Option Investor
Newsletter

Daily Newsletter, Monday, 11/14/2016

Table of Contents

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

Market Wrap

A Change In Paradigm

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Global indices continue to cheer in the wake of the Trump victory, the market at least seems to accept the new paradigm. Two notable moves in today's action occurred in the Dollar Index and Dow Jones Transportation Index which both surged to new long term highs. Other markets held their ground, at or near last week's highs, while investors consolidate positions and prepare for a period of lower taxes, deregulation, infrastructure spending and rising inflation.

Asian markets were a bit mixed but most indices closed with gains. The Japanese Nikkei led with gains near 1.75%, trading there was boosted by better than expected GDP numbers. Consensus estimate of 0.9% was blown out of the water by actual results of 2.2% and the first strong evidence that Abenomics and negative interest rates are working to spur economic activity. Europe closed the day with most indices in the green although gains were small, in the range of 0.25% to 0.50%.

Market Statistics

Futures trading indicated a flat to mildly positive open all morning. There was no economic data or noteworthy earnings releases before the bell to impact trading so action was pretty dull. At the open trading was to the upside but very choppy, just above break even levels, and did little more than hold gains posted last week. Most of the major indices, except the transports as noted above, spent the day drifting sideways within ranges set in the early part of the day and were not able to break them. Sideways trading continued into the end of the day leaving the indices near the middle of their respective ranges, and the blue chips at a new all time high.

Economic Calendar

The Economy

No economic data today but lots this week including retail sales, PPI, CPI, housing data and much more. The most important may be the CPI and PPI but Wednesday's release of FOMC Minutes could easily steal the spotlight. Taken together we will get an X-ray look at the FOMC along with important reads on consumer and producer level inflation, the housing sector, the consumer and a couple of regional manufacturing releases that could add momentum to the Trump Trade.

Moody's Survey Of Business Confidence gained another 0.8% to hit 32.6 and a new 6 month high. This is the 5th week of gains and the 1st week post-Trump; Mr. Zandi says that the "shocking presidential results" have had no noticeable impact on global sentiment. Based on the market rally I'd say that there had been a positive impact on sentiment but who am I to judge? Regardless, according to his summary sentiment remains steadfast around the world; the US is strongest, the EU has shrugged off the Brexit and poor sentiment in South America appears to have at least bottomed.


Just over 91% of the S& 500 has reported earnings so far this season. Of those that have reported 71% have beaten EPS estimates and 55% have beaten revenue estimates, both basically in line with trends over the past few quarters. All 11 sub sectors of the S&P 500 have beaten earnings expectations.The blended rate for earnings growth is now 2.9% and looks like it will remain at or near this level into the end of the season; the earnings recession has come to an end.


Looking forward earnings growth remains positive and on the upswing, although outlook continues to dim. Fourth quarter growth fell -0.3% to3.6% and a new low; based on 4 year trends this is likely to rise to 7.5% to 8% by the end of the 4th quarter cycle. Full year 2016 outlook held steady at 0.2% for the third week, full year 2017 outlook fell -0.2% to 11.2% and is also a new low.


Diminishing earnings growth outlook is a concern but what I would call a brick-in-the-wall-of-worry. Outlook for earnings growth is positive and expands into the end of next year regardless of the fact that the amount of expected growth is declining. Add in the chance that earnings will run 4% better than expected, on average, for each quarter of the year and 2017 growth could be as high as 16%. Add in the Trump effect from tax relief alone and those expectations could easily top 20%.

The Dollar Index

The Dollar Index surged more than 1% to hit a new 1 year high, break above the 100 level and approach the all time high. The index is supported by expectations of increased inflation expansion driven by the Trump economy, hopes for the Trump economy and the need for FOMC interest rates hikes due to current economic conditions reinforced by expectations for the Trump Economy. Today's move is strong, looks decisive and is confirmed by bullish signals in the indicators. There may be consolidation of pull back following today's move but a test of the all time high near 100.50 and probably a new all time high look fairly certain.


The Oil Index

Oil prices remain under pressure as faith in OPEC evaporates like water in the desert. The cartel is calling for production caps and cuts that, at face value, should help oil supply/demand imbalances to stabilize but when compared to actual production levels and production level increases do very little to address the situation. As of last week's report OPEC is pumping oil at a new monthly record that would leave production well above the levels seen the last two times they talked the market up on hopes of stabilizing prices. Conspiracy or not they are adding serious volatility to the market. WTI fell more than -1.5% in early trading to hit $42.75 but managed to regain most of that loss before the close. Next downside target is $40, a break below here could spell trouble for the oil industry and next years earnings outlook.

My new theory for oil is that low prices could help spur the economy in this time of change and lead to increased demand. How low they go in the near term is hard to say but I wouldn't be surprised to see demand outlook begin to improve in the next few months and a true stabilization of oil prices.

The Oil Index remains range bound. The index fell to test support near the middle of the 7+ month range and managed to rally from there but still closed with a loss for the day. Price action created a small white bodied candle, just above support, with indicators consistent with range bound trading. Current bias is to the downside, support at 1,120 could be tested or broken, if broken a move to the bottom of the range near 1,090 is likely.


The Gold Index

Gold prices are tanking. The surge in the dollar is overcoming any kind of physical support that exists and pushing gold prices down to long term lows. Today's action saw spot prices dip another -0.5% to touch a new 5 month low just above $1,200. Momentum is to the downside, next target for support is $1,200 and likely to be reached in the short if not nearer term. If prices were to rebound for some reason first target for resistance is $1,250.


In The News, Story Stocks and Earnings

Fall out from the election is plaguing some big names. Facebook is one. The social media giant is coming under fire for how it handles posts, particularly political and fake news posts, and the reliability of the information contained within. Some are saying that Facebook helped to influence the election by allowing the rampant spread of completely false propaganda, an allegation Zuckerberg denies. A twist in the story is the apparent existence of software designed to prevent such abuses that was not used for fear of its affect on, among other things, the election. Shares of the stock fell -3% to hit a new 6 month low, extending losses incurred following the release of earnings.


Apple is feeling the sting of a possible trade war with China. China's government issued a statement through a state backed newpaper saying they would retaliate with tariffs and restrictions of their own, and cited Apple's iPhone as a specific target. The statements went on to say that the government of China does not believe it will come to a trade war calling the threats campaign rhetoric and citing laws limiting the Presidents power to impose such tariffs. Shares of Apple fell -2.5% to hit $105 and 2 month low where there is potential for support. If so, this could be the Trump Entry for Apple. A cooling of rhetoric or, best case scenario, a warming of relations between China and Trump could send this one back up to test recent highs.


Boeing was also named in the Chinese news report as a target of retaliatory trade practices if a trade war were to be engaged. The paper says that a number of orders for Boeing planes would be replaced for Airbus aircraft instead, the news however did not have material impact on the company's stock prices. Shares actually rose in today's session, gaining nearly 1%, to tickle a one year high and were further supported by late day reports Warren Buffet was buying airlines.


The Indices

Today's market action was largely without significant move, at least in terms of the major indices. The one stand out is the Dow Jones Transportation Average which gained nearly 2.20%. The transports have come late to the party but are making up for lost time, gaining nearly 10% in the last 8 days to break above resistance levels and set a new 18 month high. The index looks poised to continue this move and eventually retest all time highs set almost exactly 2 years ago. The indicators confirm and support this move, both showing strength and suggestive of higher prices. Next upside target is near 9,000 and a consolidation range just beneath the current all time high.


The next biggest gain in today's session was set by the Dow Jones Industrial Average, a mere 0.11%, and enough to set another new all time high. The blue chips are moving up on expectations of infrastructure spending, expanding US economic growth and the spill-over effect of expanding global economic growth. The index created a small doji candle that could be a shooting star but is most likely a spinning top, we'll see. A consolidation at this level should be expected now that the index is trading above previous all-time-high-resistance. In the near term, provide we get some follow through in the market, upside target is roughly 850 points above today's close. Longer term, Dow 20,000 does not look unlikely.


The S&P 500 made the smallest loss in today's session, -0.01%. Price action looks like consolidation beneath current all time high levels and gearing up to make a run to test resistance. The indicators are bullish and confirm the move, a reconfirmation in the indicators and break to new highs would be very bullish in my opinion and could easily lead the index up to 2,400 in the near to short term. For now, upside target is near 2,200 and the current all time high with support rising along with the short term moving average near 2,140.


The NASDAQ Composite made the biggest loss in today's session but only -0.36%. The move appears to be part of consolidation along support levels consistent with the short term moving average and could lead to further upside. The indicators have confirmed the bounce and suggest prices will continue to rise in the near term. First upside target is just above today's close, near the current all time high, and may not be broken unless the market follows through on the Trump Rally. A break to new all time highs would be bullish and could lead the index up to 5,500 in the near term.


Today's action was a consolidation of last week's Presidential Rally and the indices look poised to extend that move into the near, short and long term. Supporting this outlook is ongoing economic recovery, positive and expanding earnings growth outlook, low oil prices and a general acceptance that the Trump presidency will bring a period of unfettered growth for the US economy. Unless something completely unexpected hits the market I just don't see any reason to expect the onset of bear market conditions. As for the FOMC, they and their rate hike don't seem that important anymore. Important yes, but not as important as they were even a week ago. Not to discount them but it seems assured that rates are going to begin rising very very soon. On the market, I'm still cautious, but cautiously bullish, looking to buy on the dips and preparing for what could be a long ride upward.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Triple Miss

by Jim Brown

Click here to email Jim Brown

Editors Note:

Do not miss on earnings, revenue and guidance or your shares will tank. That is what happened to Cerner over the last two weeks. Three strikes and you are out.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

CERN - Cerner - Company Profile

Cerner Corporation designs, develops, markets, installs, hosts, and supports health care information technology, health care devices, hardware, and content solutions for health care organizations and consumers in the United States and internationally. The company offers Cerner Millennium architecture, which includes clinical, financial, and management information systems that allow providers to access an individual's electronic health record at the point of care, and organizes and delivers information for physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals, and consumers. It also provides HealtheIntent platform, a cloud-based platform that enables organizations to aggregate, transform, and reconcile data across the continuum of care, as well as assists to enhance outcomes and lower costs. Company description from FinViz.com.

When the company reported earnings on November 1st they missed on all three metrics. Earnings of 59 cents missed estimates by a penny. Revenue of $1.18 billion missed estimates for $1.24 billion. They guided for Q4 earnings of 60-62 cents and analysts were expecting 65 cents. They guided for revenue of $1.23-$1.30 billion and analysts expected $1.32 billion. Bookings fell -10% to $1.43 billion and below Cerner's own guidance for $1.45-$1.60 billion.

Shares fell after the report then fell again after the election on uncertainty over what the health care changes will do to existing programs and services. With potentially sweeping changes to the sector and Cerner already under pressure the stock began to decline again.

Earnings Jan 31st.

With shares declining in a bullish market and setting a new 3-year low on Friday, I expect them to continue lower as the bullishness wears off.

Buy Jan $47.50 put, currently $1.70, no initial stop loss.



In Play Updates and Reviews

Selective Participation

by Jim Brown

Click here to email Jim Brown

Editors Note:

The rally continued for some sectors and individual stocks but the breadth is shrinking. We may be coming to the end of the road on the post election rally with a lot more stocks failing to participate.

The S&P has failed to make a material gain for the last two days and is now stuck under the 2,167 and 2,175 resistance levels. This may be just a pause to consolidate for the next move higher or it could be a distribution phase where managers are taking some quick profits with expectations for a decent decline in the coming days.

The Russell 2000 broke out to a new high and the biotech sector had another monster gain. Tech stocks were weak again and Facebook was down $5 intraday to kill our long call entry only an hour after we launched it.



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


SMG - Scotts Miracle Gro

The long call position was entered at the open.

WDC - Western Digital

The long call position was entered at the open.

FB - Facebook

The long call position was entered at the open and stopped at 11:AM.



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BULLISH Play Updates


FB - Facebook - Company Profile

Comments:

That was not fun. Facebook shares crashed again at the open and were down over $5 intraday. We entered the position at the open and were stopped out at 11:AM. I still believe FB will rebound but we need to see it form a bottom first.

Original Trade Description: November 12th.

Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.

The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.

Facebook still makes a lot of money and they still have a lot of assets to monetize. Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.

Earnings February 1st.

Position 11/14/16:

Closed 11/14/16: Long Jan $125 call @ $2.90, exit $1.89, -$1.01 loss.


HON - Honeywell - Company Profile

Comments:

No specific news. Minor decline in a mixed market.

Original Trade Description: October 15th.

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

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

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

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

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

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

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

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

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

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.


IWM - Russell 2000 ETF - ETF Profile

Comments:

New high on the IWM. This rally should end soon so I am just going to continue raising the stop until we are taken out.

Original Trade Description: November 5th.

The IWM currently holds 1,975 stocks and attempts to replicate the performance of the Russell 2000 Small Cap Index.

The S&P has now declined for nine consecutive days and the longest streak in 36 years. That is the equivalent to red coming up on the roulette table nine times in a row. The index is short-term oversold after a 4.8% decline. I believe the sell off over election uncertainty is nearly over. Investors and funds have had a week since the end of the October fiscal year end to make changes to their portfolios and raise cash for their post election purchases.

We all know there are several sectors that will not do well under a Clinton presidency and some that will prosper. Under a Trump presidency there are more profitable sectors but there is a greater fear of the unknown. He is a take no prisoners type of person and he has a lot of ideas about how to make American great again. Unfortunately, it may start off with a larger market sell off on that uncertainty.

Clinton is still ahead in the polls with two days to go and she is pulling out all the stops. The electoral map favors Clinton because there are more democrats than republicans. The heavily populated coastal states with a high number of electoral votes are liberal democrat while most of the flyover states are conservative republican.

The key point here is that Clinton is favored to win despite all her problems. If that turns out to be the case the market is expected to rally 3% to 5% very quickly.

There is always the possibility of a Trump upset and a temporary market dip but that would be the "Brexit dip" that should be bought. This is a headline event rather than a sudden change in the government. It would take many months or even years to get his changes passed into laws, and some would never be passed. The key point is that a Trump victory could be a sell the news event followed by a Brexit type rebound.

I am recommending a call position on the Russell 2000 ETF because the Russell is the most oversold. It is also cheaper for a speculative position.

I am going to recommend two entries. One for a positive move higher and one for a dip buy. It is entirely possible we could end up with both positions. If the dip entry is triggered first, cancel the rebound entry.

This is a SPECULATIVE position. Do not invest money you cannot afford to lose.

Rebound entry:

Position 11/7/16: With an IWM trade at $117.25
Long Dec $119 call @ $2.47, see portfolio graphic for stop loss.


SMG - Scotts Miracle Grow - Company Profile

Comments:

No specific news. Shares gapped open to $82.29 and our call entry was pretty close to the high for the day. Shares faded after the open but recovered to close at the highs.

Original Trade Description: November 12th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter, sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

Position 11/14/16:

Long March $90 call @ $3.90, see portfolio graphic for stop loss.


TREE - Lending Tree - Company Profile

Comments:

No specific news. TREE shares gapped up to $99 at the open but faded with the market to close at $95 with only a 35 cent gain.

Original Trade Description: October 31st.

LendingTree, Inc., operates an online loan marketplace for consumers seeking loans and other credit-based offerings in the United States. The company offers tools and resources, including free credit scores that facilitate comparison shopping for these loans and other credit-based offerings. Its mortgage products comprise purchase and refinance products. The company also provides information, tools, and access to various conditional loan offers for non-mortgage products, including auto loans, credit cards, home equity loans, personal loans, reverse mortgages, small business loans, and student loans. In addition, it offers information, tools, and access to other products, including credit repair, through which consumers obtain assistance improving their credit profiles; debt relief services, through which consumers obtain assistance negotiating existing loans; home improvement services, through which consumers have the opportunity to research and find home improvement professional services; personal credit data, through which consumers gain insights into how prospective lenders and other third parties view their credit profiles; real estate brokerage services, through which consumers are matched with local realtors who assist them in their home purchase or sale efforts; and various consumer insurance products, including home and automobile, through which consumers are matched with insurance lead aggregators to obtain insurance offers. Company description from FinViz.com.

Lending Tree reported revenues that rose 35.5% to $94.6 million but missed estimates for $96.9 million. Earnings of 80 cents were in line with analyst estimates. The company lowered its revenue guidance for the full year from $380-$390 million to $370-$375 million. The stock was knocked for a $16 loss to $75.

Yes, they reported a 35.5% increase in revenue but missed estimates by $2 million and the stock was crushed. That is hardly worth a major decline.

That is not the entire story. Mortgage product revenues rose 21%. Total loan requests rose 68%. Small business lending has risen more than 200% from the year ago quarter. The MyLendingTree.com customer portal product now has more than 3.7 million members.

The CEO was not apologetic. He said in a quarter where mortgage rates were near a record low we optimized the business to expand margins and grow profits.

Earnings Jan 26th.

I see nothing wrong with Lending Tree. While they did miss revenue fractionally and guided fractionally lower for the full year, the business is booming. We should see a swift rebound because there are very few companies of any type growing this fast.

Position 11/1/16:

Long Dec $85 call @ $4.00, see portfolio graphic for stop loss.


WDC - Western Digital - Company Profile

Comments:

No specific news. Testing resistance at $60.

Original Trade Description: November 12th

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

Last week WDC announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy with a price target of $69.64. Shares closed at $58.89 on Friday.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Position 11/14/16:

Long Jan $62.50 call @ $2.20, see portfolio graphic for stop loss.


XBI - Biotech ETF ETF Profile

Comments:

Another major gain and moving closer to resistance at $69. A breakthrough there could really run.

Original Trade Description: October 29th.

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

The XBI traded up to $69 in late September and has since crashed back to support at $56 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls.

Comments from Clinton, Warren and Sanders about drug pricing concerns also caused investors to flee the biotech sector.

The biotechs may have ended their decline in fear of Hillary Clinton. After the news on Friday about the FBI reopening the criminal investigation on her emails, that should make it really tough to win the election. That means the biotech sector could begin to rebound even before the vote if the polls tighten even further or move into Trump's favor.

On Friday 10/28, the healthcare sector imploded on earnings and warnings from several companies including McKesson, AmerisourceBergen, Cardinal Health and others. The XBI failed to decline after hitting support at $56.

With the XBI now -18% off its September high, all of those factors above are baked into the market. This may be time to place a bet on a biotech rebound.

The ETF has support at $56 and the 200-day at $56.55. The dip on Friday penetrated to $55.80 but then rebounded $1 in a weak market.

I am recommending we buy a cheap December call ahead of the polls that will be out next week. If Clinton does win, we will exit on any weakness.

Position 11/8/16 with a XBI trade at $58

Long Jan $60 call @ $2.37, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

VXX - VIX Futures ETF - Company Profile

Comments:

Only a minor decline because of the mixed market.

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:

Sure glad we reopened that Yahoo put. Shares hit a new 3-month low. No specific news.

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.

Update 10/26/126: 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.

Update 11/10/16: In a filing with the SEC the company admitted it waited 18 months after the hack was initially discovered before researching it so see what was really stolen and the actual number of account records hacked. The filing also said the FBI is researching data supplied from a hacker that includes a significant amount of account information that was not initially thought to be taken in the account. The hacker said he obtained the information on the web and turned it over to the FBI.

The new SEC disclosure contains this clause in the risk section.

"risks that Verizon may assert, or threaten to assert, rights or claims with respect to the Stock Purchase Agreement as a result of facts relating to the Security Incident and may seek to terminate the Stock Purchase Agreement or renegotiate the terms of the Sale transaction on that basis."

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 11/11/16:

Long Jan $40 put @ $1.90. See portfolio graphic for stop loss.

Previously closed 11/10/16: Long Jan $40 put @ $1.90. Exit 1.96, +.06 gain


YUM - YUM Brands - Company Profile

Comments:

No specific news. The morning bounce faded to close back at the lows.

Original Trade Description: November 2nd.

YUM! Brands, Inc., operates quick service restaurants. It operates in three segments: the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items. As of April 21, 2016, it operated approximately 36,000 restaurants in approximately 130 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food categories. Company description from FinViz.com.

Yum China had 7,300 stores and adding 1,500 since 2012. Currently they are on a path to add 600 stores a year with a growth target of 20,000 stores. This was the growth engine for Yum Brands.

Now the parent company is going to focus on a dividend model and returning cash to shareholders. Yum is planning on reducing its owned store count in the U.S. from 3,200 to 1,000. In the U.S. the pace of new restaurants has slowed significantly and Yum will concentrate on generating and retaining cash of its existing portfolio.

While Yum may generate a great dividend in the years to come, the excitement has evaporated from the stock. There will be little growth and earnings are going to flat line.

Update 11/4/16: Yum announced a giant expansion plan for Taco Bell. They are going to add 2,600 stores by the end of 2022 to bring their total to 9,000 US locations. That will increase employment by 100,000 from the current 210,000. Shares declined on the news.

Apparently I was wrong about Yum Brands lack of expansion. They are taking their most popular store and spending the money they are getting from yum China to expand it. While this will have no impact on YUM in the near future, it would be beneficial five years from now and raise earnings and dividends.

Earnings Jan 4th.

Shares are at $60 and I think they have risk to $55 or even $45. There is support at $57.50 but the company has changed. I would not be surprised to see shares cut through that support very quickly.

The YUMC shares began trading on Tuesday and YUM shares have declined sharply on Tue/Wed. The option is cheap and we will have little risk.

Position 11/3/16:

Long Dec $57.50 put @ $1.10, see portfolio graphic for stop loss.




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