Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/27/2016

Table of Contents

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

Market Wrap

Big, Fat, Ugly Bubble

by Jim Brown

Click here to email Jim Brown

The market bubble inflated again on Tuesday after Clinton appeared to win the first presidential debate.

Market Statistics

During the debate, Trump said the market was in a big, fat, ugly bubble that would collapse as soon as the Fed began to hike interest rates. He may not be too far off on that prediction but the claim did not impact the market on Tuesday.

I reported last week, since 1980, the week after the first presidential debate has been negative 83% of the time. The average decline is -1.8% for the Dow and -1.5% for the S&P.

However, I did not report the statistic that since 1992, the day after the debate the S&P was up an average of .8% according to research by Dan Clifton at Strategas Partners. The S&P rose .64% today so slightly under trend. If the long-term trend holds, the rest of the week through next Monday could be down. Obviously, this is "history" rather than a forecast. The apparent Clinton win on Monday could soften that potential decline because she represents a third term for President Obama and maintaining the status quo.

Helping lift the markets today was a blowout number on Consumer Confidence. The headline number rose from 101.1 to 104.1 and that is the highest level since August 2007. Analysts were expecting a decline to 99.0. The spread between those who believe jobs are plentiful and those who believe jobs are hard to find rose from 4.0 to 6.3 and the largest spread since August 2007.

The present conditions component rose from 125.3 to 128.5 and the expectations component rose from 86.1 to 87.8. Those respondents who believe jobs are plentiful rose from 26.8% to 27.9%. Those having trouble finding jobs fell from 22.8 to 21.6%.

However, there are always rough spots. Those expecting an income increase fell from 18.5% to 17.1% but those expecting an income decrease fell from 11.0% to 10.3%. Those planning on buying a car fell from 12.3% to 11.4%, homebuyers fell from 6.9% to 5.1% and appliance purchasers fell from 50.9% to 49.2%.


The Richmond Fed Manufacturing Survey for September improved slightly from -11 to -8 and the first time since November the survey has been in contraction territory for two consecutive months. All of the top line components contracted. The employment component at -13 is the lowest reading since 2009.

On a positive note the separate services survey rose from zero to 13 and the highest level since the reading of 15 in April. Services snapped back but that survey is highly volatile.



The Texas Service Sector Outlook Survey for September rose from 6.5 to 13.0 and a healthy rebound as well. The business conditions component rose from -5.0 to +4.7 and the highest level since July 2015. The employment component did weaken from 5.8 to 4.4 but still above the recent trend. This report is normally ignored.

The economic calendar for Wednesday is somewhat scary. With five Fed heads speaking plus Yellen's testimony to the House on financial regulation. They will probably discuss stress tests, banks trading commodities, Wells Fargo and executive compensation. Monetary policy and the impact of the election. Trump has accused her of being political and keeping rates low to keep the market high and keep democrats in power.

Yellen is probably going to maintain an even tone and try not to make waves on any topic in an effort to be nonpolitical. If Trump wins the election, I would expect her to resign shortly thereafter.

Actually, regardless of who wins, I would expect her to resign so she is not blamed when the Fed begins to raise rates and the next recession appears.

The next president, regardless of party is likely to preside over a bear market, recession, rising debt limits and rising interest rates, not necessarily in that order. There is a tremendous incentive for Yellen to announce her retirement once the new president is sworn in.

The expectations for a November rate hike have fallen to only 8.3% and the December chances have fallen to 47.6% and well below the 54.2% on Friday.



I added a new item to the calendar. The deadline for the Senate to approve at least a stop gap budget measure and avoid shutting down the government is midnight on Friday. An attempt to pass something on Tuesday failed 45-55 after weeks of negotiations. The democrats are demanding money to be allocated to fix the Flint Michigan water crisis. Republicans are promising to tackle the problem after the election in a separate Water Resources bill but democrats are objecting and want it in the U.S. budget bill. The proposed temporary funding bill would keep the government running through December 9th and provide $1.1 billion for fighting Zika. I find it hard to believe Senators would let the government shutdown only a month before the elections. That would bring people to the polls but they would be chanting "throw the bums out."

Another market mover could be the headlines out of the OPEC meeting on the sidelines of the Algerian energy conference. If talks break down, we could see $40 oil very quickly. Oil prices were down intraday but rallied after the close when the API inventories reported a decline for the fifth consecutive week. Analysts were expecting a 3 million barrel build and saw a -752,000 decline instead. Distillates declined -343,000 barrels and gasoline fell -3.7 million barrels.


In stock news, Twitter (TWTR) rallied to $23.75 after news broke that Microsoft (MSFT) and Disney (DIS) were also considering making an offer in addition to Google (GOOGL) and SalesForce (CRM). We exited the Twitter position in the Ultimate Investor Newsletter at the open this morning. I have very little confidence that a deal will be done at a significantly higher level. Even if one is announced, it will take months to close and shares are likely to weaken until nearer to the closing date. I know for sure that option premiums will evaporate instantly once Twitter announces a price and a deal. I would recommend not being greedy here if you are holding a position in Twitter.


Kite Pharma (KITE) shares rallied +9% after a clinical study of its lead cancer therapy met its primary goal. A mid-stage study showed that 76% of patients with Non-Hodgkin Lymphoma responded well to the treatment, while 47% showed a complete remission. The CAR-T treatment is the first of its kind to show significant progress and the company will now file for formal approval of the process with the FDA. Novartis (NVS) and June Therapeutics (JUNO) are also working on CAR-T therapies. The patient's own T-cells are removed and reengineered to identify and kill malignant blood cancer cells. The current treatment is by chemotherapy, which has an 8% response rate.


American Express (AXP) announced a 10% hike in its dividend to 32 cents payable on November 10th to holders on October 7th. The company also announced a 150 million share buyback program. However, that replaces a prior program that had 50 million shares not purchased so the net impact is only a 100 million share increase. After the recent stress tests the Fed approved the company's plan to buy back $3.3 billion in shares through the end of Q2-2017. The timing of the buybacks and the quantity are at the company's digression. Shares rose only fractionally.


Jelly maker JM Smucker (SJM) shares fell -$4 after a downgrade by Credit Suisse from outperform to neutral. Credit Suisse said commodity inputs have bottomed and the company would not get any further benefit from falling prices. The analyst singled out the pet food division where Nielsen tracking has shown a -2.2% decline in sales over the last four weeks compared to -1.4% over the last 12 weeks.


Shares of AutoZone (AZO) gained $20 after Morgan Stanley upgraded the company from equal weight to overweight. The analyst said the rising number of older cars on the road suggested AutoZone's business was going to improve since older cars need more parts to keep them running. More than 85% of AutoZone's inventory is failure and maintenance related products. Low gas prices tend to lead to more miles driven and more failures on older cars. Winter is hard on automotive components and it causes more failures and the need for replacement parts.


Deutsche Bank (DB) posted a fractional gain on Tuesday after making a historic low on Monday. Their problems are legion including a $14 billion fine from the U.S. Justice Dept over subprime loans. That may be the least of their worries. The bank is facing a steep capital raise and probably some extreme dilution at this level. People are warning of a potential Lehman type event at DB. Others do not believe DB will fail but they have significant problems and depositors are fleeing to avoid a European "bail in" where depositors and debt holders see their holdings cut to help liquefy the bank. With the yield on the German Bund at -0.08% it discourages savers from keeping money in the bank when they can get a higher yield almost anywhere else. These capital outflows are sinking DB. Chancellor Angela Merkel has said she will not bail out the bank. Meanwhile the European banks are sucking all the oxygen out of the European markets.

The Credit Suisse CEO said today that Q3 was going to be a tough quarter and would lead to 1,200 additional jobs on top of 4,800 already cut this year.


After the bell, Nike reported earnings of 73 cents compared to estimates for 56 cents. Revenue of $9.06 billion beat estimates for $8.87 billion. While the earnings were good, there was a problem. Future orders were 7% compared to estimates for 8.3%. Orders rose only 1% and analysts were expecting 5% because of the post Olympics ordering. That is the third consecutive quarter the company missed on future orders. Nike said it would no longer report futures orders with earnings. I guess if the number is bad then do not tell anybody. Adidas is said to be surging in the athleisure sector and Under Armour is also seeing rising market share.

Nike also said its profit margins fell -125 basis points compared to a 30-50 point rise in the prior quarter. Inventory levels also surged and they took a hit on their markdowns in an effort to exit the golf equipment business. Shares fell sharply to a 3-month low in afterhours.


Sonic Corp (SONC) reported preliminary earnings of 43 to 45 cents compared to analyst estimates for 47 cents. The restaurant chain expects revenue to decline -2%. They will not report actual earnings until Oct 24th and the warning caused a $2 drop in afterhours.


Tempur Sealy International (TPX) warned after the close that full year sales would decline -1% to -3%. In 2015, the company reported revenue of $880 million and analysts are expecting $911 million in 2016. A 3% decline would be in the vicinity of $853 million. The company also reduced EBITDA estimates from $525-$550 million to $500-$525 million. Shares fell -20% from $75 to $55.


After the debate Clinton was the assumed victor because of her calm, fact filled answers. Analysts had picked several stocks that would rise with a Clinton presidency and they were all up on Tuesday.

Deutsche Bank said buy FSLR, C, NFLX, UNH and FB.
Zacks said buy FSLR, LMT and PFPT.
Estimize said buy FSLR, UNH, FB, NFLX and CYBR.
InsiderMonkey said buy FSLR, CREE, TSLA, UNH and HUM.

Notice anything similar in those recommendations? First Solar was in every one. That stock is off to the races with a 5% gain today.


If you watched the debate, you probably have a clear idea who won. I thought Clinton won because she succeeded in getting in Trump's head and her responses were fact filled and presented rationally. I am not expressing any favoritism, just a rational view of the physical debate.

However, I must have been watching the wrong debate. The DailyMail.com, a UK website, collected all the available snap polls and published them on one page. Link Here

The polls show Trump won by a landslide. I was in shock. There are some obvious errors in the sampling since the Drudge Report and Breitbart are conservative leaning sites and therefore should have shown a preference to Trump. However, there are a lot of polls and even the ones with a liberal democratic bias like ABC had a respectable showing for Trump even though he did not win their poll. The CNN poll was very slanted. Conservatives call it the Clinton News Network because of their bias.

Which debate were you watching on Monday night?


The initial ratings are in at 81.4 million viewers but that will continue to rise because it does not capture all the cable channels or the streaming broadcasts. The S&P futures were down -5 points at 10 minutes before the debate started and then reversed back to positive territory 15 min after the debate started and Clinton was already starting to wear down Trump. The market clearly wants a Clinton victory and would prefer the republicans maintain control of the House and Senate so that nothing changes and we have four more years of the current administration.

Markets

The majority of the market gains were at the open and then again at 10:30 when the economic reports were released. The S&P hit a high of 2,160 at 12:00 and was perfectly flat the rest of the day to close at 2,159.86. The morning gains were all short covering in big cap tech stocks. IBM was the biggest gainer on the Dow.

The S&P ended the day right in the middle of the congestion range from the last two months. It closed above support at 2,150 but below resistance at 2,175. The S&P futures are down -5 as I type this so tomorrow could start off negative.


Despite having only one Dow component in negative territory the Dow failed to return to resistance at 18,250. The +133 point gain failed to erase the -166 point decline from Monday. The Dow is in a dangerous place. If it cannot rebound over that initial resistance in the next couple days, the probability of a retest of support at 18,000 will increase. The overall pattern is now negative and that suggests a retest would fail. I am not predicting that but if the historical trend prevails this could be a rocky week.



The Nasdaq 100 ($NDX) is the 100 largest cap stocks in the Nasdaq Composite. The top five stocks make up 40% of the weighting in the index with the other 95 stocks having 60% of the weighting. When AMZN, FB, GOOG, AAPL, MSFT are positive the index will be positive.

The Nasdaq rebounded 1% to 4,866 and only 25 points below a new high. If the NDX was able to break out to another new high, it could energize the rest of the market. Support is 4,800 and the old high from last Thursday is 4,891.



This was a big cap tech rally. The small caps barely moved. The Nasdaq 100 gained +1.02% and the small cap S&P-600 gained +0.16% and the mid cap S&P-400 gained +0.11%. That may have been portfolio managers throwing money at the big caps so the market does not run away from them but there were very few buyers in the small/mid caps. Until the portfolio managers begin moving back into small caps the market rally will lack conviction.



I would continue to caution not to be overly long until the market picks a direction. There is always another trade waiting as long as you have capital to invest when the volatility ends.

Make a shopping list of stocks you would like to buy at a lower level and you may get your chance.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Technology Bypassed

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes bleeding edge technology companies can turn into trailing edge companies if their technology cannot keep up. That is happening to Mobileye as multiple companies have passed them buy to grab the lead in autonomous driving.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

MBLY - Mobileye - Company Profile

Mobileye N.V., together with its subsidiaries, develops computer vision and machine learning, data analysis, and localization and mapping for advanced driver assistance systems and autonomous driving technologies primarily in Israel. It operates through two segments, Original Equipment Manufacturing and After Market. The company offers Roadbook, a localized drivable paths and visual landmarks using its proprietary REM technology through crowd sourcing; and proprietary software algorithms and EyeQ chips that perform detailed interpretations of the visual field to anticipate possible collisions with other vehicles, pedestrians, cyclists, animals, debris, and other obstacles. Its products also detect roadway markings, such as lanes and road boundaries, as well as barriers and related items; and identify and read traffic signs, directional signs, and traffic lights. In addition, the company provides enhanced cruise control, pre-lighting of brake lights, and Bluetooth connectivity, as well as related smartphone application. It serves original equipment manufacturers, tier 1 system integrators, fleets and fleet management systems providers, insurance companies, leasing companies, and others through distributors and resellers. Mobileye N.V. was founded in 1999. Company description from FinViz.com.

Mobileye was kicked to the curb by Tesla because their camera technology was not precise enough and was subject to errors from things like lightning flash, rain storms, fog and oncoming headlights. Analysts claim the location accuracy needs to be within 1.5 centimeters or about 0.6 inches. While I do not understand the need to be precise to within half an inch I would expect that to be on near objects with the size miss widening if the objects are farther away. For instance a rifle bullet that misses the target by half an inch at 10 feet would be 15 inches off target at 100 yards. When your car is traveling at 60 mph any miss of that size could be an immediate challenge as in a car coming towards you in two-way traffic.

Tesla also said they were hard to work with because the company demanded all the sensor data received from their cameras could only be used by Mobileye. That would be like Intel claiming all the data on your PC belonged to them because the PC had an Intel processor.

Multiple car manufacturers including Tesla, Ford and Volvo have now moved away from Mobileye technology. The company replacing them is Nvidia with their Drive PX2 technology. Uber is now using an off the shelf camera that costs only $1 and image processing is done in the onboard computer.

Trip Chowdhry of Global Equities Research said the stock is worth $10 today but remains hyper inflated because it was an early leader in the mobile technology. He expects the stock to collapse within 6-8 months as more investors realize the company is being left behind.

Earnings Nov 3rd.

Shares have been falling from their high of $50 as the heated words between Tesla and Mobileye increase. When Mobileye learned it was being replaced they tried to stop Tesla from developing their own system and immediately halted any support for previously installed systems.

Buy Nov $40 put, currently $2.15, initial stop loss $44.50.



In Play Updates and Reviews

Once More Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

The debate results seemed to indicate a Clinton victory and shorts raced to cover short positions. There was a heavy short component to Monday's decline ahead of the debate. If Trump had won the debate convincingly, the market could have continued lower.

Many of the stocks with big gains today were prior winners so it looked like portfolio managers were starting to add positions for their fiscal year end on Oct 31st. Other stocks rising were those thought to benefit from a Clinton win.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.




Current Position Changes


IDCC - Interdigital

The long call position was entered with a trade at $78.65.


WDC - Western Digital

The long call position was opened with a trade at $59.79.



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


CLVS - Clovis Oncology - Company Profile

Comments:

No specific news. Only a minor 62 cent gain but excellent relative strength.

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. We were stopped out of this position on a big gap down open on Monday. We reentered the position at the open this morning.

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.

Position 9/27/16 with an IDCC trade at $78.65

Long Nov $80 call @ $2.90, see portfolio graphic for stop loss.


LITE - Lumentum Holdings - Company Profile

Comments:

No specific news. New historic high.

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:

Huge $2 spike on news Nvidia is preparing to release two new video cards at a lower price to take direct aim at stealing market shares from AMD. The GTX 1050 Ti will have 4gb GDDR5 memory and retail for $149. The GTX 1050 will have 2gb of memory and sell for $119.

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.


WDC - Western Digitial - Company Profile

Comments:

Research company Cleveland Research said channel checks for WDC showed continued strong demand for the most common hard drives and a potential ramp in demand for the new 10TB Helium drive. There was also strong execution and pricing for NAND chips. Cleveland projected earnings of $6.60 in fiscal 2018 and a mid $70s stock price. Shares closed at $58 after a $1.85 gain.

The Helium 10TB drive is filled with helium instead of air. Helium is one-seventh the density of air and that allows the read/write heads to fly smoother and closer to the actual magnetic recording surface, contain more recording platters, consume less power and operate at a lower temperature. More than one million Helium drives have already been sold with a mean time between failure of 2.5 million hours. Quality is expensive with a $750 price tag.

Original Trade Description: September 26th.

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs). The company also offers HDDs embedded into WD, HGST, and G-Technology branded external storage appliances with capacities ranging from 500 GB to 24 TB, as well as using various interfaces, such as USB 2.0, USB 3.0, FireWire, Thunderbolt, and Ethernet network connections. In addition, it provides consumer electronics solutions, including DVRs, gaming consoles, security surveillance, systems, set top boxes, camcorders, multi-function printers, and entertainment and automobile navigation systems. Company description from FinViz.com.

Western Digital recently acquired flash memory company SanDisk and they are stronger together. The company recently raised guidance for the second time as the integration of the two companies is turning out to be a winning duo.

WDC raised revenue guidance for the current quarter to $4.45-$4.55 billion up from $4.4-$4.5 billion. Analysts were expecting $3.41 billion. Gross margin guidance rose from 32% to 33%. Q3 earnings guidance rose from 85-90 cents to $1.00-$1.05. Analysts were expecting 68 cents. The company said the product mix was improving with the addition of the SanDisk lines. They also said PC sales were improving, as did Intel, and that means more disk drives sold.

Earnings Oct 27th.

Shares spiked to $54 on the stronger guidance and then languished for a week before starting to move higher to start a new trend.

Position 9/27/16:

Long Nov $60 call @ $2.14, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

KR - Kroger Co - Company Profile

Comments:

No specific news. New 52-week low. Analyst earnings estimates continue to decline.

Original Trade Description: September 24th.

The Kroger Co., operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 30, 2016, the company operated 2,778 retail food stores, including 1,387 fuel centers; 784 convenience stores; and 323 fine jewelry stores and an online retail store, as well as 78 franchised convenience stores. The Kroger Co. was founded in 1883. Company description from FinViz.com.

I wish I was writing a bullish play recommendation on Kroger but the chart is going in the opposite direction. They have so much going for them it is hard to understand the decline in the stock price. Hardly a week goes by that some broker does not reiterate a bullish rating on initiate a new one. Still the stock continues to fall.

I believe most are not aware of the new competition in the sector. The European discount grocer Lidl (Lee-dle) has established its U.S. headquarters in Arlington VA. They are planning store openings in Virginia, Maryland, NC and SC, Georgia, Delaware, New Jersey and Pennsylvania. Those states are dominated by Kroger's various brands.

Lidl acquired the Harris Teeter Supermarket chain in NC in 2014 to get their foot in the door. The resulting performance of those stores convinced Lidl to go all out in an expansion phase.

Another German chain, Aldi, already has 1,400 discount grocery stores in the U.S. and plans to expand to 2,000 stores by 2018. That is a monster addition to the sector that is already scratching to make pennies on every item.

For Q2, Kroger posted earnings of 47 cents that beat estimates for 45 cents. That was a 6.8% increase over the comparison quarter. However, "due to continued deflation" the company lowered full year earnings guidance from $2.19-$2.28 to $2.10-$2.20 per share. Revenue of $26.565 billion rose 4% but missed estimates for $26.783 billion. Same store sales rose 1.7%. They guided for 0.5% to 1.5% for the rest of 2016, which was lower than Q2.

Earnings Dec 9th.

With Kroger warning about lower earnings I think we could see shares decline back to the $25 range. The stock made a monster move in 2014 and then traded sideways for 2015-2016. That sideways trend has now failed and there is a lot of blank space on this chart.

Position 9/26/16:

Long Jan $30 put @ $1.50, no initial stop loss.


RGR - Sturm Ruger & Company - Company Profile

Comments:

No specific news. Gun stocks seeing investor attention after daily shootings suggest more gun control talk ahead. Shares up slightly on Clinton's mention in Monday's debate.

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 fell -2.2% after a -3.3% decline on Monday. New 3-year low.

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 stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

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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