Option Investor
Newsletter

Daily Newsletter, Thursday, 9/8/2016

Table of Contents

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

Market Wrap

The Churn Goes On

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The stock market continues to churn, the ECB and Mario Draghi fails to inspire buyers and potential catalysts are running thin this week. Today's policy announcement and press conference with the ECB were the news of the day. The central bank held rates steady, as expected, but did not extend the duration of QE programs as expected. Also unexpected, a decrease in GDP forecast lowering 2017 and 2018 outlook to 1.8% each. The one ray of light was a mild upward revision to this years GDP outlook.

Mario Draghi says that "our program is effective and we should focus on implementation". He also says that interest rates will remain at present levels for some time. Asian market were not affected by this news, having closed long before the release. Markets in that region were mostly flat, mixed, on a day largely devoid of news. Trading in Europe was much different. Early action saw most indices hang around break even levels up to and until the policy statement. At that time the indices began a slide that shaved more than -1% off of yesterday's close. Some, but not all, of the loss was regained before the end of the trading day leaving the DAX down by about -0.6%.

Market Statistics

Futures trading was flat all morning, up to and until the ECB policy statement. At that time the trade slipped a few points indicating a mildly negative open for the US indices. This week's labor data did little to support prices although they show ongoing health in the sector. The indices opened with small losses, as much as -0.25% in some cases, and extended them into the first 45 minutes of trading. An early bottom was hit around 10:15AM at which time the bulls were able to stage a come back. The indices rose for the next hour but were not, in most cases, able to recover all of the day's loss. Resistance set in shortly after and held the market in check the remainder of the day. Today's range was once again very tight, volume was low and trading was without direction.

Economic Calendar

The Economy

Only one economic release today, jobless claims. Initial claims fell -4,000 from last week's not revised figured to hit 259,000. The four week moving average of claims fell -1,750 to hit 261,250. This is the 79th week of claims below 300K, the longest streak since 1970. On a not adjusted basis claims rose 1.5% versus an expected 2.8% to hit 218,000, -6% from this same time last year. New York and California led with increases in claims of 4,913 and 1,628. Michigan and Texas led with decreases in claims of -1,101 and -942. This week's data remains consistent with ongoing labor market health.


Continuing claims fell -7,000 on top of a downward revision of -8,000 to hit 2.144 million. The four week moving average shed -4,000 and is now slightly above 2.153 million. These figures continue to trend near long term lows and show no signs of changing. At these levels continuing claims remains consistent with ongoing labor market health.

Total claims fell -45,845 to hit 2.054 million, consistent with expectations, seasonal and historic trends. This number is now at a 9 week low and should continue to move lower over the next 6-7 weeks. At these levels total claims are just above the long term low of 1.881 million and consistent with ongoing labor market health.


There is only one release scheduled for tomorrow, Wholesale Inventories, and not much on the calendar until next Thursday. Next Thursday the calendar heats up with 10 distinct releases including Retail Sales, PPI, Philly Fed, Empire Manufacturing and Business Inventories.

The Dollar Index

The Dollar Index fell to, and bounced from, support on the heels of the ECB policy release. Draghi's comments at first strengthened the Euro but that strength faded during the press conference. The Dollar Index fell a half percent to test support levels just above $94.30, support was there and sent the index back up to regain of all the early loss and more. By end of day the index was up as much as 0.15% although the indicators suggest the test of support is not over. With so little on the economic calendar over the next week I expect to see the index continue to trend between $94.30 and $95.60, perhaps even up to the FOMC meeting scheduled for 9/21. Current probability of a rate hike as predicted by the CME Fed Watch Tool is about 24%.


The Oil Index

Oil prices surged today following inventory reports showing multi-million barrel draw on US stockpiles. Yesterday the API report forecast a 12 million barrel draw, today the EIA confirmed that and upped the number to over 14 million barrels. The caveat is that the decline is due primarily to shut downs of services related to last week's hurricane, we could easily see a build as big or bigger next week as gulf production resumes. WTI jumped more than 4% on the news to trade above $47. Momentum has turned to the upside and could take WTI back to retest recent resistance but beware, oversupply still plagues the market.

The Oil Index rose along with the underlying commodity, gaining just over 1.5% in today's session. Today's move brings the index up to the upper boundary of a 5+ month trading range and likely resistance. The indicators are showing a weak buy signal but otherwise remain consistent with range bound trading. Resistance is near 1,170 with a possible move to 1,200. A move above 1,170 may be bullish but just as likely a whipsaw provided oil prices do not make new highs. A move above 1,200 would be bullish.


The Gold Index

Gold prices held near $1350 for most of the morning but eventually succumbed to the dollar's rebound from support. By late day spot gold prices had fallen by -0.6% to trade closer to $1,340 but remains range bound nonetheless. Today's action confirms resistance at the $1,350, if not it's strength, but did not break below the mid-point of Tuesday's long white candle. The near term trend is up but upside potential is limited without some form of catalyst to push it above, or confirm, resistance. Resistance is in near $1,375-$1,385 and may be contingent on the upcoming FOMC meeting, funny how that always seems to work out. If the FOMC confirms the more hawkish line the dollar will likely strengthen and gold prices will fall, if they appear less sure of hiking rates the dollar could fall and gold could move up to and above resistance targets. Until then expect day to day action to be driven by headlines.

The gold miners fell in today's action, the Gold Miners ETF GDX shedding -2.5%. Today's move appears to confirm resistance at the short term moving average and could lead to a retest of recent support. The ETF is in a corrective phase, possibly now within a new trading range, and indicated to retest support by MACD. The last MACD peak is a bearish extreme, convergent with a low, which suggests that the low will be tested or exceeded. Resistance is near $28.50, the mid point of the potential range. Downside targets are $26.70 and $25, the bottom of the range.


In The News, Story Stocks and Earnings

Shares of Twitter fell nearly -6% as the board holds its annual meeting to decide the company's fate. Speculation is running wild, will the company sell itself? If they do who would want them? How much is it really worth and just how relevant to today's internet is it? Shares are falling from the top of a range in which they have been trading since February.


Bank Of America's CEO Brian Moynihan had some interesting things to say this morning during a televised interview. Without giving details he said that August was a very strong month for consumer banking and that the consumer is in good shape. He went on to talk about the company's health and cost cutting measures, citing a $20 billion in savings already realized and ongoing efforts to do more. Mobile services have helped to achieve that goal as it allows the bank to reduce the number of branches and employees. These savings will continue to accrue as more and more customers make the shift. Shares of Bank Of America were among today's top gainers, adding more than 1.2% to yesterday's close.


Barnes & Noble reported earnings before the bell and did not meet expectations. The company reported a narrower loss than last year but declining revenue did not match estimates. Revenue fell -6.6% year over year, comp stores sales fell -6% and Nook sales fell -24%. In the report softer than expected results are due to a "challenging" retail environment. It could be that buying new books is just really expensive compared to other alternatives. Shares of the stock fell more than -5% to test support near $11.50 and were able to bounce from that level to close with a lose of only -4%.


The Indices

The indices did nothing but churn today, moving within a very tight range and without true direction. One index did of course buck that trend, the Dow Jones Transportation Average. The transports gained 0.25% on day when all others posted losses, extending yesterday's gains and moving up toward a potentially strong level of resistance. Resistance is near 8,150, a 5 month high, and likely to hold without catalyst. The indicators support a move up to test resistance but are not strong, consistent with range bound trading. A break above 8,150 is potentially bearish but would face additional resistance just above near 8,250.


The day's biggest loser is the NASDAQ Composite which posted a decline of -0.46%. The tech heavy index created a small black candle moving down from the newly set high. Today's move lower was supported at 5,250, this level may hold but divergences persist and grow stronger suggesting an growing weakness within the market. First target for stronger support is near the short term moving average, near 5,200, and then near 5,000 should first target be broken.


The second largest decline in today's session was posted by the Dow Jones Industrial Average. The blue chips index fell -0.25% creating a very small black candle, yet another doji like spinning top. Today's action came to rest directly on the short term moving average but may fall through in favor of stronger support near 18,275. The indicators are mixed and directionless, consistent with range bound trading, so I would expect support to hold unless the bears come out in force. A break below support could take the index down to 18,000 or lower. Until then look for this index to continue trending sideways.


The S&P 500 made the smallest move in today's session, only -0.22%. The broad market created yet another tiny spinning top doji, within the recent consolidation/congestion band, and does not appear ready to move outside its trading range. The indicators are mixed in the near term and consistent with range bound trading, looking further out divergences persist suggesting underlying weakness in the market. Support is currently near 2,160, a break below this level would be bearish in the near term and could take the index down to 2,130 or lower.


The market continues its listless drift sideways while signs of underlying weakness persist. In order to move higher it will need a catalyst, and there is nothing in sight strong enough to spark a rally, not until the FOMC meeting in two weeks. And that is assuming they do or say something other than the same thing they've been saying. Until then I expect to see the market continue side-winding on whatever scraps of news or data it can get its hands on. After that it will only be about 2 more weeks until the next earnings cycle begins, about 4 weeks from now, and that I think will be what really drives longer term direction. I remain cautious, optimistically bullish, but very very cautious.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Hiccup or Warning Sign?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market decline today was broad based but minimal. Was this just a hiccup or a warning of things to come? The advance decline ratio was 4:3 in favor of decliners. That is not a material imbalance but it also came on the highest volume of 6.83 billion shares since August 5th. The small, mid and large caps were all sold equally suggesting the portfolio managers are ramping up their restructuring as we get farther into September.

The ECB failed to extend the current QE program and that shocked analysts. With the Fed meeting on the 20th we may be reaching a tipping point where stimulus reverses from ultra lose to something a little tighter. The Chinese market is at a 10-month high and that could keep the PBOC from announcing any new plans. All of these factors count and while each is just a brick in the stimulus wall, a few of those bricks could be ready to crumble and it would weigh on the U.S. markets. I am not recommending any new plays until we see what Friday and the weekend headlines tell us.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Pothole

by Jim Brown

Click here to email Jim Brown

Editors Note:

The broader market hit a bump in the road with minor declines across the board. The selling was not heavy but it was broad based. Volume of 6.83 billion shares was the highest since August 5th. You do not want to see an increase in volume when the market is declining. The declining issues were 4:3 over advancing so it was not a flush, just an increase in selling.

This suggests Friday could be a pivotal day. This was either a one-day minor decline or it could have been the start of the normal September volatility. Midcaps and small caps were sold as well with the only safe places the biotech sector and the Dow Transports. With those two sectors showing strength the broader market would not decline significantly. If those sectors join the decline on Friday we could see the selling increase.

We are starting to see some unexplained declines in individual stocks on no news. This would appear to be portfolio managers locking in profits. If the market is about to retest the recent lows or worse we could lose more than the two positions that were stopped out today. Keep your stop losses tight.



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


IDCC - Interdigital

The long call position was entered with a trade at $73.25.


AMP - Ameriprise Financial

The long call position remains unopened until a trade at $102.75.


FTNT - Fortinet

The long call position remains unopened until a trade at $37.50.


HSY - Hershey

The long put position was opened with a trade at $98.75.


CAVM - Cavium

The long call position was stopped out with a trade at $53.85.


AKAM - Akamai Technology

The long call position was stopped out with a trade at $53.85.



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Long and short equity trades = Premier Investor



BULLISH Play Updates


AKAM - Akamai Technologies - Company Profile

Comments:

No specific news. Two days of declines on no news finally stopped us out for a minor gain.

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:

Closed 9/8/16: Long Nov $55 Call @ $2.46, exit $2.70, +.24 gain.


AMP - Ameriprise Financial - Company Profile

Comments:

No specific news. Support at $100 is holding.

The position remains unopened until a trade at $102.75.

Original Trade Description: September 3rd.

Ameriprise Financial, Inc., provides various financial products and services to individual and institutional clients in the United States and internationally. The company's Advice & Wealth Management segment provides financial planning and advice, as well as full-service brokerage services primarily to retail clients through its advisors. Its Asset Management segment offers investment management and advice, and investment products to retail, high net worth, and institutional clients through unaffiliated third party financial institutions and institutional sales force. They offer U.S. mutual funds and their non-U.S. equivalents, exchange-traded funds, variable product funds underlying insurance, and annuity separate accounts; and institutional asset management products, such as traditional asset classes, separately managed accounts, individually managed accounts, collateralized loan obligations, hedge funds, collective funds, and property funds. They also offer annuities and various insurance products including disability, property, casualty and life insurance. The company was originally known as American Express Financial Corporation. They were founded in 1894 and employ more than 10,000 financial advisors.

In late July the company reported earnings of $2.23 and analysts were expecting $2.27. Revenue was $2.87 billion which missed estimates for $2.91 billion. The company has assets under management of $776.6 billion. The revenue and earnings miss was caused by exchange rate problems enhanced by Brexit and outflows of investor funds. The entire industry is struggling because investors are afraid of the market after a 7-year run and they are pulling funds out of investments in advance of the next recession. The current expansion is the third longest in history so investors are expecting it to end. It may be two quarters from now or two years from now but they expect it to end. Because this is an industry problem rather than a company problem, I believe the minor miss on earnings and revenue was actually positive. They also declared a quarterly dividend of 75 cents.

The company repurchased $444 million in stock in the quarter. They also closed an acquisition of Emerging Global Advisors in an effort to accelerate their Smart Beta efforts. This expands the Ameriprise foothold in the ETF marketplace. They recently filed for multiple new ETFs under the Smart Beta name. They first began offering ETFs of their own in 2011.

Earnings Oct 26th.

Shares fell sharply on the earnings miss from $101 to $85. Over the last month, they have recovered that loss and are back at the $101 level with resistance at $102.50. A break over that level targets $110 and then $115. Because of the potential for market volatility I am going to recommend an entry trigger.

With an AMP trade at $102.75

Buy Dec $105 Call, currently $3.10, initial stop loss $97.65.


CAVM - Cavium Inc - Company Profile

Comments:

No specific news. Entire sector was down three consecutive days. The drop below support stopped us out.

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

Closed 9/8/16: Long Nov $60 call @ $3.70. Exit $2.05, -1.65 loss.

Optional:
Closed 9/8/16: Short Nov $70 call @ 1.05. Exit .55, +.50 gain

Net loss $1.15


FTNT - Fortinet Inc - Company Profile

Comments:

No specific news. Resistance held.

This position remains unopened until a trade at $37.50.

Original Trade Description: September 3rd.

Fortinet, Inc. provides cyber security solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and virtual appliances products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which provides a single point of network log data collection. It also offers FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; and FortiDDos and FortiDB database security appliances. The company also offers security subscription, technical support, training, and professional services. Company description from FinViz.com.

They reported earnings of 3 cents that beat estimates for 2 cents. Revenues rose 29.9% to $311.4 million and beat estimates for $304 million. Product revenues jumped 19% and services revenues surged 40%. During the quarter they added 9,000 customers to bring their total to more than 280,000. The number of transactions over $100,000 increased by 36% and deals over $250,000 rose 35% with deals over $500,000 rising 19%. Total billings rose 26% to $373.8 million. Gross profits rose 33.2%. They ended the quarter with $985 million in cash.

They guided for Q3 to earnings of 17-18 cents and revenue of $319-$324 million. Consensus estimates were expecting 7 cents and $318.9 million. They also raised full year revenue guidance to $1.28 billion which was also above prior estimates.

Earnings Oct 20th.

The company is growing rapidly and the future is bright. There is resistance at $37.25 from a gap down last October and it has failed at that level twice. I expect it to break through on the next attempt. That breakout will target $43-$45 and then the prior highs at $50.

With a FTNT trade at $37.50

Buy Dec $39 call, currently $1.80, initial stop loss $35.25


GRUB - GrubHub - Company Profile

Comments:

No specific news. Minor decline from Tuesday's 52-week high close.

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.


IDCC - Interdigital - Company Profile

Comments:

The company issued revenue guidance for Q3 of $220-$225 million. This compares to Q2 revenue of $75.9 million. Quarterly revenues are volatile because they receive royalties on new products when shipped. For instance, a royalty on the iPhone 7 would show a monster jump in Q4 compared to minimal revenue in Q3.

Original Trade Description: September 7th.

InterDigital, Inc. designs and develops technologies that enable and enhance wireless communications in the United States and internationally. It offers technology solutions for use in digital cellular and wireless products and networks, such as 2G, 3G, 4G, and IEEE 802-related products and networks. The company develops cellular technologies comprising technologies related to CDMA, TDMA, OFDM/OFDMA, and MIMO for use in 2G, 3G, and 4G wireless networks and mobile terminal devices; and other wireless technologies related to Wi-Fi, WLAN, WMAN, and WRAN. Its patented technologies are used in various products, including mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants; wireless infrastructure equipment comprising base stations; and components, dongles, and modules for wireless devices. As of December 31, 2015, it had a portfolio of approximately 20,400 patents and patent applications related to the fundamental technologies that enable wireless communications. Company description from FinViz.com.

IDCC does not make the equipment that uses its designs and patents. They lease those patents to other companies for annual royalty payments based on the volume of devices sold. This is a very lucrative business because they do not have the cost of production or the risk any specific product will not sell in the marketplace.

For Q2 they reported earnings of 48 cents that beat estimates for 26 cents. Revenue of $75.9 million was $300,000 short of estimates. They received an arbitration award of roughly $150 million from Huawei in the quarter that will be reported as income in Q3. They also announced a new multi-year patent agreement with Huawei for 3G and 4G units. They ended Q2 with $814 million in cash.

Earnings Oct 27th.

IDCC is a member of the S&P-400 MidCap index.

IDCC shares are moving slowly higher with very little volatility. They closed at a new high on Wednesday. I know the daily chart looks scary but the 90-min chart below shows the three weeks of consolidation after their Q2 earnings jump. That consolidation is breaking to the upside and given their guidance, I believe it has room to run. I am using an inexpensive option in case disaster strikes.

Position 9/8/16 with a IDCC trade at $73.25

Long Oct $75 call @ $1.60. See portfolio graphic for stop loss.


ITW - Illinois Tool Works - Company Profile

Comments:

No specific news. Shares still holding over support despite today's 64 cent decline. Completely market weakness related.

Original Trade Description: September 6th.

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.

Earnings Oct 19th.

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.

After we were in the prior position the stock continued sideways with only a slightly positive bias. This consolidation was fin but we were stopped out on 9/1 when I raised the stop to close thinking the market was about to weaken.

On Friday shares spiked to $123.50 on no news. That spike was erased and shares drifted back down to the prior consolidation range of $119. If the market is going to rally, ITW is a strong growth stock that managers should want to own.

I am choosing an inexpensive strike to allow us to ride out any volatility.

Position 9/7/16:

Long Dec $125 call @ $2.00. See portfolio graphic for stop loss.


JACK - Jack in the Box - Company Profile

Comments:

No specific news. Big $3 drop from the new high. No sector news that I saw. This is probably profit taking and fund portfolio restructuring.

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


OC - Owens Corning - Company Profile

Comments:

No specific news. Minor decline 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 bought another 225,000 shares for $10.6 million. I sure wish I had his trading account. Shares hit a new 8-month high.

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.

Update 9/8/16: Roger bought another 225,000 shares for $10.6 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. Minor decline after Tuesday's intraday spike.

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.

Position 9/6/15 with a SMG trade at $83.25

Long Dec $85 call @ $2.25, sese portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

Minor decline but all the indexes are starting to show weakness. Maybe the normal September volatility is starting to appear.

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


HSY - Hershey Co - Company Profile

Comments:

Hershey finally saw the post dip support fail and we entered the position with a trade at $98.75. Now we need to see support at $90 retested.

Original Trade Description: September 3rd.

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hershey's, Reese's, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands. It markets and sells its products to wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, and department stores. The Hershey Company was founded in 1894 and is headquartered in Hershey, Pennsylvania. Company description from FinViz.com.

Mondelez offered $107 per share for Hershey in June. Shares spiked to $110-$115 in anticipation of an upgraded offer. After two months of discussions they finally got around to price. The Hershey board said it would need a lot higher price to get the deal approved. Mondelez thought about it and came back saying "maybe they could go to $115" if some conditions were met. Hershey replied that was not high enough and it would take at least $125 to continue the discussion. Mondelez immediately broke off negotiations saying there was no "actionable path" to a conclusion.

Hershey is struggling. Sales have been slowing as new competition slowly erodes market share. The Hershey Trust owns 80% of the voting stock so even if the Hershey board decided to consider an offer the trust would have to approve it along with the Pennsylvania Attorney General, which has power over the trust. There will not be another deal and the trust board is being reconstituted in 2017 as demanded by the AG so no major actions will be approved.

Hershey is going to have to deal with its own market share losses and slowing sales. This means the outlook for Hershey shares is negative. Last week Bank America reiterated an underperform rating with a price target of $100 and shares closed the week at $99. The outlook is underwhelming and the stock should decline back to the $90 range where it was stuck before the Mondelez offer.

Earnings Nov 1st.

Position 9/8/16 with a HSY trade at $98.75

Long Nov $95 put @ $1.60. See portfolio graphic for stop loss.




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