Option Investor
Newsletter

Daily Newsletter, Tuesday, 8/8/2017

Table of Contents

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

Market Wrap

Streaks Eventually Fail

by Jim Brown

Click here to email Jim Brown

The Dow was well on its way to another record close when a headline appeared to dash those hopes.

Market Statistics

The Dow started negative but quickly reversed direction to move sharply higher. The index hit 22,179 and +63 points before crashing back -122 points to 22,057 and the low of the day. Somebody bought the dip at the close but the rebound was lackluster.

The headline credited with reversing the market was a statement from President Trump that further threats from North Korea would be "met with fire and fury." Earlier in the day a headline broke saying North Korea had successfully created a miniaturized nuclear warhead that would fit on its ICBMs. If that is the case, the time for critical decisions has arrived. People claim Kim Jong-un could not be stupid enough to actually attack the USA. They are uninformed because many times, he has displayed irrational behavior and refugees have said he would carry it out if provoked. While all his bluster today is calculated to create a nuclear defense to prevent his reign from coming to an untimely end, he is rapidly reaching a point where that risk could come true. If attacked, he could retaliate much like a cornered animal.

We should not be worried about his missile borne nukes. They are a long way off, he could only have a handful and we can shoot them down. We should be worrying about the two Korean satellites that cross the U.S. every 94 minutes. If those satellites have nuclear weapons, he could cause extreme damage with an EMP attack on the U.S. where tens of millions would die. Details Here

I personally believe the Trump comments were blamed but they were just a convenient excuse. Many times when markets are overbought, traders are looking for a reason to take profits. They are constantly pushing up their stop losses and they are nervous about the potential for a decline. They seize on the first headline that appears and the initial selling begets more selling. The lack of a material rebound at the close is troubling. The candles lengthened as volatility increased but buyers were unable to cause a rebound.


There were only two economic reports on Tuesday. The NFIB Small Business Optimism Index for July rose from 103.6 to 105.2 and the highest level since February. This was the first increase since February and suggests optimism is rebounding despite the lack of any major legislation in Washington. The percentage of businesses that expect better economic conditions ahead rose from 33% to 37%. The current job openings component rose from 30% to 35% and those planning on hiring rose from 15% to 19%. Those expecting higher sales rose from 17% to 22%. Those planning on raising prices rose from 19% to 23% and that should please the Fed.

The Job Openings and Labor Turnover Survey for June (JOLTS) showed a surge in new job openings from 5.702 million to 6.163 million. Those actually getting new jobs declined from 5.459 million to 5.356 million. Separations declined from 5,245 million to 5.224 million. Layoffs increased slightly from 1.673 million to 1.701 million. This confirms the robust job market where there are 15% more jobs than hires and it is difficult to find qualified workers. This is a lagging report for the June period and it was ignored.

The calendar for Wednesday has no reports that are likely to move the market. The oil inventory report would be as important as the others because of the decline in the API inventory tonight.


The earnings on Wednesday will be led by Jack in the Box, Mylan and Netease. Thursday is the big day with Nvidia and a flurry of retailers. Blue Apron and Snap Inc will also confess and those will be watched out of curiosity rather than investment potential.


After the bell, the API inventory report showed a whopping decline of -7.839 million barrels compared to estimates for a 2.27 million barrel decline. Despite the big decline, oil prices were stable at $48.95. If the EIA report on Wednesday shows a similar decline then prices should retest $50.


Internet retailer Wayfair (W) reported a loss of 26 cents that beat estimates for a loss of 46 cents. Revenue of $1.12 billion, up from $786.9 million, rose 42% and beat estimates for $1.06 billion. Active users rose 43.1% to 9.5 million and the average order rose from $244 to $258. I do not understand why Amazon has not bought them yet. With a $4 billion market cap, they would be pocket change for Amazon. They are growing so fast they are carving out a niche where Amazon does not currently compete.


Retailer Michael Kors (KORS) reported earnings of 90 cents that beat estimates for 62 cents. Revenue of $952.4 million beat estimates for $919.0 million. The only fly in the soup was a decline in same store sales of -5.9% but analysts were expecting -9.2% so it was still a beat. The company guided for the current quarter for revenue of $1.04-$1.06 billion with same store sales in the mid-single digit range. Earnings are expected to be 80-84 cents. Analysts were expecting $1.01 billion and 78 cents. They guided for the full year for revenue of $4.28 billion and earnings of $3.62-$3.72. Analysts expected $4.19 billion and $3.54. Shares spiked 21% on the news.


Retailer Ralph Lauren (RL) reported earnings of $1.11 and beat estimates for 96 cents. Revenues fell 13% to $1.347 billion and missed estimates for $1.349 billion. They blamed the decline on exiting a brand, promotional activity and soft consumer demand. North American revenue dropped -17% with Europe down -14%. They guided for the full year for 8-9% decline in net revenues. For the current quarter, they expect a decline of 9-10%. Given all the gloom and doom, you would have expected shares to trade lower. Instead, they rallied 13%.


Valeant Pharmaceuticals (VRX) reported earnings of $1.05 compared to estimates for 97 cents. Revenue of $2.23 billion missed estimates for $2.24 billion. The company cut full year revenue guidance from $8.9-$9.1 billion to $8.7-$8.9 billion. The company said it was on track to reduce debt by $5 billion. Unfortunately, they still have $25 billion to go. If they succeed in paying off that $5 billion by February 2018, they have no significant maturities remaining before 2020 and that gives them a couple years to restructure and raise cash. Shares rallied fractionally on the debt news rather than the earnings beat.


Avis Budget Group (CAR) reported earnings of 30 cents that missed estimates for 42 cents. Revenues were $2.238 billion, which beat estimates for $2,227 billion. They said revenue in the U.S. declined due to a 4% reduction in time and mileage revenue per day. International revenues rose 4% mostly due to a 6% benefit from the FranceCars acquisition in December. They guided for full year revenues of $8.8-$8.95 billion with earnings of $2.40-$2.85, down from prior guidance of $2.85-$3.50.


Disney (DIS) reported earnings of $1.58 compared to estimates for $1.55. Revenue of $14.2 billion missed estimates for $14.4 billion. Shares fell $4 in afterhours.

The company said it was cancelling its licensing deal with Netflix (NFLX) and would launch its own streaming service that would launch in 2019. They will also launch a streaming service for ESPN videos in 2018 that will feature about 10,000 events a year. The service will have content from MLB, NHL, MLS, collegiate sports and tennis Grand Slam events. Disney will acquire a majority interest in BAM Tech for $1.58 billion. They bought a 33% stake in the company in 2016. BAM was spun off from MLB Advanced Media in August 2016. Netflix shares fell -5% in afterhours.



Priceline (PCLN) reported earnings of $15.15 that beat estimates for $14.25. Revenue of $3.02 billion beat estimates for $3.0 billion. Unfortunately, they guided for full year earnings of $32-40-$34.10 and analysts were expecting $34.42. Bookings were $20.8 billion and analysts were expecting $21.05 billion. Shares fell 6% (-$135) on the news.


Fossil Group (FOSL) reported an adjusted loss of 61 cents that missed estimates for 28 cents. However, revenue of $596.8 million missed estimates for $619.5 million. They guided for the current quarter for a loss of 26 cents to earnings of 7 cents. For the full year, they guided for earnings of 35 cents to $1.15. Revenue is expected to decline 4.5% to 8.5% with a GAAP loss of $6.62-$7.42 in Q3. They also announced the resignation of their CFO. Shares fell 23% in afterhours.




Markets

Despite the midday reversal in the indexes, the markets were fairly quiet today. With earnings slowing there is little to interest traders. The very low volume of 5.3 billion shares on Monday was a symptom of August trading. Investors are busy cramming in last minute vacations and getting kids ready to go back to school. Volume would have been low today as well except for the sharp midday reversal. Volume rose to 6.3 billion shares, which is still only moderate. Tomorrow could be significantly different.

The S&P futures are down -9 as I type this with the Nasdaq futures down -31 and Dow futures -48. The combination of declines in Disney, Netflix and Priceline are going to be a toxic mix for Wednesday.

The S&P spiked to 2,490 intraday after starting the day with a minor loss to 2,475. The afternoon decline knocked it back to 2,479 and it lost 6 points for the day. This outside reversal day is a negative indicator. Even without the hits from those three stocks I mentioned, we would have probably traded lower on Wednesday. With those hits, the severity of the potential decline should be worse.

Traders have wanted a real market drop as a buying opportunity. We may just get one. Since Aug/Sept are typically weak, the traders have been looking for a short opportunity to carry them into that weakness. This could be it. The key will be whether dip buyers appear in volume on Wednesday. If they rush into the gap then the damage could be minimal. If they step back to see where the market goes, then the August decline may have begun.

The closing level on the S&P is not a problem. That is right in the middle of the recent consolidation range. We could easily muddle around at the 2,470 level for a couple days and then make another run at the top. The real directional indicator would be a close under 2,465. That could trigger additional selling.


The Dow only had one major gainer today and that was a break in the recent trend. Apple rallied because a rumor site showed actual pictures of an iPhone 8 and said it would be announced in September with the model 7s. This is the iPhone 8 below. The pictures are copies of copies and are not to scale.


The Dow could be challenged on Wednesday because of the magnitude of its recent gains. There are a lot of uncaptured profits and support is well back at 21,500.



The Nasdaq broke through resistance at 6,395 to hit 6,423 but crashed back to close at 6,370. Critical support remains 6,335. If the Priceline/Netflix combo poisons sentiment on Wednesday, we could easily crash through that support level. The next logical target for any continued decline is 6,100.



The Russell 2000 had a similar chart but minimal damage with only a 4-point loss. However, the Russell futures are down -9 tonight and any material drop in the big cap indexes is likely to worsen in the small caps.


Doubleline Capital's Jeffrey Gundlach said on CNBC today, "Being long the VIX is free money" because there will be at least a 3-5% decline between now and November. I completely agree on the decline. We are really stretching our luck without any extended decline since Q3. We have had some one-day wonders with follow up volatility but most of the damage was done in the first drop.

The S&P has now traded 75 sessions without a 1% gain. That is also very rare. This is part of the low volatility environment. Gundlach offered as an analogy the height of Nevada's Telescope Peak at 11,331 and Death Valley at -282 feet below sea level. They sit right next to each other. He said that was the same with the VIX. A period of very low volatility often ends with a period of very high volatility. They go hand in hand. If volatility were normal, the peaks would be minimal. Very low, as we have today, tends to end with a very high volatility event.


I would not be a buyer of the first dip on Wednesday. I would recommend waiting until we see where the day takes us. Actually, it could take several days to settle out since we are in August and the sentiment is turning bearish.

Do not forget this is National Sneak Some Zucchini Into Your Neighbor's Porch Day. Google it.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

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

subscribe now

 


New Option Plays

Futures Warning

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P futures are warning that Wednesday could see additional volatility. The S&P futures are -9 as I type this, Dow futures -41, Nasdaq futures -30 and Russell -9. If these levels hold overnight, the open is going to be rocky. There is nothing I could recommend today that would work in a large gap lower at the open.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Turnaround Tuesday Arrives

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the major indexes posted intraday gains and then rolled over in the afternoon to losses. Trump comments on North Korea were blamed but the market was primed to decline. The new high records on Monday came on the lowest non-holiday volume since 2007 at 5.3 billion shares. Conviction is fading for both bulls and bears. The worry is increasing that August could be the start of a market decline.

The Dow opened lower, rebounded to sprint to a 60-point gain then collapsed for -122 points before recovering slightly at the close. Disney disappointed after the close and that will weigh on the index on Wednesday. The Dow's consecutive string of gains and record highs has broken.



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


PCRX - Pacira Pharmaceuticals
The long put position was entered at the open.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

ITW - Illinois Tool Works - Company Profile

Comments:

No specific news. Shares declined slightly with the market.

Original Trade Description: Aug 5th.

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The Automotive OEM segment produces plastic and metal components, fasteners, and assemblies for automotive-related applications. The Test & Measurement and Electronics segment provides equipment, consumables, and related software for testing and measuring of materials and structures. This segment also offers equipment and consumables used in the production of electronic subassemblies and microelectronics. The Food Equipment segment provides commercial food processing, warewashing, cooking, and refrigeration equipment; and kitchen exhaust, ventilation, and pollution control systems, as well as related services. The Polymers & Fluids segment produces adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. The Welding segment produces arc welding equipment, consumables, and accessories; and metal jacketing and other insulation products for various industrial and commercial applications. The Construction Products segment produces engineered fastening systems and solutions. The Specialty Products segment provides beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Company description from FinViz.com.

ITW reported earnings of $1.69 that beat estimates for $1.63. Revenue of $3.6 billion missed estimates for $3.62 billion. Shares fell from $147 to $139 and traded sideways for two weeks. They guided for Q3 for earnings of $1.57-$1.67 and analysts were expecting $1.68. For the full year, they expect earnings of $6.32 to $6.52. Shares had risen 20% in 2017 and the minor miss caused some profit taking.

The company said on the earnings call that revenue was driven by the automotive sector plus some cyclical areas like welding, test and measurement. Organic revenue rose 2.6%. GAAP earnings rose 16%.

They guided for full year organic growth of 2%-4%, up from 1.5%-3.5% in January. They did guide for slower growth in Q3 because of the slowdown in the automotive sector. Vehicle sales have plateaued the last several months and there is always a pause in August while the manufacturers retool the plants for the next model year vehicles. ITW expects a 6% decline in auto builds in Q3 and a 2% decline in Q4. However, even with that decline, ITW is still predicting the 2% to 4% organic growth rate for the full year with a 1% to 3% growth rate in Q3.

Earnings expected on Oct 23rd.

On Friday, they announced a regular quarterly dividend of 78 cents payable Oct 10th to holders on September 29th. Shares rose $1.45 on the news to close at a two week high.

I am recommending ITW because it has already reported earnings, was punished for the revenue miss and was starting to tick higher before the dividend announcement. This is a good company and even with the auto slowdown, will continue to grow. The dip and the low cost of the option gives us a little insurance against a market decline. Support is $140.

Position 8/7/17:

Long Dec $145 call @ $3.90, see portfolio graphic for stop loss.


VAR - Varian Medical Systems - Company Profile

Comments:

No specific news. Shares posted another minor decline with a potential retest of support at $95.50.

Original Trade Description: Aug 2nd.

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.

Expected earnings October 26th.

On July 26th, Varian reported earnings of $1.04 that beat estimates for 95 cents. Revenue of $662.4 million just barely missed estimates for $663.2 million due in part to currency translation issues. They sell their high dollar imaging systems all over the world.

The guided for the current quarter for earnings of $1.15-$1.23 and analysts were expecting $1.18. This should have been positive but the stock fell $6 because of the minor revenue miss.

If the market is going to be historically weak in August, shares that have already been beaten up will fare better than the rest of the market. I am choosing the $105 strike instead of the $100 strike for reduced cost/risk going into August.

Position 8/3/17:

Long Nov $105 call @ $1.75, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

Minor rebound with the minor market decline. Plenty of time with our November option.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss. Target $22 to exit.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow ETF - ETF Profile

Comments:

The Dow streak ended at 10 consecutive days of gains and 9 consecutive record highs. The strong intraday gains evaporated and the futures are strongly negative in afterhours. We may actually get a real decline but one day does not make a new trend.

Original Trade Description: July 27th.

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average (the "Index"). The Dow Jones Industrial Average (DJIA) is composed of 30 "blue-chip" U.S. stocks. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity. The DJIA is a price-weighted index of 30 component common stocks.

The Dow closed at a new high in an ugly market solely because of big gains in Boeing, Disney and Verizon. If the rest of the market continues lower, the Dow will eventually crater as well. I am recommending we enter a put position on the Dow ETF at the current high.

Position 7/28/17:

Long Oct $215 put @ $3.33, see portfolio graphic for stop loss.
Short Oct $205 put @ $1.29, see portfolio graphic for stop loss.
Net debit $2.04.


FTNT - Fortinet - ETF Profile

Comments:

No specific news. Prior support at $37 is holding and there was a minor decline today.

Original Trade Description: July 29th.

Fortinet, Inc. provides cybersecurity solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which offers a single point of network log data collection. It also provides FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; FortiDDos and FortiDB database security appliances; and FortiSIEM family of products to provide a cloud-ready security information and event management (SIEM) solution for enterprises and service providers. Further, it offers security subscription, technical support, training, and professional services.Company description from FinViz.com.

Expected earnings October 25th.

The company reported Q2 earnings of 14 cents that beat estimates for 8 cents. Revenue of $363.5 million also beat estimates for $361 million. All the normal metrics were good to great but their guidance failed to impress. Full year guidance was higher but Q3 guidance disappointed.

They guided for revenues in the $367-$373 million range and analysts were expecting $372 million. Earnings guidance for 22 cents matched estimates. Investors normally do not want a match, they want a raise. The lower level on the revenues is also a caution. Shares fell $3 over the last three days and are right on the verge of breaking through support.

The entire cybersecurity sector has been weak despite the recent attacks. This is another weight on FTNT.

Position 8/1/17:

Long Sept $36 put @ $.90, see portfolio graphic for stop loss.


IBM - International Business Machines - ETF Profile

Comments:

No specific news. IBM declined -$1.36 today

Original Trade Description: July 29th.

International Business Machines Corporation provides information technology (IT) products and services worldwide. Its Cognitive Solutions segment includes Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. The company's Cognitive Solutions segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system for z systems. It has a strategic collaboration with ABB Ltd to develop industrial artificial intelligence solutions. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. Company description from FinViz.com.

Expected earnings October 17th.

IBM reported revenue of $19.29 billion, down -5% annually and the 21st consecutive quarterly decline. Analysts were expecting $19.49 billion and that was already on the low side. Earnings were $2.97 and beat estimates for $2.74 thanks to a lower tax rate of 9.2%. Full year guidance was reiterated for "at least" $13.80. Several years ago, they made a big deal out of forecasting $20 a year in earnings. That is not likely to happen in this decade. All five of IBM's reporting segments posted revenue declines.

The problem with IBM is the lack of a light at the end of the tunnel. There is no way out of this problem without major changes which could include splitting the company up or going on an acquisition spree. Shares hit $182.50 in February but hopes have now been dashed twice with Q1 and Q2 earnings. The outlook is dim.

If the market were to roll over and the Dow decline materially, IBM would be a leader in that decline. It has been losing ground even when the Dow is setting new highs.

With earnings Oct 17th we can use the Oct options which expire on the 20th. They should hold their premium well.

Update 8/5/17: Wedbush initiated coverage with a neutral rating saying IBM is going to face "structural headwinds" and free cash flow will continue to be consumed by "aggressive M&A." The analyst said the world has moved away from the labor intensive model of IT services with cloud computing and cloud software replacing those IT consultants. Legacy IT services contracts are going to see margins decline due to "pricing resets" and an industry wide "skills mismatch." He said IBM's lack of transparency about its current business models suggests they are lagging the evolution curve.

Update 8/7/17: A judge in Indiana ruled IBM must pay the state $78 million for failing to complete the automation of much of the state's welfare services system. The court case came after the state cancelled the $1.3 billion automation contract because of numerous complaints about long wait times, lost documents and improper rejections. An appeals court found that IBM had committed a material breach of its contract by failing to deliver improvements to the welfare system.

Position 7/31/17:

Long Oct $140 put @ $3.10, see portfolio graphic for stop loss.


PCRX - Pacira Pharmaceuticals - Company Profile

Comments:

No specific news. Minor 15 cent gain.

Original Trade Description: August 7th.

Pacira Pharmaceuticals, Inc., a specialty pharmaceutical company, develops, manufactures, and commercializes proprietary pharmaceutical products primarily for use in hospitals and ambulatory surgery centers in the United States. It develops pharmaceutical products based on its proprietary DepoFoam drug delivery technology. The company's lead product includes, EXPAREL, a liposome injection of bupivacaine, an amide-type local anesthetic indicated for infiltration into the surgical site to produce postsurgical analgesia. Its development pipeline comprises DepoTranexamic Acid, a long-acting local antifibrinolytic agent, which is in Phase II clinical development for the treatment or prevention of excessive blood loss during surgery by preventing the breakdown of a clot; and DepoMeloxicam, a long-acting non-steroidal anti-inflammatory drug, which is in preclinical development for the treatment of acute postsurgical pain. Company description from FinViz.com.

Pacira reported a loss last week of 29 cents that missed estimates for 28 cents and was well over the 2 cent loss in the year ago period. Revenue of $70.9 million ros eonly 1.9% and misses estimates for $74 million. Rising revenues for their top product, Exparel, were offset by falling revenues elsewhere. Exparel revenues rose 6.1% but DepoCyte and other product revenues declined -81.1%. Research and development costs rose 10`% and G&A costs rose 9.4%. Revenues slowing and expenses rising are never a good combination.

The company reaffirmed their full year revenue guidance for Exparel in the range of $290-$310 million.

Shares declined to a 6 month low after earnings.

Expected earnings November 3rd.

The optimistic outlook faded in late July when a Phase III trial of Exparel did not produce the desired results in treatment of total knee arthoplasty or TKA. Pacira is trying to expand the uses for Exparel as a way of expanding sales. This was a blow for the stock in July and the weak earnings is causing further declines.

Support is well below at $30.

Position 8/8/17:

Long Sept $35 put @ $1.44, see portfolio graphic for stop loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

The Turnaround Tuesday arrived right on schedule. The new high on Monday came on the lowest volume for a non-holiday since 2007.

August has been down 5 of the last 7 years and up only 5 of the last 20 years. If the historical trend is going to appear, I wish it would hurry.

Original Trade Description: July 24th.

• The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index (the "Index") The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.

The S&P is marching slowly towards a date with destiny and 2,500. Since the median estimate by the top 16 analysts was a 2,450 yearend price target on the S&P, the arrival at 2,500 could be a tripwire that triggers an August correction. We have not had a 5% drop in a year and it has been 9 months since a 3.5% decline. With earnings rapidly playing out and most of the high profile companies will finish reporting by next Wednesday, I am going to recommend a bearish position for August/September.

I am going to set an entry trigger for a SPY put with the S&P at 2,495. Since aggressive traders normally want to anticipate a particular number, I want to enter the position just before we reach that level.

Update 7/26/17: The Dow was up +100 points, Nasdaq +10, Nasdaq 100 +20 and the S&P only gained 70 cents. The Russell 2000 lost -6 and the S&P-400 lost -15. We may not get to that 2,495 level. I am going to add another trigger/strike in case we get a failure from this level.

Position 7/27/17 with a S&P trade at 2,465:

Long Oct $243 put @ $3.65, see portfolio graphic for stop loss.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now