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Newsletter

Daily Newsletter, Wednesday, 10/26/2016

Table of Contents

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

Market Wrap

Coiling Patterns Hold

by Keene Little

Click here to email Keene Little
The market is waiting to get through the elections and in the process the major indexes are forming tighter trading ranges. Depending on one's interpretation of the consolidation patterns it can be argued they're bullish or bearish, leaving traders waiting for a break. We might be waiting for at least another week before that break.

Today's Market Stats

The market is on hold and it continues to chop up and down in a tightening trading range. That sentence describes the market for the past two months and it might not change until we get through the elections. It's driving traders crazy but at least we are likely much closer to the end of it than the beginning. The challenge will be figuring out which direction the break should occur.

There's very little affecting the market right now and with lower trading volume we're getting fast reversals of reversals, leaving traders trapped daily looking in the wrong direction. Trend traders are getting chopped to pieces and are giving up, which drives trading volume lower. While this might not change for at least another week, it's important to understand how the market typically frustrates the most traders to the point of giving up before establishing a new trend. The new trend is typically not believed until it's well underway. Our job is to figure out where and when that trend will start so that we can get a jump on it earlier than most traders.

I'll jump right into the charts, starting with the SPX weekly chart, to point out the patterns that could help us identify a trend change (from a consolidation or ending pattern to a new trending move). If you're very frustrated right now, join the club, but stay patient for a little longer so that you'll be ready to start trading again when the time is right (no later than post-election I believe).


S&P 500, SPX, Weekly chart

From a weekly perspective SPX continues to hold onto the bottom of a rising wedge pattern, which is the uptrend line from February-June and currently near 2150. Bears look at the break of the uptrend line on October 13th and not being able to recover back above the line as bearish. A break followed by back-tests should lead to lower prices, or so the theory goes in a normal market. In any case, the bulls really would be in a better position above 2150. But a descending triangle off the August high (better seen on the daily chart further below) is a bullish continuation pattern and it's looking like price could continue to consolidate for another week or two before breaking out to the upside. Of course if it breaks down instead, with a decline below the October low near 2114, it would leave behind a failed bullish pattern and that would likely be followed by strong selling.


S&P 500, SPX, Daily chart

On a daily basis I'm seeing short-term patterns getting blown up with the endless choppy consolidation that we've been in (over two months now). I can't help but feel there are some monied interests holding the market up to ensure a Clinton victory. I see signs of distribution but then indexes spike back up in order to keep the bears away. And if Clinton wins I can see the potential for a hurrah rally to follow, which from a longer-term pattern perspective would be the completion of the rising wedge shown on the weekly chart and that would in turn complete the cyclical bull off the 2009 low.

The descending triangle off the August highs is shown on the daily chart and this ideally will get one more up-down sequence to finish (around election day?). That would be a setup for a big rally to complete the cyclical bull (maybe to SPX 2250-2300). Short term there is the possibility that the descending triangle can be considered complete at any time and therefore a rally above the October 10th high near 2170 would be bullish. Between 2114 and 2170 we have to stay aware of the potential for more of the same choppy whippy price action, potentially into the elections.

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


S&P 500, SPX, 60-min chart

A closer view of the price action inside the triangle is shown on the 60-min chart below. We have price-level S/R near 2145 and 2135 that price has been cycling around for the past two weeks, along with the bottom of the triangle near 2120 and the top of the triangle currently near 2158. As with all triangles, they're full of choppy price action and this one certainly has been no exception. I show an up-down sequence into election day to complete the triangle but obviously that's just speculation. For now it provides a road map to follow to help determine whether or not we're going to get a bullish setup out of this or if instead it breaks down or breaks out early.


Dow Industrials, INDU, Daily chart

The Dow got a bigger helping hand today, thanks to Boeing (BA), which finished up at 145.54 (+4.7%). It's a real heavy weight for the Dow and it single-handedly lifted the index, which made the Dow the only one in the green today. But its chart is no different from SPX as it hammers out what appears to be a descending triangle with all the choppy price action inside to support the interpretation. The bottom is near 18K and the top, depending on how the downtrend line is drawn, is near 18300 or 18345. The May 2015 high is at 18351 so there's double resistance near there for the bulls to break through. Above its October 10th high near 18400 would be bullish since it would be a breakout from the triangle and a rally back above its 50-dma, near 2158. But a break below 18K would indicate a breakdown from a bullish pattern and I would not want to be in long positions if that happens. Beware of more chop until we get the break one way or the other.

Key Levels for DOW:
- bullish above 18,400
- bearish below 17,992


Nasdaq-100, NDX, Daily chart

On Monday it looked like NDX finally broke free of its trend line along the highs from July-November 2015, currently near 4881. Tuesday it dropped back down to the trend line for a bullish setup with a back-test. All it needed was a rally today to keep things bullish. AAPL spoiled those plans with a disappointing earnings report (first sales decline in 15 years) in yesterday's after-hours session. That gapped NDX down this morning and left another bull trap with Monday's rally. The gap down put NDX back below the trend line which it broke above on Monday. This has been one frustrating index for bullish traders since we've seen repeated breaks of resistance that then turn into failed breaks and bull traps.

The choppy move higher from September 12th looks like a shallow rising wedge pattern with the top of the wedge being the trend line along the highs since September 22nd (where Monday's rally stopped) and the bottom of the wedge being the uptrend line from September 12th, currently near its March 2000 high at 4816. The rising wedge for NDX is a bearish ending pattern, which calls for a completion prior to the elections. This is very different from the bullish interpretation of the descending triangles for the blue chips and is a strong reason to doubt the bullish pattern. The flip side says if NDX breaks out of the rising wedge, with a rally above 4930 (the projection for where the 5th wave of the rally from June equals the 1st wave), bears will need to abandon the short side and head for the hills.

Key Levels for NDX:
- bullish above 4931
- bearish below 4760


Russell-2000, RUT, Daily chart

The RUT is the bearish index and as a sentiment index it's not a good sign for the bulls. It could be in just a larger pullback while the other indexes trade sideways/up but at the moment it's looking more bearish than bullish. On October 14th it broke its uptrend line from February-June, as well as price-level support near 1215. It repeatedly bounced back up but was held down by the broken uptrend line. Following Monday's back-test it sold off sharply yesterday, leaving a bearish kiss goodbye. But the bulls had another chance to power it higher since price-level support near 1215 held. But today's decline dropped the RUT below 1215 and then through support at 1205 (its December 2015 high and last tested on September 13th). It closed only marginally below support so there's still a chance for the bulls to come to the rescue but I don't see any reason to be long this index. Maybe if it gets back above Monday's high near 1232 (which was also a back-test of its broken 20-dma).

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


High Yield Corporate Bond fund, HYG, Daily chart

In addition to the higher-risk small caps, the higher-risk bonds could be in trouble as well. I've mentioned HYG many times in the past as a good index to watch since it's a good reflection of risk-on vs. risk-off by investors. It's hard to see the break on the squished daily chart of HYG below but today's decline broke its uptrend line from February-June, currently near its 20-dma at 87.05. If that's the bottom of a rising wedge we could see faster selling develop. But a larger rising wedge, using an uptrend line from August 2 - September 13, currently near 86.35, could be the more important line to break since a drop to there could be followed by another leg up to finish the rising wedge later in November (which would keep it in synch with the bullish idea shown for the blue chips). An early breakdown is predicted by the RUT if it keeps selling off while we'll likely see more of a choppy rise higher if the blue chips keep their bullish patterns intact. In any case, this index could be a good canary for the broader stock market.


10-year Yield, TNX, Daily chart

The 10-year yield has been holding near the high set on October 12th and will either form a small double top here or press at least a little higher to trendline resistance just below 1.84%. Above 1.84 would be bullish for yields (bearish for bond prices) but at the moment, with a stall under the projection at 1.811 (two equal legs for a double zigzag wave count), I wouldn't be surprised to see yields start falling back down at any time, especially if tomorrow's Durable Goods report and Friday's GDP report are weak and further support the idea that the Fed will not have enough wiggle room to raise rates.


KBW Bank index, BKX, Daily chart

The banks have been relatively strong, presumably under the assumption they'll be in a stronger financial position with a rate increase from the Fed. The pattern for its rally from February is corrective (choppy with overlapping highs and lows within the move) and that means the entire thing has a high probability of getting completely retraced. The only question is how high it could go before rolling over. For a while, since it climbed above price-level S/R near 66.50 in July and then its downtrend line from July-December 2015, near 69.60 in mid-August, I've thought it could reach a price projection at 75.41 to achieve two equal legs up from February. With today's high at 74.87 it's within spitting distance of achieving that level. There's no guarantee it will reach that level or stop there but it's a level of interest to see if it's achieved and then rolls over after that.


U.S. Dollar contract, DX, Daily chart

The US$ remains on track to reach the top of its shallow down-channel off the March 2015 high, currently near 100.35. I show a projection to that level by the end of November to reach the top of its parallel up-channel from April at the same time. Obviously this is speculation but it would be a good setup for a reversal back down for one more test of the bottom of its down-channel in early 2017 before finally setting it up for a big rally.


Gold continuous contract, GC, Daily chart

Following gold's breakdown on October 4th into the low on October 7th it has tried to bounce back up and hold onto its 200-dma, currently at 1269.70, slightly above today's close at 1267.60. The bounce looks corrective and suggests at least another leg down and we could see it stair-step lower to price-level support at 1182, or perhaps to its May 31st low at 1199, before getting a bigger bounce. Note the breakdown from a descending triangle pattern that followed its July high, which had suggested we'd see another rally leg for gold. Instead, the breakdown led to strong selling, which once again shows how a failed pattern tends to fail hard. Longer-term there is the potential for much more selling in the future and a complete retracement of the 3-wave bounce off the December 2015 low (1046.80).


Silver continuous contract, SI, Weekly chart

Silver often leads gold since it has more of a production component whereas gold is often thought of as a currency hedge. Silver has been in a long-term down-channel since 2011 and the bounce off the December 2015 low into July 2016 high was just a 3-wave move up to the top of its down-channel. It would have been more bullish with a break of the down-channel and a rally above its July high near 21.23 would have me turning bullish both metals. The decline into the October 6th low was a break of its uptrend line for the bounce off last December's low. The bounce attempt since October 6th is a choppy sideways/up correction, which should be followed by another leg down. It should find at least temporary support near 16 and maybe on a back-test of the mid-line of its down-channel, which will be near 14.75 by the end of November. The overlap of its May high at 18.06 suggests a high probability that the December-July rally will be completely retraced and a drop down to the bottom of its down-channel could be next, perhaps down to it 2008 low at 8.40 by the end of 2017.


Oil continuous contract, CL, Daily chart

I've been watching an upside target zone for oil at 50.92 (its October 2015 bounce high) to 51.97 (two equal legs up from August 3rd. The October 19th high was 51.93 so 4 cents from the 51.97 target and I'd say close enough, especially now with the drop below the October 10th low at 49.15. (today's low was 48.87). It could still press higher and it would be bullish above 52 for at least a run up to price-level S/R near 58.50. But the bearish setup, which would be confirmed with a break of the uptrend line from August 3rd, currently near 46, is for oil to now head lower and drop below 26.


Economic reports

Thursday's economic reports include unemployment claims data and more importantly the Durable Goods Orders and Pending Home Sales. The bigger market impact could come from Friday's GDP data since that could influence the Fed, which is what the market reacts to.


Conclusion

We have been in an endless consolidation (over two months at this point) and it's driving traders crazy. These are the times when trend traders get chopped to pieces and finally give up at about the time the market is ready to trend again. Traders get used to the quick reversals with all the choppy price action and when a trend gets started they miss it because they expect the market to reverse again. This is the way the market frustrates the most traders and we're experiencing it again. Get ready for a trend to start since most traders have now been conditioned to not expect one.

But a new trend might not start until after the elections. Traders seem to be on hold (low trading volume) while waiting to get through this period of uncertainty. It's a little surprising the market hasn't declined during this period but I strongly suspect there are big-monied interests keeping the market from sinking in order to maintain the status quo -- those in power want to keep the power and those who have influence over the government (big money, whether that's banks, pharmaceuticals, big Ag or other corporate interests) want to keep that influence. This has created a strong support effort to get Clinton elected in order to extend the current power structure. That's not a political comment since it wouldn't matter which party was in power. In fact we've seen very little difference between the parties as far as how this country is run (into ruin).

The big question is which way the market is going to break. The pattern for the blue chips (descending triangles) suggests an upside break following the election. But keep in mind what happened to the bullish descending triangle for gold. NDX is in a rising wedge ending pattern and might have finished or could see a choppy sideways/up continuation to finish its rally shortly after the election. The RUT is threatening to break down now and that would not be a good sign for the broader market. Keep an eye on it and HYG for advance bearish warning (or not).

Good luck and I'll be back with you next 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

Weak Guidance

by Jim Brown

Click here to email Jim Brown

Editors Note:

The worst thing a retailer can give investors ahead of Q4 is weak guidance. Big Lots warned Q4 comps would be "flattish" and leaving the door open for a decline. They revised down full year revenue guidance to only 1-2% growth.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

BIG - Big Lots - Company Profile

Big Lots, Inc., operates as a non-traditional, discount retailer in the United States. The company offers products under various merchandising categories, such as food category that includes beverage and grocery, candy and snacks, and specialty foods departments; consumables category, which comprises health and beauty, plastics, paper, chemical, and pet departments; soft home category that consists of home decor, frames, fashion bedding, utility bedding, bath, window, decorative textile, and area rugs departments; hard home category, including small appliances, table top, food preparation, stationery, greeting cards, and home maintenance departments; and furniture category consisting of upholstery, mattress, ready-to-assemble, and case goods departments. It also provides merchandise under the seasonal category that includes lawn and garden, summer, Christmas, toys, and other holiday departments; and electronics and accessories category, including electronics, jewelry, hosiery, and infant accessories departments. The company operates 1,449 stores in 47 states. Company description from FinViz.com.

For Q2, the company reported earnings of 52 cents compared to estimates for 45 cents. Revenue of $1.2 billion missed estimates for $1.22 billion. For the current quarter they guided for a profit of 1 cent to a loss of 4 cents. That is not exactly a stellar performance.

Revenue growth in Q2 slowed from the 3% in Q1 quarter to a -0.5% decline in Q2. Same store sales only rose +0.3%. Big Lots warned Q4 comps would be "flattish" and leaving the door open for a decline. They revised down full year revenue guidance to only 1-2% growth. The admitted online sales were only about 4% of the total and there was limited inventory online. That is not what investors wanted to hear.

Earnings Dec 2nd.

Shares collapsed to plateau about $47 in September. In October that plateau declined to $44.50 and this week that level has now broken. With the market weakening there is less tolerance for companies that are not performing. Shares are near a 9-month low.

Buy December $42.50 put, currently $2.15, initial stop loss $45.35



In Play Updates and Reviews

Dow Support Test

by Jim Brown

Click here to email Jim Brown

Editors Note:

The converging resistance at 18,250 on the Dow held once again and the Dow dipped more than 100 points at the open to test support at 18,100. The markets opened weak with the Dow down hard thanks to Apple and other stocks in their post earnings depression period. The index rebounded to trade in a 174 point range but closed with a gain of only 30 points.

The Russell 2000 small cap index broke support at 1,210 with another -1% drop to close at 1,205. The Russell is telling us there may be further broad market declines ahead. Portfolio managers appear to be taking money out of small caps ahead of month end and the election. That is not a good sign.



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


ALK - Alaska Air

The long call recommendation has been cancelled.



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


ALK - Alaska Air Group - Company Profile

Comments:

Southwest Airlines (LUV) posted disappointing earnings and tanked the entire sector. I am cancelling this recommendation.

Original Trade Description: October 22nd.

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.

Recommendation cancelled.


COST - Costco - Company Profile

Comments:

No specific news. Morgan Stanley said Amazon is not a competitor for Costco. Based on a survey most Costco members are also Amazon Prime members. More than 95% of people surveyed plan to renew both memberships.

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:

Sling TV by Dish has surpassed the one million subscriber mark giving them a head start over DirecTV and AT&T.

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 and a decent gain in a weak market. Shares are moving steadily higher and now pressing resistance at $110.

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.

Update 10/21/16: 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.

Position 10/17/16:

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


LB - L Brands - Company Profile

Comments:

No material movement. The company will host an investor day on November 1st and everyone can listen/watch on the LB.com website.

Original Trade Description: October 24th.

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

In early October LB said same store sales for the five weeks ended on Oct 1st, rose 3% and beat expectations. Total net sales for September rose $971.4 million. Same store sales were flat at Victoria Secret but rose 9% at Bath& Body Works.

The company said they are emphasizing pink active bras and the sports collection for October. They guided for comps to increase in the low-single digits for October.

With analysts expecting a decent earnings report on November 16th and shares rising, we could see a decent gain over the next three weeks. Resistance is $73.50 and again at $75.

This is a short-term play and we will try to get in and out quickly. I am using the December strike so there will be some earnings expectation premium left when we exit.

Somebody recently bought 2,300 November $75 calls for as much as $1.80. That is a pretty expensive bet that shares will rise.

Position 10/25/16:

Long Dec $75 call @ $1.65, see portfolio graphic for stop loss.


NVDA - Nvidia - Company Profile

Comments:

Shares rallied to another new high on a rumor they will hike the dividend by 15% with earnings on November 10th. They are also expected to increase the stock buyback.

Microsoft announced a new Windows 10 Surface Studio that includes a desktop PC and 28 inch ultra-high resolution monitor powered by Nvidia graphics chips.

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/QQQ declined again and by a material amount thanks to Apple's earnings drop. If fund managers are going to window dress for the end of October fiscal year, they are running out of time.

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. Trump now leading in several states and there is a risk of Clinton losing. That means gun sales would not rise and shares are weakening.

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.

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)

VXX - VIX Futures ETF - Company Profile

Comments:

This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.


YHOO - Yahoo - Company Profile

Comments:

Verizon executive, Marni Walden, said Verizon was taking an in-depth look at how the Yahoo cyber attack occurred and what risk Verizon would have from continuing the acquisition. They would have an answer within 60 days. She said the deal still makes sense strategically BUT we have to be careful about what we do not know. The deal was tentatively still on track but the impact of the breach was "material" and still a big unknown. Use of the word material refers to a possible "material adverse change" or MAC clause in the contract that would allow Verizon to walk from the deal. With 500 million accounts hacked, a $20 fine on each account would be $10 billion and more than twice the $4.8 billion sales 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. See portfolio graphic for stop loss.




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