Option Investor
Newsletter

Daily Newsletter, Thursday, 9/22/2016

Table of Contents

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

Market Wrap

Rally On?

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market seems mollified by what the FOMC and Janet Yellen had to say but does this mean it's time to rally on? When you dig into the details it's hard to know what it is she and the committee are really saying, each statement carefully hedged by the next, so confusion remains the dominate result of FOMC clarity.

This is what I heard. The case for a rate hike has strengthened because economic activity has picked up but the rate hike time line flattened because economic activity is approaching a peak. My interpretation; there is more chance of a hike than ever but less chance of getting one, much less chance aggressive hiking, because economic activity is expected to remain tepid for the next 2 years.

Three FOMC members say there is no chance of a hike this year, since growth and inflation are expected to be weak there doesn't seem to be any reason to. According to the CME's Fed Watch Tool there is only a 12.5% chance of hike in November but that goes up to at least 50% in December and hovers around that level far into 2017. Risk is skewed toward the no-hike scenario as far out as the March meeting where futures show a 30% of rates will stand pat until then with a 50/50 chance they will hike once and a 15% chance they will have hiked twice.

International markets were pleased, or at least relieved, by what they heard the Fed deliver. Asian indices were led by the Nikkei's 1.9% gain, European markets were led by the French CAC 30 with gains near 2.5%. In both cases gains were broad based with notable strength in miners and energy.

Market Statistics

Futures trading indicated an up open all morning but not an overly strong one. The SPX was showing gains in the range of 0.5% and held them for most of the morning. The open was positive and after a quick dip to test intraday support led to a morning rally and a new intraday all time high for the NASDAQ Composite. By 11AM the market had topped out for the day, the morning rally having run its course. The rest of the day saw the market drift sideways leaving the indices near the highs of the day at the close of trading.

Economic Calendar

The Economy

Lots of economic data today and little of it supporting the need for a rate hike. The one release that does is the weekly jobless claims which fell an unexpected -8,000 from last weeks not revised figure to hit 252,000. This is the lowest levels in nearly 6 months and just above the long term 43 year low, it is also the 81st week of claims below 300,000. The four week moving average fell -2,250 to hit 258,500. On a not adjusted basis claims rose +6.4% versus an expected +10.1% month to month and are down -6% year over year. Virginia and Oklahoma led with increases of +1,051 and 434. California and Illinois led with decreases in claims of -4,627 and -4,389.


Continuing claims fell by -36,000 to hit 2.113 million from last week's upwardly revised figure. Last week's number was revised higher by 6,000 to 2.149 million. The four week moving average of continuing claims fell -8,000 to 2.140 million. Despite revisions continuing claims have fallen to a multi-month low just above the long term 43 year low and are consistent with improvement in the labor market.

Total claims for unemployment made a substantial drop this week, -106,960, to hit 1.905 million. This is the lowest level since October of 2015 and consistent with long term and seasonal trends. Based on those trends we can expect to see total claims continue to fall for the next 4-5 weeks and hit a low below 1.80 million. Today's data is -8% below this same time last year and consistent with ongoing improvement in the labor market.


The FHFA Housing Price Index was released for July. The index shows a 0.5% month to month increase in July home prices and 5.8% in year over year prices. Gains were made across the board but were strongest in the Pacific region.

Existing Home Sales fell for a 2nd month to a seasonally adjusted 5.33 million. August sales fell -0.9% due to a lack of inventory that NAR economists see as concerning. The August data is the 2nd lowest level of sales this year, the July figure was revised lower. Despite the drop however sales remain up year over year, +0.8%, and expected to remain steady at least.

The Index Of Leading Indicators was also released at 10AM. It declined by -0.2% August after rising 0.5% in July and 0.2% in June. The July figure was revised higher by 0.1%, the June lower by 0.1%. The Coincident Index rose by 0.1%, the Lagging Index rose by 0.2%. Conference Board economists say that despite the decline in August readings the index is pointing to ongoing growth into the end of the year. Looking back over the past 12 months the index has been up 6 times and down 6 times with +1.4% growth on balance.


There is little data tomorrow, a flash PMI reading and US rig counts, and the calendar for next week is pretty light. There are a few important releases thought, including housing data, personal income and spending, the 3rd estimate for 2nd quarter GDP and durable goods.

The Dollar Index

The Dollar Index fell today. No rate hike and low expectations of a hike at the next meeting have weakened the dollar but the index remains range bound. Today it fell about a half percent, below the mid-point of the current trading range and the short term moving average. The index may continue to move toward the bottom of the range in the near term on low FOMC expectations and a lack of confidence in the BOJ. Longer term I expect to see it wind up again on data and Fed expectations going into the November and December meetings. The mid point of the range is near $95.50, the lower range boundary/support target is $94.31, the upper boundary/resistance target is $96.60.


The Oil Index

Oil prices rose more then2% after yesterday's surprise draw of US stockpiles. Today's action added a little more than $1 to WTI to leave it trading near $46.50 at the close of the day. It looks like oil prices are winding up too, driven by supply/demand imbalances and any news to that effect. Yesterday's draw appears to show a swing back to rebalance versus the ongoing imbalance but is not definitive by any means. Product levels remain high, storage levels remain high and there have been some significant events in recent weeks which are likely having an effect on the data. Until a clearer picture emerges oil is could remain range bound near current levels into the indefinite future.

The Oil Index was able to make gains today as well but is also otherwise range bound. The index gapped up at the open, above the mid-point of the range and the short term moving average, but sold off during the day erasing a lot of the early advance. The indicators are mixed and consistent with range bound trading. Upper resistance is near 1,180, the mid point is near 1,120 and lower support is near 1,080.


The Gold Index

Gold prices jumped nicely on the FOMC statements but capped by the longer term outlook. Although outlook is weak it is still rate-hike positive which ultimately will be dollar positive and gold negative. In the near term the no-rate hike decision and low level of expectations into the end of the year have weakened the dollar within its range and strengthened gold within its. Spot prices gained more than 1% to trade near $1,345 and are heading up to test resistance at $1,350. A move above $1,350 is likely to continue higher to test the long term highs near $1,380.

The gold miners naturally got a lift from rising gold prices and outlook. The miners ETF GDX gained more than1% intraday but sold off on profit taking later on to close with a gain closer to 0.3%. The ETF appears to have bottomed following a correction and is now poised to move higher. Today's action left it below resistance levels near $28.50 which, if broken, could lead to further upside. Upside target is the recently set all time high, $32 or 10% above today's close. If resistance holds a drop back to support near $26 is likely.


In The News, Story Stocks and Earnings

Redhat, open source software solution provider and competitor to Oracle, released earnings after the bell on Wednesday and sent shares moving higher today. The company reported top and bottom line earnings that beat expectations and led management to raise guidance. Full year guidance was raised to a range above consensus and the previous guidance, driven by strong demand. Two of the strongest segments, infrastructure and applications, saw growth of 18% and 33% respectively with positive forward outlook. Shares of the stock jumped more than 7% in the overnight session, gapped higher at the open at resistance levels, sold off during the day and closed with a gain near 3.5%.


RiteAid also reported before the opening bell, missing on revenue but beating on the EPS end of things. The company reported income of $14.8 million, $0.01 per share, a drop of roughly 30% from this same quarter last year. Total revenue for the quarter rose however, gaining more than 4% over last year. Shares of the stock tried to move higher on the news but were unable to sustain a rally and closed close to flat line.


The Indices

The indices moved higher for a second day, led by the NASDAQ Composite which set another all time closing high. The tech heavy index posted a gain of 0.84% to close at the high of the day. Despite the new all time high the indicators are mixed and reveal ongoing weakness in the market. In the nearer term MACD momentum is on the rise so the move higher may continue but stochastic is rolling over and showing resistance, and both indicators are showing divergences from the new high in the longer term. At current levels, and with recent price action, the index is looking frothy. It is also about 6.5% above a long term up trend line drawn between two previous bottoms.


The S&P 500 made the 2nd largest gain today, about 0.65%. The broad market created a small white bodied candle, extending yesterday's gains, but did not make a new all time high. Today's action closed near, but not at, the the high of the day and fell short of crossing resistance at the current all time high. The indicators remain weak and more consistent with range bound trading than anything else. Resistance is near 2,185, a break above which would be bullish. Support is near the recent low, close to 2,120, and may be tested again. Looking forward this index is also approaching a long term up trend line that will be intercepted in about 6 weeks if recent trading ranges persist.


The Dow Jones Industrial Average made the 3rd largest gain today, a little over 0.5%. The blue chips created a small bodied white candle with visible upper shadow, indicative of resistance to higher prices. Today's action moved up from the short term moving average, potentially bullish, but was capped by resistance well below the current all time high. The indicators remain weak and consistent with range bound trading so it does not look like the move has much strength. A break above resistance would be bullish and could lead to significant upside if new all time highs can be reached.


The Dow Jones Transportation made the smallest gains today, about 0.4%, and looks the least likely to continue higher. The index created a small doji candle with shooting star potential, indicating resistance at the 8,000 level. The indicators remain weak and consistent with range bound trading and do not support higher prices. A break above resistance would be bullish but faces additional resistance at 8,100. While it looks like the chances of a major correction are diminishing there is also little sign of rally. A continuation of the current range looks more likely.


The FOMC meeting, it came and went and left the market in the same place it was before... listlessly trending sideways within long term trading ranges. Looking forward there is a chance that this action may continue for the next 6 weeks or so. All the major indices are approaching long term up-trend lines that, if price action continues to progress as it has, will be intercepted towards the end of October/first part of November.

Looking to the calendar there are a number of important events that coincide with that time line and will likely contribute to another wind-up of the market. These are, not in any particular order, the peak of 3rd quarter earnings season, the November FOMC meeting (11/2) and the presidential election (11/8). I want to get bullish, I think a major rally is on the way (based on earnings growth outlook) but remain cautious in the near term while the market churns it way forward. In the meantime labor markets continue to show signs of health which will eventually lead to stronger economics and stronger corporate earnings.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Cloudy Day Ahead?

by Jim Brown

Click here to email Jim Brown

Editors Note:

After a market rebound from eight-week lows back into the prior congestion, is there a cloud in our future? The S&P catapulted from the 2,120 low to 2,177 and right back into the middle of the prior congestion range. This is strong resistance because of the length of time the index traded in the narrow range. The 2185-2193 range could be tough to cross without another catalyst and I do not see one on the horizon. The is a strong possibility we could see some profit taking on Friday ahead of the weekend event risk. Any pullback would be appreciated since many of the momentum stocks are up 3-5% or even more over the last three days.

Our long positions are basking in the glow of the big rally but the strong gains are begging for at least a one day rest. Any new stock we would want to add probably needs that same rest. I am recommending we hold off on adding plays for Friday and take a fresh look in the weekend newsletter.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Gap Only Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Fed and BoJ decisions led to major rallies overseas and the U.S. markets gapped significantly higher. However, that was the high of the day on the Dow and S&P while the Nasdaq continued to climb higher to a new historic close.

The small caps were on fire with the Russell 2000 gaining 18 points or +1.5% and the S&P-600 gained +1.5% to close at the prior high less half a point.

Friday should be interesting as we see how many traders take profits and how strongly any dip is bought.

The big market wide short squeeze at the open stopped us out on the DIA, FSLR and HSY puts but all of the long positions were up strongly so it was still a good day.



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


VXX - VIX Futures ETF

The long put position was entered at the open with a trade at $33.74.



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:

Britains FDA equivalent (NICE) approved the drug Strensiq for treating a rare inherited bone disorder but there was a catch. The drug can cost up to $2 million a year for an adult. NICE had originally denied it because of the cost but changed their mind saying it could be a lifeline for individuals stricken with the disease. The catch, they want Alexion to give them a significant discount. Alexion is already capping annual costs in a confidential agreement but NICE wants an additional discount. Given the price of the drug, there is plenty of room for Alexion to discount and still make a nice profit.

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. Shares finally broke through resistance at $36. We have a long way to go before the gap fill at $100.

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:

IDCC boosted its dividend 50% to 30 cents per quarter. This dividend is payable on Oct 26th to holders on Oct 12th. 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. The company demonstrated some new products at a technology conference. New high close.

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 but only a minor gain. I was disappointed we did not see an explosive 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:

The Dow gapped open this morning with the DIA opening at $183.66 to stop us out a few seconds later at $183.75. The play worked as planned with the exception the market never crashed. By turning the position into a put spread we were able to exit the position for only a 91 cent loss. We were hedged against a major market decline since August 1st and it only cost us 91 cents. I do not think anyone should complain.

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:

Closed 9/22/16: Long Oct $182 put @ $3.98, exit $1.72, -2.26 loss.
Closed 9/22/16: Short Oct $172 put @ $1.73, exit .38, +1.35 gain
Net loss 91 cents.


FSLR - First Solar - Company Profile

Comments:

No specific news. The big opening gap in the market triggered short squeezes all across the board and FSLR spiked 4% to stop us out. I am going to monitor this for a potential reentry if it rolls over again.

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:

Closed 9/22/16: Long Nov $32.50 put @ $1.79, exit $1.39, -.40 cent loss.


HSY - Hershey Co - Company Profile

Comments:

No specific news. The gap open in the market lifted HSY shares in a minor short squeeze to stop us out at $96.75. Shares immediately rolled over to close negative for the day.

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

Closed 9/22/16: Long Nov $95 put @ $1.60. Exit $2.41, +.81 gain.


RGR - Sturm Ruger & Company - Company Profile

Comments:

No specific news. Short squeeze in a bullish market after an 8-month low close on Tuesday. The opening spike missed our stop loss by 30 cents. Shares faded immediately from the open

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. Big gap open short squeeze in a bullish market after a 2-year intraday low on Wednesday.

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.


VXX - VIX Futures ETF - Company Profile

Comments:

No specific news. Shares gapped lower to give us a slightly higher fill but then failed to decline the rest of the day. Since the market highs were at the open there was some rising volatility as the day progressed.

This is a long-term position and I will not be commenting on it on a daily basis.

Original Trade Description: September 21st.

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.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.




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