Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/21/2016

Table of Contents

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

Market Wrap

Central Banks Please the Market

by Keene Little

Click here to email Keene Little
Equity futures shot higher during the overnight session after the BOJ announced some policy tweaks that supported the stock and bond markets. The FOMC announcement this afternoon was essentially the same -- hold steady -- and the market rallied some more. As long as the central banks remain accommodative and continue to hand out free money the market is happy.

Today's Market Stats

The market went into a holding pattern following the September 12th low and the indexes began coiling in a tighter consolidation pattern while waiting to get through today's FOMC announcement. It was setting up for a big move but of course the big question has been what direction the coil will break. There are a couple of different short-term patterns for the consolidation but coming into today's FOMC report there was still no clear direction setting up and the FOMC announcement keeps the waters just as muddy as they were.

While there was much speculation about the Fed wanting (needing) to raise rates by +0.25%, they had practically no wiggle room to do so. The economy, other central bank actions and the strength of the US$ make it extremely difficult for the Fed to start tightening since they'll surely upset the apple cart and cause a stock market selloff. One of their new self-imposed mandates is to not let the stock market sell off and they've painted themselves into a smaller and smaller corner. There's no way out without causing the market to have a hissy fit.

The Fed is leaving rates alone, again, but Yellen mentioned she believes one increase this year would be "appropriate." That leaves December as their likely next opportunity (so as not to upset the markets days before the election) and as long as nothing has changed much they might be able to get away with it, but I doubt it. I think they're trapped and they know it and we'll see lower (negative) rates before we see higher. JMHO.

Yellen said senior Fed officials "are generally pleased with how the economy is doing" but that they still want to see a better labor market and an increase in inflation. The decision to leave rates unchanged was not a unanimous decision as there were three dissenters, the same number as in the December 2014 decision to raise rates. Those who dissented this time argue for a need to cool down the financial markets (do ya think?). There's been more and more concern expressed about the Fed's blowing more bubbles into the market and the fear of course is what happens when those bubbles pop.

The market cares about only one thing -- is the Fed going to keep the party going or are they going to start reducing the amount of Vodka in the punch? As long as the Fed continues to offer plenty of free booze the market will continue to party. The hangover won't be pleasant, which is what the Fed is now afraid of, but as far as the market is concerned it's looking like it could party at least into December. But the chart patterns don't fully support that view so let's get into their review, starting with the SPX weekly chart.


S&P 500, SPX, Weekly chart

This week SPX recovered back above its May 2015 high near 2135 and remains potentially bullish for another rally to a new high inside a rising wedge off the February low. We could see a rally to the 2250 area by November, especially if there will be an effort to not rock the political boat and keep the Democrats in the White House, followed by a brief celebration into a final market high. That's not a political comment since I'd say the same thing if a Republican was President, but is instead simply a recognition that the government and Fed readily admit to buying the stock market to prevent a selloff. If they're successful for another 6 weeks I can easily see this bullish scenario completing and the Democrats maintaining the White House. Whether or not it will be a sickly Hillary or someone else is hard to say (OK, that was a political comment, wink). But if the buyers lose the battle here and SPX drops below the September 12th low near 2119 I think it would be the fat lady singing the blues as the market would likely sell off hard, at least into a cycle turn window in mid-October.


S&P 500, SPX, Daily chart

The spike down from September has been followed by a choppy consolidation and that's one of the things that keeps me bearish at the moment. The setup for a strong reversal, like we saw off the June 27th low (note the similar RSI setup), has not followed through and that change of character is a warning sign for bulls to heed. A rally above the 50-dma, near 2168.60, would change my tune and turn me bullish for an expected new high but right now I lean with the bears and the next big move could be down to at least the 200-dma near 2060. The cycles point down hard into mid-October and therefore I would not be surprised to see a mini-crash leg lower and a test of the June 27th low at 1992 in the next few weeks. That's not a prediction but instead more of a warning about the potential. The bearish setup at the moment is a back-test of the broken uptrend line from August 2 - September 1, near 2163 (where it closed today), its broken 20-dma, near 2161, and its broken 50-dma. That's tough resistance between 2161 and 2169. The bulls need to hold onto today's rally otherwise it's going to look like a bull trap.

Key Levels for SPX:
- bullish above 2181
- bearish below 2119


S&P 500, SPX, 60-min chart

The choppy pattern for the consolidation following the September 12th low can be viewed a few different ways but the bottom line is that it looks corrective. While we could see a choppy rally to new highs, since it followed the strong spike down from September 7th it looks like a correction to the decline rather than the start of another bullish rally. Not shown on the 60-min chart below is the 62% retracement of the September 7-12 decline, which is near 2162 so throw that into the 2161-2169 resistance zone mentioned above that the bulls need to break through. If they can do it I'll be impressed but let's first see if they can do it. For the bounce off the September 12th low it achieved two equal legs up today at 2164, also in that 2161-2169 resistance zone. From a short-term perspective, I have the key level to the upside at 2171 for two equal legs up from September 14th, above which would leave little doubt the bulls mean business.


Dow Industrials, INDU, Daily chart

The Dow's pattern is very similar to SPX and today's rally brought it up close to its broken trend line along the lows from August 2 - September 1, near 18330 (today's high was 18307). A 38% retracement of its August 15 - September 12 decline is at 18331. Two equal legs up from September 12th points to 18356, just above its May 2015 high at 18351. Its broken 20-dma is near 18326 so like SPX, there's some tough resistance at roughly 18330-18360 and it's important that the bulls crack this zone. Otherwise a back-test followed by a bearish kiss goodbye here would look ominous (except for salivating bears).

Key Levels for DOW:
- bullish above 18,351
- bearish below 17,994


Nasdaq-100, NDX, Daily chart

After weeks of trying (since August 15th) NDX looks like it might have finally broken free of resistance at its March 2016 high near 4816. It's only a 1-day break, as it was on August 15th, August 23rd, September 6-7, September 15-16 and now today, so the bulls will need to hold today's gains to prevent another failure. But even if they hold today's gains there's another line of resistance just overhead -- the trend line along the highs from July-November 2015, currently near 4865. Not shown on the daily chart below is a price projection at 4865 for two equal legs up from February so there's tight correlation at 4865 for it to be potentially tough resistance to break. If the bulls can power through 4865 I see upside potential to 4930 but at the moment the bearish divergence since August is not confidence inspiring if you're looking for a bullish trade.

Key Levels for NDX:
- bullish above 4931
- bearish below 4656


Russell-2000, RUT, Daily chart

The rally from September 12th for the RUT also looks corrective and I see potential trouble for it near 1250 (actually from here, at 1245, up to 1250), which would include a back-test of its uptrend line from August 3 - September 1. The RUT is more bullish than the others as far as its moving averages since it's now above both its 20- and 50-dmas and if it's able to rally above 1250 it would open the door to a new high. Otherwise the bearish pattern calls for a steep decline to follow the bounce off the September 12th low, one which should at least test 1205 area but could drop quickly to support near 1160.

Key Levels for RUT:
- bullish above 1250
- bearish below 1205


20+ Year Treasury ETF, TLT, Daily chart

Bonds also rallied this afternoon following the FOMC announcement, which of course dropped bond yields. I've been expecting a bond market rally since last week but I'll want to see TLT above 136.15 to break into its gap down on September 9th as well as climb back above its broken uptrend line from December 2015 - May 2016, currently near 136.15. At the moment we could be looking at a bearish setup with a back-test of the broken uptrend line so it's going to be important what it does over the next couple of days.


High-Yield Corporate Bond index, HYG, Weekly chart

Another bond ETF to watch is HYG. As mentioned in prior updates, it tracks well with the stock market because the bullishness (or lack thereof) in stocks is typically matched with bullishness in the higher-yield (junk) bonds. Since the top in 2013 for HYG we've seen the stock market continue to new highs while HYG has only been able to make lower highs so that's been a longer-term warning sign for stock market bulls. Eventually that will correct and I doubt it will be HYG making new highs. But what happens following today's rally will tell us whether or not we should expect new highs in the coming week(s).

As can be seen on its weekly chart, the rallies in HYG tend to form rising wedge patterns and predictably the breakdowns from them happen quickly. With the strong selloff in the stock market on September 9th, HYG also broke down and dropped out of its latest rising wedge (the one off the February low). It found support on September 13th at its broken downtrend line from June 2014 - April 2015 so it's possible it's a back-test of resistance-turned-support but I think it will be good for only a bounce. However, today's rally brought it back up near the bottom of its wedge, currently at 86.80, so we'll get to see if it's stronger resistance on a back-test than support at its broken downtrend line. If HYG breaks down further it would suggest a big selloff is coming. Not shown on this chart, there's a big rounding top pattern for the price action since 2009 (it can be more easily seen on the monthly chart), which suggests the 2009 low will be taken out. The combination of patterns right here is a setup to get short HYG against its August 30th high at 87.14, which provides a nice tight stop on the play.


Transportation Index, TRAN, Daily chart

The TRAN has been struggling with its downtrend line from August-November 2015 all year. It managed to pop above the line for 3 days, making it look like a real breakout but then the September 9th selloff dropped it quickly back below the line. Today's rally (thanks largely to FedEx (FDX), which rallied more than $11 for a +7% gain) has it back up to the line for another test, currently near 7916 (it closed slightly above it with today's close at 7931). It's another opportunity for the bulls to shine but if today's rally is followed by selling and the TRAN drops below the September 15th low at 7712 I think we'll see a lot more selling follow. Do or die time for the bulls.


U.S. Dollar contract, DX, Daily chart

The US$ lost some ground today following the FOMC announcement since no rate increase weakens the dollar, which is part of the reason why the Fed doesn't want to raise rates. Strengthening the dollar would hurt international businesses, which would in turn further hurt the economy an stock prices. What's a Fed to do? So many things to think about. The dollar is coiling between the downtrend line from December 2015 - July 2016 and the uptrend line from May-August, each currently near 96.75 and 94.80, respectively. I'm looking for a continuation of a choppy rally into October/November but it would obviously turn at least short-term bearish below the uptrend line.


Gold continuous contract, GC, Daily chart

With the help from the dollar's decline gold got a little boost but it remains stuck inside a tightening consolidation pattern since the July 6th high. This sideways consolidation fits well as a 4th wave triangle (descending) in the move up from December 2015. If this is the correct interpretation the correction should be over and we should get another rally leg for the shiny metal. I show an upside projection to the top of rising wedge, near 1475 by the latter part of October. It has me wondering if a selloff in the stock market, if it comes, will spark interest in the safety of gold. A stock market selloff would also likely have traders seeking the perceived safety of Treasuries. But if gold loses support near 1308 it could instead prompt some panic selling (a failed bullish pattern would likely fail hard).


Oil continuous contract, CL, Daily chart

Oil is fighting hold on and so far with just a 3-wave pullback from August 19th it might be able to start another rally leg. Above its downtrend line from June 2014 - June 2016, near 46.10, would be a good start for oil bulls and then above its September 8th high at 47.75 would leave a confirmed 3-wave pullback correction. The next upside target would be back to its October 2015 high at 50.92 and then its June 9th high at 51.67. Above that would open the door to its next price-level S/R near 58.50. But if oil breaks down instead and drops below 41 I think it would start of lot more selling.


Economic reports

There are very few economic reports Thursday morning and none on Friday so the market will left to react to whatever is happening overseas. Each morning this week has started with a gap up following an overnight rally and then the rally completes by 10:00 so we'll see if that pattern continues.


Conclusion

Today's rally added some strength behind the bounce attempt off the September 12th lows and there's certainly a good chance for more to come, in which case we should see a rally to new highs into the end of the month. But the choppy bounce pattern suggests it's just a correction to the decline off the September highs and that it will be followed by stronger selling. The post-FOMC bullish reaction (it always seems to be a bullish reaction) might have put the finishing touches on the bounce correction rather than something more bullish but that means there should be very little, if any, buying on Friday.

There's nearby resistance for each of the indexes, which I pointed out on the charts, so we should find out quickly whether this afternoon's rally was anything more than a short squeeze. The day after the FOMC announcement often sees a reversal of the post-FOMC afternoon move and that's one more reason to be careful about expectations for higher prices on Friday.

I've mentioned in recent wraps that there is a grouping of market cycles that point hard down into mid-October and between that and the choppy bounce pattern since September 12th I've been leaning bearish. But that also means we cannot see much more of a bounce correction otherwise I'll start wondering if the mid-October turn window will be a high instead of a low. Sometimes the cycles invert like that.

For those who follow any of Jeff Cooper's work (he used to write for Minyanville), he has some very interesting numerology patterns, as well as Gann date relationships that suggest a market top could be found by the end of September. That means we could see a rally to a new high next week but based on relationships to past market crashes the new high could turn into a monster bull trap that leads to strong selling into mid-October.

All of this is to say I'd be very careful about a new market high from here -- the wave count and Jeff Cooper's analysis tell me it would be a high to be shorted, not bought. In the meantime, if Friday turns down we might see a negative week instead of a positive one next week. Trade very carefully the next few days.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Volatility Fading

by Jim Brown

Click here to email Jim Brown

Editors Note:

If the market is headed higher then we can expect volatility to fade in Q4. Typically the market rallies in the last half of October and into Thanksgiving. The market could be headed for new highs over that period and the volatility ETF should shrink significantly.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

VXX - VIX Futures ETF - Company Profile

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Buy Dec $33 Put, currently $3.90. No stop loss.



In Play Updates and Reviews

Slow Motion Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow pushed through interim resistance at 18,250 but there was no urgency in the move. It was a slow motion rally but it was broad. The small caps posted the largest gains but the Dow failed to make it over 1%. The stronger Dow resistance at 18,350 could still be a roadblock but the Nasdaq indexes closed at new highs. Any further tech gains should light a fire under the rest of the market.

While the post Fed rally captured a lot of points it was not exciting. That could weigh on investor sentiment in the days ahead. The market was expected to move higher after the Fed and sometimes that brings a contrarian sell the news event. I doubt any sell cycle would make much of a dent in the indexes because the higher lows suggest investors are raising their buy targets.



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


SIG - Signet Jewelers

The long put position was entered with a trade at $75.00.



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


ALXN - Alexion Pharmaceuticals - Company Profile

Comments:

No specific news. Shares dipped at the open but recovered about 50% in the afternoon.

Original Trade Description: September 14th.

Alexion Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes life-transforming therapeutic products. The company offers Soliris (eculizumab), a monoclonal antibody for the treatment of paroxysmal nocturnal hemoglobinuria (PNH), a genetic blood disorder; and atypical hemolytic uremic syndrome (aHUS), a genetic disease. It provides Strensiq (asfotase alfa), a targeted enzyme replacement therapy for patients with hypophosphatasia (HPP); and Kanuma (sebelipase alfa) for the treatment of patients with lysosomal acid lipase deficiency. The company also conducts Phase IV clinical trials on Soliris for the treatment of PNH registry; Phase III clinical trials for the treatment of myasthenia gravis, neuromyelitis optica spectrum disorder, and delayed kidney transplant graft function; and Phase II clinical trials for antibody mediated rejection in presensitized renal transplant patients. It develops cPMP (ALXN 1101) that is in Phase II/III trial for treating metabolic disorders; and ALXN 1007, a novel humanized antibody in Phase II clinical trial for the treatment of anti-phospholipid syndrome and graft versus host disease. Company description from FinViz.com.

The Uncommon Strength campaign supports building global communities for patients with rare diseases, which include atypical hemolytic uremic syndrome (aHUS), hypophosphatasia (HPP), lysosomal acid lipase deficiency (LAL-D) and paroxysmal nocturnal hemoglobinuria (PNH). While the platform aims to provide key information about the diseases to educate the patients and their families, it also offers interactive connection through social media components to unite the global community.

Last week Alexion was awarded orphan drug status by the EU on the ALXN1007 drug for the treatment of graft-versus-host disease (GVHD). This is an anti-inflammatory monoclonal antibody targeting complement protein C5a, currently in a phase II study in patients with newly diagnosed acute GVHD of the lower gastrointestinal tract (GI-GVHD). This disease has a 30-40% mortality rate. The orphan drug status provides certain incentives for the company to proceed with marketing including a longer period of market exclusivity. They have several other drugs similar to ALXN1007.

In Q2 they reported adjusted earnings of $1.25 compared to estimates for $1.17. Revenue of $753.1 million also beat estimates for $742.5 million.

Earnings Oct 27th.

Shares dipped in late August and traded sideways for two weeks. They have been trying to rebound despite the volatile market. Options are expensive so I am recommending a November call spread to reduce the expense.

Position 9/15/16 with a ALXN trade at $130.50

Long Nov $135 call @ $6.00, see portfolio graphic for stop loss.
Short Nov $145 call @ $1.90, see portfolio graphic for stop loss.
Net debit $4.10.


CLVS - Clovis Oncology - Company Profile

Comments:

No specific news. Credit Suisse upgraded from neutral to outperform with a price target of $41 but could go as high as $52-$55. A little late on the trigger guys!

Original Trade Description: September 13th.

Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.

Clovis has been rising on the prospects for the drug Rucaparib. They reported last week the FDA was not planning on holding an advisory committee meeting to discuss the new NDA application. The FDA has accepted the company's NDA for accelerated approval and granted it a priority review. The FDA response is expected to be positive and is expected by Feb 23rd.

Clovis has several anti cancer drugs in final stages and the outlook is very positive. Just seeing that CLVS shares have not declined in the recent market drops is a very strong indication that portfolio managers are buying and holding.

Earnings Nov 3rd.

We have to use a January call spread because October is the only other series available and with Friday the expiration for September, the October premiums will collapse next week. The net cost is the same but with the January options, we have more flexibility in the weeks ahead.

Position 9/14/16

Long JAN $30 call @ $6.00, see portfolio graphic for stop loss.
Short JAN $40 call @ $3.31, see portfolio graphic for stop loss.
Net debit $2.69


IDCC - Interdigital - Company Profile

Comments:

No specific news. New historic high close.

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. Closed at 2-week high.

Original Trade Description: September 12th.

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. Company description from FinViz.com.

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.

On Sept 2nd shares spiked to $123.50 on no news. That spike was erased and shares drifted back down to the prior consolidation range of $119 and held there for two days. The 9/9 crash knocked us out of our prior position and shares dipped to $114.91 on Monday the 12th. Real support is $114.50. I am going to recommend this position for a reentry on a dip to $115.50 on any further market weakness.

Position 9/13/16 with an ITW trade at $115.50

Long Dec $120 call @ $2.50. See portfolio graphic for stop loss.


LITE - Lumentum Holdings - Company Profile

Comments:

No specific news.

Original Trade Description: September 12th.

Lumentum Holdings Inc. manufactures and sells optical and photonic products for optical networking and commercial laser customers worldwide. It operates in two segments, Optical Communications and Commercial Lasers. The Optical Communications segment offers components, modules, and subsystems that enable the transmission and transport of video, audio, and text data over high-capacity fiber optic cables. It offers optical communication products, including optical transceivers, optical transponders, and supporting components, such as modulators and source lasers; modules or sub-systems containing optical amplifiers, reconfigurable optical add/drop multiplexers or wavelength selective switches, optical channel monitors, and supporting components; and products for 3-D sensing applications, including a light source product. This segment serves customers in telecom and datacom markets. The Commercial Lasers segment offers diode, direct-diode, diode-pumped solid-state, fiber, and gas lasers; and photonic power products, such as fiber optic-based systems for delivering and measuring electrical power. This segment serves customers in markets and applications, such as manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, and solar cell scribing. Company description from FinViz.com.

In Q2 LITE reported adjusted earnings of 41 cents compared to estimates for 35 cents. Revenue of $241.7 million beat estimates for $238.4 million. The company guided to earnings of 40-46 in Q3 and revenue in the range of $245-$255 million. Both were slightly ahead of analyst estimates.

Raymond James upgraded the stock saying strong demand from new datacenter build outs and from China was pushing sales higher. The company only has two competitors, Finsar and Nistica, and they only compete in certain products. Raymond James believes LITE can increase sales in that category by 50% by year-end. Verizon's network upgrades are expected to supply $900 million to LITE over the next several years. Zacks also joined the upgrade club with a strong buy.

The stock is also getting a boost from the strong performance of Acacia (ACIA), which sells some similar products. The winning is rubbing off on LITE.

Shares made a new high at $37.82 on Friday morning and then dipped to $35.37 this morning before rebounding to close just under the prior high.

Position 9/13/16 with a LITE trade at $37.75

Long DEC $40 call @ $2.65, see portfolio graphic for stop loss.


NVDA - Nvidia Corp - Company Profile

Comments:

No specific news. Closed at a new high.

Original Trade Description: September 17th.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors. Company description from FinViz.com.

Q2 earnings rose 800% to 40 cents and beat estimates for 37 cents. Revenue of $1.43 billion beat their own guidance of $1.35 billion they gave in Q1. Earnings in the year ago quarter were 5 cents and $1.15 billion. They hiked full year revenue guidance as well as the current quarter. They guided for Q3 revenue of $1.68 billion and analysts were only expecting $1.45 billion. During the first six months of 2016, they bought back $509 million in shares and paid $124 million in dividends. The company had $4.88 billion in cash at the end of Q2.

Earnings Nov 10th.

They recently released several new graphics cards that are twice as fast and 40% cheaper than the cards they are replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

Nvidia shares have been stair-stepping higher since January. That means they post solid gains for a month or so and then pause to consolidate with a minor retracement. They set a new high at $63.38 on August 12th, the day after their Q2 earnings beat. Shares have moved sideways for a month. Last week, when the extreme market volatility hit on the 9th, shares dropped from $63 to $57. Within 4 days the stock was back at $63. I believe it it now poised to breakout now that the weak holders have been eliminated.

Position 9/19/16:

Long Nov $65 call @ $3.45, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

Nice rebound by the Dow but it still closed under resistance. If it breaks through that level tomorrow I am going to close the position. I added a stop loss today.

I would like to see the play be successful but a breakdown would damage all the long plays that we currently hold. I look at this as a hedge against a market decline.

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, see portfolio graphic for stop loss.
Short Oct $172 put @ $1.73, see portfolio graphic for stop loss.
Net debit $2.25


FSLR - First Solar - Company Profile

Comments:

No specific news. 8Point3 (CAFD) missed on earnings and that kept FSLR to only a fractional rebound in a strong market.

Original Trade Description: September 19th.

First Solar, Inc. provides solar energy solutions in the United States and internationally. It operates through two segments, Components and Systems. The Components segment designs, manufactures, and sells solar modules that convert sunlight into electricity. This segment manufactures cadmium telluride and crystalline silicon modules for system integrators and operators. The Systems segment provides turn-key photovoltaic solar power systems or solar solutions, such as project development; engineering, procurement, and construction; and operating and maintenance services to utilities, independent power producers, and commercial and industrial companies. Company description from FinViz.com.

For Q2, FSLR reported earnings of 87 cents that beat estimates for 58 cents. Revenue of $934 million beat estimates for $904 million. However their GAAP earnings declined 86 cents to 13 cents after the company decided to halt production os solar panels using TetraSun's experimental technology. The company guided to full year earnings from $4.10-$4.50 to $3.65-$3.90 per share.

Goldman Sachs warned the solar sector was facing demand risk as government regulation and new laws made solar systems less desirable. The supply continues to be higher than demand and that is forcing the average selling price lower. Jinko Solar and Trina Solar are increasing production 18% this year. Utility companies are becoming less agreeable about buying back power that systems push into the grid during daylight hours. Goldman expects hardware costs to decline 20-30 cents per watt in early 2017. They are currently averaging 42 cents a watt and First Solar's production cost is 42 cents. As prices continue lower, FSLR will lose more money. They are not the only one. Trina's cost is 45 cents a watt.

Earnings Oct 27th.

JP Morgan said First Solar will struggle to hit earnings estimates in the near term. JMP cut FSLR to an underperform. Deutsche Bank cut them from buy to hold.

Shares have fallen from $39 to $34 but the trend is still lower. Monday's close was a three-year low.

Position 9/20/16:

Long Nov $32.50 put @ $1.79, see portfolio graphic for stop loss.


HSY - Hershey Co - Company Profile

Comments:

No specific news. Decent rebound from support on short covering in a bullish market. Any further gains will stop us out.

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.


RGR - Sturm Ruger & Company - Company Profile

Comments:

No specific news. Short squeeze in a bullish market from 8-month low close on Tuesday.

Original Trade Description: September 15th.

Sturm, Ruger & Company, Inc. designs, manufactures, and sells firearms under the Ruger trademark in the United States. It operates in two segments, Firearms and Castings. The company offers single-shot, autoloading, bolt-action, and sporting rifles; rimfire and centerfire autoloading pistols; single-action and double-action revolvers; and firearms accessories and replacement parts, as well as manufactures and sells steel investment castings and metal injection molding (MIM) parts. It sells its firearm products through independent wholesale distributors to commercial sporting market; and castings and MIM parts directly or through manufacturers' representatives. The company also exports its firearm products through a network of commercial distributors and directly to foreign customers comprising primarily of law enforcement agencies and foreign governments. Company description from FinViz.com.

In Q2, RGR reported earnings of $1.22 that beat estimates for $1.19. Revenue rose +19% to $167.9 million. The company said the new AR-15 clone, the AR-556 was responsible for one-third of all sales.

However, the pace of sales growth declined from the 26% rate in Q1. Ruger also surprised investors with a new CEO succession plan. The highly regarded Michael Fifer will retire in May and be replaced by the COO Christopher Killoy. The company had not mentioned a possible succession plan at the last shareholder meeting. Killoy is a good choice because he graduated from West Point and worked at both GE and competitor Smith & Wesson before joining Ruger as head of sales in 2003. He will only be the fourth CEO in Ruger's history.

The slowdown in sales growth was accompanied by a decline in background checks. FBI background checks slowed in August to only a 6% rise compared to 37% growth in July and 39% in June. The actual number of checks fell from 2.19 million in July to 1.85 million in August.

The gun makers have been posting some outstanding earnings thanks to rapidly rising gun sales only those sales are slowing now that Trump has pulled even or slightly ahead of Clinton. Trump is pro gun and Clinton is anti gun. As long as his numbers are improving, gun sales are likely to slow. However, should Clinton surge into the lead again, the numbers will rocket higher. Consumers are not going to spend hundreds of dollars to buy another gun if they think their gun rights will be safe for another 4 years. If Clinton surges into the lead again, they will be out in force buying those "extra" guns. The biggest surge will occur if Clinton wins the election on Nov 8th. At that point we want to be long every gun manufacturer and ammunition maker.

Earnings Nov 1st.

Ruger shares closed at an 8-month low on Wednesday. The rebound on Thursday was lackluster in a market were the Dow was up +200 points. With sales growth slowing and investors thinking the "bun boom" is over we could see Ruger retest the November lows at $48.

Position 9/20/16 with a RGR trade at $54.85

Long Jan $52.50 put @ $3.50, see portfolio graphic for stop loss.
Optional:
Short Jan $45 put @ $0.80, see portfolio graphic for stop loss.
Net debit $2.70


SIG - Signet Jewelers - Company Profile

Comments:

No specific news. Shares only rebounded slightly in a bullish market after a 2-year low close on Tuesday.

Original Trade Description: September 20th.

Signet Jewelers Limited engages in the retail sale of diamond jewelry and watches. Its Sterling Jewelers division operates stores in malls and off-mall locations under the Kay Jewelers, Kay Jewelers Outlet, Jared The Galleria Of Jewelry, Jared Vault, Jared Jewelry Boutique, JB Robinson Jewelers, Marks & Morgan Jewelers, Every kiss begins with Kay, He went to Jared, Celebrate Life. Express Love., the Leo Diamond, Hearts Desire, Artistry Diamonds, Charmed Memories, Diamonds in Rhythm, Open Hearts by Jane Seymour, Radiant Reflections, Colors in Rhythm, Chosen by Jared, Now and Forever, and Ever Us names. As of January 30, 2016, this segment operated 1,540 stores.

The company's Zale division operates jewelry stores and mall-based kiosks in shopping malls under the Zales, Zales Jewelers, Zales the Diamond Store, Zales Outlet, Gordon's Jewelers, Peoples Jewellers, Peoples the Diamond Store, Peoples Outlet the Diamond Store, Mappins, Piercing Pagoda, Arctic Brilliance Canadian Diamonds, Candy Colored Jewelry, Celebration Diamond, The Celebration Diamond Collection, Unstoppable Love, and Endless Brilliance names. This segment operated 977 jewelry stores and 605 mall-based kiosks. Company description from FinViz.com.

In Q2, Signet reported earnings of $1.14, down from $1.28 and well below analyst estimates for $1.45. Revenue fell -2.6% to $1.37 billion and also missing estimates. Same store sales declined -2.3% system wide with sales at Jared down -7.6% and Kay Jewelers seeing a -0.5% decline.

The CEO blamed the drop in oil prices for the decline in jewelry sales. The company slashed guidance, cutting the earnings forecast from $8.35-$8.55 to $7.25-$7.55. They cut same store sales guidance from 2.0% - 3.5% growth to a decline of -2.5% to -1%.

Next earnings Nov 22nd.

Shares fell from $95 to $80 on the earnings news. After moving sideways for three weeks, shares began to fade last week and closed at a two year low today at $75.65.

Position 9/21/16 with a SIG trade at $75

Long Nov $70 put @ $2.43, see portfolio graphic for sto loss.




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