Option Investor
Newsletter

Daily Newsletter, Saturday, 12/3/2016

Table of Contents

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

Market Wrap

Holding Pattern

by Jim Brown

Click here to email Jim Brown

After trying to move higher intraday, the markets ended flat ahead of the Italian referendum.

Weekly Statistics

Friday Statistics

The Italian constitutional referendum on Sunday is a major decision for Italy. The vote will significantly modify the 68-year old constitution. Forty-seven of the Constitution's 139 articles will be modified. It would change the composition of Parliament, the ways the laws are passed and the balance of power between the central government and the country's 20 regions. A yes vote would reduce the 315 Senate members to only 95, plus 5 members nominated by the president. The current requirement for the Senate and the lower house of Parliament to both pass an identical version of the same bill before it becomes law, would be removed. The lower house will pass most laws and the Senate would become more of a consultative body.

Prime Minister Matteo Renzi, wants a yes vote in order to concentrate more government authority in a smaller number of hands. If the vote is a no and the constitution remains unchanged, he has vowed to resign. Some opposition members have been promoting a no vote in order to force his resignation and topple the current government. Renzi has lost a lot of popularity in recent months and there may be quite a few people that vote no. If Renzi did resign, President Sergio Mattarella would consult with the various political parties and could decide to form a caretaker government or call for early elections.

However, a yes vote would be the equivalent of the Brexit vote for the Italian markets. The CEO of the Italian stock exchange said there are colossal short positions held by U.S. investors and the market would explode if there was a yes vote.

A no vote would promote political instability and banks, currently under severe pressure and in need of recapitalization, would find it difficult to raise capital under an unstable government. The vote will have repercussions in the rest of Europe where populism is surging after the Trump election and the sharp rise in violence as a result of the Muslim immigration.

U.S. markets could react sharply to the outcome of the referendum but it is difficult to know which way they would move. It will depend on the outcome and the impact to currencies. I would expect some significant volatility at the open but it should fade quickly.

In the U.S. the payroll numbers had little impact on the market. November saw 178,000 jobs added compared to consensus estimates for 175,000. Moody's had predicted 215,000. The October number was revised down from 161,000 to 142,000 and September was revised up from 191,000 to 208,000.

The unemployment rate declined 3 tenths from 4.9% to 4.6% and the low for this cycle. However, it was due to more discouraged workers leaving the workforce and fewer new workers entering the workforce. The labor force participation rate declined one tenth to 62.7% as the labor force declined by -226,000 workers. Those not in the labor force rose by 446,000 to 95,055,000.

Average hourly wages declined -0.1% after rising a total of +0.7% over the prior two months. The average hourly workweek was flat at 34.4 hours for the third consecutive month.

Analysts were surprised by the loss of 8,000 jobs in the retail sector heading into the holiday shopping season. Information technology lost 10,000 jobs and manufacturers lost another 4,000 jobs. Construction contractors were a high point with a gain of 19,000 jobs. Professional/business added 63,000, education/healthcare added 44,000 and leisure/hospitality gained 29,000.

The Nonfarm Payrolls disappointed compared to the blowout in the ADP numbers on Wednesday. ADP reported a gain of 217,000 jobs compared to estimates for 165,000 and the 147,000 created in October.


The ISM - NY current conditions index rebounded from 49.2 to 52.5 for November. That is the first reading in expansion territory over 50 in four months and significantly improved from the 47.5 in August. The employment component rose from 50.6 to 52.3. The six-month outlook rose from 56.9 to 60.8. The prices paid component rose from 55.6 to 69.2 and a five-year high. This is showing the rapidly rising inflation beginning to filter through the system. This report was ignored.

We had a very robust economic calendar last week and that left us with a void for the coming week. The only report of interest is the ISM services on Monday but it rarely moves the market. We have some filler reports on Tuesday with factory orders the most important if they come in as expected with a big 2% bump. After that the calendar is devoid of any material events until the Fed rate hike the following Wednesday.

The only Fed speakers are on Monday with the normal one-week pre FOMC quiet period starting on Tuesday. It does not make any difference that there are no speakers because the Fed will still hike rates. The CME FedWatch Tool is now predicting a 97.2% chance of a rate hike.



Internet music streaming company Pandora (P) saw its shares rise 16% after sources said it was open to selling itself. The report said the company was now willing to talk to SiriusXM, a company that tried to buy them in the past. The official word from the Pandora spokesman was that the company does not "comment on rumors or speculation." Bloomberg was reporting that Sirius XM chairman, Greg Maffei, recently made a fresh approach to Pandora. No prices were discussed. Previously Sirius offered $15 per share. Competition is increasing from sources like Spotify, Apple Music, Google Play Music and Amazon Music Unlimited. When they reported earnings, Pandora said active users had declined. Activist fund Corvex has a 9.9% stake and has been urging a sale.


Starbucks (SBUX) CEO Howard Schultz announced he was stepping down from the position and turning the company over to the current COO, Kevin Johnson, who will serve as president and CEO starting April 3rd. Schultz will become executive chairman and focus on innovation, design and development of the new Starbucks Reserve Roasteries around the world.

The premium Reserve Roasteries and Tasting Room stores are gigantic stores with dozens of comfortable seating areas more like a cozy den with overstuffed leather chairs, coffee tables, fireplaces, etc. Roastery sales rose 24% in 2016 and the average customer spends four times as much per visit than a typical Starbucks store. Schultz is currently focused on opening 30 of those stores in "influential" cities around the world. They are targeting 1,000 of the slightly lower scale Starbucks Reserve stores, which include espresso bars that make coffee in a variety of brewing methods.

Schultz was CEO from 1987 to 2000, when he resigned. He came back to rescue Starbucks from a depressed period in 2008 and has been CEO for the last 8 years. Schultz grew up in the projects in New York and his father was a blue-collar worker that never made more than $20,000 a year in wages. Schultz went to college on a football scholarship and was the first person in his family to go to get a diploma. After working in sales for Xerox and GM for a Swedish house wares company, he joined Starbucks in 1982 in the marketing department. The company only had four stores at the time.

Kevin Johnson is a great guy, aggressive and intelligent and this may be exactly what Starbucks needs, fresh ideas at the top.


Workday (WDAY) reported earnings of 3 cents compared to estimates for a loss of 4 cents. Revenue of $409.6 million beat estimates for $400.5 million. Unfortunately, they guided for Q4 at $428.8 million and analysts were expecting $433.6 million. The company also said some large contracts that had been expected to close in Q3 were delayed citing uncertainty over Brexit and the potential for a Trump administration to modify trade agreements. Workday was cut from hold to sell by Societe Generale. Shares fell $10 on the news.


Smith & Wesson (SWHC) reported blowout earnings of 68 cents compared to estimates for 55 cents. Revenue of $233.5 million rose 63.5% and beat estimates for $228 million. Gross margin was 41.8% compared to 29.3%. They guided for the current quarter for earnings of 52-57 cents and revenues of $230-$240 million. Analysts were expecting 59 cents and $237.74 million.

The CEO said firearm sales had been very volatile under president Obama and that was not expected to continue under a pro-gun Trump administration. They guided for "single-digit to high single-digit" sales growth in a "normalized environment." He did say more women were buying guns both for defense and for sport.

Shares had fallen sharply after the pre-election uncertainty but they fell off a cliff on Friday with a -12% drop of $3. Going from a 63% increase in revenue to high single-digits is a major drop in growth.


Gap Stores (GPS) reported a 1% drop in same store sales for November but that is significantly better than the 8% decline in the year ago quarter. Comps for Gap global fell -3% and Old Navy -2%. Banana Republic posted a 5% increase after a 19% decline in the year ago quarter. The company said the fire in the distribution warehouse in Fishkill NY in August knocked 3% off the overall comp sales in November because of lack of inventory and distribution capability. The company also said foot traffic at mall stores remains challenging. Shares fell -3% on the news.


Ulta Beauty (ULTA) reported earnings of $1.40 that rose 26% compared to estimates for $1.37. Revenue of $1.13 billion rose 24.2% and beat estimates for $1.108 billion. Online sales rose 59.1% and same store sales were up 13.6%. The company guided for Q4 revenues of $1.516-$1.541 billion, earnings of $2.08-$2.13 and same store sales to rise 12% to 14%. This company is growing very fast and profitably. They opened 42 new stores in the quarter. They ended the quarter with 949 stores. Unfortunately, we cannot play them in Option Investor because the options are so expensive. Shares spiked to $274 intraday but faded to close at $253 in the weak market.


G-III Apparel (GIII) confounded the earnings traders with earnings of $1.50 that missed estimates for $1.53. Revenue of $883.5 million missed estimates for $937.5 million. The company guided for the full year for earnings of $1.61-$1.71 and revenue of $2.43 billion. Despite the earnings miss, shares spiked 3% after falling to $24.41 at the open. Short interest of more than 14% apparently fueled the squeeze.


Oil prices rallied to $51.50 on Friday after a week of gains on the bogus OPEC production cut news. OPEC officially said it was cutting 1.16 million bpd starting in January to reach its 32.5 mbpd target. Cue the wild applause from traders long the market and stupid reporters that believed the headline spam.

Whenever OPEC does anything, there is always a catch. This is nothing buy a slight of hand trick to confuse the market. One of the important points left out of most of the reports about the cut is the timing. It starts in January and lasts only six months. The Saudi Arabian oil minister said they could discuss it again at the May 25th OPEC meeting and vote on extending it another six months if everybody agreed.

Secondly, the actual production cut is only about 300,000 bpd. In the graphic below the October numbers are from OPEC and that is what they based their reductions on by country. Note that the total of 32,997,000 bpd is significantly less than the 33.6 mbpd that the IEA claims was actually produced in October. I guess if OPEC fudges the starting number by 600,000 bpd than they can cut less to arrive at their future targets.

Note that Iran actually won approval to increase production by 90,000 bpd. That was quite a trick on their part since Saudi Arabia said they would not agree to any deal unless Iran cut production as well. Don't worry, OPEC members are only lying if their lips are moving.

Also note also that Libya and Nigeria are exempt from the cuts. They are also the nations that will be increasing production the most over the next six months. It is convenient they were left out of the deal. Libya plans to increase production by 349,000 bpd by the end of December. Nigeria plans to add 423,000 bpd by early 2017.

If you just believe the headlines, you probably thought OPEC actually accomplished something. However, in the graphic below there is only about 396,000 bpd less in 2017 than there was in October and remember, the October "quoted" number was 600,000 bpd under the IEA reported number. It is all a combination of misdirection and selective reporting by OPEC.


Lastly, they said non-OPEC producers were going to cut production by 600,000 bpd. Russia was the only major producer to step up and say, we will cut 300,000 bpd. Again, easy to say in front of a gaggle of reporters, easy to ignore in the homeland. Later an official in Russia said, I doubt we will be cutting any production. Another official said Russia would work "towards" cutting production in "2017" but no specific number or dates. They just wanted to make a big splash and once the ripples subside, they expect everyone to forget it because it is not going to happen. It is all politics and bravado. Russia previously announced they were going to increase production in 2017. They could just postpone that 300,000 bpd increase and claim they fulfilled their part of the deal. It is all smoke and mirrors.

I have not even touched on follow through by OPEC. They have never honored production limits and never will. You can say one thing in Vienna in front of the microphone and then go back to your home country and conduct business as usual. Back when they had a 30 million bpd quota, for two years they produced 32 mbpd and continued to claim at every meeting that the production quota was 30 million. "Move along, there is nothing to see here."

I am just amazed that oil traders have fallen for this scam once again. However, it has been so long since the last quota scam, the old army of traders has probably retired and a crop of newbies are running the trading desks.

Oil rose to $51.50 and several analysts are calling for $60 by the end of December. I hope they are right but I am very skeptical after living through multiples of these shell games over the last 25 years.


Active rigs only increased by 4 last week with 3 oil rigs and 1 new gas rig. If oil prices remain over $50, I would expect to see these numbers spike rather briskly over the next couple months. The key words in that sentence were "remain over $50" and that has yet to be proven.


 


 

Markets

We finally got a decent bout of profit taking. The selling was tame unless you were in Nasdaq stocks. The Nasdaq fell -152 points in two days and the selling may not be over.

The Russell 2000 completed a streak of 15 consecutive daily gains and then lost four days in a row. Friday was a fractional win of a half point but it was a gain. The Russell has pulled back to about 1,310 and appears to be resting before the next big move. There is psychological support at 1,300 where there was a little stutter step on the way up. I would look to be a buyer of the IWM ETF at the 1,300 level on the Russell.


The S&P tested support at 2,190 for the last two days but there is no assurance it is not going lower. The index closed 6 points off its intraday high for a gain of less than 1 point. That is hardly induces bullish conviction. The S&P could easily bounce from here or dip further to retest 2,175.

The overbought conditions have eased. Now we are in the testing phase where traders will be taking small positions to see if support is going to stick and sellers will be looking for intraday bounces as an opportunity. This is low volume sparring. However, Wed/Thr traded an average of 9.3 billion shares and Friday was just over 7.0 billion. There is still a lot of activity but no directional movement.


The Dow has been making new highs while the broader market indexes were selling off. The Dow made a new high on Thursday and closed only 21 points below that high on Friday. There have been some amazing one-day gains in a couple Dow components to produce those new highs.

Goldman Sachs (GS) gained 16 points in two days to add roughly 124 Dow points. UnitedHealth (UNH) gained 10 points to add roughly 75 points to the Dow. Since the Dow only gained 18 points total for the week you can easily tell who was carrying the load for the other 28 stocks. Those 28 were either marginally positive or negative for the week. What happens when GS/UNH quit surging? Will somebody else take their place?

Resistance is now 19,250 and support 19,065 and 19,000.



The Nasdaq did not decline on Friday but it was close. The 4-point gain was simply an accident after the index closed -19 points below its intraday high. If I had to bet, I would bet on a retest of support at 5,200. We had a very strong rally and only two days of declines. Those were some very strong declines but the sector rotation may not be over yet.

Resistance is 5,400 and a long way off from here.

The Nasdaq 100 never made a new high and has fallen back to just over critical support at 4,700 and I would not be surprised to see that tested next week.




Friday was a settlement day. The market was up for three weeks, down for one week and the overbought pressures have been relieved. Traders were squaring up positions and trying to decide what to do for next week. The Italian referendum headlines probably did not have a lot to do with retail trading but actively managed funds were likely holding off on establishing new positions until the results are known. They may have a better buying opportunity next week.

I believe the worst is over but I cannot guarantee it. If we get a decent dip on Monday, I would be a buyer of some index ETFs but I would probably avoid buying the big cap tech stocks. There may be more pain ahead for the big guys. That monster two day dip did give us some buying opportunities in select stocks but only if you can stomach the potential for a little additional volatility.

 



 

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Random Thoughts


The rally bloom is fading. Bullish sentiment declined -6.1% with the difference spread equally between the bearish voters and neutral voters. Nothing to see here. This survey ended on Wednesday.

Last week results


Do not install those apps! If you have an Android phone, you are at risk of downloading malware instead of an app. According to Check Point Software, malware designed to look like real Android apps has taken control of more than a million Google accounts since August. The new malware is called Gooligan but the fake apps have names like StopWatch, Perfect Cleaner, WiFi Enhancer, etc.

Gooligan is infecting 13,000 devices every day and can potentially infect about 74% of existing Android phones based on the Android 4 and 5 operating systems. The malware steals information including email addresses, authentication tokens, passwords, photos, documents, Google Drive and G Suite.

Check Point has a free online tool that will tell if your device has been infected. You can go HERE and enter the email address of your device and Check Point will tell you if your phone has been breached and what to do to clean it.


Let's say your company paid $100 million to build a Panamax container ship ten years ago. The Panamax classification was given to the maximum size ships that could pass through the Panama Canal. I hope you made a lot of money over the last ten years because your new container ship is now scrap.

Since the Panama Canal has opened its new expansion in June, it can now accept ships three times larger than the Panamax ships, which were the largest of their period. Bigger ships with three times the cargo capacity, have crushed freight rates. The cost to run both ships is roughly the same but with three times the cargo the shipping cost is significantly lower on the larger ships. The largest ships can carry more than 18,000 containers per trip. There are ships being designed today that will carry 27,000 to 30,000 containers but they will not be going through the canal and will not be completed until 2022-2024. By comparison the Panamax ships could only carry 4,000 containers.

In September, a 7-year-old Panamax container ship was being bid at $5.87 million for scrap. SEVEN years old! The value of Panamax ships fell -62% in 2016 alone. Previously the average age of scrapped container ships was 19 years.

There have been 151 container ships scrapped so far in 2016. That is twice the number scrapped in 2015. New environmental regulations requiring retrofitting are also pressuring the value of younger vessels. Shippers are hoping their retrofit requirements will drive a lot more ships to the scrap yard and lift shipping rates again. Currently, freight rates are at record lows. This is sparking consolidation in the industry with Maersk buying the seventh largest container carrier Hamburg Sud. Hamburg Sud operates 130 container ships. Maersk operates more than 605 container ships that travel more than 50 million nautical miles a year.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"If you dream small dreams, you may succeed in building something small. For many people, that is enough. But if you want to achieve widespread impact and lasting value, be bold."

Starbucks CEO Howard Schultz


 


Index Wrap

No Material Weakness

by Jim Brown

Click here to email Jim Brown
Despite the minor volatility over the last week the broader market is not showing any material weakness. The big cap tech stocks on the Nasdaq and the biotech sector had the biggest losses and the semiconductor stocks had one bad day. Otherwise, I only saw minor selling in the broader market. As is normally the case, the stocks with the biggest gains over the last month, generally had the biggest losses.

Here is the problem. Although the broader indexes are not showing any significant damage, the oscillators have rolled over. In theory, the next support break could be ugly but the keyword there is "break."

On the Russell 3000, the largest 3,000 stocks in the market, the index closed at 1,303 and critical support is 1,295. I believe that support will hold as long as we do not have an external market event like a Brexit type vote in Italy on Sunday. Otherwise there is nothing on the calendar that has market moving potential until the Fed announcement the following Wednesday.


The Vanguard Total Market Index (VTI) is showing an identical pattern with support at 112.75 and the close at 113.31. This index moves slow because of the breadth and the small dollar amounts but it is at a critical level.


The NYSE Composite Index of all 1900+ stocks traded on the NYSE, does not even look like it is related to the rest of the market. It is well below the prior 2015 high of 11,254 and has not reacted as violently to the post election euphoria. I do not have an answer to this except that 400 of the stocks are not USA companies and there is a very broad range in the size of the companies represented. I would not be watching this index for market direction.


I would watch the Nasdaq 100 Index. The $NDX has failed to make a new high and has almost completely erased the post election gains. The big cap tech stocks remain weak and a break below support at 4,680 would be a disaster. That would signal a major change in sentiment for the broader market. While I do not expect that to happen, we have to be aware of the possibility and be prepared to take action if it happens.


The Semiconductor Index ($SOX) fell nearly 7% in only three days. This was a major factor in the Nasdaq crash on Thursday. The rebound was decent but not convincing. Support is well below in the 800 range, which would erase all the post election gains.

The $SOX leads the Nasdaq. It has been called the "head of the snake" because the Nasdaq always follows, up or down. We need the $SOX to recover if the Nasdaq is going to shed its bearish outlook.


Note the perfect correlation over the last month between the SOX and Nasdaq.


The biotech sector is also crashing and that is a major sector on the Nasdaq. The index has fallen -9% from the post election high at 3,454. There is no specific reason for the sector to be crashing. There have been several companies with drug trial failures but there are over 100 companies with trials in progress. The Valeant cloud could be impacting the sector along with those failed trials. If the sector continues to decline it is a long way before support at 2,800.


With only two sub sectors causing the most trouble and the Nasdaq the weakest link because of those problems, we need to watch the Nasdaq for market direction. Eventually those stocks will reach a point where value investors will begin to think they are attractive. Hopefully, that will happen soon.

I do not believe the broader market is sick. The broader market is suffering from a light case of profit taking and it should end soon.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

800 Pound Gorilla

by Jim Brown

Click here to email Jim Brown
Editor's Note

There is a new gorilla on the block and they are serving notice of their future dominance. That gorilla is Nvidia. They are fast on their way to be the new Intel for the next decade.



NEW BULLISH Plays

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.

Nvidia is taking market share from every chipmaker in the market. Their graphics cards are the hottest things going and every model sells out and are resold for higher prices in the secondary market. Their GPU products are the fastest processors available for extreme computing environments, monster applications, data mining, machine learning and artificial intelligence. One recent benchmark showed an Intel server would take over 2,000 hours to process one massive computation program. A Nvidia GPU server only took 30 hours. Amazon and other cloud providers are buying 1000s of GPU equipped servers to handle massive cloud applications.

They are also moving into a stronger position in the self driving vehicle sector with superfast visual and logic chipsets that can 1000s of inputs in a second to help the car navigate and avoid collisions.

Every time Nvidia announces a new product they are years ahead of the competition.

Earnings Feb 9th.

Shares are up +165% in 2016 alone but they are far from done. They spiked 10% after earnings in early November and held the highs for two weeks despite market volatility in tech stocks. On Thursday, Nvidia shares finally cracked when the Nasdaq fell -77 points for the second consecutive decline of more than 1%. On Friday, shares posted a gain and showed no signs of further weakness. Over the last two weeks, MKM Partners upgraded them to a $106 price target and Needham raised their target to $100. The problem is that most analysts do not understand the technological revolution underway at Nvidia.

Options are not cheap but you sometimes get what you pay for. You can spread it to reduce the cost but I am not going to recommend that today. As the stock moves higher we can spread later once the distant strikes become more valuable.

Buy Feb $95 call, currently $4.65, initial stop loss $82.25



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Another Tie

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes closed only fractionally off unchanged suggesting buyers and sellers fought to a tie. The Dow lost -21 points and the Nasdaq gained +5 with the S&P and Russell 2000 barely positive. It was hardly an exciting day in the market.

The biggest news was that the Nasdaq did not lose another 1% as it had in the two prior days. However, just finishing mildly positive does not mean the selling if over. The index closed -19 points off its highs with a 5 point gain. That does not inspire confidence.

On the positive side the 2,190 support level on the S&P held for the second day. That is a critical support level just like 5,200 is critical on the Nasdaq.



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


No Changes

VXX - Volatility ETF

The long put position remain unopened until a trade at $30.00.

FFIV - F5 Networks

The long call position remain unopened until a trade at $142.25.



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


FFIV - F5Networks - Company Profile

Comments:

I put FFIV back in the portfolio with a recommendation to enter the position at $142.25. If we get a rebound from here or lower, I expect it to be swift. If FFIV continues lower, I will reset the entry when appropriate. The tech sector has been under serious profit taking but FFIV has lagged on the downside.

Original Trade Description: November 21st.

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Link Controller, which monitors the health and availability of each connection in organizations with more than one Internet service provider; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; and Traffix Signaling Delivery Controller for diameter signaling and routing. Company description from FinViz.com.

The big attack on the Internet several weeks ago was driven by malware that had been placed on IoT devices including security cameras, cable boxes, burglar alarms and dozens of other device types. These devices are typically delivered without any material malware defenses. It is up to each manufacturer to overcome this in the future with some kind of defense.

However, FFIV provides software and hardware to prevent denial of service attacks from these devices as well as the more robust attacks from computers and servers. With more and more servers in the cloud it is harder to protect them from attack like you would dedicated physical servers in a dedicated data center. This is where FFIV excels.

The company's Silverline service places a sophisticated cloud based filter around critical infrastructure that stops attacks instantly. Aided by hardware based firewalls in dedicated data centers they protect data and equipment from all outside attacks.

For Q3 they reported earnings of $2.11 compared to estimates for $1.94. revenue ot $525 million beat estimates for $520 million.

Earnings Jan 21st.

FFIV shares spiked on earnings in late October and have been moving steadily higher. They are about to break over resistance at $144 and we could see another leg higher when that happens.

With a FFIV trade at $142.25

Buy Jan $145 call, currently $3.15, initial stop loss $137.25.


FLOW - SPX Flow Inc - Company Profile

Comments:

No specific news. Thursday's breakout was sold today.

Original Trade Description: November 30th.

SPX FLOW, Inc. provides various engineered solutions worldwide. The company engineers, designs, manufactures, and markets products and solutions used to process, blend, filter, dry, meter, and transport fluids with a focus on original equipment installation, including turn-key systems, modular systems, and components, as well as aftermarket components and support services. It operates through three segments: Food and Beverage, Power and Energy, and Industrial. The Food and Beverage segment offers mixing, drying, evaporation, and separation systems and components, as well as heat exchangers, and reciprocating and centrifugal pump technologies primarily under the Anhydro, APV, Bran+Luebbe, Gerstenberg Schroeder, LIGHTNIN, Seital, and Waukesha Cherry-Burrell brands. The Power and Energy segment provides pumps, valves, and related accessories, principally for use in oil extraction, production, and transportation at wells, as well as for pipeline applications under the APV, Bran+Luebbe, ClydeUnion Pumps, Copes-Vulcan, Dollinger Filtration, LIGHTNIN, M&J Valve, Plenty, and Vokes brands. This segment primarily serves customers in the oil and gas industry, as well as in nuclear and other conventional power industries. The Industrial segment offers air dryers, filtration equipment, mixers, pumps, hydraulic technologies, and heat exchangers under the Airpel, APV, Bolting Systems, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power Team, and Stone brands. This segment principally serves customers in the chemical, air treatment, mining, pharmaceutical, marine, shipbuilding, infrastructure construction, and general industrial and water treatment industries. Company description from FinViz.com.

SPX Flow was spun off from SPX Corp (SPXC) in September 2013. Shares sold off from the $40+ opening to $15 over the next six months. After a quick rebound to $31 in May the stock has moved sideways for the rest of the year.

They reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $466.8 million narrowly missed estimates for $467.7 million. They guided for full year earnings of $1.27-$1.47 with revenue of $2.0 billion.

The CEO said the company had made good progress in its restructuring efforts post split. Revenue was light in Q3 because of a delay in shipping some orders in the energy sector. They are looking forward to a rebound in the energy sector and manufacturing in general.

Earnings Feb 1st.

Shares closed right at 52-week resistance at $31.50 and are poised for a breakout, market permitting. The stock gained $1 today in a weak market.

Position 12/1/16:

Long March $35 call @ $1.51, see portfolio graphic for stop loss.


SMG - Scotts Miracle Grow - Company Profile

Comments:

No specific news. Nice rebound from support.

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.


WDC - Western Digital - Company Profile

Comments:

No specific news. Nice rebound from Thursday's volatile decline

WDC announced an investor day for Tuesday Dec 6th.

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.



BEARISH Play Updates (Alpha by Symbol)

VXX - VIX Futures ETF - Company Profile

Comments:

We were finally stopped out on the VXX position on Thursday's decline. This was a good thing since it was a December option. We exited with a gain and I am putting it back in the recommendation list with a longer dated option and $30 entry trigger.

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.

With a VXX trade at $30.00

Buy March $25 put, currently $2.55, no stop loss.




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