Option Investor
Newsletter

Daily Newsletter, Thursday, 10/6/2016

Table of Contents

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

Market Wrap

Fed Outlook, Clear As Mud

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Economic data and Federal Reserve officials continue to give mixed signals and leave Fed transparency as murky as ever. Stanley Fischer, vice-chairman of the board of governors and voting member of the FOMC, says low rates are a sign of possible economic trouble. Jeffrey Lacker, president of the Richmond Fed and not on the FOMC this year, says that rates should already be higher and that strong labor data bolsters this case. Today's data was good, when added to ISM and other data released this week point to economic recovery and higher interest rates.

Asian markets rose in the Thursday session, supported by rising oil prices. Gains were led by the Hang Seng index, most indices in the region closed well of intraday highs. European indices were not so buoyant, trading first up but later falling into negative territory on outlook concern. In both cases moves were small, less than 1%.

Market Statistics

Futures trading indicated a flat to slightly negative open for most of the morning. Economic data was good, but led to a slight increase in rate hike expectation that depressed trading further. The indices opened the day with small losses and then quickly moved lower to set an early low just before 10AM, and then another slightly lower low just after 11AM. This second low turned out to be intraday bottom and led to a quick reversal in price action. Between 11:15AM and 11:55AM the market rallied, recovering most if not all of its earlier losses, setting an intraday high, on the SPX, just above break even. This level held for the next several hours as the indices moved sideways within a narrow range into the close of the day.

Economic Calendar

The Economy

The Challenger Gray & Christmas report on planned lay-offs was the first bit of data released today. The headline number is 44,324, an increase of 38% over the previous month. At first glance this is not great but within the data are quite a few details that shed a more positive light on the labor situation. First, the number of lay-offs planned in September is about average for the past 2 years so not alarming in and of itself. Second, the number is 25% lower than this same time last year. Third, YTD lay-offs are down -12% from last year at this time. Fourth, 3rd quarter lay-offs are down -8% from the 2nd quarter and down -41% over the 3rd quarter of last year.

So, while lay-offs increased this month they are trending lower in the near and long terms. This month's gains were led by the education sector and primarily ITT Tech which is responsible for about 18% of the total. Back this out and lay-offs would have only gained about 12%. Computers and retail also contributed significantly to September job cuts. Cuts in the computer sector are a continuation of shake-up and consolidation within the sector that has been going on for nearly 2 years. Cuts in the retail sector are seasonal in nature and off-set by robust job gains announced in the August NFP report.


Initial claims for unemployment fell -5,000 from last week's not-revised data to hit 249,000. This is the 83rd week of claims below 300,000 and the 2nd week in 3 for claims to set a new 6 month low. The four week moving average of claims fell -2,500 to hit 253,500, the lowest level the average has seen since 1973. On a not adjusted basis claims rose by 2.2% week to week, versus an expected 4.5%, but are down -10.75% over this same time last year. Based on these numbers the labor market continues to show signs of active recovery.


Continuing claims fell by -6,000 to hit 2.058 million. This is the lowest level for this metric since July, 2000. The four week moving average of claims fell -21,000 to hit 2.094 million, also a low dating back to 2,000. Both of these figures continue to trend lower, consistent with ongoing labor market recovery. They, together with initial claims, my not indicate creation of new jobs but they certainly suggest that less people are losing work, more people who do lose a job find new work quicker and some of the massive amount of open jobs, as reported by JOLTs, are getting filled.

The total number of Americans filing for unemployment benefits fell by -79,054, consistent with seasonal and long term trends, to fall below my target of 1.80 million. What is not consistent is the rate of decline over the past few weeks, much greater than what we've seen at this time of year in the past and suggestive of some significant change in the overall employment situation. Based on seasonal trends we can expect to see total claims continue to decline for another 2-3 weeks before bottoming out. As I said before, these figures may not indicate job creation but they do indicate a decline in overall unemployment and ongoing health in the labor market.


Tomorrow is the all important NFP and unemployment data. ADP suggests that NFP may be on the weaker side, in the range of 160K to 180K, but stable relative to long term labor trends. Based on the claims data I expect to see a drop in unemployment and maybe even an uptick in the participation rate.

The Dollar Index

The Dollar Index surged higher today by 0.55%, breaking out of the narrowing trading range I have been watching. The move is being powered by this week's round of positive data and to some extend rising FOMC expectations although there are some caveats. First, the FOMC still isn't likely to raise rates soon and they might not this year at all. Second, the ECB meets before the FOMC and now that an ECB taper is on the table there is a chance the euro could be strengthened and suck the wind out of the dollar bull's sails. The indicators are bullish and pointing higher but remain consistent with range bound trading. If the index is able to break free of the trading range and move higher next target is near $97.50 and still within the 4 month FOMC-rate-hike-outlook driven trading range.


The Oil Index

Oil prices gained more than 1.5% today as bullish sentiment driven by the OPEC deal and yesterday's draw of crude supports higher prices. Today's move took WTI above $50 for the first time since July and looks like it could continue higher. The risk is that oil prices are now within a former congestion band and resistance zone set during June with bearish fundamentals in place. The OPEC deal is still without substance, production remains highs, storage is at/near record levels and there is little reason to think it won't stay that way.

The Oil Index gained a little more than a half percent to trade right up to the top of the 6 month trading range. The indicators are bullish and pointing higher so further testing of resistance or break above resistance is possible. A break above 1,175/1,180 would be bullish and could take the index up to 1,250 in the near to short term. However, until then, the index remains range bound and at the mercy of the oil markets. If oil is able to sustain its gains the Oil Index will likely do the same.


The Gold Index

Gold prices have broken out their trading range, fallen below critical support and heading lower. Today spot gold lost another -1.25% to trade just above $1,250. This move is driven by dollar strengthening economic data and FOMC rate hike outlook. $1,250 may provide support while we await data, the ECB and the FOMC meeting but if broken, could lead spot prices down to $1,200 or lower. Tomorrow's NFP could be the catalyst that does it, if it shows enough strength.

The gold miners are suffering from falling gold prices. The miners ETF GDX fell a little more than -3.5% today to hit a potential support level. Today's action created a small doji type candle just above the $22.50 level, an important level of support during the April/May period and the mid-point of the 2016 rally. I'm using this opportunity to set up some fresh Fibonacci Retracements, using the January 2016 low and the August 2016 high. So far, the indicators are consistent with support at the 50% level but this move is not played out. Expect further testing of the $22/$22.50 level which, if broken, could lead to a deeper retracement. Downside targets, on a break of the 50% line, are $19.75 and $16.50.


In The News, Story Stocks and Earnings

Twitter was trending on social media today as possible suitors pull away. The news is that Disney, Apple and Google among other big money names are no longer in the running. With interest waning the question arises, who will buy it and for how much? Shares of the stock fell more than -15% in the premarket, opened with a big loss and moved deeper into the red during the day. Twitter closed with a loss near -20% and could easily go lower until a viable bidder comes into the scene. #istilldontknowhowitworks, #whatsthepoint


Walmart reports earnings in about 6 weeks but provided a mid quarter update today. The company outlined a shift in strategy and gave guidance for the next three years. Moving forward the worlds largest retailer will slow the number of store openings and shift focus toward comp store sales and ecommerce. Guidance for the current year was maintained but fiscal 2017 and 2018 both came in well below analysts estimates. Shares of the stock fell more than -3.2% on the news, breaking below $70 for the first time since May.


The Indices

The indices began the day ducking for cover. At the low of the day the SPX was down nearly a half percent but by end of day that move had been erased although the trading was mixed. Three of the four major indices closed with losses but all closed more flat than not, within a range of 0.2% of break even. The biggest loser was the NASDAQ Composite which lost -0.16%. The tech heavy index created a very small spinning top doji candle just above the short term moving average and just below the recently set all time high. This is the 8th day the index has drift sideways at this level, after setting the all time high, and the indicators are deteriorating. MACD was weak to begin with and divergent from the high, stochastic the same. Now, both are confirming a peak with bearish crossovers but remain consistent with range bound trading in the longer term. Support is along the short term moving average, a break of that could move down to 5,080.


The next biggest move was made by the Dow Jones Industrial Average. The blue chips declined -0.09%, creating a very small doji-like spinning top just below the short term moving average. The index is trending sideways and nothing has changed about that. The indicators remain consistent with range bound trading as well. If the index is able to move higher next resistance is about 250 points higher at 18,500, if it moves down to the bottom of the range support is about 250 lower near 18,000.


The smallest decline was posted by the Dow Jones Transportation Average. The transports fell only -0.04%, barely declining at all, creating a small spinning top doji candle. Price action is hovering right at the top of the range, near 8,128, although it does not look like it will break above it at this time. The indicators are both rolling over to form bullish peaks, consistent with the top of a trading range. A break above this level would be bullish but would also face additional resistance at the 8,250 level. Support targets should prices pull back exist at at 8,000 and 7,750.


The S&P 500 posted the smallest move but the only gain in today's session, 0.04%. The broad market created a small spinning top doji style candle just above the short term moving average and very near the middle of the September/October trading range. The indicators are consistent with range bound trading and show a market that has reached a point of near calm. A move lower will find the bottom of the range, at 2,120 and near the previous all time high. A move higher will find the top of the range, near 2,185 and the current all time high.


A lot has happened in a couple of days. ISM and employment data have been good, ECB tapering has come onto the table, more FedSpeak to confuse the market and a sharp rise in oil prices. What hasn't happened is a change in the equities market. The indices continue to trend sideways and appear to have reached a point of calm ahead of the NFP report. This report is likely to shake the foundations of the market, at least for a few minutes, and move the indices within their ranges. Whether or not it will be strong enough to move the indices out of their ranges remains to be seen.

Don't forget, earnings season is here again, the next few weeks will be a roller coaster of reports, sentiment and has a high potential for knee-jerk market reactions so caution is due regardless your market stance. I remain cautious in the near term, eyeing early November and a cluster of events each with major market moving potential; the elections, the peak of earnings season and the next FOMC meeting. Longer term I'm bullish, earnings growth is at hand and economic data support it, just waiting for the market to give the signal to go all in.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Eggshells

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets appeared to be walking on eggshells this afternoon with traders afraid to make any moves. The Dow traded in a very narrow 25 point range from 11:45 until the close. The S&P traded in only a 3 point range. Something spooked traders and investors and nobody was making any trades. The volume died at noon and everything went silent.

The S&P futures are down -6.50 as I type this. That is twice the range the S&P traded in all afternoon. We are setting up for a major move on Friday only we do not know in which direction. I am recommending we stand aside and see what Friday brings before launching any new positions.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Really Strange Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

After a -117 point decline at the open, the Dow rebounded to positive territory and then traded in a very narrow 25 point range the rest of the day. Volume slowed to a crawl at 11:45 and the indexes went dormant while we wait for the Nonfarm Payrolls on Friday.

I was out of the office in the early afternoon and I would periodically check the markets on my phone and after several checks I actually rebooted my phone because it looked like the data had not changed in a couple hours. Unfortunately, there was no change.

I do not know why the markets are so sensitive to Friday's payroll report after the ADP report showed a lower than expected number. If the Nonfarm report is similar it could keep the Fed guessing about a December hike. If the number comes in hot, it could rekindle fears about a November hike but the chances are still minimal.

The S&P futures are down sharply overnight and it looks like we could see a major move in the markets on Friday but we do not know in which direction.



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


LCI - Lannet

The long call position was entered at $27.69.


NVDA - Nvidia

The long call position was stopped out at $67.25.


RGR - Sturm Ruger

The long call position was stopped out at $55.85.


KR - Kroger

The long put position was stopped out at $29.45.



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. Gave back some of Wednesday's gains.

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


COST - Costco - Company Profile

Comments:

At 9:PM Wednesday night Costco reported same store sales for September. U.S. sales were flat, Canada sales up +5% and international was flat. Overall sales were up +1.0%. Total sales rose 3% from $10.75 billion to $11.06 billion. Shares declined 50 cents.

Original Trade Description: October 4th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business. In addition, it provides gold star (individual) and business membership services. As of October 29, 2015, it operated 690 warehouses. Company description from FinViz.com.

Costco reported earnings last week of $1.77 compared to estimates for $1.73. Revenue of $36.56 billion barely missed estimates for $36.81 billion. Same store sales, excluding gasoline, rose 2% in the USA, +5% in Canada and +1% internationally. Overall sales rose +3%.

For the full year same store sales were up +4%. Membership fees rose from $785 million to $832 million. The company said some of its increased profitability came from the lower fees it was paying to Visa compared to the prior payments to American Express. There were initial problems in the conversion and some customers were angered leading to weaker sales in the prior two quarters. That is now over and customers are coming back.

The earnings were Friday and shares spiked to $154 on the news. Post earnings depression appeared along with a weak market over the last two days. I believe Costco will rebound into Black Friday because this is the strongest quarter. They typically sink into the September earnings and then rally into December.

The plan is to buy calls now and exit around Black Friday. The December calls are cheap and any rally should lift the stock back to $160-$165. I am not putting a stop loss on this position because of the potential for market volatility over the next two weeks.

Position 10/5/16:

Long Dec $155 call @ $2.76, no stop loss.


DISH - Dish networks - Company Profile

Comments:

No specific news. Minor decline. Still fighting resistance at $56.50. Once it breaks out it should run to $64.

Original Trade Description: October 3rd.

DISH Network Corporation provides pay-TV services in the United States. The company operates through two segments, DISH and Wireless. The company provides video services under the DISH brand. It also offers programming packages that include programming through national broadcast networks, local broadcast networks, and national and regional cable networks, as well as regional and specialty sports channels, premium movie channels, and Latino and international programming. In addition, the company provides access to movies and TV shows via TV or Internet-connected tablets, smartphones, and computers; and dishanywhere.com and mobile applications for smartphones and tablets to view authorized content, search program listings, and remotely control certain features. Further, it offers Sling TV services that require an Internet connection and are available on streaming-capable devices, including TVs, tablets, computers, game consoles, and smart phones primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Additionally, the company operates Sling International that offers over 200 channels in 18 languages; and Sling domestic package that consists over 20 channels and tiers of programming, including sports, kids, movies, world news, lifestyle and Spanish language, and premium content, such as HBO. Further, it offers Sling Latino service; and satellite broadband services, wireline voice, and broadband services under the dishNET brand. Additionally, the company has wireless spectrum licenses and related assets. As of December 31, 2015, it had 13.897 million Pay-TV subscribers. Company description from FinViz.com.

Dish is gaining a significant number of views in the millennial generation that either have never had a cable subscription or cannot stand paying the monthly cable bills for what they believe should be free TV. They are also developing a large audience of Latino viewers with their various Spanish language channels. They also offer 18 other languages and more than 200 channels.

In early September, they gained the rights to about 800 sporting events offered by the six PAC 12 networks. Millennial's love to watch sports, especially when it is free or nearly free.

The online Sling TV offering is gaining market share with its skinny bundles including channel packages like HBO and Starz.

Over the last month the consensus earnings estimates for the current quarter have risen from 63 cents to 68 cents. Full year estimates have risen from $2.92 to $3.05.

Earnings Nov 7th.

Since they signed the sports deal on September 12th the stock has been in rally mode. Shares are closing in on resistance from June at $56.50 and should easily break through. The next resistance is in the $65 range.

Position 10/4/16

Long Nov $57.50 call @ $2.43, see portfolio graphic for stop loss.


FSLR - First Solar - Company Profile

Comments:

No specific news. Minor move but held the gains over resistance.

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. New support has formed at $78 and shares posted a minor gain in a weak market.

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.


LCI - Lannet - Company Profile

Comments:

No specific news. Down with the -3.3% drop in the biotech sector.

Original Trade Description: October 5th.

Lannett Company, Inc. develops, manufactures, packages, markets, and distributes generic versions of brand pharmaceutical products in the United States. It offers solid oral, extended release, topical, nasal, and oral solution finished dosage forms of drugs that address a range of therapeutic areas, as well as ophthalmic, patch, foam, buccal, sublingual, soft gel, and injectable dosages. The company provides its products for various medical indications comprising glaucoma, muscle relaxant, migraine, anesthetic, congestive heart failure, gastrointestinal, cardiovascular, thyroid deficiency, central nervous system, urinary, dryness of the mouth, gout, hypertension, and gallstone. It also manufactures active pharmaceutical ingredients. Lannett Company, Inc. markets its products under the Diamox, Fioricet, Fiorinal, Lanoxin, MiraLAX, Imdur, Levoxyl/Synthroid, Metadate CD, Concerta, Procardia, Prilosec, Ditropan, Protonix, Salagen, Dyazide, and Actigall brands. Company description from FinViz.com

For Q2, LCI reported earnings of 73 cents that beat estimates for 60 cents. Revenue of $169 million beat estimates for $162 million. Lannet guided for full year revenue in the range of $690-$700 million. Analysts were expecting $666 million.

Revenue increased 70% thanks to new drugs in inventory. They refinanced $250 million in 12% notes to take advantage of the current low interest rates. The forecast an earnings growth rate in the mid teens percentage for the second half of the year.

Shares immediately spiked from $32 to $40 on the earnings news and then faded on post earnings depression. A rebound began on Sept 12th culminating with a spike to $33.50 on the 20th when they announced the FDA approval of two new drugs. That appeared to trigger a sell the news event and shares rolled over and fell to $26 over the next week. The next day after the drug announcement, they also said their Chief of Scientific Affairs resigned. That could have accelerated the decline.

Fast forward to September 29th and shares found support at $26 for three days and prices are now beginning to rise. There is no reason for LCI to be declining. It has fallen to value stock status and fund managers should be drooling over it for their October portfolio restructuring. If this is the bottom, we can enter a cheap position as they rally into earnings on Nov 3rd. Remember they blew away estimates in Q2.

Earnings Nov 3rd.

Position 10/6/16:

Long Nov $30 call @ $1.50, see portfolio graphic for stop loss.


LITE - Lumentum Holdings - Company Profile

Comments:

No specific news. Shares up sharply on the Ciena upgrade after the bell on Wednesday.

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.

Update 10/3/16: Jefferies raised earnings estimates to $2.61 for the 2018 fiscal year, which is 14% above consensus. Revenue estimates rose to $1.29 billion and 11% over consensus.

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. I mentioned yesterday Nvidia was looking toppy and I raised the stop loss just in case there was a sell cycle. The stock dropped to $66.26 at the open to stop us out of the position. This was the second consecutive winning trade on Nvidia and the instant we see any real profit taking we will jump back in. I believe Nvidia is the new Intel and there are higher highs in Nvidia's future.

Original Trade Description: September 17th.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors. Company description from FinViz.com.

Q2 earnings rose 800% to 40 cents and beat estimates for 37 cents. Revenue of $1.43 billion beat their own guidance of $1.35 billion they gave in Q1. Earnings in the year ago quarter were 5 cents and $1.15 billion. They hiked full year revenue guidance as well as the current quarter. They guided for Q3 revenue of $1.68 billion and analysts were only expecting $1.45 billion. During the first six months of 2016, they bought back $509 million in shares and paid $124 million in dividends. The company had $4.88 billion in cash at the end of Q2.

Earnings Nov 10th.

They recently released several new graphics cards that are twice as fast and 40% cheaper than the cards they are replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

Nvidia shares have been stair-stepping higher since January. That means they post solid gains for a month or so and then pause to consolidate with a minor retracement. They set a new high at $63.38 on August 12th, the day after their Q2 earnings beat. Shares have moved sideways for a month. Last week, when the extreme market volatility hit on the 9th, shares dropped from $63 to $57. Within 4 days, the stock was back at $63. I believe it it now poised to breakout now that the weak holders have been eliminated.

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.

Update 9/30/16: 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.

Update 10/3/16: Amazon announced a new P2 instance for the Amazon Elastic Compute Cloud (Amazon EC2). The VM machines are powered by 16 Nvidia Tesla K80 GPUs. They also include up to 64 vCPUs with up to 732 Gb of host memory. These instances offer up to 60 times the processing power of prior P2 instances.

Nvidia is the Intel of the future.

Position 9/19/16:

Closed 10/6/16: Long Nov $65 call @ $3.45, exit $5.44, +$1.99 gain


RGR - Sturm Ruger - Company Profile

Comments:

Wunderlich posted a note on Smith & Wesson saying "peak gun" sales have arrived and sales would be declining over the next year. Obviously, the analyst is not tuned into the political scene because a Clinton win would double the number of guns being bought ahead of her new gun control policies. The downgrade on SWHC hit Ruger as well and we were stopped out for a minor 51 cent loss.

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.

Update 10/3/16: FBI background checks rose from 1,853,815 in August to 1,992,219 in September. That was a 7.5% increase month to month. This compares to 1,795,102 in September 2015 or a +11% increase year over year.

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:

Closed 10/6/16: Long Nov $60 call @ $1.89, exit $1.38, -.51 cents.


WDC - Western Digitial - Company Profile

Comments:

No specific news. Minor decline in a weak market.

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:

Kroger shares rose sharply on rumors it may be considering an offer for Whole Foods Market (WFM). Kroger has gotten heavily into organic products and acquiring Whole Foods could be a good way to capture the higher dollar customer. The spike stopped us out of the position for a minor gain.

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.

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

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:

Closed 10/6/16: Long Jan $30 put @ $1.50, exit $1.85, +.35 gain.


MBLY - Mobileye - Company Profile

Comments:

No specific news. The -2% drop to close at $41.25 was a new 3-month low. Things could get interesting now.

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.


VXX - VIX Futures ETF - Company Profile

Comments:

Once again, the VXX dropped despite a weak market. The $33.20 close is a historic low.

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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