Option Investor
Newsletter

Daily Newsletter, Saturday, 9/10/2016

Table of Contents

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

Market Wrap

The Last Straw

by Jim Brown

Click here to email Jim Brown

The last straw is the event that finally breaks the markets back. Eric Rosengren was the last straw.

Weekly Statistics

Friday Statistics

The markets have ignored data point after data point for the last couple months with economic news weakening at every turn. The market has also ignored multiple Fed speakers offering multiple points of view that keep the Fed Funds Futures highly volatile. The market ignored the fifth consecutive quarter of negative earnings and a Q2 GDP revision at only 1% growth. After all, the Fed keeps telling us they are "data dependent" and when rate hikes eventually arrive, they will be gradual. The market ignored the hawkish comments from Mario Draghi when he failed to announce an extension to QE last week. The market ignored the BoJ Governor, Haruhiko Kuroda, when he appeared to have run out of options to save his sagging economy.

On Thursday the Fed funds futures were only showing a 15% chance of a rate hike in September. On Friday, Eric Rosengren was the last straw when he spoke about the need to hike rates sooner rather than later and implied the Fed would move in September. The Fed futures spiked to a 24% chance of a rate hike and the equity markets declined the steepest since the Brexit vote on June 27th.


There were complications. With a quadruple option expiration next Friday, portfolio managers and traders normally clean up their option positions on the Friday before that quadruple witching. That helped to increase the volatility. Also, over the prior two days I have seen sharp unexplained declines on no news on multiple stocks. They were mostly prior winners and I wrote in the Thursday newsletter it appeared fund managers were locking in profits and raising cash ahead of the Fed meeting on the 20th. There was likely some caution as well about the 15th anniversary of 9/11 on Sunday. Al Qaeda is fond of anniversaries and there is always the potential for a new attack in the USA.

When the combination of Draghi, Kuroda and the Fed all appearing to be near the end of their stimulus cycles, the next move would be rate hikes. Draghi's comments and lack of action were thought to have been the result of a call from the Fed suggesting a rate hike at the next meeting. In order to prevent further damage to the Euro, he elected to pass on further stimulus. When Rosengren, a former dove, came out strong on the need to hike rates, it was the last straw for the market. The weight of all those prior straws suddenly caused a high volume crash and the two-month consolidation pattern was broken.

Adding to the confusion was a sudden announcement that the Fed's most dovish governor, Lael Brainard, would speak on Monday at 1:PM on the last day before the quiet period begins ahead of the Fed meeting. If she has a hawkish tone, it will be a sure sign the Fed is planning on hiking in September.

I wrote last week after the several negative economic reports, if the FOMC was planning on hiking rates in September they would have to produce multiple speakers before the meeting to warn the market a hike was coming. Since the Fed claims it is "data dependent" the data was suggesting no hike. Since I wrote that, there has been a steady stream of hawkish comments and squeezing in Brainard at the last minute could be the final warning. However, if she maintains her dovish tone maybe she was recruited at the last minute to throw cold water on the hawkish comments from others. Hers will be the last speech before the Fed meeting.

I have written many times warning that when the 4th tightest range since 1928 finally broke it was going to do it explosively. Friday was explosive. Volume was 8.44 billion and 7.69 billion was down volume. Decliners were 10:1 over advancers. New highs fell from 736 on Wednesday to 94 on Friday.

In theory, 10:1 down volume is considered a capitulation day. That means everyone rushed to the exits at once and the weak holders were eliminated. While I would like to think that was the case, I seriously doubt it. Too many support levels were broken in one day and the market closed on the lows. I would expect Monday to be down as well as traders race to cover their margin calls.

Now that the range has broken, it is entirely conceivable that we could decline another 1-2% to prior support in the 2,100 range for the S&P and 17,925 on the Dow. Any declines below those levels would face the potential for a real washout to 17,000 and 2,050.

For the last two months we have seen dip buyers appear on every dip. They never appeared in volume but it was enough to keep the indexes in the consolidation pattern. Those dip buyers were obliterated on Friday.

The only economic report on Friday was the Wholesale Trade for July. Wholesale inventories remained flat after posting solid gains in the prior four months. Durable goods inventories rose +0.3% and nondurables declined -0.3%. Sales fell -0.4% with nondurable goods sales falling -1.0%.

The economic calendar for next week is heavily loaded for Thursday. The Philly Fed Manufacturing Survey is the most important but retail sales will be a close second. There is a strong possibility sales will be negative even though the consensus estimate is for a minor +0.1% gain.


This is a quadruple option expiration week and volatility could remain elevated. However, it would take a continued crash to push it higher than Friday's +39.9% spike to 17.50 on the VIX.


The Fedspeak on Friday caused treasury yields to spike to a two-month high with the ten-year yield rising to 1.672% compared to 1.52% on Wednesday after Tuesday's weak ISM and the lackluster Beige Book. Anyone who bought treasuries over the last two months has already lost in principal more than they will earn in interest over the term of the investment. If the Fed is truly about to embark on a rate hike cycle it is going to be very painful for holders of treasuries.

With $13 trillion in global bonds now offering a negative yield, there could be a race to the exits if it appears rates are going to rise. Switzerland and Germany are selling new 10-50 year debt with negative yields. That means the buyers will get back less money than they paid. This suggests those investors expect economic growth to remain stagnant for years.


Apple (AAPL) shares have collapses since their iPhone 7 announcement. Apple shares closed at $107.70 on Tuesday. I wrote in the Tuesday commentary, "Typically, Apple shares decline on the announcement. Active traders may want to pick up some puts on Wednesday morning. The September $107 puts with 10 days until expiration were $1.19 at the close. Apple shares could easily drop to $105 or so without any unexpectedly good news in the announcement." After Apple said it would no longer report initial sales numbers the stock fell harder than normal to close at $103 on Friday and was a major drag on the Dow and Nasdaq. That $107 put was worth $4.05 at the close on Friday.

Apple did not make any friends with the announcement and the realization the missing headphone jack rumors were true. In order to blunt criticism, Apple is including this cheesy dongle that will allow you to use your existing headphones on a new model 7 phone. However, Apple fans were quick to point out that it would be impossible to charge your phone and listen to music at the same time. Since battery life issues are a common complaint with Apple phones, it means you cannot listen to music when your phone needs to be recharged.

On the positive side, dropping the headphone jack allowed for 14% larger battery and upping the size to 1955mAh. Apple claims that will add 2 hours of battery life to a normal phone.


Apple fans were also excited about the new glossy "piano black" or glossy black color option. The phone looks really nice BUT Apple put a warning on their website that says the phones are prone to "micro abrasions" or scratching. Apparently, even with as little as one day of use, even when being especially careful, the scratches become easily visible and several weeks of use can trash the glossy aesthetics of the phone. Buyer beware, the new phone may look old relatively quickly.

Apple also said it was refocusing its efforts on self-driving cars. Apple closed several parts of the self-driving car project and laid off dozens of employees. The project code named "Titan" has struggled to make any progress. Sources said Apple was going to move away from actually building cars and concentrate on building self-driving technology that could be licensed to auto manufacturers.

Credit Suisse added Apple to their "Focus List" with a price target of $150. That analyst must have been smoking something funny when he issued that note.


Chipotle Mexican Grill (CMG) settled cases with more than 100 customers that became ill after eating at Chipotle stores. Terms of the settlement were confidential. Shares declined $10 with the market but they are still up $25 since Monday when Bill Ackman announced a 9.9% stake in the company.


Deutsche Bank (DB) is close to a settlement with U.S. regulators over past problems with subprime loans. The bank is expected to agree to a fine of $2.4 billion. Some analysts had expected a fine of up to $3.4 billion. The bank is also under fire for manipulation of foreign exchange rates, gold and silver pricing, and rigging of the borrowing benchmarks of Libor and Euribor. DB agreed to pay another $1.9 billion in 2013 on $14.2 billion in subprime loans where the loans were misrepresented.

Deutsche Bank also announced on Friday it was redeeming eight bond futures ETNs. The prospectus allows the bank to redeem them at any time at its sole discretion. The ETNs they are redeeming are LBND, SBND, BUNT, BUNL, JGBT, JGBL, JGBD and JGBS. Five of those are 3x leveraged ETNs. All of the ETNS had very low volume with some less than 1,000 shares a day.


JP Morgan (JPM) is no longer getting the respect it did in prior years. On Friday Macquarie cut its rating from outperform to neutral on valuation. The analyst price target is $70 with JPM at $67. That broker is not the only one turning negative on JPM. The last six ratings changes have been negative.

Macquarie - Outperform to Neutral
Bernstein - Outperform to Market Perform (Neutral)
Citigroup - Buy to Neutral
Berenberg - Initiated at Sell
Portales Partners - Sector Perform to Underperform
Nomura - Buy to Neutral

The analyst said JPM could find it difficult to "meaningfully improve" its return on equity in the future due to "higher-than-peer required capital buffers."


Mattress Firm (MFRM) posted revenue that rose 48.2% to $980 million but missed estimates for $1.0 billion. The company increased sales nearly 50% but was berated for missing estimates. Earnings of 57 cents also missed estimates for 65 cents. They opened 59 new stores and closed 49 stores bringing the total company operated stores to 3,482. They are being acquired by Steinhoff International for $64 or $3.8 billion including assumption of debt. That is the only reason the shares did not decline.


Crude prices have been very volatile the last several weeks. They have been buffeted by OPEC headlines claiming a production freeze was a possibility for several days and then no chance of a freeze for several days and then repeat. Prices have also been pushed around by the volatility in the dollar. A strong dollar means less dollars are needed to buy oil and a weak dollar sends oil prices higher.


The latest news on a potential freeze came from Russia and Saudi Arabia forming a joint venture to find a way to stabilize oil prices. In theory that means freezing or reducing production but in reality it was just one more headline that helped to support oil prices in September, a month that typically sees declines. The initial meeting of the two countries will be in October. If they were actually serious about stabilizing prices, they would meet immediately and announce a plan. This is just more headline spam to support prices in a weak period.


Active oil rigs rose +7 to 414 and gas rigs rose +4 to 92. Offshore rigs rebounded from the -10 the prior week with a +8 gain. This was related to the hurricane in the Gulf that shutdown 10-15% of the platforms along with those ten rigs.

The Gulf produces 20% of the U.S. crude and shutting down the platforms for several days was the reason oil inventories fell -14.5 million barrels last week. There was no monster surge in demand. It was simply a halt in production until the storm moved away. Anyone buying oil on that inventory headline has no clue how the sector works.


 


 

Markets

The consolidation pattern was broken by an abundance of events with the Rosengren speech getting the most blame. We will never know what actually triggered the strong selling but we were very overdue for a decline regardless of the reason. We sometimes forget that the market does not need a reason for a crash. Sometimes all the factors just line up at once and traders are caught off guard.

The strongest sectors over the last couple of weeks were the small and mid cap stocks. The biggest losses on Friday came from the small and mid cap stocks. No real surprise there. The Russell 2000 lost -3.1% while the Dow lost only -2.1%.

This was a good example of portfolio managers locking in profits ahead of 9/11 and the Fed meeting. I reported earlier, I saw some preliminary unexpected selling on Wed/Thr in stocks that had been strong gainers in past weeks. Suddenly they were down 2-3% on no news. This was the advance warning. That profit taking accelerated on Friday as the Fed fears escalated. Stops were hit and the selling became a cascade.

That means there was no material pause points. Every sharp intraday dip triggered new stop losses and new selling. The S&P closed at the low for the day.


The S&P crashed out of its recent congestion range and closed just below light support at 2,130. I do not expect it to rebound from that level. While the market crash could have been a one-day wonder, there should be more selling as a result of margin calls on Monday. There are three Fed speakers on Monday and Brainard speaks at 1:PM. I would not expect any material rebound until after her speech and then only if she remains dovish.

A continued decline would most likely stop in the 2100-2105 range. If that level breaks, we could be looking at 2,050 to 2,000. Given the strong volume on Friday and the 10:1 negative internals, there is a good chance the worst is over. That does not mean an immediate rebound but I would not expect any further "crashes" unless the Fed commentary turns even more hawkish.


All 30 Dow components were negative and 24 of them lost more than $1. Boeing and 3M were the biggest losers followed by HD, IBM, GS and UTX. There was no specific news on any of those stocks that would have caused them to decline -3% or more. This was simply more of the big cap weakness we have seen over the last several weeks. When the market decline accelerated the big caps were the first to be sold because they are the most liquid and the easiest place to raise a lot of cash quick. In times of market stress, sometimes you have to sell what you can instead of what you want to sell. For retail traders, selling the big caps raised cash to cover margin calls on stocks they wanted to keep.

The Dow has risk to 17,925-18,000 and we could easily see those levels on Monday if there is any follow through selling.



The Nasdaq was a wasteland on Friday. After setting a new high on Wednesday there was a minor drop on Thursday but the bottom fell out on Friday. The Nasdaq lost -133 points or 2.5%. The support at 5,200 was broken at the open and the continued decline was dramatic.

The 5,100 level is light support but there is a good chance we retest 5,000 on any multiday weakness. Any rebound will have a tough climb as traders exit along the way, thankful for the opportunity to recover some losses.

Note that almost all of the 30 biggest losers lost more than the top stock gained on the winners list. Only 12 Nasdaq stocks gained more than $1 and the 30th biggest gainer only added 29 cents.



The Russell 2000 fell right to the bottom of the uptrend channel and stopped exactly where we would have expected it to stop. Any further decline breaks the channel support again but the 1200-1205 level should be a pause point. A break below 1,200 turns a minor bout of profit taking into a rout and the 1,095 level comes back into focus.


Do not fight the Fed. If the Fed has decided they are going to hike rates in September regardless of the data, then get out of the way, because the market is going lower. I know it is irrational and a quarter point increase is nothing more than a mosquito bite in the long term scenario. It comes from decades of fearing a recession brought on by Fed rate hikes. The Fed has a gun with only 1 bullet. We are going to see a recession at some point in the next 18-24 months and the Fed is desperate to reload by adding some rate hikes to their arsenal. The higher the interest rate when we reach the next recession the more times they will be able to cut to slow those recessionary forces. They only have one bullet today and it is scaring them because they see the long-term outlook.

This economic expansion is now 7 years old and the third longest in history. The law of averages is working against the Fed and it is only a matter of time before trouble strikes. The sharp declines in the economic reports have awakened the Fed from its stimulus induced coma.

Monday's market will be driven by margin calls and Fed speeches. Brainard is the key to the Fed outlook. As the most dovish member of the group, if she changes her tone, look out below.

For the last couple of weeks, I have been warning to refrain from being overly long, keep some cash in reserve and make a shopping list of stocks you would like to buy on a dip. If you followed my recommendations, Friday was painful but not the end of the world. Now you have more cash to spend. Pull out that shopping list again, look at the charts and pick entry points that would be a best-case scenario. You never know when you will get that once in a year opportunity again.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts


This will be an interesting week. The graphic below is for the survey week that ended on Wednesday. The Nasdaq and the small and mid caps were making new highs. Bearish sentiment was declining with the losses evenly split between the neutral and bullish groups.

The survey that ends next Wednesday is sure to be dramatically different depending on the next two days of trading and the Fedspeak on Monday.



Fifteen years ago today (9/10) my son and I had just completed a presentation in Washington and were scheduled to fly back to Denver the next morning. I had plenty of time we were bored so we went to the airport and flew standby back to Colorado that night. I woke up the next morning to planes where we might have been passengers, crashing into the World Trade Center. It was a sobering experience about how quickly and unexpectedly your life can be over. Never take any day for granted.


In July 2001, a writer for Option Investor had just written a commentary projecting seasonal market movements for the rest of the year. The next day he received a cryptic email from a reader warning "In early September every market in the world will crash. You can bet on it." The actual email was a little longer but that is all I can remember today. We discussed it at the time trying to decipher what could cause the worldwide markets to crash. We could not reach a consensus that made sense and forgot about the email as some crackpot conspiracy theorist. A couple weeks after 9/11 somebody remembered the email. It had been deleted and there was no way to trace it backwards. We get thousands of emails a day and back then, we did not archive them.

I have often thought about that email and wondered why a terrorist, knowing he was going to die in a couple months, would be reading an option investing newsletter. It came to me one day that it was probably not anybody on a plane but somebody farther up the supply chain that actually had investments. Somebody, supposedly Bin Laden, funded the $500,000 spent by the hijackers for room, board, transportation and training. We have readers all over the world and quite a few in the Middle East. Who knows, that person may still be reading the newsletter today.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A teacher is never a giver of truth; he is a guide, a pointer to the truth that each student must find for himself."

Bruce Lee



Index Wrap

Maximum Uncertainty

by Jim Brown

Click here to email Jim Brown
You could not script conditions any better for market uncertainty.

The major indexes traded sideways in a very narrow range for nearly two months. The S&P went 40 days without a 1% move. Over 5 weeks the S&P only had back to back gains three times. This major consolidation pattern at market highs collapsed in only one day with a 2-3% bearish move to close at the low for the day on a Friday. Monday could see another 2% move in either direction or no move at all.

The explosive breakout from the consolidation range was expected. We knew it could not continue forever. The indexes with the biggest gains the prior week had the biggest losses.

The big question now is where do we go from here?

The problem with reading charts this weekend is that the big one-day drop has skewed all the indicators into oversold conditions in only one day.

The Dow stopped right on the 100-day average at 18,085 but because of its narrow composition the Dow is not normally reactive to moving averages. The MACD has been in decline since late July despite the new high in August. After Friday's drop the MACD is turning bearish.


The S&P decline is so out of character to the prior two months that we have to look for support at a lower level around 2,100. A breakdown below 2,100 targets 2,000 with a potential pause point at 2,020. The S&P has not been reactive to moving averages in the last year.


The Nasdaq set a new high on Wednesday only to blow through support at 5,200 on Friday. There is no near term support until 4,975. One more big decline like we saw on Friday would get us there in a hurry. The 5,000 level is a big round number that has been support/resistance in the past and it could be a price magnet on this decline.


The Russell 2000 had a clearly defined trend with stable rising resistance that finally proved too tough to crack. Fortunately the Russell also has clearly defined support at 1,200 that could function as a brake for the broad market. The Russell 2000 and the Dow Transports tend to act as sentiment indicators for the broader market. If the Russell reached 1,200 and fails to break lower, it could put the brakes on the broader market decline.


The S&P-600 Small Cap Index also has a clearly defined uptrend channel. The drop on Friday put the index back on uptrend support and the center of the recent congestion was 740, which is where the index closed on Friday. I doubt that will contain the decline. I have more confidence in the horizontal support at 729. A failure at 729 targets 665.


The S&P-400 Midcap Index was also making new highs. However, it has fallen harder than the S&P-600 and is already below the same relative congestion levels. The index closed at 1,528 with support at 1,525. However, I am not confident this support will hold and a continued decline could be ugly with a potential decline to 1,410.


The Russell 3000 last made a new high on August 15th and fell completely out of the consolidation range on Friday. If support at 1,250 fails, it targets 1,200. This is the broadest representation of the market and a break below 1,250 could cause sentiment issues with the rest of the indexes.


The problem with projecting downside targets is the calendar. Portfolio managers are going to be very interested in finding a bottom as quickly as possible so they can go all in and hope to maximize returns over the next six weeks. It is in their best interest to crash the markets as quickly as possible by selling all their unwanted positions and then transfer that cash to new positions.

The upside resistance has not changed but it has moved farther away. If we get another 2-3% decline it could take weeks to recover the highs. Since the Fed meeting is September 21st and the election only six weeks later, there will be continued uncertainty for a long time.

We may experience bouts of volatility for the rest of September. This is the third week of the six most volatile weeks of the year. Last week was an example of that potential volatility with new highs and then new 8-week lows two days later.

Complicating the future for the Nasdaq, the semiconductor sector is in decline. This is the leading indicator for Nasdaq direction. After peaking the prior week the Semiconductor Index is heading lower and the Nasdaq will eventually follow. The Nasdaq ALWAYS follows the $SOX. Fortunately, the SOX has support at 750 and it is possible this is just a temporary trend change. The SOX has a tendency to correct every month of two and it has been two months. The Apple suppliers are in an accelerated decline on expectations for lower iPhone sales.



Also complicating the Nasdaq's future is the weakness in the Biotech sector. The $BTK has been chopping around with no direction for the last six weeks because of the drug pricing headlines and blowups in several biotech stocks. Without the BTK to provide additional support missing from the semiconductors the Nasdaq is going to be in trouble. The biotech sector may not recover until after the election and then it depends on which candidate wins.


I am bearish on the market for Monday. I believe margin calls and Fed speakers will control our fate. Once the last speaker walks away from the podium about 1:30 it will be time for the afternoon margin call sellins. If Brainard remain dovish the market could rally after her speech, assuming Lockhart and Kashkari did not turn significantly more hawkish.

With fund managers wanting to end the crash quickly, I would expect bullish sentiment to return before the end of the week.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Directionally Challenged

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's market drop was a sudden change in direction that leaves unanswered questions. Was it the start of a bigger market decline or just a one-day wonder to be followed by an equally ferocious rebound? Unfortunately, we do not have the answer this weekend. There is a strong potential for margin call selling on Monday and with three Fed speakers early in the day, they could accelerate the crash or they could reverse it.

With the margin call selling there should be weakness at the open and then depending on Lael Brainard's speech at 1:PM there would be another rush of selling at 2:PM. Those are the two periods where margin call selling occurs. If by chance Brainard contradicts Rosengren and continues her dovish tone, we could see some dip buying.

However, this is the third week in the six most volatile weeks of the year and it is a quadruple witching option expiration week. Anything is possible. I recommend we pass on new plays for Monday's open and reevaluate on Monday evening. Jumping into new positions at the open on Tuesday is a suicide play. It is simply a coin toss for direction and we are better off waiting for a better read on market direction.

If you just have to have something to trade, I would pick the QQQ. This is not an official trade, just a suggestion. The October $115 calls are $1.84 and the $112 puts are $1.89. If you feel you know which way the market is headed then jump right in and pick a side. The entry fee is cheap and IF you pick the right direction, you can make some money.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Trapdoor

by Jim Brown

Click here to email Jim Brown

Editors Note:

Markets climb stairs to the top but take the elevator down. In this case, there was only an elevator shaft. Everyone always talks about the last straw. That is the one that breaks the market's back after months of ignoring the daily bits of information it accumulates on the move higher. Eventually there is one piece of data too many and the market suddenly collapses under the pressure.

In this case it was Fed President Eric Rosengren giving a convincing argument why the Fed needed to hike in September. That came after news that the ECB and Bank of Japan may have reached the end of their stimulus cycle. The combination of the three headlines pushed the market over the cliff and the drop was steep.

We were stopped out of five positions but the losses were minimal. I have been warnings to keep stop losses tight and that saved us from some serious damage. I plan on putting ITW and JACK back in the play list next week once the market stabilizes.

I have warned multiple times not to be overly long and save some money for bargain hunting when a decline eventually appeared. Now the big question is whether we get a continued drop next week or was this a one-day wonder?



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


GRUB - Grubhub

The long call position was stopped with a trade at $40.65.


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.


ITW - Illinois Tool Works

The long call position was stopped with a trade at $117.85.


JACK - Jack in the Box

The long call position was stopped with a trade at $96.85.


OC - Owens Corning

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


SMG - Scotts Miracle Gro

The long call position was stopped with a trade at $80.85.



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


AMP - Ameriprise Financial - Company Profile

Comments:

No specific news. Support at $100 broke but only barely. I like the relative strength.

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.


FTNT - Fortinet Inc - Company Profile

Comments:

No specific news. Resistance held and the stock fell with the market.

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. Market decline knocked us out on the tight stop. I am looking forward to adding this position back into the portfolio once the market stabilizes.

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:

Closed 9/9/16: Long Dec $42.50 call @ $2.71, exit $3.10, +.39 gain.


IDCC - Interdigital - Company Profile

Comments:

No specific news. Shares appeared to find support at $70.

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.

Update 9/8/16: 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.

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 broke below support at $118 and I am putting this back in the play list for a new entry at $114.50.

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:

Closed 9/9/16: Long Dec $125 call @ $2.00. Exit 1.33, -.67 loss.


JACK - Jack in the Box - Company Profile

Comments:

No specific news. Actually a minor decline but we were stopped out. Support appeared at $96.50 and I will put it back in the portfolio when the market stabilizes.

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.

Position 9/1/16 with a JACK trade at $100.25

Closed 9/9/16: Long DEC $105 Call @ $4.21, exit $2.90, -1.31 loss.
Closed 9/9/16: Short DEC $115 call @ $1.50, exit $1.20, +.30 gain.
Net loss -1.01


OC - Owens Corning - Company Profile

Comments:

No specific news. Big -5% decline on expectations for slower home sales if the Fed raises rates.

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

Closed 9/9/16: Long Nov $55 call @ $2.35, exit $1.65, -.70 loss.


PAG - Penske Automotive Group - Company Profile

Comments:

No news of a new buy from Roger Penske but given the $1.50 drop in the shares, I would expect him to be back in the market on Monday.

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. Support failed in the market crash to stop us out.

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

Closed 9/9/16: Long Dec $85 call @ $2.25, exit $1.50, -.75 loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

I am really glad I did not close this position on Wednesday. The breakout of the consolidation pattern finally occurred and it was dramatic. The DIA fell -4 points and any continued decline could cause a cascade selling event. At this point I would be cautious about an immediate rebound since the decline was so sharp.

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:

Mondelez confirmed it was going after Hershey's chocolate business after being snubbed. The market crash helped to push Hershey to a new two-month low.

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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