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Newsletter

Daily Newsletter, Saturday, 10/22/2016

Table of Contents

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

Market Wrap

Outlook Fading

by Jim Brown

Click here to email Jim Brown

With one week left in October and the broader indexes weakening the expectations for an end of October rebound are fading.

Weekly Statistics

Friday Statistics

The first week of the best six-week period of Q4 was definitely lackluster although the major indexes did post a minor gain. However, the markets are being held up by a few big cap stocks and the broader indexes are fading. The Russell 3000, the 3,000 largest stocks in the equity market, posted a very weak rebound from the Oct 13th support test at 1,250. Another test of that level may not be successful.

However, this coming week is window dressing week as fund managers close out their fiscal year on October 31st. That could lift the markets temporarily but the longer-term outlook is fading because of election uncertainty.


The only economic report on Friday was the Regional and State Employment. The report showed that job growth was slowing, which is not surprising in the 7th year of an economic expansion. We have seen declines in the payroll reports but everyone continues to claim all is well.

In September, only 14 states saw employment increase but that was up from the 4 states in August. In June and July there were 15 and 18 states showing increases. Employment was flat in 33 states and declined in 3 states. The three largest gains came from Texas at +38,300, California +30,000 and Florida +23,000. The three biggest losers were Wisconsin -10,500, Alabama -6,600 and New Mexico -4,200. The report was ignored.

The calendar for next week is relatively uneventful except for the four Fed speakers on Monday and the GDP report on Friday. The GDP for Q3 has declined significantly from the +3.7% forecast by the Atlanta Fed GDPNow in early August. The forecast was for +2.0% as of Wednesday, up slightly from the +1.9% earlier in the week. If the Friday report shows GDP growth significantly less than 2% or significantly higher, the market could react sharply. Any further decline will put pressure on the Fed to skip a rate hike in December.


Currently the odds for a rate hike at the November meeting are around 9% and practically impossible unless the Fed produced a dramatic surge in hawkish Fedspeak and that is not expected.

The odds for a hike at the December meeting have risen to 69.9% and almost a certainty with some expecting the possibility of a 50-point increase.


The Richmond Fed Manufacturing Survey on Tuesday is relatively important but nobody is expecting a material change.


Friday was all about earnings and the reaction to specific reports. The biggest impact to the open was McDonalds (MCD). The company reported earnings of $1.62 that beat estimates for $1.48. Revenue of $6.42 billion, declined from $6.62 billion but still beat estimates for $6.28 billion. Same store sales rose +3.5% globally and +1.3% in the USA. In the year ago quarter they posted +3.1% rise globally. Currency issues removed 3 cents a share from earnings. Revenues at company-operated stores rose 7.3% to $3.97 billion. Revenue at franchised stores rose 5.1% to $2.45 billion. The company said the introduction of Chicken McNuggets with no artificial preservatives boosted sales. McDonalds shares spiked $3.50 at the open to add +25 points to the Dow.


General Electric (GE) had the opposite impact on the Dow. The company reported earnings of 32 cents that beat estimates by a penny. However, revenue of $29.27 billion missed estimates for $29.84 billion. GE lowered full year organic growth guidance to 2%, down from the 2-4% in the prior forecast from July. They maintained their full year earnings guidance but narrowed the range. They guided for $1.48-$1.52, down from $1.45-$1.55. The midpoint is the same. Analysts were expecting $1.49. GE said organic industrial orders fell -6% but digital and software orders rose 11%. Oil and gas revenues declined -25% but power unit revenue rose 37%. GE also raised its stock buyback program by $4 billion. As the biggest industrial manufacturer, the continued weakness in their sector suggests the U.S. economy is slowing. Shares dropped to $28.33 at the open but rebounded nearly to the flat line and closed at $28.98. GE shares do not normally move in a hurry.


Honeywell (HON) reported earnings of $1.67 compared to estimates for $1.60. Revenue of $9.80 billion beat estimates for $9.78 billion. The company said it was well positioned for double-digit earnings growth in Q4 and that would push them to 8-9% earnings growth for the full year. For Q4 they guided for $1.74-$1.78 in earnings and analysts were expecting $1.80. They guided for the full year to earnings of $6.60-$6.64 and revenue of $39.4 to $39.6 billion. Analysts were expecting $6.68 and $39.63 billion.

Shares rallied despite the lowered guidance because Honeywell had already warned two weeks ago and shares were crushed. The company focused on being upbeat about 2017 saying they expect double-digit earnings because of the restructuring they accomplished in 2016. The company laid off 3,017 positions in Q3 as they separated the automation and control solutions business into two new reporting segments. They took a charge of $202 million on the restructuring and layoffs. Because of the big drop in early October, the risk should be reduced for Honeywell shares.


Microsoft (MSFT) reported earnings after the bell on Thursday. They reported 76 cents compared to analyst estimates for 68 cents. Revenue of $22.3 billion beat estimates for $21.7 billion. The company said revenue growth in the Azure cloud rose 116%. Overall cloud growth which includes the server products and cloud services rose 8% to $6.4 billion. Shares spiked 4% to $59.66 and a historic 15-year high. Shares had been flat for the last three months along with the market. I would not buy MSFT shares on the breakout but I would buy a dip. Microsoft is in growth mode again and their future is bright.



Skechers (SKX) reported earnings of 42 cents that missed estimates for 48 cents. Revenue rose 10.1% to $942 million but also missed estimates for $954 million. For Q4 they guided to revenue of $710-$735 million and analysts were expecting $800 million. The domestic wholesale business, which accounts for 60% of their revenue declined -3.4%. The international wholesale business rose 18% but that was well below the 50% growth rate for Q3-2015. Shares fell -17% on the news.


According to FactSet 23% of the S&P 500 companies have reported earnings. Of those companies, 78% have beaten on earnings and 65% have beaten on revenue. The current blended earnings decline is now -0.3% and significantly better than the -2.7% forecast at the beginning of the quarter. That should be a significant boost for the market but nobody appears to be paying attention. The blended revenue forecast has risen to +2.6% and the first time since Q4-2014 there has been revenue growth.

However, these earnings beats have been against lowered expectations. Twenty-three of the Dow 30 stocks saw their estimates lowered over the quarter. For example, Apple (AAPL) reports earnings next week and their estimates have been lowered from $1.96 to $1.66 over the last quarter. This will be the third consecutive quarter of earnings declines for Apple.

The guidance for Q4 has also improved. Of the 17 S&P companies issuing guidance, only 10 have guided lower and 7 have guided higher. Q4 earnings growth is now expected to be +5.5% with revenue growth of +5.2%.

There are 178 S&P-500 companies reporting this week and 12 Dow components.

Tuesday is the big day for the Dow with 7 stocks reporting.


There was a series of major cyber attacks on the Internet infrastructure on Friday. Early in the morning, a distributed denial of service (DDOS) attack was localized to the northeast. That one faded as providers mitigated the damage and the internet slowly returned to normal.

Morning outage map

When the second attack came, it was stronger than the first and was followed later in the day by a third wave of attacks. Security analysts said it was especially hard to stop because there were "tens of millions of IPs" involved in the attack. Hackers take control of innocent PCs and hide software they can trigger at any time. These PCs can remain dormant for weeks, months or even a year before activated. Once the hackers decide to launch the attack, their governing program wakes up these PCs and gives them the coordinates to attack. The PCs immediately begin making web requests against the IPs provided as targets. It is the equivalent of you sitting at your PC and hitting "refresh" on your browser every second only there are no outward signs of the attack on your PC. Multiply this constant refresh request by a million PCs all attacking at once and the target servers are overloaded.

This particular attack was directed against Dyn DNS, a company that offers dynamic DNS (domain name service) addressing. Every website has an IP address. When you type in a website name, your computer uses that name to look up the actual IP address at a service provider like Dyn. Once your PC has that IP address it contacts the website and displays the web page you are requesting. With millions of these requests hitting Dyn every minute, the system became overloaded and no IP addresses were being returned. That meant that phones, tablets and PCs were unable to connect to thousands of websites around the world. Amazon, Netflix, Twitter and many other major companies "appeared" to be offline because individual PCs could not get a response to the request for IP.

DYN released a news update about 5:30 ET saying the majority of the attacking IPs belonged to Internet of Things (IoT) devices like printers, smart TVs, DVRs, WiFi devices, security cameras, routers and even kitchen appliances. I discussed this several weeks ago that there were millions of devices and growing every day, which were Internet capable but had no antivirus software to protect them from hackers. We can put virus software on our PCs but most IoT devices do not have that capability to host the programs. There are 3.4 billion internet users but there are 10-15 billion IoT devices already in use.

Late in the day, the impact of the attack had grown to include many areas of the U.S. and the impact was starting to be felt around the world. DYN issued another update at 6:30 saying the attack had been resolved but computer traffic continued to be slow until nearly 10:PM.

Afternoon Outage Map

Time Warner (TWX) shares spiked 8% after it was confirmed they were in talks with AT&T (T) about an acquisition. Shares were trading at $79 on Thursday before the news started to trickle out. On Friday, there were several confirmations and shares traded as high as $94 before fading into the close. The combination could create a media conglomerate with wireless and pay TV subscribers and extensive content from HBO, Warner Brothers and CNN to name a few. Analysts believed a stock deal for Time Warner would have to be over $100 a share given previously attempted deals. Time Warner refused an $85 bid from 21st Century Fox in 2014. Shares closed at $89.50 on Friday.

On Saturday, the companies announced an $85 billion deal where AT&T would but TWX for $107.50 per share in cash and stock. The deal will combine AT&T's 315 million wireless subscribers with Time Warner's vast movie and television content. There is likely to be some stiff regulatory opposition to put this much content control into one company. The Time Warner CEO will leave the firm after the transition period. There is a $500 million breakup fee, which is very small given the size of the deal.


Qualcomm (QCOM) has reportedly sealed a deal to acquire NXP Semiconductors (NXPI) for $110 per share in cash. The deal would value NXPI at $37 billion. NXPI shares closed at $101.71. The deal would allow Qualcomm to expand beyond chips for mobile phones and into automotive, industrial and Internet of Things devices. This would create the second largest chip company by revenue with Intel the largest. NXP's biggest customers are Apple, Ericsson, Bosch, Huawei, Hyundai, Nokia and Samsung. If this acquisition is completed it could set off a wave of consolidation because there are dozens of smaller players that would need to grow quickly or risk being shut out of the market.


British American Tobacco offered to buy Reynolds American (RAI) in a $47 billion cash and stock deal. BAT already owns 42.2% of RAI and offered $56.50 per share for the rest. That is a 20% premium over the $47.17 closing price on Thursday. RAI bought Lorillard last year for $25 billion.


Virgin America (VA) and Alaska Airlines (ALK) have a merger agreement where ALK will pay $2.6 billion for VA. However, regulators are balking at approving the deal and the deadline has been extended again from the October 17th date. Analysts believe it will eventually be approved since both are small airlines and do not occupy a large market share. However, a lawsuit was filed by 42 plaintiffs in San Francisco to stop the merger. Alaska said it would lay off 225 Virgin America management positions as redundant once the merger is completed. The suit had been on hold pending regulatory action. On Friday, the judge in the case ruled the suit could now continue. The suit was brought by travel agents and frequent fliers who claim the merger will lessen competition on many routes. The judge said he would begin a trial as soon as the Justice Dept approves the merger. He said there is no reason for a trial if the DOJ blocks the merger. He is sitting on a motion for an injunction to prevent completion of the deal, until the DOJ rules. Analysts believe there is still a 75% chance the deal will get done. VA shares have been volatile over the last five weeks as the DOJ and suit headlines call into question the deal.


Alkermes (ALKS) shares rose 27% after the company said its depression drug ALKS 5461 met its main goal in a final-stage study. The drug was found effective in rebalancing brain function in patients with major depressive disorder that have not responded to other treatments. More than 16 million U.S. patients suffer from this disorder.


Crude prices continue to hold over $50 thanks to a sharp decline of -5.2 million barrels in the weekly EIA inventory report. This is typically a period where inventories rise by that amount. Not only were inventories down but refinery inputs were at a six-month low at 15.37 million barrels per day. Imports were also at a multi-month low of 6.91 million bpd, down from 8-9 mbpd in August. Gasoline demand fell from 9.264 mbpd the prior week to 8.798 mbpd. U.S. oil production is at three-month lows at 8.45 mbpd.

All the demand factors are slowing sharply and inventories are still declining thanks to the one million bpd drop in imports. I continue to believe that the unseasonable inventory patterns are related to the hurricane in the Gulf and imports will catch up.


Active rigs rose by 14 after a gain of 15 the prior week. Oil rigs rose by 11 for the 16th weekly rise in the last 17 weeks. It appears producers believe oil prices will remain at $50 or higher and they are putting rigs back to work in order to increase production in 2017. Active gas rigs have risen 20% over the last four weeks and natural gas prices fell sharply on Friday with a -6% decline.


 


 

Markets

Friday was option expiration Friday and market volume normally rises. However, volume on Friday was only 6.0 billion shares. That compares to the very low average volume for the week of 5.76 billion per day and Thursday's volume of 6.1 billion, which was the highest day of the week.

Nobody is trading. The market remains locked in a range and that range is sinking. The chart is getting messy with increased volatility and a trend that is currently negative. The S&P has closed under the 100-day average on 8 of the last 9 days. The resistance at 2,145 has grown stronger with each failure to move back over that 100-day level.

The opening dip to 2,130 looked like it had legs but buyers unexpectedly appeared thanks to Microsoft and McDonalds.


The Dow is even worse with the support at 18,100 being tested on five out of the last 9 days. We have a pattern of lower highs and lower lows and it looks like the next test could be of 18,000. We came within 49 points on Friday.

There are 12 Dow components reporting next week with 7 on Tuesday alone. Typically, even when they beat on earnings and spike the next day, the trend for the rest of the week is down. It is called post earnings depression. The excitement prior to earnings evaporates as traders move on to find a new stock that has not yet reported.

The three biggest gainers, MCD, MSFT and DIS, added 50 points to the Dow and the index still closed with a 16-point loss. There is significant risk that a couple additional earnings misses could push the Dow under 18,000. Our best hope is that fund managers finally begin window dressing for the October 31st year-end next week.



The Nasdaq continues to show a slightly better chart pattern than the Dow and S&P. The big cap tech stocks are holding their own with Facebook, Google and Netflix leading the index higher.

I mentioned several times over the last couple weeks that fund managers might give up trying to decide what to buy given the political uncertainty and just throw money at big cap techs until the end of October. It appears that is what is happening.




The Nasdaq is only about 80 points below its historic high thanks to those big cap stocks. This week we will see earnings from Amazon, Amgen, Google, Tesla, Expedia and some other large tech stocks. If we get some big beats like we saw with Netflix and Microsoft we could see the index hit new highs.



The small cap Russell 2000 is really struggling. Support at 1,210 has been tested multiple times and a breakdown there targets 1205-1195. A failure at 1,195 would trigger a major market meltdown. We need a catalyst for the small caps to keep them from breaking through support but today I do not know what that would be. This is a market sentiment index on the verge of failure.


The first week of the best six weeks of Q4 is over and technically, it was positive. All the major indexes posted minor gains but only because of spike on Tue/Wed. Monday, Thursday and Friday were negative.

We are going to need more bullish conviction next week just to stay in positive territory. We need that end of October window dressing to begin or investors are going to start running to the sidelines in confusion.

I believe the political uncertainty is weighing on the market. Earnings are better than expected and guidance has been decent. The only material economic report will be the GDP on Friday. While there is no bullish catalyst on the horizon there are no negative events either. This will be an earnings focused week and hopefully it will cause investors to forget the election.

Early Bird Special As of next Sunday there will only be 62 days left in 2016. On the last weekend in October, we begin the Early Bird Special for the End of Year Renewal Special. For a one-week period, we offer the EOY Special for an additional $50 discount. Be prepared to act quickly because the Early Bird Special only lasts one week. The regular EOY begins the weekend after Thanksgiving.

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

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Random Thoughts


Bullish and even neutral sentiment continued to decline with bullish sentiment now well below the average of 38.5%. This is the second consecutive week of sharp increases in bearish sentiment. Given the normally bullish six-week period that started last week, this is a definite warning sign.



The dollar closed at a 9-month high on expectations for a December rate hike. GE said they saw the impact of the dollar decline in Q3 but their problems are going to come right back. Since the beginning of October the dollar has surged despite weak economics and slowing employment. The solid expectations for a hike have trumped all the economic fundamentals.

It is surprising that oil has maintained the $50 level with the strong dollar because gold prices have collapsed. Commodities are cheaper when the dollar is stronger.




Sears (SHLD) is in trouble again. On Friday, Sears responded to news that Jakks Pacific has suspended shipments to Kmart stores ahead of the holiday season. Jakks is the fifth-largest U.S. toy company and they told investors on their earnings call on Thursday that is had halted shipments to "a major U.S. customer" which was presumed to be Kmart. They halted shipments of Star Wars and Disney products after discussing the situation with their bankers. The halt in shipments caused revenue to decline -10% to $302 million for the quarter. The company said based on what they were seeing in regards to this particular retailer, Jakks was best served to reduce its accounts receivable risk by holding back products.

At a recent toy fair in Dallas, a BMO analyst was asked by multiple vendors if they should continue shipping toys to Sears/Kmart. There is a lot of worry about payment from Sears. There is considerable concern that Kmart is headed for a system wide shutdown in January as parent Sears kills off the chain to stop the cash drain. They can then sell off the real estate to raise cash. Sears has already said they were closing 64 Kmart stores in mid December out of the 883 stores still operating. Sears has closed more than 400 Kmart stores in recent years.

CEO Eddie Lampert wrote, "Recent reports have suggested that Kmart will cease operations. I can tell you that there are no plans and there have never been any plans to close the Kmart format."

Obviously, it is incumbent on Lampert to maintain that stance until the day he announces otherwise. If he did not refute the rumor, all his suppliers would immediately cut off shipments.



Railroads running on empty. Shares of Union Pacific fell -7% on Thursday after reporting its sixth consecutive quarterly earnings decline. Older analysts have always claimed that slowing rail shipments were a leading indicator of economic decline. Union Pacific said volume declined along with total revenue by carload. Shipments of agricultural products declined in 5 of its 6 business segments. Coal shipments were down -19% and chemical shipments fell -1%. Justin Long, an analyst at Stephens, said we have been in a freight recession for two years. He blames the slow growth in the global economy and the strong dollar for the lack of exported consumer goods and commodities.

BK Asset Management said "from a global macro perspective we are starting to see some serious cracks in global growth." China's industrial production fell short of estimates and Australia's job growth fell off a cliff last month. A governor from the Bank of Canada warned there were serious "structural" issues with global trade.



Builders excavating for a building foundation in Romania in 1974 found a machined object that is 90% aluminum and is reportedly 250,000 years old. The geologic layer where it was found was about 11,000 years old. The object was found 33 feet underground along with two mastodon bones that were up to 10,000 to 80,000 years old. Since modern man did not begin producing aluminum until about 200 years ago in 1808, this archeological find has baffled scientists. Aluminum smelting requires temperatures of 1,000 degrees or more. The layer of surface oxidation suggests it had been buried for at least 300-400 years. The find was documented at the time but was not widely reported until recently.

The technology required to combine aluminum with the 12 metals that compose the other 10% of metals in the object does not exist on earth according to scientists. The clean cut hole on one of the ears was drilled to test the metal.

If you have ever watched the National Geographic series "Ancient Aliens" on TV, you know there are numerous unexplained relics from the past and this one is very puzzling.

Here is a link to a video of the item. Unexplained Metal

Link to news item. Source




 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The only thing necessary for the triumph of evil is for good men to do nothing."

Edmund Burk


 


Index Wrap

Now or Never

by Jim Brown

Click here to email Jim Brown
Fund managers holding off on window dressing their portfolios for their October 31st fiscal year end are running out of time.

October option expiration is over and there are only six trading days left in the month. If fund managers have been holding off on their window dressing buys in hopes the election uncertainty would clear, are suddenly running out of options. After Wednesday's debate, the polls are tightening again and there is less clarity now than there was a week ago.

Fund managers know that energy, biotech and financials will be under pressure with a Clinton victory. With a Trump victory energy, aerospace and defense stocks could rise sharply. For portfolio managers they need to pick a winner and invest accordingly.

However, I believe they will take the safe way out and throw money at highly liquid big cap tech stocks that are unlikely to be depressed regardless of the winner. Once past the election they can quickly dump those stocks and invest based on the winner's platform. All of this indecision is artificial since it will take months past the inauguration for any changes to actually take place.

Meanwhile, the big cap techs are seeing strong inflows of cash and the rest of the market is lagging. I have a portfolio of 750+ stock symbols in my charting program. About twice a week, I scan every chart looking for potential play candidates. This weekend was very depressing.

Out of the 750 stocks there were only about 10 that had play potential. The vast majority, maybe 75% to 80%, had bearish charts. Most of the ones with mediocre or better charts had earnings over the next two weeks and that took them out of contention.

The large number of bearish charts was the biggest surprise since we are one-week into the best six-weeks of Q4. There will have to be a major shift in sentiment for the broader market to recover.

In the Option Investor commentary, I showed a chart of the Russell 3000 as evidence the broader market was fading. The Russell 1000, the 1,000 largest stocks by market cap, is showing the same pattern. There is critical support at 1,175 and the index is stuck under 100-day average at 1,187 and the 2015 resistance high at 1,190.

If I take off all the identifying marks from this chart, would you say the direction is up or down? Much of the time, our view of market direction is colored by our bias and by the commentary from the talking heads on stock TV. Does the second chart give you a different impression of direction? By removing the red and green candles, your mind focuses on the chart pattern rather than the implied motion from the red/green colors. Leigh Stevens always used bar charts rather than candlesticks for that reason.



I have used this example in the past with individual stocks and eliminated the headings and prices and the results are always amazing. If I show you a chart with Apple in the header and the prices for Apple shares, you would immediately include your bias for Apple when you are looking at the chart.

For instance, without knowing the stock on this chart, would you buy it? I cheated and added the blue support line. Without knowing the name of this stock, I would probably buy the chart because of the support line.


However, if I tell you that is the Biotech Index ($BTK) would that change your opinion? Normally, it would not but because of the current political environment, I would be reluctant to take a chance until after the election. If Clinton wins, the index is likely to move lower. Even now, all it would take is another comment about drug pricing from Clinton, Bernie Sanders or Elizabeth Warren to knock it back to the June lows. Since the biotech stocks are an integral part of the Nasdaq and the Russell 2000, those comments could tank the market at any time.

This is what fund managers are facing. They do not know what to buy so they are not buying anything or at least very little. Market volume last Monday was only 5.1 billion shares. It was not a holiday Monday or contain any specific event that would have depressed volume. Tuesday was only slightly better at 5.6 billion shares. The problem was the debate. Nobody wanted to take a position ahead of the debate in case somebody said something that tanked the market. Volume for the entire week was very low.

The S&P has failed to close above the current resistance for the last nine days. The dip below 2,120 on Oct 13th was a three month low. The rebound from that low resulted in a strong short squeeze but it faded the very next day. The index is chopping around in a narrow range under resistance because of the election uncertainty. The path of least resistance here is down under normal circumstances. The fund year-end next week is the wild card that could push us higher. However, they will have to buy more than just the top ten big cap tech stocks to actually lift the market.


The Dow chart is weaker because of the narrow breadth and the lack of tech participation. Microsoft was the exception but Intel, Cisco and Apple have been floundering. The Dow chart is in a confirmed down tend until it closes back above 18,400. The red down trend resistance line is the key. That is pushing resistance slightly lower every day. Note that the Oct 13th plunge below 18,000 was a three-month low and the index has not rebounded materially.


The buying in the big cap techs has lifted the Nasdaq 100 ($NDX) to within 42 points of a new high. The current high was on Oct 10th at 4,893 and we closed at 4,851 on Friday. This is our best shot at generating a rally. If the Nasdaq closes at a new high it would produce some positive market sentiment that might drag hesitant investors off the sidelines.


The percentage of S&P stocks over their 50-day average rebounded from the 27% the prior week to 34.5% but the long-term trend since July has been down. A level under 20% represents a buying opportunity.


Normally a small number of stocks making large gains characterize a weakening bull market. The minor gains in the indexes give the appearance the market is healthy. The McClellan Summation Index measures the market breadth over a longer term to tell us what is really happening under the market. The index shows us that market breadth has been deteriorating since peaking in late July. The index is at the lowest point since early March and approaching a negative number. The low for the index in late January equates to the 15,450 low on the Dow and 1,812 on the S&P. That was the low for the year on both indexes. The $NYSI tells us the truth about market direction.


The Dow Jones Global Index has a similar pattern to the U.S. indexes only without the recent highs. The index is right on the verge of collapse below support at 317. Note the MACD has turned negative.


The bottom line to all the commentary this weekend is that the markets are weakening as the election uncertainty increases in the USA. Fund managers are facing a 5-day shot clock and that could be the saving grace for the markets next week. They will have to buy something even if it is wrong.

I do not want to be bearish on the market because we are in the best six-week period in Q4. However, this is not a normal year and it is far from a normal election. We need to trade what we see rather than what we want to see.

We should continue to avoid being overly long and keep a list of stocks we would like to buy at a lower level. We may get that chance.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Flying High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow Transports has had a rough couple of weeks thanks to the declines in the railroads. However, airlines are taking off. Several of the airlines are moving towards new highs but I think Alaska has the best outlook.



NEW DIRECTIONAL CALL PLAYS

ALK - Alaska Air Group - Company Profile

Alaska Air Group, Inc., provides passengers and cargo air transportation services primarily in the United States. The company operates through three segments: Alaska Mainline, Alaska Regional, and Horizon. It serves approximately 100 cities in Alaska, the Lower 48, Hawaii, Canada, Mexico, and Costa Rica. As of December 31, 2015, the company's fleet consisted of 147 Boeing 737 jet aircraft; and 52 Bombardier Q400 turboprop aircraft. Company description from FinViz.com.

Alaska is in the middle of an attempted acquisition of Virgin America for $2.6 billion. The acquisition will give them a larger share of the California market and some choice landing slots on the East Coast. The Dept of Justice is still reviewing the deal and the completion deadline has been extended. Analysts believe the deal has a 75% chance of closing. The CEO said last week there is no danger of a breakup. They are simply having to work through some questions posed by the DOJ. There is also a suit brought by travel agents and some frequent fliers but that is expected to be settled if the DOJ approves the acquisition. The judge in the trial has said the case could proceed once the DOJ approves the deal. Otherwise there is no need for the trial.

On Thursday ALK reported earnings of $2.20 compared to estimates for $2.08. Revenue of $1.57 billion beat estimates for $1.56 billion. Passenger miles rose 8.1% and available seat miles rose 8.1% to 11,212 million. The load factor of 85.6% was flat. The company ended the quarter with $3.226 billion in cash compared to $1.328 billion in the year ago quarter. They have long term debt of $1.861 billion.

Alaska is growing. They have a decent on-time record of 87.8% in August and passenger sentiment is very positive.

Once they complete the Virgin acquisition their capacity and passenger miles are going to rise sharply. They have already said they are reducing more than 200 Virgin management positions in California alone to reduce costs. Virgin has 10 Airbus A319s and 50 Airbus A320s.

Shares have been in an uptrend since mid September and are trading at a six-month high at $75. Resistance is $82.50. Because of the crazy market I am putting an entry trigger on the position to make sure the stock is rising before we enter.

With an ALK trade at $75.50

Buy Jan $80 call, currently $1.70, initial stop loss $71.35.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Lower Low, Lower High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P dipped to 2,130 at the open and struggled back to close at 2,141 and while that was a nice rebound, the index still closed negative. This was another lower low and lower high and another close under the 100-day average. This was far from a bullish event. Every time we retest lower levels it weakens that support.

The Dow dipped well under 18,100 to touch 18,049 and a six-day low. The index rebounded nearly 100 points to close at 18,143 but still made a lower high and lower low.

The Nasdaq closed positive with a 15 point gain thanks to the spike in Microsoft.

This was the first week in what is normally the best six weeks of the quarter. I would be hard pressed to call it a positive start since the Dow only gained 5 points for the week.



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


HD - Home Depot

The long call position remains unopened until a trade at $127.50.


NKE - Nike Inc

The long put position remains was closed at the open.



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. Minor decline. Portfolio managers have not begun buying for their end of October year end.

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:

The AT&T and Time Warner news killed the breakout in Dish at least temporarily. That +1.74 gain on Thursday was erased with a -$1.78 decline today.

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.


HD - Home Depot - Company Profile

Comments:

HD shares posted a minor gain but we have not seen the end of October buying appear yet.

Original Trade Description: October 20th.

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself (DIY), do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves home owners; and renovators/remodelers, general contractors, repairmen, installers, small business owners, and tradesmen. The company also sells its products through online. As of December 31, 2015, it had 2,274 stores. Company description from FinViz.com

Home Depot is insulated from the Amazon competition. You cannot buy 2x4 boards, carpet or a 5-gallon bucket of stain on Amazon. With the housing recovery in full swing, Home Depot has been fueling a massive remodeling binge. Customers trying to spruce up their homes so they can sell, go to Home Depot for the supplies. Customers that have just bought a home shop at Home Depot for items to remodel to fit their tastes. Customers just remodeling their own home to bring it up to date shop there as well. Home Depot now has online ordering with shipping to you on the smaller items or in store pickup for larger items. About 42% of online orders are now picked up in local stores. That also provides an opportunity to sell the customer something else as he wanders around the store. I am living proof that you cannot go into a Home Depot without buying something.

Same store sales have risen 4% or more in 15 of the last 16 quarters. In an interview with the CFO she said property managers were 3% of their customers but 40% of sales. That is an amazing statistic because once those professional managers are locked into a supplier like Home Depot they rarely change. The only other comparable big box is Lowes and they are always more expensive.

The CFO said the addressable market for their products in the U.S. is $550 billon and Home Depot only has 20% of that market. There is plenty of opportunity for additional growth. More than 50% of U.S. homes are over 40 years old. The company is targeting $100 billion in annual revenue in 2018.

Home Depot has bought back $2.6 billion in stock in 2016 with $2.4 billion to go. Their capital spending plans called for $5 billion for stock purchases. The company will also pay $3.4 billion in dividends. They have not added a new store in the U.S. in more than three years. They are using the expansion money to remodel one-third of each store every year. These "resets" are critical to keeping the stores fresh and implementing new marketing strategies.

Since Hurricane Matthew hugged the coast and caused damage in multiple states, Home Depot is going to have a very strong Q4. They actually have a hurricane response team that loads up trucks with building materials like plywood ahead of the storm and generators for businesses to continue to operate after the storm. They load the trucks and send them to the potential impact areas before the storm actually hits. Once the storm does hit they immediately send more trucks loaded with the supplies normally in demand after a storm. Before the winds actually quit blowing they have trucks pulling into the local stores with the needed inventory.

Home Depot has turned storm watching into a profit center and they do a very good job. This will have only a minimal impact on Q3 earnings but the guidance for Q4 should be strong.

Earnings Nov 15th.

Earnings are the week of the November option expiration so I am using the December strikes to preserve speculation premium. Shares are hovering just above support at $126 and normally rally into earnings and decline afterwards. Because of the expectations for strong guidance I am not planning on exiting before the earnings. We will exit afterwards and probably reload with a February option to capitalize on the January earnings for Q4.

Shares have declined since the early September period and have found support at the $125 level for the last six weeks. HD normally has a pre earnings run and it could start any time now, market permitting.

Because of the market instability I am putting an entry trigger on the position.

With a HD trade at $127.50

Buy Dec $130 call, currently $1.91, initial stop loss $123.85.


HON - Honeywell - Company Profile

Comments:

Honeywell reported earnings of $1.67 that beat estimates for $1.60. Revenue of $9.8 billion also beat estimates for $9.77 billion. They guided for the current quarter to earnings in the range of $1.74-$1.78 and analysts were expecting $1.75.

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 testing resistance at $80 and trying to breakout.

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.


NVDA - Nvidia - Company Profile

Comments:

Shares down slightly after AMD posted weak earnings and guidance. Apparently, the market does not understand that Nvidia is kicking AMD butt and that is why AMD earnings were weak.

Original Trade Description: October 19th.

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.

On September 28th, 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.

On October 3rd, 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.

Update 10/20/16: Tesla announced the decision to equip all new cars with complete self driving hardware and technological components. Nvidia is the chosen partner to provide the Drive PX chipsets, which retail for $250-$300 each. If Tesla goes with the super high performance Titan GPU at $1,200 each that would equate to $1 billion a year in revenue for Tesla.

Nvidia is the Intel of the future.

Nvidia shares have been stair-stepping higher since January. They peaked at $69.70 on October 4th. When the stock rolled over on the 6th we were stopped out of a prior position. Nvidia has a habit of surging $5-$7 then resting for a couple weeks. The decline from the October 4th peak touched $63.70 on the 13th and shares have been moving sideways with a slight upward bias. I think they could be getting ready for another move higher as we head into earnings.

I am a firm believer that Nvidia will beat on earnings. I am going to recommend that we hold over the event but I will give everyone fair warning a couple days before so you can make your own decision.

Position 10/20/16:

Long Dec $70 call @ $2.90, see portfolio graphic for stop loss.


QQQ - Powershares QQQ ETF - ETF Profile

Comments:

The NDX rose +18 points and lifted the QQQ to resistance at $118.15. The ETF is finally trying to move higher.

Original Trade Description: October 17th.

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.

Position 10/18/16 with a QQQ trade at $117.50

Long Dec $119 call @ $2.54. See portfolio graphic for stop loss.


SWHC - Smith & Wesson - Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: October 18th.

Smith & Wesson Holding Corporation manufactures and sells firearm products and accessories. The company operates in two segments, Firearms and Accessories. It offers handguns, including revolvers and pistols; long guns, such as sporting, bolt action, and single shot rifles; hunting rifles; black powder firearms; handcuffs and restraints; and firearm-related products and accessories. The company also provides accessories, such as reloading, gunsmithing tools, gun cleaning supplies, tree saws, shooting and field rests, gun vises, hearing protection, ammo tumblers, and vault accessories. It sells its products under the Smith & Wesson, M&P, Thompson/Center Arms, Caldwell Shooting Supplies, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal Reloading Tools, Lockdown Vault Accessories, Hooyman Premium Tree Saws, BOG-POD, and Golden Rod Moisture Control brands. In addition, the company engages in selling parts of other brands; operates a private law enforcement training facility. It serves gun enthusiasts; collectors; hunters; sportsmen; competitive shooters; individuals desiring home and personal protection; law enforcement and security agencies and officers; and military agencies. The company markets products through independent dealers, large retailers, in-store retail channels, and range operations utilizing consumer-focused product marketing and promotional campaigns; social and electronic media; and in-store retail merchandising systems and strategies. It also operates Websites; and online retail stores that sells hunting and shooting accessories, branded products, apparel, and related shooting supplies. Company description from FinViz.com.

I have written about Clintons potential attacks on firearms and gun owners multiple times. She has pledged to issue an executive order implementing various types of gun control in her first 100 days in office. She has also vowed to nominate antigun judges to the Supreme Court in an effort to rewrite firearms laws as cases are presented to the court. She wants to restrict purchases, eliminate concealed carry, close gun shows, eliminate quantity purchases of ammo and ban modern sporting rifles, etc.

Since Clinton surged in the polls on Trump's Access Hollywood comments, gun manufacturers shares have found a bottom and begun to rise again. The closer we get to the election the more the firearms issues will be in the press. If she is elected there will be a flood of purchasers rushing to acquire guns before she can issue her executive order.

Earnings December 1st.

  Gun stores are starting to advertise their "Pre Hillary" sales. Link

I am going out to January on this option and if she is elected, we will hold over the December earnings because guidance should be off the chart.

Position 10/19/16

Long Jan $28 call @ $1.35, no initial stop because of low price.


WOR - Worthington Industries - Company Profile

Comments:

No specific news. Minor decline in a weak market. No breakout yet but WOR is close.

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.



BEARISH Play Updates (Alpha by Symbol)

NKE - Nike Inc - Company Profile

Comments:

We exited this position at the open and were helped by the opening dip in the stock allowing us to exit for a breakeven. We exited because Apple is going to announce a cobranded watch with Nike next Friday and that is likely to give the stock a boost. Source

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:

Closed 10/21/16: Long Dec $50 put @ $1.05, exit $1.05, breakeven.


VXX - VIX Futures ETF - Company Profile

Comments:

Another new historic closing 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.


YHOO - Yahoo - Company Profile

Comments:

Yahoo was downgraded by Jefferies from buy to hold. This follows the Needham downgrade from buy to hold earlier in the week. Analysts are starting to turn pessimistic over the potential for the Verizon deal to close at the original price.

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.

Update 10/18/16: Yahoo reported revenue that fell -14% to $857 million. This is the fourth consecutive quarter that revenue has fallen more than 10%. They beat on earnings with 17 cents compared to estimates for 11 cents but did it on major cost cutting with the termination of 2,200 employees or one-fifth of its workforce. Verizon signaled last week it was reconsidering the acquisition because of the damage from the cyber attack. The decision to complete the deal or back out should be made over the next 2-3 weeks. Yahoo did not hold a conference call in order to avoid having to answer questions that might stir up more objections by Verizon.

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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