by 2,000 to 263,000, last week's figures were not revised. The 4 week moving average of claims fell -1,000 to hit 263,000. This is the 78th week that claims have been below 300,000, the longest streak since 1970. Claims are trending near the long term 43 year low and are consistent with ongoing labor market health. On a not adjusted basis first time claims fell -0.7% versus an expected decline of -1.4%. On a year over year basis not adjusted claims are now -6.3% lower. The largest increases in claims were in Michigan, +2652, and Louisiana, +2280. The largest decreases in claims were in California, -2962, and Virginia, -1168.


Continuing claims rose by 14,000 from last week not revised figure to hit 2.159. The four week moving average also moved higher, gaining 4,500 to hit 2.159 million. Despite the gains second week claims continue to trend near long term lows and consistent with labor market health.

The total number of claims fell -22,536 to hit 2.100 million. This is the 5th week of decline since hitting the August peak, we can expect it to continue to fall for another 7 weeks based on historical/seasonal trends. On a year over year basis total claims are down -5% and consistent with labor market health.


Productivity and Labor Cost data was also released at 8:30AM and is what began to take the wind out of the markets sails. Second quarter productivity was revised lower to -0.6% from -0.5%, showing a decrease in the output of American workers. Labor cost was revised to +4.3%, more than doubling the original estimate, bringing the YOY gain to +2.6%. Driving the upward revision was a similar revision in wages, up 3.7% versus the originally reported +1.5%. While rear looking, this data is both negative and positive for the economy. Corporate profits will likely be impacted by higher labor cost and loss of productivity but the consumer will continue to improve on rising wages.

Construction Spending and ISM data was released at 10AM, spending data was flat and ISM contracted. Construction Spending was unchanged from the previous month but up 1.5% year over year. On a month to month basis, a 0.4% gain in residential spending was offset by a 0.3% decrease in non-residential spending. Year over year residential construction spending is up 1.7%, non-residential up 1.4%. These number are good but growth appears to have stalled so did little to support today's trading.

ISM Manufacturing report was reported as 49.4, showing a contraction in the manufacturing sector. This is well below forecast and put a curb on talk the FOMC may be raising rates at the September meeting. Within the report new orders, production and employment all fell and showing contraction while supplier deliveries are slowing. The only bright spot is that inventories are also falling which, eventually, will clear the way for renewed production.

Auto sales data was released throughout the morning. All showed a decline in sales from last August, most a little worse than expected, GM and Ford bucked that trend. GM shaved a half percent off expectations at -5.2%, Ford beat expectations by more than a full percent at -8.2%. Regardless, sales are far short of last years levels and expected to decline according to statements from Ford execs. Based on their view the market has peaked, the pent up momentum post financial crisis having lost steam, and will not hit record highs this year as previously expected. This is a concern due to the overly large influence booming auto sales has had on the economy. A peak is OK so long as activity remains stable, a decline in activity could have spillover effects.

Tomorrow is NFP day, the biggest day of the monthly economic cycle. Expectation is about 175,000 and I think this is probably about right. Labor data over the course of the month was good but seasonal trends do not support strong job growth. Unemployment however may fall, consensus estimate is for a drop of -0.1% to 4.8%, which suggest existing jobs are being filled even if new jobs aren't being created.

The Dollar Index

The Dollar Index took a hit today as ISM data, auto sales and construction spending all point to sluggish economy and no reason for the Fed to raise interest rates. The index fell about -0.40% seeking support along the $95.60 level which was broken earlier this week. Dollar strength over the past week or so was driven by hawkish sounding Fed Speak, now it seems the strength of that move is waning in light of the data. Tomorrow's NFP will likely have an effect on the market although I think it is generally accepted that the labor data is not the Fed's worry at this point. The index is sitting on a potential support at the $95.60 level consistent with a Fibonacci Retracement and moving average. A break below this level would be bearish and could take it down to $94.20 o lower.


The Oil Index

Oil prices took a dive today. First down -1%, then -2% and then more than -3% in blink of an eye. WTI lost nearly $1.50 and is now trading near $43.25. Supply, production and storage are all high and over powering demand. That's the bottom line, until that changes oil prices will remain under pressure. Downside target at this time is near $40, a break below there could go much lower if nothing emerges to support prices.

The Oil Index fell about -1.20% today, extending the drop below the short term moving average and breaking the 1,120 level. The index has now crossed the mid-point of its 5 month trading range and moving lower. The indicators both confirm this move and remain consistent with range bound trading. Downside target is near 1,075 provided oil prices do not snap back in the next couple of days.


The Gold Index

Gold prices rebound in today's session as data weakened the dollar. Spot gold gained about $5 to trade just above $1,315. Gold prices have been pushed down to what could become critical support levels by the recently strengthened dollar. This could be reversing, especially if the data continues to come in on the soft side. I'm watching $1,300 as critical support with upside targets at $1,325, $1,350 and $1,375 should the metal sustain a bounce. After the NFP, next week's Beige Book release may be the catalyst to keep an eye on.

The gold miners were able to post a nice rebound today as well. The Gold Miners ETF GDX gained nearly 3% but remain near the recently set low. The ETF has sold off along with gold, if gold rebounds expect to see it rebound along with it. A move up from here could mean as much as 20% upside if the recent high is retested. The indicators appear to have bottomed, which could lead to at least a small rebound. The risk is that the MACD peak is an extreme, convergent with a lower low, which suggests that a test of the low at least should be expected. If this is the bottom support is just above $25 with potential resistance just above today's close near $26.65. A break above this level would be bullish but need the support of rising gold prices to push it higher.


In The News, Story Stocks and Earnings

Apple was all over the news again today. The company, Tim Cook, has responded to the EU's claims of past due taxes calling them ridiculous, Ireland stands by its claim that no taxes are due. The new twist is that Cook now says those monies were earmarked for repatriation to the US, a move no doubt intended to bring Uncle Sam into the fray. Shares of the stock are as yet unmoved by this development, they gained about a half percent in today's session. What will be of importance is the expected launch of iPhone 7 in the not too distant future.


Campbell's reported earnings before the bell. The soup maker came up short on the top and bottom lines, producing a net loss for the quarter versus a small profit last year, disappointing execs and shareholders. The results are due to tepid sales growth and execution issues that CEO Denise Morrison hopes to fix in the future. Despite the results the board approved an increase to the dividend of 12%. Shares of the stock fell more than -6.25% on the news.


The Indices

The indices saw a bit of volatility today, first up, then down, then back to break even for the close. Today's leader was the Dow Jones Transportation Average which gained about 0.5%. Today's action however positive created a small, weak candle within recent trading ranges without much volume. The indicators remain consistent with range bound trading. A move higher will likely find resistance at the 8,000 level unless a strong catalyst emerges.


The NASDAQ Composite made the second largest gain today, about 0.29%. The tech heavy index created a small doji candle, more of a spinning top, just above the short term moving average but below the previous all time high. The index has been pulling back to support ever so slowly over the past few weeks and the indicators support this move. Support is near 5,200 and if broken could lead to further downside. Looking back over the past couple of months price action appears to be forming a rounding top which, if confirmed, could result in a moderate to deep correction.


The Dow Jones Industrial Average made the third largest gain, 0.10%. The blue chips closed below the short term moving average despite recovering from today's lows, this average may provide resistance moving forward. The indicators continue to show weakness and suggest the pull back may not be over. First downside target is near 18,250 with a chance of deeper correction to 18,000.


The SPX brings up the rear in today's action with no gain, and no loss, 0.00%. This may not be the first time I've seen this happen in more then 10 years of market watching but if it isn't I can't remember another time. Nevertheless, it doesn't really matter as today's action merely means the market is in balance, for today at least. Price action moved down to test support at 2,160 and set a new almost one month low. The indicators continue to weaken so I would expect to see support tested further, a break below would be bearish with possible target near 2,130.


The market continues to churn within the tight range it entered mid-July. It appears to be waiting for something and I am more and more convinced it is the end of the summer more than anything else. Tomorrow's NFP may spark a move to break the range but I do not expect much to come from it other than for job growth to remain stable relative to long term trends. The charts are showing persistent weaknesses, weaknesses highlighted by today's manufacturing and auto sales data, so I remain cautious even in the face of strong labor data.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Binary Event

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's employment report is a binary event. That event has two opposing outcomes. A strong jobs report at 200,000 and over would raise the chances of a September rate hike significantly. That would probably tank the market. A jobs report at 150,000 or lower would probably cause the Fed to postpone the hike until December or later and the market would probably rally. A number in the middle would leave investors confused and the market would probably decline.

The binary outcome is that the market is likely to move in one direction at a rapid pace. That direction is unknown. We have a complicating factor tonight. The volume has spiked the last two days to 6.8 billion on Wednesday and 6.4 billion today compared to 4.9 billion on Monday. Both days the market made triple digit moves and finished well off the lows. However, we did make a lower low today.

That volume is a response to the sudden increase in selling. However, on both days the dip buyers showed up to absorb that selling and that is significant. Today the ISM manufacturing came in at an 8-month low. That prompted the surge in selling early in the day. It would appear that we are back to the "bad news is good news" market where bad news is bought.

We have the potential on Friday for either good or bad news in a report that nearly all the Fed heads have said will be crucial to their rate hike plans. Volume should be the lowest of the week. That means we could get a large triple digit move in either direction or even both directions. Since we are predominately long in the portfolio there is no reason to add new long positions. We already have two market oriented short positions as a hedge against those longs. There is no reason to add a new play when the market is likely to gap open significantly on the jobs news. We would probably get a bad fill regardless of the direction we chose.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Lower High, Lower Low

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite the new lows, the dip buyers erased the triple digit loss and the Dow closed with a gain. This is a really tough market to read. The Dow made a lower high and a lower low but ended with a gain. The trend is still bearish but it refuses to produce a major decline. In theory, it would suggest we are going higher next week once volume returns but theory has not worked well this season.

If we go solely on the chart the outlook is bearish. If we look at the sentiment produced by the multiple triple digit rebounds this week it would suggest bullish. We have to just keep watching to see if critical support breaks.



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


JACK - Jack in the Box

The long call position was opened with a trade at $100.25.


SMG - Scotts Miracle-Gro

The long call position remains unopened until a trade at $83.25. High today $82.92.



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. Minor gain in a mixed 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.


CAVM - Cavium Inc - Company Profile

Comments:

No specific news. Nice 2% gain.

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.

Position 8/30/16 with a CAVM trade at $56.40

Long Nov $60 call @ $3.70. See portfolio graphic for stop loss.

Optional:
Short Nov $70 call @ 85 cents. See portfolio graphic for stop loss.

Net debit $2.85


GRUB - GrubHub - Company Profile

Comments:

No specific news. New high in a mixed market.

Original Trade Description: August 29th.

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.

Position 8/30/16:

Long Dec $42.50 call @ $2.71, see portfolio graphic for stop loss.


JACK - Jack in the Box - Company Profile

Comments:

No specific news. Shares gapped higher to trigger the entry in the position at $100.25 but fell back with the market intraday. New 52-week high close but still trapped by the resistance.

Original Trade Description: August 30th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of August 10, 2016, it operated and franchised approximately 2,250 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951.

Jack shares are up 29% year to date after the company reported Q2 earnings of $1.07 that beat estimates by 20 cents. Revenue rose +2.6% to $368.9 million. Same store sales rose 1.1% and the average check rose 3.5%.

They will end 2016 with an additional 20 Jack in the Box stores and 50-60 new Qdoba locations. The company is refranchising many of its stores and believes it can raise earnings by 65-78 cents through cost reductions achieved by shifting company owned stored to new franchisees. Management expects same store sales o rise 2.5% to 3.5% for Jack stores and 4% to 5% for Qdoba stores.

Earnings Nov 21st.

Shares rallied to $99 and the 2015 high on the Q2 earnings. They have held at that level and closed at a historic high on Monday. Today's decline was minimal given the weak market. The next time the market strings together several days of gains I expect JACK shares to break over $100 and start a new leg higher.

Because the market appears "toppy" and we are due for a dip, I am putting an entry trigger on the position. I am using the December options so there is some expectation premium when we exit before earnings.

With a JACK trade at $100.25

Buy DEC $105 Call, currently $4.00, initial stop loss $95.85
Optional: Sell short DEC $115 call, currently $1.10, initial stop loss $95.85
Net debit $2.90


MKC - McCormick & Co - Company Profile

Comments:

No specific news. Still stuck in a range along with the 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. Shares moved just over resistance in a weak market.

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:

Roger Penske bought another 187,764 shares worth $8.5 million. The stock was up early but fell back with the 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.

Update: On August 29th, Roger Penske bought another 478,000 shares for $21,132,400. That lifts his ownership to roughly 32 million shares.

Update: On September 1st, Roger Penske bought another 187,764 shares worth $8.5 million.

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.


SMG - Scotts Miracle-Gro - Company Profile

Comments:

No specific news. Position remains unopened until a trade at $83.25.

Original Trade Description: August 31st.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide. The company's Global Consumer segment offers lawn fertilizers, grass seed products, spreaders, other durable products, and outdoor cleaners, as well as lawn-related weed, pest, and disease control products; water soluble and continuous-release plant foods, potting mixes, garden soils, mulch and decorative groundcover products, landscape weed prevention products, plant-related pest and disease control products, organic garden products, live goods and seeding solutions, and hydroponic gardening products; and insect and rodent control products, and selective and non-selective weed control products to protect homes and maintain external home areas.

For Q2 they reported earnings of $2.16 compared to estimates for $2.08. Revenue of $994.1 million missed estimates for $1.04 billion. The company said miserable weather in April/May caused a significant decline in sales as gardeners and homeowners put off buying until June. The continuous rain turned everything green and that depressed fertilizer sales. Going into early April sales for the year were up +14% but after May they had declined -2%. There was also a shift of six days in the company's fiscal calendar.

The company raised earnings estimates for the full year to $3.75-$3.95 but reduced full year revenue forecast as a result of the spring slump. Shares soared on the guidance as the company was very bullish on the business.

They acquired a 75% stake in Gavita, a hydroponic products distributor. They also signed a definitive agreement to acquire Botanicare, a producer of fertilizer and hydroponic systems. They entered into a third transaction that has not yet been announced. They also increased their relationship with AeroGrow International, a consumer direct indoor gardening and hydroponic supplies business.

SMG is rapidly beefing up its lighting division, expanding on hydroponics and adding new products that will help indoor growers. They expect sales of hydroponics equipment to reach $250 million for the year. During the year, they also completed the sale of the Scotts LawnService business into a joint venture with Truegreen and received a $196 million cash distribution from the venture.

Along with earnings, they announced a $500 million share buyback in addition to the $400 million remaining on a prior authorization. "Our priorities for uses of cash are beginning to shift and we expect to begin a more aggressive share repurchase plan in the upcoming quarters."

Earnings Nov 3rd.

Shares spiked to $83 after earnings and moved sideways for the last month. After dipping back to $81 last week it looks like shares are preparing to move higher. A breakout over $83.25 would be a new high.

With a SMG trade at $83.25

Buy Dec $85 call, currently $2.80, initial stop loss $80.65.


SWKS - Skyworks Solutions - Company Profile

Comments:

No specific news. Broadcom beat on earnings but disappointed on the guidance. Shares fell -$3 in afterhours. Shares of SWKS fell 35 cents in afterhours in sympathy.

Original Trade Description: August 18th.

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

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

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

Earnings Nov 3rd.

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

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

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

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



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

The dip buyers struck again after the Dow dipped -100 points in late morning. The morning loss was completely reversed to a positive close. If we do not get a breakdown by Wednesday, I am going to close the position.

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:

Resistance at $160 held again. The DIA will not fall below $183 and IBM cannot move back over $160. If we do not get a breakdown by Wednesday I am going to close the position. No specific news.

IBM is moving in lock step with the Dow and both are stock in a trading range with a minor bias to the downside.

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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