Option Investor
Newsletter

Daily Newsletter, Thursday, 9/15/2016

Table of Contents

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

Market Wrap

Data Dump And OPEX

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

A massive data dump ahead of OPEX and next week's heavily anticipated FOMC meeting send the market higher. Despite today's move the near term outlook remains weak with volatility on the menu. The bottom line, economic growth remains spotty with positive outlook and tame inflation, no reason to think the FOMC will forced into raising rates next week. According to the CME's Fed Watch Tool the chance of a rate hike next have fallen again and now hovering around 12%.

Asian markets were mostly mixed in the absence of major market moving news. The stand out was the Japanese Nikkei which fell more than -1.5% on a strengthening yen. FOMC and BOJ uncertainty, both meet next week, have lent a bit of volatility to the yen which may strengthen further over the next week should the BOJ be less dovish than anticipated, and the FOMC less hawkish. European indices were mixed as well but able to rise in late day trading on the back of the rally here at home.

Market Statistics

Futures trading was pointing to a rebound all morning if not a strong one. The massive round of economic data released at 8:30AM did little to alter the trade immediately following the announcements. However, by the time the opening bell rolled around trading had turned slightly negative. The first half hour of trading was bit hectic, the indices opened with a small loss but wavered around break even levels in choppy action. By 10AM the rally was established and began pushing the indices up to hit the early shortly after 11:30AM. The hour of trading, perhaps due to Donald Trumps speech before the New York Economic Club, saw the indices move sideways and even retreat a little before upside momentum prevailed. By 2PM new intraday highs were hit again and held until the end of the day.

Economic Calendar

The Economy

Lots and lots of economic data today. Lots. First up is the weekly jobless claims figures. The initial claims number rose by 1,000 from last week's not revised figure to hit 260,000. This is the 80th week of claims below 300,000. The four week moving average of claims fell by -500 to 260,750. On a not adjusted basis claims came in -11.2% below last week's level, slightly below the -11.8% predicted by the seasonal factors. Year over year not adjusted claims are down -2.75%. This week's figures remain consistent with ongoing labor market health.


Continuing claims rose by 1,000 on top of a -2,000 revision to last week's data to hit 2.143 million. The four week moving average of continuing claims fell by -8,000 to hit 2.146. Both numbers are within analysts expectations and consistent with ongoing labor market health, trending just above the long term lows.

The total number of jobless claims fell by -48,265 to hit 2.012. This is the lowest level in four months and consistent with long term and seasonal labor market trends. The total number of unemployed should continue to decline for the next 6 to 7 weeks and eventually reach a level below 1.85 million. Based on this and continuing claims data I expect to see unemployment begin to tick down again, if not expanding job growth.


Total US Retail Sales declined by -0.3% July to August but remains up by 1.9% year over year. On a year to date basis sales are up 2.4% versus the same period last year. The July figure was revised up by 0.1%. Ex-autos retail sales fell by -0.1% but remain up 2.1% on a year over year basis. These figures show a continued, moderate, improvement in the consumer minus the impact of weak and weaker than expected auto sales. The auto boom may have peaked but sales growth remains steady in other parts of the sector.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey jumped 11 points to hit 12.8. This is the second month of gains and the time we've had two back to back months of positive readings in a year. Within the report New Order turned positive, rising to 1.4 from -7.2, although Inventory and Employment remain negative. Inventory fell to -26.7, Employment managed to rise to -5.3 from -20. The 6 month outlook remains positive at 37.5 but has declined from last month's reading. This report is basically positive with some hope for the future. Falling inventory is a good thing, if it leads to increased production in the not too distant future. That of course will come down to demand.


The Empire State Manufacturing Survey was not as positive, coming in at -2. Within this report New Orders improved by 0.5 to reach -7.5, still negative, while shipments gained 8.6 to reach -9.4, also negative and contractionary. The Employment Index is also of concern here, falling -13 to hit -14.3. Looking forward outlook remains positive. The 6 month outlook gained 11 points to hit 34.5.


The Producer Price Index was unchanged month to month and year over year on the headline number. Core PPI rose by 0.1% and ex-auto rose by 0.3%. Year over year ex-auto is up 1.2% and reveals only a moderate amount of long term producer level inflation. Based on this alone I would not expect to see the FOMC raise rates, add in tomorrow's CPI data and things may look different.
%imb18%

Industrial Production fell by -0.4% month to month in August and is down -1.1% year over year. Output is also down by -0.4%. Capacity Utilization also fell by -0.4% and is now only 75.5% of full capacity, below the long running average.

The last bit of data released today was Business Inventories, delivered at 10AM. Business Inventories fell -0.1% month to month but are up 0.5% year over year. Sales fell -0.2% month to month and -0.5% year over year.

Tomorrow there are two data releases, CPI and Michigan Sentiment. CPI is expected to rise by a modest 0.1%, Michigan Sentiment is expected to rise slightly to just over 91. Next holds a few important released to watch for but the main event will be the FOMC meeting and policy announcement scheduled for Wednesday afternoon.

The Dollar Index

The dollar tried to move today but the mix of data ended up leaving it just as confused as ever. The Dollar Index created a small spinning top candle with visible upper and lower shadows just below $95.60 and near the mid-point of the recent trading range. The index is wound up on data and FOMC expectations with a hint of BOJ worry and could go either way, depending on the outcome of next week's central bank meetings. Don't forget, the BOJ is slated to release their latest policy statement early Wednesday morning. Resistance is at $95.60, support near $95. A break out of this range could take the index to test the upper or lower limits of the range near $97.50 to the upside and $93 to the downside.


The Oil Index

Oil prices were choppy again today but managed to settle with a gain. WTI traded in the $43.50 to $44.00 range for most of the day, closing near $43.75 for a gain of 0.4%. Yesterday's surprise draw of crude supplies is helping to support prices but production and supply imbalances remain. Two of three Libyan ports are supposed to reopen soon with additional capacity coming back online from Nigeria as well. Until there is concrete sign of market rebalancing I expect to see oil prices under pressure.

The Oil Index was able to move higher today, supported by oil prices. The index closed with a gain near 1.4% after moving higher by as much as 2% earlier in the day. The move was capped at near term resistance along the mid point of the 6 month trading range. The index remains range bound and appears to be moving toward the bottom of the range near 1,075. The indicators are weak and pointing lower, suggesting that lower prices are to come. The upcoming earnings season will be telling, the energy sector is expected to post deep year over year earnings declines once again.


The Gold Index

Gold prices fell today despite declining expectations for a September rate hike. Spot gold fell a little more than -0.5% in choppy trading to close near $1,317. This move is driven by FOMC uncertainty, despite the fact that expectations of a rate hike are low the chance for one remains as does the chance for an increased hawkish tone to the statement. Gold prices are still above support until then. Critical support is the $1,300 psychological level, a breach of which could take gold much lower.

The Gold Miners ETF Continues to show signs of support in the $25 to $26 region. Today's action created a spinning top candle below near term resistance at $26.65. The indicators are consistent with support and a potential support bounce from this level but there is a chance, based on MACD peak analysis, that the ETF will touch back to $25 one more time before it decides to move higher. Depending of course on the FOMC, what they do to the dollar and how that affects gold prices. If the Fed does raise rates it means that they see inflation at hand and that will bring gold back into the picture as a hedge against inflation.


In The News, Story Stocks and Earnings

Apple shares led the market all day. The global tech gadget behemoth once again sold out of the latest iPhone model showing not only the demand for their products but the company's ability to manage that demand. Shares jumped another 3.25% to break above potential resistance at the $115 level for the first time since last December. The stock is now up more than 12% for the week and indicated to go higher. Now that the range is broken this one could go as high as $125.


Oracle reported earnings after the bell and delivered good, but not good enough, results. The company reported adjusted earnings of $0.55, a little better than expected, on light than expected revenue. Despite the miss total revenue is up 2% in US dollars led by cloud SaaS and PaaS. SaaS profit alone was up 77% and is expected to generate $2 billion in recurring revenue annually. Shares had been up strongly in the open session but gave up all the gains after the release of earnings.


The Indices

The indices started the day off on shaky footing and then slowly recovered throughout the day. Today's gains have put them into positive territory for the week but volatility is likely not gone. Today's move is driven as much by tomorrow's options expiration as much as anything else so there is a chance we could see another 1+% move in either direction. The NASDAQ Composite led today's action with a gain of 1.47% and appears the most bullish of all the indices. The index created a long white candle that extended a bounce begun yesterday and broke above the short term moving average. The indicators are not yet confirming the move higher but they are rolling over into potential bullish signals. We could see this one continue higher tomorrow but there is significant resistance just above today's close at the current all time high. A break above the all time would be bullish and could lead to further upside.


The S&P500 is runner up in today's action with a gain of 1.01%. The broad market created a long white candle moving up from support but was capped at near term resistance at 2,150. This bounce could continue higher and if so would meet next resistance at the short term moving average, near 2,162. The indicators however are weak and do not support a move higher at this time, MACD is bearish and stochastic is sliding lower. Even with today's surge higher bias is to the downside with a test or open at support a good possibility. Support for the index is 2,120, a break below this would be bearish.


The Dow Jones Industrial Average made the third largest gain today, 0.99%. The blue chips created a long white candle moving up from support but was capped by resistance. The index is trading withing a range, swinging back and forth from support to resistance, and may continue to do so tomorrow. The indicators are weak and suggest range bound trading will persist. A drop below 18,000 would be bearish with downside target near 17,750. A move above 18,250 could be bullish but would find additional resistance just above, near the current all time high.


The Dow Jones Transportation Average made the smallest move today, only 0.58%. The market leading transports created a small candle, feebly moving up from support levels, with weak indicators. The indicators are mixed with a downside bias, stochastic is moving lower while MACD may have peaked, so another test of support may be coming. Support is the bottom of a 2.5 month trading range near 7,750, a break below this would be bearish and could take it down to 7,500. If the index swings higher tomorrow there may be resistance just above today's close near the short term moving average.


The market moved higher today but I don't think any kind of significant bounce has started, at least not yet. The indices are trapped in a tight, volatile range ahead of OPEX and one of the most heavily speculated FOMC meeting in a string of meetings that has included the start of taper and the first rate hike since the financial crisis. The scary thing is, there is no telling what the FOMC will do and the uncertainty is much greater than before. The inflation data doesn't really suggest they have to raise rates right now but they could anyway, labor trends certainly support it and a preemptive move is not out of the question. I remain very cautious, prepared for the worst, waiting for the Fed.

Until then, remember the trend!

Thomas Hughes


New Plays

Cloud Neutral

by Jim Brown

Click here to email Jim Brown
Editor's Note

Box Inc is that neutral player in the cloud space. They have decided not to compete with all the giants but to partner with them in hopes of gaining a bigger piece of the cloud.


NEW BULLISH Plays

BOX - Box Inc - Company Profile

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Buy BOX shares, currently $14.87, initial stop loss $13.85.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Lower Highs

by Jim Brown

Click here to email Jim Brown

Editors Note:

Nice rebound from critical support levels but still just a lower high. The major indexes closed on critical support levels on Wednesday and today's rebound could not have been scripted better. Everyone wants to see support levels hold and gains result but it will take several more days of gains to convince traders the trend has changed.

The rebound came on worse than expected economics that put the Fed on hold for next week's meeting. It would be very difficult for the Fed to hike rates and continue to claim they were data dependent.

The weak economics caused a new short squeeze and another 1% day, the fourth in the last five days. Quadruple witching option expiration on Friday should see a large increase in volume but expirations rarely produce major market moves.

The September $14 call on Radian and the September $22 put on Skechers will expire at the close on Friday. If you are still holding those and you see a big move in the stock you need to close those positions for anything you can get on Friday. Skechers is $1 over the put strike and Radian is 65 cents below the strike. Anything is always possible.




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


SWHC - Smith & Wesson
The short stock position remains unopened until a trade at 26.45.


WFM - Whole Foods Market
The short stock position remains unopened until a trade at 27.75.



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BULLISH Play Updates

PTLA - Portola Pharmaceuticals - Company Profile

Comments:

No specific news. Excellent gain to a new four-week high.

The company will be presenting at carious sessions at the Annual Neurocritical Care Society Meeting from Sept 15-18th.

Original Trade Description: September 12th.

Portola Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes therapeutics for patients in the areas of thrombosis, other hematologic disorders, and inflammation. The company is developing Betrixaban, an oral, once-daily Factor Xa inhibitor, which is in Phase III clinical trial for treating venous thromboembolism prophylaxis in acute medically ill patients in-hospital and post discharge; and Andexanet alfa, a recombinant protein that is designed to reverse the anticoagulant activity in patients treated with a Factor Xa inhibitor. The company is also developing Cerdulatinib, which is in Phase I/IIa proof-of-concept study, an orally available kinase inhibitor that inhibits spleen tyrosine kinase (Syk) and janus kinases enzymes, which regulate signaling pathways, as well as for hematologic, or blood, cancers, and inflammatory disorders. In addition, it is involved in the development of PRT2607, a selective Syk inhibitor. Portola has collaboration agreements with nearly a dozen major pharma companies including Bristoll Myers, Pfizer and Bayer to name a few. Company description from FinViz.com.

The billion dollar drug is Andexxa (Andexanet Alpha). In February, Portola licensed the rights in Japan to Bristol-Myers and Pfizer for $15 million in upfront payments, $90 million in milestone payments and double-digit royalties. This is just for Japan. Portola is planning on submitting the MAA for approval in Q3.

In the U.S., Portola suffered a setback in August when the FDA rejected its BLA submission for Andexxa. The FDA asked for some manufacturing information and a change to the labeling. Portola plans to meet with the FDA in the coming weeks to resolve any outstanding questions. Once the drug is approved we could see the shares spike significantly. There is almost zero risk of non-approval based on the remaining questions posed by the FDA. Shares fell from $28 to $18 on the news in late August and the rebound is starting to accelerate.

Shares only lost $1 in the Friday crash and recovered 50% of that on Monday. Support is $21 and shares closed at $22.

Earnings Nov 9th.

Because the futures are down so sharply tonight I am going to put an entry trigger on the position. I hate to say buy something and then have the market gap down -100 points at the open on its way to a repeat of Friday.

Position 9/14/16 with a PTLA trade at $22.25

Long PTLA shares @ $22.25, see portfolio graphic for stop loss.

(Wide stop loss because of the market volatility. I will raise it when it makes sense.)




BEARISH Play Updates

SWHC - Smith & Wesson - Company Profile

Comments:

No specific news. Gained 71 cents in a short squeeze with the positive market.

This position remains unopened until a trade at $26.45.

Original Trade Description: September 14th.

Smith & Wesson Holding Corporation manufactures and sells firearm products and accessories. The company operates in two segments, Firearms and Accessories. It offers handguns, including revolvers and pistols; long guns, such as sporting, bolt action, and single shot rifles; hunting rifles; black powder firearms; handcuffs and restraints; and firearm-related products and accessories. The company also provides accessories, such as reloading, gunsmithing tools, gun cleaning supplies, tree saws, shooting and field rests, gun vises, hearing protection, ammo tumblers, and vault accessories. It sells its products under the Smith & Wesson, M&P, Thompson/Center Arms, Caldwell Shooting Supplies, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal Reloading Tools, Lockdown Vault Accessories, Hooyman Premium Tree Saws, BOG-POD, and Golden Rod Moisture Control brands. In addition, the company engages in selling parts of other brands; operates a private law enforcement training facility; provides metal processing and finishing services comprising tooling, forging, heat treating, finishing, plating, and plastic injection molding, as well as engineering support services to third-party customers; and licensing of trademarks to third parties. Company description from FinViz.com.

Smith & Wesson has been posting some outstanding earnings thanks to rapidly rising gun sales only those sales are slowing now that Trump has pulled even or slightly ahead of Clinton. Trump is pro gun and Clinton is anti gun. As long as his numbers are improving, gun sales are likely to slow. However, should Clinton surge into the lead again, the numbers will rocket higher. Consumers are not going to spend hundreds of dollars to buy another gun if they think their gun rights will be safe for another 4 years. If Clinton surges into the lead again, they will be out in force buying those "extra" guns. The biggest surge will occur if Clinton wins the election on Nov 8th. At that point we want to be long every gun manufacturer and ammunition maker.

Shares have sold off despite great earnings and raised guidance because FBI background checks slowed in August to only a 6% rise compared to 37% growth in July and 39% in June. The actual number of checks fell from 2.19 million in July to 1.85 million in August.

Earnings Dec 1st.

With a SWHC trade at $26.45

Short SWHC shares, initial stop loss $27.45

No options recommended because of price.



VXX - Volatility Index Futures - ETF Description

Comments:

Major increase in volatility only a couple days after we entered the position. There will be ups and downs. Just hang in there and the long-term trend will always be down.

If you are not already in this position the spike today would be an excellent place to enter a new short.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

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. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.



WFM - Whole Foods Market - Company Profile

Comments:

No specific news. The market short squeeze prompted some short covering in WFM. However, more than 5,500 of the Nov $28 puts were purchased at $1.72 to more than double the open interest of 3,800.

This position remains unopened until a trade at 27.75.

Original Trade Description: September 14th.

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, grocery, and household goods. As of January 28, 2016, the company had approximately 434 stores in the United States, Canada, and the United Kingdom. Company description from FinViz.com.

Whole Foods Market has been known to consumers as the Whole Paycheck Market because of their high prices. That has changed somewhat in recent months because the competition is rapidly accelerating. Sprouts Farmers Market, Walmart and all the various Kroger branded chains are slashing prices on organic products and adding them to their shelves by the hundreds.

Last week Sprouts (SFM) warned that Q3 same store sales would be flat compared to prior guidance of +3.5% to +4.5% that they gave just two months ago. That is a significant decline in expectations. They cited increased price competition and a highly promotional environment that was cutting into profits as well. Their own chart for same store sales tells the tale.


I am choosing to play WFM instead of SFM because the latter dropped significantly on the guidance warning while did drop and is continuing to drop. Since Whole Foods is the most expensive store in the group they have the most market share to lose.

Earnings are Oct 26th and investors should be afraid to hold into that event.

With a WFM trade at $27.75

Short WFM shares, initial stop loss $28.75

Optional: Buy Nov $25 put, currently .60, no stop loss.





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