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Newsletter

Daily Newsletter, Saturday, 10/1/2016

Table of Contents

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

Market Wrap

The Stage is Set

by Jim Brown

Click here to email Jim Brown

The market appears to be setting up for an October rally but the timing is still unclear.

Weekly Statistics

Friday Statistics

The markets shrugged off negative news on Friday and celebrated a potential settlement deal between the Justice Department and Deutsche Bank. A news report just before the bell turned the S&P futures from seriously negative at -13 to a gap higher for the markets at the open.

With a pattern of higher lows, the markets may be getting ready to retest the highs but first we have to get through the first two weeks of October, which are famous for seeing many second half lows.

There were only two economic reports on Friday. The Personal Income and Spending for August showed incomes rose +0.2% and in line with consensus estimates. This compares to a +0.4% rise in July. Consumer spending was flat compared to +0.2% estimates and +0.4% in July. Auto sales were weak as were non-durable goods. The PCE Price Index rose only +0.1% compared to estimates for zero and the core index rose +0.2%. The headline inflation over the trailing 12 months rose to 1.0% with core inflation at +1.7% and inching closer to the Fed's 2.0% goal.

The final revision of Consumer Sentiment for September rose from 89.8 to 91.2 and the surge in the last third of the month suggests we could have a strong number in October in the 92 to 93 range. The expectations component rose 4 points to 82.7 but the current conditions component fell nearly -3 points to 104.2. Since gasoline prices are unusually low, the decline in the current conditions component is likely related to the political battle now in progress. Sentiment typically weakens late in the presidential cycle because the candidates are telling consumers how bad conditions are and what they will do to fix them.


The Fed heads are going to be out in force again next week with 9 speeches. With analysts already resigned to a rate hike in December, this will be another chance for the Fed to solidify those expectations.

This is payroll week with the ADP Employment on Wednesday with expectations for +170,000 new jobs. The Nonfarm Payrolls on Friday are expected to show a gain of +168,000 jobs. Neither number is exciting and both are right in the Goldilocks zone of not too hot and not too cold. Actual numbers in those ranges should have no impact on the future Fed decision.

The ISM Manufacturing Index on Monday could be a bright spot. The index is expected to rebound out of contraction territory at 49.4 to minimally expansive at 50.2. If the ISM were to surprise to the upside that would be market positive.


The vice presidential debate on Tuesday is not expected to generate any fireworks and should be market neutral. The population votes for the president not necessarily the vice president so the viewership will be considerably lower.

The S&P futures were down -13 points at 3:AM Friday morning. Deutsche Bank (DB) was setting new historical lows under $10 in the European market and all the commentary was negative. Just before the open, a rumor broke that DB was near a settlement with the Dept of Justice for $5.4 billion after a headline number of $14 billion was floated last week. Immediately shares began to rebound and the S&P futures exploded higher causing the market to gap higher on short covering.

The news report from AFP may not even be credible but it prevented a very ugly Friday in the U.S. markets. Reportedly, according to German law if a rumor appears in the market and the numbers are close to reality then the company has to issue a press release confirming the actual number. However, if the numbers are wildly wrong, the company does not have to do anything. DB did not issue a press release so the AFP article may be significantly in error. The report said a deal may not be reached for several days.

The big concern in the U.S. is that DB could turn into a Lehman moment for Europe. Numerous analysts have debunked that theory. The circumstances are very different. DB has deposits of 566 billion euros and 223 billion euros in liquidity. Their debt is high at 135 billion euros but they are not in danger of an imminent collapse. Secondly, despite claims to the contrary, Germany is not going to let its biggest bank fail. They would step in and orchestrate some kind of solution. DB continues to say it does not need to raise capital in a secondary offering so an immediate stock sale appears to be off the table.

Shares of DB rallied +14% in the U.S. and that does not take into account the sharp decline overnight in the European markets. This was a major short squeeze in DB shares.


There was very little stock news since most companies are moving into their quiet periods before the Q3 earnings cycle begins.

McCormick (MKC) reported earnings of $1.03 that beat estimates for 95 cents and posted a 21% rise thanks to acquisitions. Revenue of $1.09 billion was in line with street estimates. Revenue rose 6% on a constant currency basis. The company guided for full year earnings of $3.75-$3.79 per share, up from previous guidance of $3.68-$3.75. That is an 8% increase over the $3.48 in 2015. Analysts were expecting $3.75.


After the bell on Thursday Costco (COST) reported earnings of $1.77 that beat estimates for $1.73. Revenue of $36.56 billion was in line with estimates. The company said profits rose because they were paying lower fees to Visa than previously paid to American Express. Also, shoppers spent more on appliances, electronics and hardware. The company said grocery margins were under pressure from the constant deflation in food prices. There is a price war between the big chain stores and the smaller chains as each battle for market share by cutting prices. This led to a -1.0% decline in same store sales. If you exclude the impact of fuel and currency fluctuations, same store sales rose +2.0%. Shares spiked +3.4% on Friday to $152.51 after trading to nearly $155 at the open.


Alcoa (AA) said the board of directors approved the company's planned split in to two companies. One company will remain Alcoa and be the traditional aluminum business and the other, called Arconic (ARNC), will operate the high performance jet and auto parts business. The split will be effective November 1st.

In addition to the split into two companies, Alcoa is also planning on doing a 1:3 reverse stock split to raise the stock price before splitting the company. There is a shareholder meeting on Wednesday to approve the reverse split. With the shares currently at $10.14 that would make the stock price just over $30 when the company split occurs. I do not know if the company split will be even with each company having a $15 stock price or whether there will be a ratio where one might have a $20 price and the $10. Arconic will be the new parent company and will retain 85% of the company's $9 billion in debt. The new Alcoa will be spun off and existing shareholders will have 80.1% of the shares. Arconic will retain 19.9% after the spilt but plans to sell that stake eventually.


Paul Singer's activist fund Elliott Associates doubled their stake in Mentor Graphics (MENT) from 4% to 8.1% saying the company was significantly undervalued. The fund said it had "initiated a dialog with the management and board of directors regarding strategic opportunities." Shares spiked 7% on the news.


Salesforce.com (CRM) called for help in fighting Microsoft's acquisition of Linkedin (LNKD). Salesforce urged the EU to take a close look at Microsoft's acquisition plans. Salesforce plans to warn the EU that the acquisition threatens the future of innovation and competition. "By gaining ownership of Linkedin's unique dataset of more than 450 million professionals in more than 200 countries, Microsoft will be able to deny competitors access to that data and in doing so obtain an unfair advantage."

Salesforce also said insights gained from that professional data could give Microsoft a vast advantage over rivals. The EU is concerned Microsoft could apply artificial intelligence to the information to analyze business trends and company intentions that could aid sales of its other products. The deal has already been approved in the U.S. but it has not yet been presented to the EU for approval. An aggressive objection by Salesforce could add months to the approval process and possibly put some conditions on the deal approval.


Printer manufacturer Lexmark (LEX) spiked 14% after a consortium of buyers led by Apex Technology and PAG Asia Capital moved a step closer to acquiring the company. The Committee on Foreign Investment in the United States (CFIUS) approved the transaction. The consortium agreed to buy LXK for $40.50 per share. The transaction is expected to close in 2016.


Crude prices rose slightly on Friday but remain under resistance at $48.50. The OPEC agreement to "consider" a production cut at the regularly scheduled November 30th OPEC meeting is nothing but headline spam designed to lift prices in the normally weak Sept/Oct period.

In theory, the OPEC countries want to cut production back from the current 33.24 million bpd to 32.5 mbpd in order to "accelerate the ongoing drawdown of the stock overhang and bring rebalancing forward." The OPEC ministers said a committee of representatives from member countries would calculate recommended production levels for OPEC countries and consult with non-OPEC countries, namely Russia, and suggest production levels that would help stabilize inventories.

OK, so the OPEC member countries will show up at the November meeting and found out that their peers have suggested a 10% production cut is recommended and that will cut your cash flow by billions of dollars. Are countries just going to say "ok" and head for the bar? In my opinion, it is not going to happen. Meanwhile, for the next 60 days the price of oil will be artificially high thanks to the recurring headlines.

They have already suggested that Iraq, Iran, Nigeria and Libya can continue growing production until they reach "reasonable" levels. Just returning to pre civil war levels would add another two million barrels of production above and beyond the stated 32.5 mbpd goal. This is a production cut in name only and should not have any impact on reducing supplies.


Hurricane Matthew has been downgraded from a category 5 to a category 4 storm as it approaches Cuba and the first one of that magnitude in the Atlantic since 2007. Currently, sustained winds are 150 mph. It is expected to cross over Cuba on Monday evening and hit the Bahamas on Wednesday. The current path projections suggest it will only brush Florida and will not be a problem for the oil platforms in the Gulf of Mexico. However, it may be a huge problem for the East Coast.


If oil prices are going back to $50 on these headlines, the rebound in active rigs will accelerate. Last week 11 rigs were reactivated but there are still more than 1,400 sitting in storage lots rusting. There are 522 active rigs today and there were 1,931 at the peak in 2014. Some analysts claim there are as many as 4,500 drilled but uncompleted wells in the USA. Those can be brought online very quickly. If OPEC succeeds in lifting oil prices over $50 the U.S. production declines can be reversed in less than a year. Currently U.S. production is -1.113 million bpd below the 2014 peak. We could easily resurrect that in 12-18 months and even add to it. If OPEC suddenly got serious about cutting production and hiking prices, it would generate a drilling revival in the U.S. that would put 500,000 people back to work and erase their production cuts in a very short period of time.


 


 

Markets

The S&P futures declined -13 points to 2,135 at 3:AM on Friday. The Deutsche Bank rumor resurrected those futures and they rebounded to near 2,170 before the close. That is almost a 35-point move in a 12-hour period. Traders were heavily short going into Thursday's close in anticipation of more bad news for Deutsche Bank. The 2,140 level was support and it was punctured only briefly and we escaped a major market selloff.


Last week was the sixth week of the six most volatile weeks of the year. However, the volatility was relatively light and the indexes never pulled very far away from their prior highs. It was a tame six weeks.

Just because that historical period is behind us it does not mean we are out of the volatility woods. The markets normally set the lows for the second half in the first two weeks of October. The keyword there is normally. This has not been a normal year in any way.

While I believe the markets will be higher at the end of October, we do have a very hostile election process underway. That will continue to supply uncertainty for at least the next 8 weeks. Yes, that is two weeks past the election because the markets will adjust for whichever candidate eventually wins.

I would not be surprised to see some post quarter end portfolio restructuring next week. With quarter end window dressing over portfolio managers are now free to dump any stocks they held on Friday and add new positions before their fiscal year ends on October 31st.

If I had my wish, I would love to see a repeat of last October. The S&P added nearly 245 points (+13%) from the September 29th low at 1,871 to the Nov 3rd high at 2,116. That November 3rd high lasted until June 8th without being broken. Do I expect that to happen again? Definitely not. It could but we could also continue to move sideways until after the election.

On the positive side, Q4 earnings estimates are rising, currently +5.6% compared to a -2.1% decline for Q3. The third quarter will be the sixth consecutive quarterly decline in earnings. However, if analysts are to be believed, 2017 will be a banner year with earnings growth of 13% and revenue growth of 6.1%. If portfolio managers are going to buy stocks, they should do it going into an earnings recovery.

The S&P is currently moving higher at a pace resembling a drunken sailor with two steps forward and one step back. The alternating gains and losses is making it very hard to attack overhead resistance with any conviction. Investors are gun shy after weeks with no direction. Support remains 2,150 and 2,120 and resistance 2,175 and 2,185. The current intraday high is 2,193, which has been touched more than once.


The Dow has changed character completely over the last three weeks. We went from a very narrow range trade to a very broad range from 18,000 to 18,400. The last six days have all seen triple digit moves. In fact, since September 8th there has only been two days that did not see triple digit moves and one of those days was close at 98 points.

High intraday volatility is a symptom of market tops and bottoms. Since we are only 1.5% from the recent high, it would be hard to characterize this as a bottom. However, the majority of the moves have been headline related rather than market related. Deutsche Bank, the Fed, the Bank of Japan, etc have all produced triple digit moves.

The dip to 18,000 three weeks ago was a major move. The intraday ranges were huge. Those ranges have now shrunk and the intraday lows are moving progressively higher. I prefer to look at this period of volatility as a bottoming process for the early September decline.

We are approaching the earnings cycle again and we should see some pre-earnings anticipation begin to build in the Dow stocks. I went through the charts on the Dow 30 and only 7 stocks are showing any bullish trends. If the others are going to start rising ahead of earnings they will begin reversing higher soon.

With only 30 stocks in the index, disasters like Nike and Apple can and do impact the index movement. Hopefully there are not any earnings warnings in the near future from other Dow stocks.

With the pattern of higher lows, the Dow could be preparing to retest the overhead resistance at 18,600 but we still have to get through the next two weeks, which are typically rocky.



The Nasdaq Composite Index gained 43 points on Friday to close at 5,312 and only 27 point below the 5,339 new high from the prior week. Semiconductors and biotechs helped power the move but both sectors have been volatile for the last couple weeks so future gains are always in doubt.

The big cap techs helped lead the charge higher but late in the week the small cap techs also provided an assist. The Nasdaq is the most bullish index and a breakout to a new high at this point on the calendar would be bullish for the rest of the market.

Support formed at 5,250 and has not been tested in three days. The higher low pattern is bullish, especially this close to a new high.



The Russell 2000 small caps have been lagging the Nasdaq. Support at 1,240 is holding but resistance at 1,255 has been rock solid the last three days with the intraday highs at 1,255.58 to 1,255.94. There were no spike through and fall back days. That resistance level was rock solid. That could change in a heartbeat with a gap open market on Monday but any decline from here only reinforces it. The S&P-600 small cap index has an identical problem at 758. The buying in the small caps is without conviction. When resistance appears, the buyers fade away.



Monday is the start of Rosh Hashanah and the first day of the year 5777 on the Jewish calendar. For a long time, there has been a saying in the market, "Sell Rosh Hashanah, buy Yom Kippur." This year Yom Kippur is on October 12th. The idea is that many traders and investors are busy with the religious observance and family events. Positions are closed and volume fades, creating a low volume market with no buyers. According to the analysts at Bespoke Investments, that strategy has worked in 10 of the last 16 years. The average decline has been about 1.6%.

Rather than be worried about whether the market is going to go down over the next two weeks I would rather be planning what I am going to buy if it does take another dip. Since 1990, the fourth quarter has averaged a 4.54% gain and the stronger stocks have done much better. We are at that point on the calendar where buying the dip is even more important than ever.

We exited the sixth week of the six most volatile weeks of the year with a gain and while the gains and losses alternated, the volatility was not that bad.

We are approaching the point where the market "should" rally into Q4. Pick a few stocks on your shopping list and decide where you would like to buy them on a dip. If one appears, it may be brief.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts


The Nasdaq is setting new highs and the S&P is only 1% below a record high but the number of bullish investors continues to decline. The alternating days of gains and losses is confusing. The lack of direction is keeping investors neutral or even bearish on the market.



Multiple companies warned of a new type of cyber attack launched last week. Millions of DVRs, security cameras and other internet connected devices were hacked and turned into drones to launch the largest denial of service attack ever. The attackers used more than one million Chinese made security cameras, DVRs and other devices to generate webpage requests and data requests that knocked their targets offline.

The head of security at Level 3 Communications said this might be just the tip of the iceberg. Everything from smart thermostats to internet connected TVs are designed to be controlled over the Internet. Very few of them ever have their software updated. Once installed and running they are forgotten unlike a PC that can warn you of threats and update the operating system automatically. PCs have firewalls and virus protection programs. DVRs, cameras, TVs, refrigerators and smart thermostats do not have protection. Once hackers learn how to hack into one device model, there are millions of identical models already in service that can immediately be used.

Akamai Technologies (AKAM) said even Wi-Fi routers are a growing source of concern because their software is never updated. Dahua, a manufacturer of smart electronics has 71 technology partners that put their names on Dahua products. It is the same OS whether it is called Canon, Sony, Magnavox or any other name. Once the hack is perfected on one device, the others are immediately vulnerable.

Akamai said malicious traffic on its network on September 20th reached 700 Gigabits a second. That is the equivalent of streaming 140,000 high definition movies at once. That was twice the size of the previous big U.S. attack. Arbor Networks is a security firm that handled some Olympic websites said home set top boxes and home routers were pounding those sites with more than 540 Gigabits a second of webpage requests.

This is going to force another round of security upgrades and enforcement. New devices will have to have an automatic firewall system and be continually refreshed by the manufacturer. This adds another level of complexity that manufacturers are not prepared to implement. Source WSJ


Nobody should ever complain they cannot make money. The United States is a breeding ground of entrepreneurs. You do not have to start the next Facebook or Google. You just have to think of something that fills a need. It does not have to be fancy. It just has to fill a need.

Everybody has probably heard of Amazon's KickStarter program. Aspiring entrepreneurs launch a KickStarter page to explain their new product. If people like the idea, they will contribute money so you can make your product and bring it to market.

A reader sent me this link. The device is called a Fidget Cube. Their goal was to raise $15,000. As of Saturday, more than 130,000 people had contributed $5,391,245. Apparently, the device is a huge hit. If people will invest more than $5 million on this toy, there is no limit to how much anybody can raise if they get off the couch, engage their brain and make something happen.

Fidget Cube Link



Ford unveiled the Ford GT in 2015 at the Detroit Auto Show. The car has a 3.5 liter twin-turbo V6 that produces 650 horsepower and a reported top speed of 205 mph. Last week three of the GT cars were clocked at 101 mph in a 50 mph zone on I-70 in Glenwood Canyon in Colorado. The officer that clocked them on radar knew he could not catch them so he radioed ahead and multiple officers pulled them over 35 miles later. The cars were outfitted with a significant amount of high altitude testing equipment and the drivers explained they were testing the cars for Ford. The officers were not impressed and wrote each driver a ticket. You cannot outrun a radio.



I mentioned this a couple weeks ago and received several emails from readers in disbelief. At the Fed's Jackson Hole conference a speaker mentioned buying stocks in addition to treasuries as a way to support the market in times of stress. Yes, we are rapidly becoming Japan.

Last week Janet Yellen mentioned the Fed could support the market if it ran out of treasuries to purchase by adding stocks to their asset purchase list. The idea has taken root at the Fed and that should scare everyone.


Quick, pass me the Kool Aid!

Larry Edelson, Money and Markets editor said, "The Dow Jones Industrial will lead the way higher and catapult to 31,000 over the next two years."

Ron Baron, CEO of Baron Capital agreed, "The Dow is going to 30,000."

Jeffrey Hirsch, editor of the Stock Trader's Almanac said, "The Dow Jones Industrial Average will surge to 38,820 in a 'super boom' beginning in 2017."

Paul Mampilly's hedge fund was named by Barrons as "One of the World's Best." Today he says, "Stocks are on the cusp of an historic surge. They could easily hit 50,000. It will be a bull market run that will dwarf the tech boom of the '90s. I’ve never been more certain of anything in my career."


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Warren Buffett


 


Index Wrap

Ready to Rally?

by Jim Brown

Click here to email Jim Brown
The most volatile six-week period of the year is over but the next two weeks could still be rocky.

While the next two weeks could still be volatile, it is the last two weeks of October we should be expecting. The last two weeks of October are typically bullish as portfolio managers complete their restructuring ahead of the fiscal year end for equity funds on October 31st.

Market lows for the second half of the year typically occur in the first two weeks of October. Managers buy the dip and the Q4 rally begins.

I do not expect any material market decline over the next two weeks. We could have some volatility but I would expect Dow 18,000, S&P 2,120 and Nasdaq 5,200 to provide solid support. If we break through those levels something unexpected will have to cause it.

With earnings expected to rise in Q4 for the first time in six quarters, fund managers should be buying stocks using every penny at their disposal.

After a rocky three weeks with declines to critical support the indexes all have positive charts but with some better than others. The indicators are all turning positive and volume is increasing. Volume on Thursday and Friday exceeded 7.5 billion shares on both days. Advancers were 5:2 over decliners on Friday.

The S&P is testing resistance at 2,175 with the new high resistance less than 1% higher at 2,193. The daily candles are shrinking and there is a solid pattern of higher lows.


The Dow chart is less bullish than the S&P because the pattern over the last three weeks does not have the same upside bias. There is solid resistance at 18,350 and again at 18,400. There is still a pattern of higher lows but it is weaker than the S&P. The narrow 30 stock index is constantly impacted by major moves in individual stocks. The week before it was Apple and last week was Nike. Every week some stock is misbehaving and causing trouble. With earnings starting in two weeks, we should see some positive trends develop in the individual stocks and provide a positive bias to the Dow.


The indicators for the Nasdaq Composite Index are actually fading slightly after the index made a new high on September 22nd. The trend is still positive and I fully expect a new high but the indicators are urging caution.


The Nasdaq 100 big cap index has a slightly more bullish bias with Friday's close only 16 points from another new high. The trend may not be as clean we would like but I am sure we will all celebrate when the index surges over 4,900. The historic high close from the prior week was 4,891 and resistance is 4,925. Comparing the last two months of activity with the July gains is disappointing but that was an extraordinary rally. The last two months of consolidation have been uneventful with the exception of the September 9th crash. The rebound was solid and we cannot complain.


The small cap S&P-600 index has run into some serious resistance at 758 but that is only 7 points from the historic high. There is nothing bearish about this chart. Support at 730 was rock solid and the index has rebounded back to the highs. Some would call this a double top but the pattern does not fit. For me there was not enough time between the two tops. This was just profit taking from a new high and then a repeat when that high was tested again. As long we the 730 support remain firm the small caps are in good shape.


The Dow Transports are about to break out to the high for 2016. This is very bullish for the broader market, especially since they are doing it despite rising oil prices. The Transports have been consolidating for more than a year after the railroads fell out of favor when oil prices crashed and airlines added too much capacity. A break out this week would be strongly market bullish.


The biotech index is the spoiler for the week. The sector failed at resistance and declined back into the congestion range. This is headline related with politicians and Congress taking almost daily shots at the sector for the last month. However, we need the sector to heal and break out of that congestion if the Nasdaq and Russell indexes are going to move higher. There are a lot of biotech stocks and they all move in relation to the sector rather than individually.


Lastly, crude prices rallied and supported the market on the OPEC headlines. I believe those headlines will fade along with the price of oil. The $48.50 level is solid resistance and without come kind of commitment out of Saudi Arabia and Iran the headline spam can only keep prices elevated for so long. This is historically the weakest period of the year for demand and prices and so far they have been able to artificially lift the prices. How long it will last is unknown. In general, the market will move in the direction of oil prices. Other factors like the dollar, biotechs or techs in general can overcome that relationship on a temporary basis. Lately the dollar has been docile and has not exerted much influence on oil prices. That could change the closer we get to the December Fed meeting.



Friday was quarter end and it was accompanied by a lot of window dressing. Next week begins a new quarter and the obligatory window undressing where those positions are reduced so money can be used elsewhere. When funds near the end of the quarter with cash on hand, they tend to throw that cash into whatever big cap position they already have in order to keep their quarterly statements from showing a lot of cash on hand. Once the new quarter begins, they can recover that cash as needed and put it to work elsewhere. That means big cap stocks can tend to be weak in the first few days of the quarter.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Retail Pain

by Jim Brown

Click here to email Jim Brown

Editors Note:

Retailers have been struggling in 2016 with declining sales and weak guidance. Heading into Q4, nothing has changed. Unless your name is Amazon, every quarter just continues to weaken.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

LULU - Lululemon Athletica - Company Profile

Lululemon athletica inc., designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. It operates through two segments, Company-Operated Stores and Direct to Consumer. The company offers pants, shorts, tops, and jackets for healthy lifestyle and athletic activities, such as yoga and running; other sweaty pursuits; and athletic wear for female youth. It also provides fitness-related accessories, including bags, socks, underwear, yoga mats, and water bottles. The company sells its products through a chain of company-operated stores; outlets and warehouse sales; a network of wholesale channel, such as yoga studios, health clubs, and fitness centers; license and supply arrangements; and showrooms, as well as directly to consumer through lululemon.com and ivivva.com e-commerce sites. As of January 31, 2016, it operated 363 company-operated stores. Company description from FinViz.com.

Unfortunately for LULU the athleisure sector is seeing even more problems than the retail clothing sector in general. For Q2, the company reported earnings of 38 cents that matched estimates and revenue of $514.5 million that missed estimates slightly.

The bad news came from customer traffic and guidance. Same store sales fell to 5% compared to 5.9% estimates. LULU guided for Q3 earnings of 42-44 cents and analysts were expecting 44 cents. In the comparison quarter sales rose 17% thanks to new products And expanding menswear line. Unfortunately, consumers are no longer excited by the athleisure sector.

Mall shoppers are dwindling and LULU's high priced designer yoga apparel is too expensive for current consumer budgets. Abercrombie & Fitch, Gap, Macy's and Nordstrom's are all reporting declines in sales and closing stores. Everyone is fighting for that last consumer dollar and LULU is struggling to sell $100 yoga pants.

On Friday, Goldman Sachs cut its price target on LULU to $46 and reiterated a sell rating. The analyst believes the comps will decline to only 3% growth and full year earnings will drop to $2.28-$2.36 and analysts are expecting $2.51. He sees inventory turnover decelerating, weakening pricing power, slower traffic and slower online sales. The analyst expects LULU's core customer to branch out into less expensive competitive brands. Despite all the negatives LULU is still trading at a PE of 31 and far too high for the current outlook.

Earnings Dec 1st.

Shares crashed after the Q2 earnings to $66 where they held for three weeks. Multiple downgrades including the Goldman call last week have broken through that $66 support. Support from May is $60 and that is in danger of collapsing with $45 the next material target after a speed bump at $55.

Buy Dec $60 put, currently $3.35, initial stop loss $66.65
Optional:
Sell short Dec $52.50 put, currently $1.03, initial stop loss $66.65
Net debit $2.32



In Play Updates and Reviews

Monster Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

S&P futures were down -12 at 3:AM and they rebounded to positive territory just before the open as DB rumors made headlines. It looked like we were going to close out September with a serious drop but conditions can change quickly with the right headline. The markets opened positive and surged back to resistance once again. This was the sixth consecutive day of a triple digit Dow move.

The morning rebound caused some shorts to cover and a couple of our put plays saw gains instead of losses but that is likely to be temporary. Nothing changed in the fundamentals.

We escaped the sixth week of the worst six week period with only minor losses despite the volatility. Second half market lows are normally made in the first two weeks of October so we may not be out of the woods yet but I think we are close.



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


RGR - Sturm Ruger

The long call position was entered with a trade at $57.19.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates


CLVS - Clovis Oncology - Company Profile

Comments:

No specific news. Rebound erased the Thursday loss.

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. Minor close over resistance after Williams Capital initiated coverage with a buy rating and $50 price target.

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 at a new intraday high but closed just under new high resistance.

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. Testing new high resistance.

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 and another new high. Bloomberg had a blurb earlier in the week saying Nvidia was hiring Apple engineers to work on new graphics for the Apple product line. Apple has always relied on imbedded Intel graphics chips but with the new demand of video editing and VR, that is no longer an option. They are going to have to upgrade to a more powerful video interface. That would be a big win for Nvidia and they would not be hiring Apple engineers unless there was some announcement coming.

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.


RGR - Sturm Ruger - Company Profile

Comments:

No specific news but shares punched through resistance and should continue the gains.

Original Trade Description: September 27th.

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.

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.

Position 9/30/16:

Long Nov $60 call @ $1.89, see portfolio graphic for stop loss.


WDC - Western Digitial - Company Profile

Comments:

No specific news. Minor gain but still holding at a 9-month high.

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. Barclays said Kroger was facing its toughest pricing environment in 56 years. Heightened competition from Walmart and others has caused deflation in food prices.

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. Minor rebound on market short covering.

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. Minor short covering from Thursday's 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. 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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