Option Investor
Newsletter

Daily Newsletter, Monday, 10/17/2016

Table of Contents

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

Market Wrap

October's Weakness Continues

by Keene Little

Click here to email Keene Little
We're into what is typically a bullish time of the month, opex, but so far the bulls have been largely absent. Last Thursday's strong recovery was followed by Friday's weak rally attempt and today continued the weakness. Waiting to see if the opex bulls show up.

Today's Market Stats

Tom and I have switched Market Wraps this week and he'll be with you on Wednesday.

Today was a relatively quiet day with only a small loss to start the day. A quick morning low was followed by a sideways consolidation into midday but then the sellers continued to be a little stronger than the buyers. It looked to be more a lack of buyers than any kind of concerted effort to sell. This is a little surprising since opex is typically bullish. When it's not bullish it can get very bearish so the bulls will need to do something on Tuesday. Last week's lows must be defended by the bulls.

This morning's economic reports were mixed but a little disappointing. The Industrial Production, at +0.1%, was better than August's -0.5% but not as good as had been expected (+0.2%). The Empire Manufacturing index for October was also disappointing, coming in at -6.8, which was much worse than the expected 2.0 and a further decline from -2.0 for September. Capacity Utilization was roughly in line with expectations and no change from August.

The market barely made a ripple following the reports and as I'll show later, the market has been ignoring all kinds of economic and stock earnings reports. That might not change until we at least get through the elections and then December when it's expected the Fed might maybe possibly raise rates. Yellen's last statement was a little bit of back-peddling on that possibility and as long as the market believes the Fed will not have the room to raise rates, which means a weaker economy, it could stay elevated. It should be paying attention to earnings and the economic slowdown but we know the market is ignoring those signals and pinning its hopes on more accommodation and more government spending.

The stock market has been stuck in a rut, again, since the September lows and while we could at least see those lows tested again, there's no strong evidence yet that the month-long trading range is going to break. We could be stuck in this until at least the elections but at least we have some key levels to watch to help us know when it will be time to trade the move.


S&P 500, SPX, Weekly chart

SPX has struggled this week to hold its uptrend line from February-June, currently near 2140 (arithmetic price scale), as well as price-level support near 2135 (its May 2015 high). Losing support at both of these levels is not a good sign for the bulls, especially if it closes below those levels for the week (for what is typically a bullish week). If support is lost we will likely see the next support level tested quickly, which is the 50-week MA at 2167, about 60 points lower. Below that level there isn't much support before price-level S/R at 1992. But as long as last Thursday's low near 2114 holds there is still upside potential to the 2275-2300 area in the rising wedge pattern off the February low.


S&P 500, SPX, Daily chart

I had been watching a sideways triangle pattern for SPX (and the Dow) and the breakdown last Tuesday made it more bearish looking. The breakdown was followed by two attempts to get back above the bottom of the triangle, last Wednesday and again Friday. Each attempt was a back-test of support-turned-resistance and then a bearish kiss goodbye. Friday's kiss goodbye was followed by more selling today and frankly it's hard to see much that's bullish here. MACD rolled back over from the zero line and RSI is back below 50, both of which are bearish as well. It's looking like we could get at least another test of price-level support near 1220 and as long as that holds we could stay stuck inside a sideways trading range into the elections. It's possible we have a larger consolidation pattern with a descending triangle (declining highs, flat bottom), which would be a bullish continuation pattern and suggests a strong rally right after the election (predicting a Clinton win?) if this continues to consolidate into the elections. It would mean a continuation of the choppy whippy price action with a run back up to about 2160, back down to 2120 and then a rally. All the bulls need to do is not let SPX drop below 2114, which would attract bears as though it was honey from heaven.

Key Levels for SPX:
- bullish above 2170
- bearish below 2114


S&P 500, SPX, 60-min chart

The short-term pattern for the leg down from last Friday suggests one more small drop to complete the leg and then a bounce back up. This is what has me wondering if we'll see another test of 2120. But we have had so much choppy corrective price action and that has made it near impossible to come up with higher odds for one particular direction vs. another. For now SPX is stuck between price-level S/R levels at 2135 and 2120 and a break from one before the other could set the tone for the next week at least.


Dow Industrials, INDU, Daily chart

The technical indicators look just as bearish for the Dow as for SPX and the inability to hold above the bottom of its sideways triangle, which it broke below last Thursday and recovered on Friday, also looks bearish. But as with SPX, as long as it holds above the bottom of a possible descending triangle, at 17992, there remains bullish potential out of this pattern (following another up-down sequence). It would turn more immediately bullish above its September 22nd high at 18450 and more immediately bearish below 17992.

Key Levels for DOW:
- bullish above 18,450
- bearish below 17,992


Nasdaq-100, NDX, Daily chart

Following last Thursday's breakdown for NDX it bounced back above its broken 50-dma, near 4814 on Friday, but was stopped by its 20-dma near 4848. Today's decline took it back below its 50-dma, as well as back below price-level S/R near 4816 (its March 2000 high). The double failure looks bearish, as does the bearish divergence with the oscillators. I continue to see upside potential into the end of the month (or maybe more sideways chop to match the blue chips) but at the moment it's looking more bearish than bullish. Bulls would be in trouble if NDX drops below price-level support near 4740 (the December 2015 high). NFLX reported after the bell and zoom climbed up to about 121 from its close near 100, for a 21% pop in after-hours and well above its April high at 111.85. It pulled back only slightly and if it opens anywhere near 120 Tuesday morning it's going to give the tech sector a nice lift back up.

Key Levels for NDX:
- bullish above 4905
- bearish below 4740


S&P 500 Earnings vs. SPX, 2010 - September 2016, chart courtesy Casey Research

Speaking of earnings reports, which I don't follow much since reactions to them are too unpredictable, no matter what they are, I came across an interesting chart showing the decline in earnings since the end of 2014. While NFLX is apparently reporting great numbers, that hasn't been true for aggregate earnings for the S&P. The decline from the end of 2014 is shown with the blue line on the chart below. The stock market usually responds to future expectations of earnings but in this case it has essentially ignored it in favor of the Fed's help for the stock market. It shows just how distorted this market has become and that distortion is very likely to get corrected. Bulls believe earnings will turn back up in time before the stock market corrects whereas bears believe the wide gap will be closed with a stock market decline. In any case, this is a chart that says something is wrong.


Russell-2000, RUT, Daily chart

The RUT has been trying the past three days to hold support at price-level S/R near 1215 but it's looking like we could see another test of price-level support at 1205 on Tuesday if we see a little more selling. Below that level there's not much support before 1160. Short term it's looking like 1205 should provide support for at least a bounce but there is no bullish divergence against the September 13th low and that should be worrisome for bulls. I don't think you want to be long below 1205. But like the blue chips, there is the possibility for a flat sideways consolidation to continue for at least the rest of this month so bears might want to hold their fire until the RUT drops below 1205 (and then be careful about a head-fake break that hits the stops and pulls in shorts that's then followed by some buy programs to reverse the whole thing).

Key Levels for RUT:
- bullish above 1254
- bearish below 1205


Volatility index, VIX, Daily chart

The VIX had popped up to 17.95 last Thursday and hit a downtrend line from June-September. It has pulled back from the trend line but is holding support at its 200-dma, currently at 16.30. A drop below 16 would be bullish for stocks whereas a rally above last Thursday's high would be bearish for stocks and a stock market selloff could push the VIX up to its downtrend line from January-June, currently near 22.80. As long as the VIX stays below 18 it would mean stocks remain potentially bullish. We're into opex week and that means there could be a little extra volatility in the VIX.


10-year Yield, TNX, Daily chart

Last Wednesday TNX almost reached the projection at 1.811% (with a high at 1.801) but immediately pulled back from its morning high. A little higher now is the top of a parallel up-channel for the bounce off the July 6th low and its broken uptrend line from July 2012 - January 2015, both near 1.84. So there's at least a little more upside potential for TNX, with a little more selling in bonds, but I think there's a good chance TNX could start back down at any time. The bounce pattern off the July low looks corrective and suggests it will be retraced.


High Yield Corporate Bond ETF, HYG, Daily chart

HYG is the go-to bond fund when you want to be in corporate bonds looking for a little extra boost in yield. I should emphasize "little" boost because there's very little difference between the yields in higher-risk securities and the safer Treasuries and that's actually one thing that makes them so dangerous now. Investors are taking on a whole lot more risk vs. the smaller-than-usual yield improvement. But regardless, HYG is a good reflection of investors' willingness to take on that added risk and when fear enters the market we'll see HYG decline as investors rotate into the relative safety of Treasuries and other bonds rated better than BBB. It's a good canary ETF for the stock market and at the moment all is fine. There's bearish divergence since March but at the moment that's just a warning. We'll know something is potentially wrong if HYG drops below the bottom of a small rising wedge pattern (uptrend line from August-September), currently near 85.96, and then confirmed bearish below the September 13th low at 85.27. The next support level below that would be its broken downtrend line from June 2014 - April 2015, near 84.50.


KBW Bank index, BKX, Daily chart

Since the June low for BKX I've been wondering if the bounce off the February low is going to achieve the price projection at 75.41 for two equal legs up. But the October 10th high at 73.58, which was slightly higher than the September 1st high, left a bearish divergence on the chart and now I'm thinking we're going to see a stronger decline instead of any additional upside. BKX is trying to hold its uptrend line from June-September, currently near 71.25, which it closed below today, as well as its 50-dma, currently at 71.05. This morning's high was held down by its broken 20-dma at 71.38 and as long as it stays below Friday's high at 72.17 I think BKX will remain weak.


Transportation Index, TRAN, Daily chart

I've seen reports by several analysts recently that point out the bullish signal coming from the transportation sector. In early September and again in early October the TRAN broke above its downtrend line from August-November 2015, currently near 7880. Last Thursday's low also tested its uptrend line from June-September. Things are looking bullish for the TRAN, especially with the higher price highs since bouncing off the June low. This supports the idea that we'll see the broader market follow, or so goes the argument with Dow Theory.

There are two problems that I see with this bullish thought: the first counterargument is that the TRAN has been significantly underperforming the broader market since it peaked in November 2014; and the second counterargument is that the "breakout" above its downtrend line is on weakening momentum. As shown on the chart, MACD and RSI have been making lower highs since March, which is an indication that the tests of the highs in March and April will lead to a failure. That's not a guarantee but it's a reason to doubt the breakout attempt.


U.S. Dollar contract, DX, Daily chart

The US$ looks ready for a small consolidation before stair-stepping higher into November in order to make it up to the top of its shallow down-channel that it's been in since the March 2015 high, currently near 100.35. Two equal legs up from April points to 99.79 so that gives us an upside target zone for the completion of the leg up from August. The first sign of trouble for the dollar would be a drop back below the broken downtrend line from last December, currently near 96.40, but for now I'm looking for the dollar to continue higher.


Gold continuous contract, GC, Daily chart

Gold's consolidation following the low on October 7th suggests lower prices and in fact its pattern since August is basically a mirror image of the dollar's. I'm looking for gold to stair-step lower into November and potentially down to price-level support at 1180-1200 before it will be ready for a bigger bounce on its way down to lower prices. If gold bulls are to prevail the first thing they need to do in order to negate the bearish wave pattern is rally the shiny metal back above its September 22nd high near 1348.


Oil continuous contract, CL, Daily chart

It's a little hard to see on my squished daily chart for oil but it has formed a possible small sideways triangle off the October 10th high and that suggests one more leg up to complete the leg up from September 20th, which in turn could complete a corrective bounce structure off the August 3rd low and lead to a stronger decline. The upside target zone, if we get a pop higher, is to about 52-55 and there's a short-term price projection right in the middle of that range. A drop below the October 9th low at 49.15 would negate the short-term bullish pattern and suggest a breakdown sooner rather than later.


Economic reports

Tuesday morning's economic reports include CPI data, which is expected to remain essentially unchanged and unless it's very different than expectations it should not move the futures market.


Conclusion

The stock market is acting a little weak and I keep waiting for the buy programs to hit so that they can spark some short covering and get the opex rally started. Last Friday's highs are important -- the bulls need to drive the indexes above those highs (SPX 2149) in order to open the door to higher prices, such as to SPX 2160. If that's achieved we could get another pullback to SPX 2120 before setting up a bigger rally. A rally above the October 10th highs (SPX 2170) would suggest the next rally leg to new all-time highs was underway. But if bears push indexes below last Thursday's lows (SPX 2114) we could see some strong selling kick in.

The market is currently stuck and we're seeing just a bunch of 3-wave corrective moves that get reversed before anything really gets started in one direction or the other. Elections are either holding up the market or "someone" is holding up the market into the elections. In either case it could be a tough time to be a trader with all the whipsaws and lack of follow through. Stay cautious and stay safe since there will be better times to trade.

Good luck and I'll be back with you a week from Wednesday.

Keene H. Little, CMT

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


New Option Plays

Earnings Overload

by Jim Brown

Click here to email Jim Brown

Editors Note:

More than 75% of companies report earnings over the next three weeks. Ideally, we do not want to hold a position over an earnings report so that dramatically reduces the number of available stocks we can play. Add in the market decline to support and only 27% of the S&P-500 trading over their 50-day average and we have a very small subset of stocks to consider.

Today I am going to add the QQQ after the earnings surprise from Netflix. That could translate into some positive sentiment for the Nasdaq and there are some other big cap techs reporting this week. Intel and Microsoft are both scheduled to report and both should beat estimates.



NEW DIRECTIONAL CALL PLAYS

QQQ - Powershares QQQ ETF - ETF Profile

PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization.

The QQQ dipped to support at $116 on Thursday. Shares rebounded in the Friday short squeeze but closed at the lows for the day. On Monday the ETF faded with the market ahead of earnings from IBM and Netflix. After the Netflix earnings, the QQQ traded up slightly in afterhours.

Of all the companies reporting over the next couple weeks the tech sector has the best chance of posting positive earnings. That should make the Nasdaq/QQQ a little stronger than the broader market.

While there is no guarantee the market will follow traditional seasonal trends, Monday was the first day of the six best weeks of Q4 in normal years. End of fiscal year window dressing by funds occurs between now and the year end on October 31st. There is a possibility the election could damage this normal seasonal cycle if portfolio managers are too confused to know how to invest depending on which candidate wins Wednesday's debate.

If that is the case, the most likely action will be for managers to throw all their excess cash into big cap tech stocks as a way to be fully invested but also have limited risk. They can exit those positions quickly once we are in November.

This is a play on the expected relative strength of big cap tech stocks over the next six weeks.

With a QQQ trade at $117.50

Buy Dec $119 call, currently $2.04. Initial stop loss $115.25.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Mixed Earnings Picture

by Jim Brown

Click here to email Jim Brown

Editors Note:

IBM and Netflix kicked off the Q3 earnings parade with major moves in the afterhours session. Worries over what they would report and a hawkish speech from Fed Vice Chairman Stanley Fischer kept the markets off balance during the day with all the indexes finishing in negative territory.

IBM fell -$5 after earnings and that will weigh on the Dow on Tuesday. Netflix gained +19 after reporting earnings and that will positively impact the Nasdaq on Tuesday.

The Dow lost -52 points after being down -75 intraday and Nasdaq lost -14. The S&P closed just above the critical 2,120 level at 2,126 and near the low for the day.

For the first day of the best six weeks of Q4 it was not a good start. However, it could have been worse. As long as support holds, this would be a good place to launch a Q4 rally. Earnings for the rest of the week plus the debate on Wednesday night will determine market 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


HON - Honeywell

The long call position was opened at $108.86.


YHOO - Yahoo

The long put position was opened at $41.35.


PANW - Palo Alto Networks

The long call spread position was stopped at $146.85.


XBI - Biotech ETF

The long call position remains unopened until a trade at $62.50.



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


COST - Costco - Company Profile

Comments:

No specific news. Shares weak in a weak market. There are no headlines moving the stock. I lowered the stop loss $2.

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. Still holding at resistance.

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.


HON - Honeywell - Company Profile

Comments:

No specific news. Shares down with the weak market.

Original Trade Description: October 15th.

Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.

On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.

The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.

After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.

The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.

He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.

Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.

Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.

I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.

Position 10/17/16:

Long Dec $110 call @ $2.51, see portfolio graphic for stop loss.


IDCC - Interdigital - Company Profile

Comments:

No specific news. Shares were up +$1.30 intraday.

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.


PANW - Palo Alto Networks - Company Profile

Comments:

No specific news on PANW. Shares crashed through support at $148.50 to stop us out.

Original Trade Description: October 8th.

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. Company description from FinViz.com.

The headlines are full of news about cyber attacks and hacking of personal computers. Just last week there were more than a dozen high profile hacks and Guccifer 2.0, a name taken by a Russian state sponsored team, published data claimed to be from the DNC, Clinton foundation and the Olympic doping committee. Not only are they hacking these agencies but the data they are releasing now contains fake data mixed in with the real data. Wikileaks just published thousands of additional emails stolen from democratic campaign officials.

These kinds of attacks and data dumps are very damaging and now that they have started modifying the actual data it could be even worse. Companies will have to admit to some things so they can disprove other claims. This goes beyond just stealing credit card info.

Every time there is a successful attack it emboldens others to increase their efforts. Years ago a company could successfully stop these attacks on their own because the technology was more primitive. Now, even successful enterprise size companies can no longer devote the time, effort, personnel and resources to protecting their data because the attack methods change almost daily. It requires a dedicated company like Palo Alto Networks and others to stop the attacks.

Palo Alto's dictionary of attack profiles is updated constantly in real time and a new attack on a server in New York can be cataloged and immediately used to stop a similar attack in Los Angeles.

State sponsored attacks from Russia, China, Iran and North Korea are just the tip of the iceberg. I am sure there are other attack teams from other countries already probing companies for their technology secrets and agencies for their political secrets. The information gained is very valuable and can be sold to other countries that were not successful in their attacks.

In their recent earnings, Palo Alto posted a 41% increase in revenue and earnings for the current quarter are expected to rise 35%. Of the 27 analysts that follow Palo Alto, 21 of them have a strong buy rating, 3 have a buy and 3 have a hold rating.

Earnings Nov 23rd.

Because the options are so expensive I have to recommend a spread. Resistance is $163 but since I doubt cyber attacks are going to suddenly stop, I expect that resistance to be broken.

Position 10/10/16:

Closed 10/17/16: Long Dec $165 call @ $7.30, exit $2.72, -4.58 loss.
Closed 10/17/16: Short Dec $180 call @ $2.40, exit $1.10, +1.30 gain.
Net loss -3.28.


WOR - Worthington Industries - Company Profile

Comments:

No specific news. Minor gain in a mixed market.

Original Trade Description: October 12th.

Worthington Industries is a leading global diversified metals manufacturing company with 2016 fiscal year sales of $2.8 billion. Headquartered in Columbus, Ohio, Worthington is North America's premier value-added steel processor providing customers with wide ranging capabilities, products and services for a variety of markets including automotive, construction and agriculture; a global leader in manufacturing pressure cylinders for industrial gas and cryogenic applications, CNG and LNG storage, Cryogenic transportation and storage and alternative fuel tanks, oil and gas equipment, and consumer products for camping, grilling, hand torch solutions and helium balloon kits; and a manufacturer of operator cabs for heavy mobile industrial equipment; laser welded blanks for light weighting applications; automotive racking solutions; and through joint ventures, complete ceiling grid solutions; automotive tooling and stampings; and steel framing for commercial construction. Worthington employs approximately 10,000 people and operates 80 facilities in 11 countries.

Worthington is a "value added" steel processing company. To put that into english it means they take steel and form it into products they can sell. They do not make the steel, they just turn it into something useful. Between 2009 and 2015 they acquired 18 companies, each with a special niche in the market, in order to broaden their product offerings and increase the size of their customer base.

As steel prices strengthen, the products Worthington makes will become more valuable and their product margins will increase. In a commodity market where the raw material is cheap, every product made from that material is also under price pressures. The growth in global auto sales is good for Worthington as is the growth in the aircraft industry, ship building, energy, construction and manufacturing of all types that requires steel parts.

In their recent quarterly earnings they reported $1.03 per share and easily beating estimates for 77 cents. Revenue declined -3% to $737.5 million and missed estimates for $742.8 million. They blamed the weaker revenue on the weak oil and gas sector. Shares spiked 8% on the news despite the revenue miss.

Earnings Dec 28th.

Shares have moved sideways with a minor uptrend bias since the Sept 28th earnings spike. After two weeks of consolidation, they should be ready to start a new leg higher, market permitting.

Position 10/13/16:

Long Dec $50 call @ $2.05, see portfolio graphic for stop loss.


XBI - Biotech ETF - ETF Profile

Comments:

Biotechs were flat after trading both positive and negative intraday. The $BTK only lost -1.39 for the day and the XBI was down only 49 cents after being up intraday. I considered lowering the entry point but decided we want to see an actual rebound rather than just a one-day bounce.

This position remains unopened until a trade at $62.50.

Original Trade Description: October 13th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

The XBI traded up to $69 in late September and has since crashed back to support at $60 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls. The Theranos disaster and the closing of their labs weighed on the sector even though Theranos was not a public company.

Comments from Clinton about drug pricing concerns also caused investors to flee some drug company stocks.

With the XBI now -13% off its September high and all of those factors baked somewhat into the market, it may be time to place a bet on a biotech rebound. New drugs are announced every week and old diseases are cured or at least made tolerable.

I know it is hard to buy a stock in free fall but this may be the right point. The $60 level is support from June and August. The 100-day average is currently $60.37. This appears to be a good spot to place a bet.

Other traders may have felt the same way today. The XBI posted a minor gain in a bad market and the opening dip to $60.50 was only a drop of 75 cents and it was quickly erased before 10:15.

Not posting a material decline when the Dow was down -185 and the Nasdaq was down -70 is a sign of good relative strength.

If we are wrong about the support at the $60 level, we will stop out quickly and look for a retest of the next support level at $50. I am going to put an entry trigger on it just in case the market gaps down again on Friday.

With an XBI trade at $62.50

Buy Nov $64 call, currently $1.83, initial stop loss $58.85



BEARISH Play Updates (Alpha by Symbol)

MBLY - Mobileye - Company Profile

Comments:

No specific news. New 3-month low.

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.

Update 10/13/16: Deutsche Bank questioned the technology used by Mobileye and others after recent announcements on falling costs. DB suggested the sharp drop in cost for technology offered by other vendors could weigh on future Mobileye sales.

Position 9/28/16:

Long Nov $40 put @ $2.08, see portfolio graphic for stop loss.


NKE - Nike Inc - Company Profile

Comments:

No specific news. Support at $51.50 finally broke and now we could be looking at a new leg down.

Original Trade Description: October 10th.

NIKE, Inc., designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.

Nike is fading fast as revenue growth slows. Previously growth had been over constantly over 10% but that has not happened in the last few quarters. Revenue growth in Q1 was 5%, Q2 4%, Q3 8%, Q4 6% and Q1 is estimated to be 8%. Another challenge is currency issues. Only 42.5% of revenue comes from the U.S. meaning 57.5% comes from overseas where currency fluctuations are costing Nike 6-8% per quarter.

Nike had been targeting $50 billion in annual revenue but quarterly numbers are not growing that fast. In the last quarter Nike had revenue of $8.4 billion. With five quarters of revenue well under $10 billion each they are going to have to push their $50 billion target well out into the future to somewhere in the 2020 range.

Under Armour, Skechers and Adidas are stealing market share with Adidas on a fast track with recent market share gains.

When Sports Authority went out of business, it was a big problem for Nike. They lost money on receivables and had to take back a lot of inventory. In addition they lost 450 retail locations that were heavily subsidized by Nike.

I expect Nike shares to continue declining until sales begin to grow again.

Earnings December 27th.

Position 10/11/16:

Long Dec $50 put @ $1.05, no initial stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

Minor decline in the VXX despite a drop in the equity market. This is an example of the failing model.

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.


YHOO - Yahoo - Company Profile

Comments:

Some people have not gotten the message on the outlook for Yahoo. MKM Partners reiterated a buy rating and raised their price target from $44 to $51. Shares gained 35 cents to $41.79 on the news. Earnings are Tuesday after the close and they are not likely to be good and there could be some negative comments in the release.

Original Trade Description: October 15th.

Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.

After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.

When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.

On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.

I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.

If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.

This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.

Position 10/17/16:

Long Jan $40 put @ $1.90. No stop loss.




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