Option Investor
Newsletter

Daily Newsletter, Thursday, 9/29/2016

Table of Contents

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

Market Wrap

Beware OPEC And Their Gifts

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

OPEC inked a deal but what do we really get? High production levels, oversupply and no change to fundamentals. The deal caps production but at the highest levels in over 10 years and well above production levels earlier this year when production caps were first discussed. So, we have a deal that does even less to alleviate oversupply than the first attempt and leaves the market supported by hot air and promises. Based on today's price action it looks like the market is beginning to realize that. The surge in equities and oil sparked by the OPEC announcement is already stalling.


International markets were also buoyed by the OPEC news. Asian indices gained in the range of 0.5% to 1.25% but gains were capped by reports of violence in India. The news, Indian Army regulars clashed with rebels in the long disputed Kashmir region. European indices were likewise affected, first up on OPEC driven euphoria then down as the reality of high OPEC oil production set back in to cap gains.

Market Statistics

Futures trading was a bit mixed and little choppy this morning. The US indices were indicated to open around the flat line for most of the morning with some fluctuations throughout. The market opened with small losses and hovered just below the break even level for most of the morning. By 11AM bearish sentiment took over and drove the indices down to intraday lows near -0.25%. These lows held for an hour and a half or so until a decisive move by the bears pushed them down to new lows just over -1%. Intraday low was hit just before 2PM at which time a snap-back rally erased about half of the day's losses. The bounce did not last, the indices retreat back toward the low of the day in late afternoon where they languished until the close of the session.

Economic Calendar

The Economy

There were two reports today, other than the weekly jobless claims, and the message hasn't changed; economic growth is tepid and spotty with ongoing signs of health in the labor market. Initial jobless claims gained 3,000 on top of a downward revision to last week of -1,000 to hit 254,000. This is the 82nd week of claims below 300,000. This weeks figure is just above the long term low and consistent with improvement in the labor markets. The four week moving average of claims also fell, shedding -2,250, to hit 256,000. On a not adjusted basis claims fell -3.7% versus an expected drop of -4.5% and is just above the long term 43 year low. Year over year, not adjusted claims are down -7.9%.


Continuing claims fell -46,000 to hit 2.062 million and a new low not seen since July of 2,000. The previous week was also revised lower. The four week moving average of continuing claims fell -23,750 to 2.11 million, it's lowest level since 2,000.

The total number of claims fell by -30,737 to hit a new 1 year low or 1.874 million. This low is not unexpected and is in-line with seasonal and long term trends. On a year over year basis total claims are down -5.5% and are consistent with ongoing labor market health. Based on the seasonal trend we can expect to see total claims drift lower for another 3 to 4 weeks, my final target is still below the 1.80 million mark. Altogether the labor data looks pretty good. Next week is the next round of monthly labor macro-data, based on the claims figures I think we can expect to see job growth remain steady at least, low levels of lay-offs, an increase in wages and high levels of job openings.


The 3rd estimated for 2nd quarter GDP was revised higher by 0.3% to 1.4%. This is above analysts estimates and helps improve the full year outlook. First quarter data held steady at 0.8%. The Atlanta Federal Reserve's GDP Now tool estimates 3rd quarter GDP at 2.8%, a number supported by labor data at least. Kansas City Federal Reserve President Esther George said today in an interview that she believes the time to "remove... accommodation" is now. The CME's FedWatch Tool shows only a 10% of rate hike at the November meeting and a 50% chance in December.

Pending Home Sales fell by -2.4% and raises some fear the housing recovery could stall out. This is the 3rd month in 4 for decline and the second lowest level of sales this year. On a year over year basis pending sales are down by -0.2%. Lawrence Yun, economist at the NAR, says that low inventory is the culprit and that if there is not an increase, either in existing or new home construction, the housing recovery could stall. He notes that new construction has not kept pace with labor market recovery adding to inventory deficits. On the positive side, new construction could be spurred by these conditions, next report on construction spending is next week.

The Dollar Index

The Dollar Index made some gains today but they were capped by resistance. The index remains range bound, trending over the past few days in a near straight line just below resistance at the mid-point of the range. Over the past few weeks and months the index has been winding up on global central bank policy and is now at a possible peak, ready to break in one direction or the other. This move could be sparked tomorrow with Personal Income/Spending and PCE data, maybe next week with labor data. In either event the move will likely leave the index range bound, but moving toward upper resistance near $96.60 or lower support near $94.50. Looking further out, I expect to see more sidewinding market wind-up going into November and the next FOMC meeting.


The Oil Index

Oil prices have surged on knee-jerk reaction to the OPEC deal but that surge already appears to have lost some of its oompf. WTI gained just shy of 2% today in choppy trading and met resistance at the $48 level, just like it did earlier this month. Near term oil prices are supported but they remain range bound longer term and at/near the top of the range. Longer term outlook is bearish, fundamentals are still supply side heavy so I expect to see prices come back under pressure.

The Oil Index gained about 0.85% in a move that extended yesterday's long white candle but failed to even reach the upper range boundary. The index remains range bound with a chance of testing the upper limit, near 1,180, in the near term. The indicators are consistent with rising prices within a range and do not show signs of strength at this time. I think the risk at this time is that the bottom could fall out of oil prices as the OPEC deal fades from importance, and bring the entire Oil Index down with it.


The Gold Index

Gold prices held steady above $1,320 and critical support levels. Trading was a little choppy here as well as the OPEC deal, economic data and FedSpeak rippled through the market. Prices are likely to remain range bound between $1,310 and $1,350ish in the near term, until the next FOMC meeting, unless economic data or another central bank makes some change to policy.

The gold miners were able to hold steady in today's action as well and continue to show support at current levels. The miners ETF GDX posted a net loss near to -1% but created a white bodied candle above support levels. Support appears to be rising from $25 to $27 and is supported by the indicators. MACD momentum is bullish although weak while stochastic has begun to tick higher again, a set up that could easily lead to a strong trend following signal. The caveat is that while there is support, there is also some resistance to higher prices that has resulted in wind-up similar to that found in gold and the dollar. A break out of this formation, if driven by a fundamental change in gold/dollar value, could lead to a significant movement in the ETF. Upside target is near $32.00, downside target is near $22.50.


In The News, Story Stocks and Earnings

Pespico reported earnings before the bell. The global snack and drink powerhouse, competitor to Coke and proud product of North Carolina reported revenue and earnings above consensus estimates and raised full year guidance to slightly above consensus. The results are driven by strong global demand and the company's ability to “manage what is in our control”. Shares of the stock were lifted by the news and gapped up at the open to trade just below the current all time high. Shares sold off during the day but were able to close with a gain of near 0.35%.


Conagra delivered nice results this morning driven by long term efforts to streamline operations. The company reported a 10% increase in GAAP earnings, +49% on an adjusted basis, that beat analyst expectations. Revenue was down about -5% but given the fact it is largely due to divestiture, foreign exchange and a voluntary “improvement” in the revenue base still a strong number. Margins also improved, 200 basis points, and helped drive shares of the stock up by more than 7.5%. The stock is now trading near a one month high and looks like it is headed up to retest resistance at the recently set all time high near $48.35.


Deutsche Bank was one of the biggest draggers on the market today, hitting fresh all time lows as the crisis deepens. The latest concern is that hedge funds which normally do business with the bank are pulling out. There are growing concerns the banks ties to the global banking community make it's fall a systemic risk with Lehman-like consequences. The news caused the stock to drop more than -6% from yesterday's close to set a new low.


The Indices

Volatility persists. The indices made another move greater than 1%, this time to the downside, but within near term trading ranges. Today's leader was the Dow Jones Transportation Index which managed to shed only -0.25%. The transports did not make a strong move today; the candle is a spinning top doji within the near term trading range, indicative of indecision and lack of market direction. The indicators are consistent with a move up, within the trading range, so upper resistance, near 8,100, may be tested. Support is a little below today's range, near the short term moving average, at 7,900.


The S&P 500 made the next smallest loss, about -0.93%, but created a med/large black candle. The candle is not significantly strong by itself but it's size does lend weight to the bearish argument. Two things to note, the candle is confirming resistance below the all time high and it is falling beneath the short term moving average. The indicators are bullish, consistent with a test of resistance, but also consistent with range bound trading so a break to the upside does not look likely. Support is at 2,120, the bottom of the 3 month range, and also does not appear like it will be broken any time soon.


The NASDAQ Composite is the next big loser, shedding -0.93% and equal to the SPX. The tech heavy index created a medium sized black candle sitting on the short term moving average and could easily move lower. The indicators are mixed, they show upward bias but are very weak and inconsistent with what we would typically be seeing if the index was about to make a break higher. The index is sitting on support, 5,250, a break of which would be bearish and could take it down to 5,100 in the near term.


The Dow Jones Industrial Average made the largest decline today, a little over -1%, and looks set to keep trending sideways into the near term. The index created a medium sized black bodied candle confirming resistance at the short term moving average near 18,250 but not an overly strong one. The indicators are pointing higher, contrary to today's move, but consistent with range bound trading in the near to short term. Support is near 18,000 and if broken will lead to additional support along the rising up trend line just below the 18,000 level.


Market shake up continues. The indices remain trapped within near term ranges with little indication of which way they will go once they break out. The good news is that the longer it takes for a break out to occur the closer we get to what is expected to be a return to earnings growth. If, in between then and now, nothing happens to alter the forward earnings outlook we could very well see the next major bull rally begin at or near today's index prices. The risks, as I've mentioned before, that not coincidentally occur about the time the indices will hit their respective long term up trend line include the next FOMC meeting, the peak of 3rd quarter earnings season and the presidential election. I remain cautious but growing more and more optimistic that once we get past these hurdles the path higher will be much easier.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Political Position

by Jim Brown

Click here to email Jim Brown

Editors Note:

Political candidates can and do influence the market and individual stocks. Sometimes they do it by accident with a casual remark and sometimes a full out position lifts or kills entire sectors. Think about the "We are going to put the coal industry out of business" remarks that crushed the coal sector. Clinton's position on guns is lifting the gun stocks on fears she might actually get elected and put her plans in motion.



NEW DIRECTIONAL CALL PLAYS

RGR - Sturm Ruger - Company Profile

We were stopped out of Ruger on a put position last week because shares appear to have bottomed on the escalation of rhetoric in the political campaign. Clinton is a rabid anti-gun politician and has even talked about gun confiscation like Australia did several years ago. She claims she is not anti-gun but no politician ever runs on that kind of platform. It is only after they get into office does their true feelings come out. Since Clinton has been in political over 30 years it is not hard to see what she has done in the past and read between the lines in this election year. Gun owners are not stupid. They realize a Clinton presidency and the Supreme Court appointments could dramatically change gun laws over the next four years. Every poll that shows Clinton gaining ground will send more buyers to gun stores and gun shows looking to add a couple of guns to their collection while they still can.

We are at the end of September and the FBI background checks will be released over the next few days. If they have risen as expected it will lift Ruger out of the 6-week decline.

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. August is typically a slow month for gun sales. The four best months of the year are September through December.

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 bottomed on September 20th at $54.41 and have risen to test $58 on Thursday in a bad market. Shares did decline at the close but only lost 13 cents. That is very good relative strength.

I am using the $60 strike instead of the $57.50 because it is cheaper and we will have less at risk if the FBI background checks are weak.

Buy Nov $60 call, currently $2.20, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

European Contagion

by Jim Brown

Click here to email Jim Brown

Editors Note:

News of depositors pulling money out of Deutsche Bank overpowered the OPEC news and caused a retest of support. The bank made a new historic low at $11.19 as worries increased about a Lehman type event. The bank continues to claim there is no solvency issues but so did Lehman until suddenly they did. With corporations, corresponding banks, hedge funds and brokers withdrawing their funds the outlook is becoming increasingly dire.

This combined with the fraud at Wells Fargo and the testimony and questioning almost all day caused a significant decline in U.S. banks because nobody knows how much exposure banks have to the European mess.

I am really happy with the portfolio performance today. Clovis was the only long position to decline materially and that was due to an implosion in the biotech sector, not anything specific to Clovis. All the put positions, with the exception of the VXX, declined nicely.



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


FSLR - First Solar

The long call position was entered with a trade at $40.00.



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BULLISH Play Updates


CLVS - Clovis Oncology - Company Profile

Comments:

No specific news. Shares down -5% with the biotech sector.

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


FSLR - First Solar - Company Profile

Comments:

No specific news. No decline in a bad market. Excellent relative strength.

Original Trade Description: September 28th.

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.

Position 9/29/30 with a FSLR trade at $40.00

Long Nov $42.50 call @ $1.95, see portfolio graphic for stop loss.


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.

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.

Update 9/28/16: 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.

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. Only a minor decline in a bad market.

Original Trade Description: September 12th.

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

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

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

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

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

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

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


NVDA - Nvidia Corp - Company Profile

Comments:

No specific news but plenty of chatter about their new products including the self-driving car project with Baidu. Shares up in a bad market.

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.

Update 9/28/16: 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.

Position 9/19/16:

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


WDC - Western Digitial - Company Profile

Comments:

Shares posted a gain in a bad market. Toshiba raised guidance and that gave support to WDC.

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 two-year low.

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. Somebody bought 5,000 October $40 puts for $1.10 on Wednesday. That is a half a million dollars in premium betting shares will decline $3 over the next three weeks.

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.


SIG - Signet Jewelers - Company Profile

Comments:

No specific news. New 3-year low. CLSA initiated coverage with an outperform and $87 price target. Shares fell -$1.74.

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. There is no news on the VXX since it is not a company.

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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