Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/28/2016

Table of Contents

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

Market Wrap

Holding Up Into End-of-Week/Month/Quarter

by Keene Little

Click here to email Keene Little
There's been an effort to hold the stock market up into the end of the week to close out the month and quarter on a positive note and it's looking like it could happen. The bulls just need to jump over a few resistance levels and new highs will be next.

Today's Market Stats

The stock market continues to hold up and looks as though it might even be able to make new highs into October if it doesn't reverse back down in the coming days. One has to wonder what is generating excitement about the upside when there's so little fundamentally that's supporting the market. And retail traders, which include the bulk of mutual fund managers, have not been participating in the rally this year.

Investors have pulled about $80B out of equity mutual funds and ETFs so far this year and only one month out of the past nine has been net positive. Through mid-September there's been more than a $5B drawdown and there's little wonder why we often hear this is the most-hated rally we've seen.

In addition to domestic outflows the foreigners are also not participating and have pulled out about $67B out of U.S. assets according to the Treasury Department's data on international capital flows. The combination of domestic and international non-participation of course prompts the question "who's doing all the buying?"

I've mentioned many times the support for the stock market is coming largely from corporate stock buybacks, which continues to be relatively strong and certainly stronger than any selling pressure. For the quarter ending this month corporations in total have spent every penny they've made and borrowed another 18% to buy back their stocks. Whether this makes sense, considering the high prices paid and the complete lack of investments, is a question stock holders should be asking. But as long as the buybacks continue and the sellers stay away and stock prices continue to climb (the music keeps playing) the stock holders are happy.

The risk of course is what happens when the music stops. If corporations, whose earnings have been in decline for 6 quarters in a row, cannot continue to spend their declining earnings or borrow more money to spend on buybacks then who will be the buyer? The answer is the government and like Japan, they could decide to support the market, I mean start QE4 to support the economy, and start buying ETFs and other mutual funds. The Fed is not big enough to do it by itself but if the government decides to take individuals' IRA funds and "invest" it for them, that's a lot of money. But any government action would likely be late and in the meantime, when the music stops we'll likely see a sudden collapse in stock prices.

So while I see an end game soon for the stock market I also recognize that there are some more rabbits that could be pulled out of the hat and if you're bearish you must recognize that the unsupported stock market (unsupported by fundamentals) could rally a lot longer than anyone thinks is possible. We could even get a blow-off rally to SPX 2300 before it's all done. But if you're a bull and enjoying this ride, keep an eye open and your ear on the track so you have advanced warning when the southbound train is headed your way.

Oil got a big boost today, thanks to an "agreement" from OPEC, and since the stock market has been reacting to the oil market lately it came as no surprise to see the stock market rally as well. Oil had spiked down in the early-morning hours and hit a low at 44.35 before rocketing back up to a new high above those since last Thursday. The stock market is following in form but has not yet followed oil to a new high above last Thursday's. Perhaps oil is telling us it's going to happen.


Dow Industrials, INDU, Weekly chart

The Dow's weekly chart shows the 3 little white candles since the low on September 12th, which was a test of its uptrend line from February-June. Other than a spike below the uptrend line on Monday it continues to hold the line, currently near 18250. The bullish pattern, for at least one more leg up, is a rising wedge pattern for the rally off the February low. Currently I'm showing a depiction to slightly above 19K, about another +5.5%. But the bounce off the September 12th low could be just a correction to the decline from August and a drop back below 17992 would indicate a top is already in place.


Dow Industrials, INDU, Daily chart

The rally off Tuesday morning's low has now made it back up to resistance at its broken uptrend line from August 2 - September 1, near 18340, and its May 2015 high at 18351. It came within a point of 18351 and then pulled back to 18339 so resistance is being recognized. Now the bulls need a gap over resistance while the bears need to see a bearish kiss goodbye following the back-test. If we do see more rally on Thursday, watch carefully to see if the downtrend line from August and its 50-dma, both near 18410, block any further upside progress. A drop below Tuesday morning's low at 18052 would be the first signal that the bounce correction finished and new lows are coming.

Key Levels for DOW:
- bullish above 18,351
- bearish below 18,052


S&P 500, SPX, Daily chart

SPX was able to close above its 50-dma today, near 2169, thanks to an end-of-day rally, but if it doesn't hold on Thursday we'd have a head-fake break that could lead to a stronger decline. If the rally continues we'll likely see the September 9th gap closed, at 2181.30, and the downtrend line from August tested, near 2182. Above 2183 would be a strong indication that new highs are coming and at a minimum we should then look for the 2250 area and the top of its rising wedge pattern for the rally from February.

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


S&P 500, SPX, 60-min chart

On the 60-min chart I show a price projection at 2174.30, which is where the bounce off Tuesday morning's low would achieve two equal legs up for a possible a-b-c correction before heading back down. A drop below this morning's low near 2151 would indicate another leg down but again, over 2183 would keep me bullish for another couple of weeks.


Nasdaq-100, NDX, Daily chart

Since early August NDX had struggled with resistance at its March 2000 highs at 4816 until more convincingly breaking above it on September 21st. It then popped above the trend line along the highs from July-November 2015, near 4868, for one day before dropping back down to resistance-turned-support at 4816 on Monday. That was used to launch Tuesday's rally (bullish kiss goodbye) but it stopped right at the trend line along the highs. Today it was able to close only marginally above the line but left a hanging man doji at resistance. So it's not a convincing bullish move yet but any further rally should get NDX up to the price projection at 4930, which is a projection for the 5th wave in the move up from June (where it would equal the 1st wave). It would turn more bullish above 4930.

Key Levels for NDX:
- bullish above 4931
- bearish below 4772


Russell-2000, RUT, Daily chart

A rising wedge pattern for the RUT supports the idea for another rally leg to complete the 5th wave. Based on a couple of different price projections for its move up from February there is upside potential to almost 1300 for the RUT and that could be reached by mid-October. I've been looking for a mid-October turn window, thinking it would mark a low, but now it's looking like it might mark a high. This also helps those who would like to see the market hold up as a way to help the incumbent party stay in power. But if the sellers return and the RUT drops below the September 21st low near 1228 it would be a confirmed break of the uptrend line form June-September, currently near 1235.

Key Levels for RUT:
- bullish above 1264
- bearish below 1228


20+ Year Treasury ETF, TLT, Daily chart

Based on an a-b-c pullback pattern from July into the September low for TLT, I was looking for the start of another rally leg and it's looking like it should continue. But first it will have to deal with its downtrend line from July, which it nearly tagged with today's high at 139.15 and where the downtrend line will be tomorrow. There's a good possibility for at least a pullback and then we'd get to see if it will be a corrective pullback or something more bearish. Until I see evidence that suggests otherwise, I'm looking for a higher rally for bonds (lower for yields).


Transportation Index, TRAN, Daily chart

The TRAN is acting bullishly by climbing again above its downtrend line from August-November 2015, like it did on September 7th. But this time, the rally above the downtrend line on September 22nd was followed by a pullback to the line and then a bounce off it, giving us a back-test and bullish kiss goodbye. Now all the bulls need to do is rally above the September 8th high near 8084 to confirm this is bullish and not just a bounce correction.


U.S. Dollar contract, DX, Daily chart

The US$ hasn't been acting very bullish but it also refuses to break down. It's coiling and holding its uptrend line from May, currently near 94.90, and as long as it holds above its uptrend line it will remain bullish. I show a price projection at 92.73, which is where a pullback from July would achieve two equal legs down so that's the downside objective if the dollar breaks down. But a break above its downtrend line from December 2015, currently near 96.70, would confirm the next rally leg to the 100 area.


Gold continuous contract, GC, Daily chart

Gold remains inside a descending triangle pattern since its July high. This is a bullish consolidation pattern and the next rally leg could reach as high as 1480. A rally above the top of the triangle, near 1345, would the first bullish sign and then above the August 2nd high near 1374 would confirm the next rally leg for gold has started. But the March 2014 high at 1393 and the downtrend line from September 2011 - October 2012, nearing 1400, would be levels to climb above. A breakdown below 1305 would leave a failed bullish pattern and that would likely be followed by a strong selloff.


Oil continuous contract, CL, Daily chart

As mentioned earlier, oil rallied off this morning's low and put in a solid day for oil bulls. The reason for the rally was attributed to an announcement by OPEC that it has reached a deal to limit oil production. It was announced that details would not be released until their official meeting in Vienna on November 30th. Uh huh, and at the same meeting we're going to hear an announcement that the tooth fairy is actually real. As one blogger put it, "I think the "agreement" constitutes the Saudis buying USO, then leaking fake info about a possible agreement, sell USO, buy SCO then leak information about how there won't be an output cap. Rinse repeat..." We've seen a repeated effort to boost the prices of oil with these "announcements" so it's hard to believe this one is any different. But the chart does support the idea for higher prices if it can get above 47.75.

Oil rallied 2.81 from this morning's low at 44.35 to 47.16, a +6% move, this afternoon into the 14:30 close of the RTH session. It continued to push a little higher to 47.47 but it was unable to break above its September 8th high at 47.75 (that could change if the overnight rally continues), which is the 3rd lower high since June 8th. The downtrend line from June 8th is currently near 47.16, which is where the rally stopped in the RTH session. The brief poke higher in the after-hours session made it above the downtrend line (twice) but was unable to hold above the line (as of 19:00 EDT).

I show an expectation for a continuation lower but if price gets above 47.75 it would be more bullish, especially if it gets back above the October 2015 high near 51 (and stays above that level since it could be a setup for a double top).


Economic reports

Thursday morning's economic reports include the 3rd estimate for GDP, which are not expected to change, the unemployment claims data and Pending Home Sales, which are expected to decline. We shouldn't see much of a market reaction unless something really surprises the market.


Conclusion

With the market's recovery off the mid-September low it's looking like we could see a press higher into Friday to complete the end of the week/month/quarter on a high note. I also see the potential for the rally to continue to new highs into mid-October, potentially meeting a turn window at that time. The flip side of that expectation is a strong decline into mid-October as the bounce efforts fail to hold. The declines have looked more impulsive than the rallies and that leaves a potentially very bearish pattern as long as the indexes do not rally above last Thursday's highs (only 8 points away for SPX, at 2080). If the bears are going to pounce before new highs they'll need to do it on Thursday, otherwise they might be forced back into their caves for a couple more weeks.

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

Keene H. Little, CMT

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


New Option Plays

Candidate Blessing

by Jim Brown

Click here to email Jim Brown

Editors Note:

Clinton's performance in the debate and her comments about the coming energy crisis had analysts recommending one particular stock. While Clinton may not win, she is currently ahead in the polls and she strongly supports solar energy. That suggests a Clinton presidency would maintain laws and tax credits to stimulate further solar production.



NEW DIRECTIONAL CALL PLAYS

FSLR - First Solar - Company Profile

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.

First Solar was the number one pick for a Clinton presidency. In the first debate, she advocated for installing "half a billion" solar panels to head off an impending energy crisis and reduce climate change.

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

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.

I could not recommend FSLR on Tuesday because it was up 5%. The morning dip on Wednesday deflated the options and gives us an entry point. However, there is strong resistance at $39.50. I would like to see it move over that level before we jump in. A move over that level could generate significant short covering because FSLR was in a downtrend before the political lift.

Earnings are Oct 27th so we will be out relatively quickly. That is a week before the election and if Clinton is ahead in the polls the stock should still be rising. This could be a volatile position because of the political sound bites.

With a FSLR trade at $40.00

Buy Nov $42.50 call, currently $1.65, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays


In Play Updates and Reviews

Small Cap Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

After almost no gains for small cap stocks on Tuesday, they were the market leaders today. I speculated yesterday that the big cap tech gains were from portfolio managers throwing large sums of money at the market to keep it from running away from them. Today it appeared they were trimming those large cap positions and putting the money back to work in the small cap stocks.

Managers can enter large big cap positions easily and exit just as easily. When the market spiked at the open on Tuesday, they probably pulled the trigger on stocks like Amazon and Facebook to make sure they had some skin in the game in case the market suddenly surged to new highs. When the morning sell off did not amount to anything today, they probably began withdrawing smaller increments from their big cap plays to put to work in the small caps. This could continue for several days if this is the right scenario.



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


MBLY - Mobileye

The long put position was entered with a trade at $41.41.


RGR - Sturm Ruger

The long put position was closed with a trade at $56.90.



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:

Minor decline after the company announced it will present data on its ovarian cancer drug Rucaparib at the Oct 7th ESMO 2016 Congress. The drug is also being evaluated for several other types of cancers. The presentation could be good or bad and investors may be worried they could report less than stellar results.

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. Shares traded up slightly intraday then closed flat. The Nasdaq gains were lackluster and many Nasdaq stocks failed to post gains.

In a study done by the EU Commission and IDCC they found the cost of rolling out 5G in all 28 EU member states could reach 56 bullion euros by 2020 and 141.8 billion annually by 2025. That is a huge amount of money that will be flowing into a hand full of companies including IDCC. The 5G standard is seen as 50 Mbps everywhere compared to the current 5-20 Mbps.

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:

Nvidia announced a new AI supercomputer chip called Xavier, which is designed for self-driving cars. The system-on-a-chip (SoC) integrates a new Graphics Processing Unit or GPU called Volta and a custom 8 core CPU along with a new computer vision accelerator. The processor will deliver 20 trillion operations per second while consuming only 20 watts of power. Nvidia already provides chips to Audi, BMW, Honda, Mercedes, Tesla and Volvo. On August 31st Nvidia and Baidu (BIDU) announced a partnership to make an autonomous car platform. Also today, the company announced a partnership with TomTom to develop artificial intelligence to create a cloud to car mapping system for self-driving cars.

Nvidia is the Intel of the future.

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:

Minor decline from a 10-month high on no news.

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.

Update 9/27/16: 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.

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. Report out today showed that food prices have declined for 9 consecutive months.

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.


MBLY - Mobileye - Company Profile

Comments:

No specific news. Shares were up in a dull market more than likely on all the self-driving car news from Nvidia. This rebound should pass.

Original Trade Description: September 27th.

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.

Position 9/28/16:

Long Nov $40 put @ $2.08, see portfolio graphic for 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 again after Clinton mentioned gun control in a rally. We were stopped out on the gain.

I am seriously considering going long RGR in the Thursday newsletter.

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

Closed 9/28/16: Long Jan $52.50 put @ $3.50, exit $2.30, -1.20 loss
Optional:
Closed 9/28/16: Short Jan $45 put @ $0.80, exit .55, +.25 gain
Net loss 95 cents.


SIG - Signet Jewelers - Company Profile

Comments:

No specific news. Minor gain after a 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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