Option Investor

Daily Newsletter, Monday, 6/27/2016

Table of Contents

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

Market Wrap

Brexit Driven Sell-Off Deepens

by Thomas Hughes

Click here to email Thomas Hughes


The Brexit driven sell-off deepens as traders around the world wonder... what now? The question is many faceted but the most pressing may be, when will the Brexit actually occur? Or maybe, will it actually occur? Just because they voted to do it doesn't mean it will necessarily come to pass, at least according to some of the analysis I've seen. To make it happen the prime minister has to invoke Article 50 of the Lisbon Treaty, the article outlining how a nation may voluntarily leave the union, since David Cameron is stepping down that might not happen until the fall. There is also a theory that the EU will make concessions to the UK which may provide reason enough for them to stay. In either case the PM has put the kibbosh on a second referendum saying the people have voted, now the nation has to honor it.

Asian markets did not react to the Brexit in quite the same way as the EU and US market did on Friday. Mainland Chinese indices closed flat to negative while the Hong Kong index, Japan and many other major indices in the region were able to make gains. Of note, Japanese Prime Minister Shinzo Abe told the finance minister, after an emergency meeting with the BOJ, to take whatever steps necessary to stabilize the yen following the wild surge it saw last week.

EU indices did not post gains today. Indices across the region lost at least -1%, most in the range of -2% to -3%, led by the STOXX 600 -4.10%. Later in the day, after the close of the European session, Britain and the BOE received credit downgrades from Standard & Poors and Fitch.

Market Statistics

Futures trading indicated a major sell-off in US equities from the earliest electronic trading. The major indices were indicated to open with losses greater than -1% for most of the morning with some volatility throughout the morning. At the open indices did indeed post a -1% loss in the first minutes of trading and then extended that loss to greater than -2% by the low of the day. Lows were reached by 11AM at which time a near term/intraday bottom was put in. From that point forward the indices were able to bounce but did not recover more than about 1% of the days losses before it was exhausted. Late afternoon saw the indices fall back toward the day's low where they bounced again. The late day bounce carried into the close of trading but left the indices with losses in the range of -1.5% to -3%.

Economic Calendar

The Economy

The advance report on International Trade In Goods And Services was the only official economic data released today. The report shows a -$60.6 billion deficit in trade, greater than the -$50.4 expected by economists and the -$57.5 deficit reported for April.

There will be quite a few major reports later this week. Tomorrow the 3rd estimate of Q1 GDP is due out at 8:30AM. The consensus is for it to be revised higher to 1% from 0.8%. Also on tap tomorrow is the Case-Shiller 20 City Index and Consumer Confidence. Wednesday Personal Income & Spending and Pending Home Sales are due. Thursday we'll see weekly jobless claims and Chicago PMI. Friday we'll get Auto/Truck sales, ISM Manufacturing and Construction Spending.

Moody's Survey of Business Confidence rose 0.7% to 26.3. The caveat is that it may not fully reflect the Brexit vote which was announced Friday, the last day of the survey. According to Mark Zandi global business sentiment appears fragile, most worrisome is South America where political upheaval continues. The US is seen as the strongest with an economy expanding consistent with its potential.

According to FactSet 10 S&P 500 companies have reported earnings for the 2nd quarter so far this season. Of those only 4 have beaten on earnings while 5 have beaten revenue estimates. Since the beginning of the 2nd quarter 9 sectors have been revised lower. The blended rate for 2nd quarter earnings is now -5.2%, the lowest level to date. The energy sector remains the number 1 contributor to earnings decline, ex-energy the expected rate of decline is -1.7%. The two sectors, not energy, with the largest downward revisions to earnings growth are Info Tech and Industrials led by Apple and GE, both companies with large exposure to business outside the US.

Looking forward the earnings picture continues to deteriorate. Q3 and Q4 have both seen estimates reduced by a tenth, both are now at new lows. Q3 growth is expected to be positive, 1.2%, with that growth expanding to 7.5% in Q4. To put this in perspective, last year at this time Q4 was projected to see growth in excess of 15%. Growth has also been revised lower for the full year 2016, to 0.7% from 0.8%. 2017 estimates remain steady at 13.6%.

The Dollar Index

The Dollar Index continues to surge in the post-Brexit referendum world. The index gained another 1% in today's session following a greater than 2% surge last Friday. Post referendum the GBP and EUR are both losing ground to the dollar in a flight to safety trade while the JPY is gaining versus the dollar. On the central bank front the the FOMC was more dovish than expected and now, post-Brexit, some pundits see a possibly of reducing interest rates, not raising them. And at the same time Japan continues to posture towards monetary action to stabilize the yen. Looking forward the waters are muddy to say the least. The current move higher appears to be strong, the candles are extremely long and white and confirmed by a strong signal from the indicators. It looks like the index will at least continue to test resistance near $96.50, the 50% retracement line, with a possible move higher. If resistance is broken a move up to $97.50 is likely.

The Oil Index

Oil prices fell again today. The price of WTI fell more than -2.5% intraday, closing with a loss of -2.4%, on a stronger dollar and persistent oversupply. Not only has the Brexit affected the dollar, it is also calling global growth into question and by extension demand for petroleum. At the same time global production remains high which is adding downward pressure to prices. Market rebalance may be on the way, but it isn't here yet, so prices are likely to remain low without additional catalyst. $50 is looking like strong resistance at this time, first target for support is near $45. A break below $45 could go as low as $40 before finding next support.

The Oil Index fell more than -3% in today's move. The candle is long and black, extends the move below the short term moving average and breaks through support at the bottom of the recent 3 month trading range. The indicators are mixed but generally support a test of support, if not a move lower, with downside target near 1,050... provided oil prices do not snap back.

The Gold Index

Gold prices are moving higher on flight to safety, and are disconnecting from the dollar ... at least for now. Spot gold closed with a gain of 0.42% in today's session, adding $5.50 to Friday's settlement price. The move is an extension of the +$50 move sparked on Friday. Momentum is to the upside with resistance targets near $1350. Goldman Sachs raised its average price target for 2016,2017 and 2018 by roughly 10%, to $1250, and has added Barrick Gold to its conviction buy list.

The gold miners are moving higher in the footsteps of gold. The miners ETF GDX gained nearly 1% in today's session, and is trading above my previous resistance target of $26.50. The move in gold, along with forward outlook, is supporting the miners and could carry them higher into the short term. Nearer term there is potential resistance near $27.50, a break above this level could take the ETF up to the $30 level. The indicators are turning bullish but remain weak; MACD has just turned bullish while stochatic is showing a weak bullish crossover. Based on the candles it looks like there are sellers present at current levels but are likely profit takers. A consolidation at these levels before moving higher would be good for longer term bullish prospects.

In The News, Story Stocks and Earnings

The news wasn't all Brexit, believe it or not. On the M&A front Medtronic announced the purchase of Heartwave for $1.1 billion. The deal is worth $58 per share in cash to shareholders, a 93% premium to Friday's closing price. Heartware makes diagnostic tools and treatments for heart failure, the addition is expected to be accretive for Medtronic by the 3rd year. Shares of Medtronic fell nearly -2% on the news but sellers stepped in to support prices, leaving the stock with a loss of only -1.4% at the close of the session.

The VIX fell about 10% in today's session and is already showing signs of topping. Today's action began with a move to the upside, extending the Friday gains, but met resistance and sent the index into retreat after hitting the early high. Today's candle is black with a large upper shadow, indicative of resistance at the $25 level. At the same time both indicators are confirming potential resistance at this level. The MACD is rising, but the current peak is divergent from the index, while the stochastic is rolling over, below the upper signal line, following a bearish crossover. If this signal plays out the index could easily return to test support near the $20 level. However, with the current situation with Brexit uncertainty and us on the cusp of a poor earnings season I think it too soon to say with any surety. A move above $25 would be bearish for the broad market and could take the fear index up to the $30 level.

Nine of ten S&P sectors were lower in today's session. The one posting gains was the utilities. The Utilities Sector SPDR was able to make strong move upward, gaining nearly 1% from the short term moving average and moving up from previously broken resistance now turned support. The reason for the move is complex but includes the fact that these companies have little to no exposure to Brexit fall-out, will continue to produce revenue and earnings in the face of a market downturn and pay a dividend, 3.19% for the XLU itself. The indicators are weakly bearish at this time but rolling over into a possible bullish signal. Today's close was a new all time high, if we see follow through it could lead to more new highs with a possible upside target of $52.50 in the near to short term.

The Indices

The indices fell again today. The move was strong, it tried to bounce from an intraday bottom but was not able to recover more than a token amount by the close. The day's leader was the Dow Jones Transportation Average which lost more than -3% and is fast approaching key support levels. Today's move created the second of two long black candles and extended the fall from the 150 day moving average and the 7,500 support level which was broken on Friday. Both indicators are bearish and moving lower, pointing to test of the next support level at least, near 7,000. There is some sign that support exists at this level, today's bounce began just above it, but there is no guarantee it will hold. A move below this level, the first and weaker of two potentially key levels of support, could take it down to 6,750 or 6,500 in the near to short term.

The next largest decline in today's session was posted by the NASDAQ Composite. The tech heavy index fell slightly more than -2.41% in a move that broke below the 4,650 support target and set a near 4 moth low. The indicators are both bearish, showing some strength and pointing to a test of stronger support. Next target for support is near 4,550 with a possible move down to 4,375.

The third largest decline in today's session was posted by the S&P 500. The broad market fell -1.81% at the close, after falling more than -2% intraday, and broke below the 2,020 support target. The index appears to be moving lower and this is supported by the indicators. Both MACD and stochastic are moving lower, confirming the move, stochastic is making a bearish crossover with today's action adding strength to the signal. The index is likely to fall to the 1980 level at least, with additional targets near 1,960 and 1,950, the long term up-trend line.

The smallest decline was posted by the Dow Jones Industrial Average, -1.5%. The blue chips extended their drop below the 150 day moving average and broke below an up trend line with today's move. The index looks set to move lower, perhaps as low as 16,500, and this is confirmed by the indicators. Both MACD and stochastic are pointing lower, and both are showing some signs of strength. One sign is increasing bearish MACD histogram, another is the bearish crossover on the stochastic which completes a strong bearish signal for that indicator.

I've been waiting for a correction for the last 2 months and it has begun. I thought it would be due to poor earnings, not the Brexit, but in the end the Brexit vote was merely the spark that started the selling. I still think poor earnings, declining outlook and tepid economics are why the market is correcting. Now that it has begun the question is, how deep will it run? The transports are already down more than -12% from the peak set two months ago, the NASDAQ about -8%, the SPX about -5.6% and the Industrials about -4.7%. If the transports are leading we could see another -5% or more in the broad market before it is all said and done.

Looking forward I am still positive on the future. Earnings growth is still expected to return, economic expansion is still progressing if slowly and the consumer is getting stronger. This correction is, in my opinion, another hiccup in the long term secular bull market and will provide another great entry for long term positions. I'm bearish in the near term, waiting for signs of the bottom and the start of the next major rally.

Until then, remember the trend!

Thomas Hughes



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New Option Plays

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by Jim Brown

Click here to email Jim Brown

Editors Note:

With the S&P futures positive tonight I am adding three plays. We could just as easily hit a roadblock overnight but the S&P is down -5% in two days. This is the definition of oversold. I picked three stocks with strong relative strength and all were at new highs on Thursday.


NVDA - Nvidia - Company Description

We were stopped out on Nvidia on Friday the day after it made a new high. I am reloading this position today.

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 companyÂ’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.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

More than 50 automakers are testing the new Drive PX chip for self-driving cars. The chip combines inputs from cameras, lasers, maps and sensors to allow cars to drive themselves and learn from each experience.

Earnings August 11th.

Shares closed at a new high at $48.50 on Thursday. On Friday they dropped to $45.30 to stop us out. That was a $3 drop. Today the stock rebounded off the opening low and only gave back 49 cents. I believe with any market that is not crashing Nvidia will be back at new highs very quickly.

Buy August $47 call, currently $2.19, no initial stop loss.

PVH - PVH Corp - Company Description

PVH Corp. operates as an apparel company in the United States and internationally. The company operates through six segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. It designs, markets, and retails mens and womens apparel and accessories, branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, hosiery, socks, jewelry, watches, outerwear, small leather goods, and home furnishings, as well as other related products. The company offers its products under its own brands, such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warners, Olga, and Eagle; and licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection, and Chaps, as well as various other licensed and private label brands.

PVH has been absolutely crushed in the sell off because they were thought to have as large presence in the UK. Shares closed at a new 9-month high of $102.70 on Thursday. Today they touched $84 intraday for a whopping $18 or roughly 18% decline in two days from a new high.

PVH thought it was important enough that they filed a disclosure with the SEC saying they only derived 3% of their revenues from the UK. Even with the massive drop in the pound the company did not think any UK weakness would be material to their results.

The company has been on a growth spurt by acquiring brands and doing license deals with other brands to improve the variety of its offerings. On June 15th the CEO spoke at a Piper Jaffray Consumer Conference and said business was improving in Q2. He said the problems with other retailers represented an opportunity for the Calvin Klein and Tommy Hilfiger brands. He said the Tommy Hilfiger women's business generates 30% of their revenue and was a growth opportunity since they recently added it to the line. They teamed up with super model Gigi Hadid to make the brand more relative to younger, fashion oriented women.

With their Q1 earnings they raised guidance from $6.30-$6.50 to $6.45-$6.55 a share for the full year. The CEO said the guidance was conservative because this "does not seem like the environment ro tray and be a hero."

Earnings August 24th.

With a PVH trade at $86.65

Buy August $90 call, currently $2.80, no initial stop loss.

GRUB - GrubHub - Company Description

I recommended GRUB as a LEAP position in the LEAPS Newsletter on Sunday. With the minor drop back to support today I am recommending it here on a short term option.

GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 44,000 local restaurants with diners in approximately 1,000 cities. It operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, iPad, Android, iWatch, and Apple TV devices; and Seamless Corporate program that helps businesses address inefficiencies in food ordering and associated billing. In addition, it provides Allmenus.com and MenuPages, which provide an aggregated database of approximately 380,000 menus from restaurants in 50 states.

GrubHub is a concept that is catching fire and the bigger they get the more restaurants want to sign on to the service. They now serve 44,000 restaurants. They do not markup prices. Whatever the restaurant charges is what you pay. Diners can customize any order to their own taste specifications and dietary needs.

Restaurants benefit because the service drives more orders. Many people cannot take 2 hours out of their day to go to the restaurant to eat. GrubHub brings the restaurant to them. Restaurants typically see about 30% more takeout orders during their first year when they sign up for the Grubhub service. Delivery fees range from free to $3.99.

GrubHub currently has more than 6.9 million diners. Ordering through the GrubHub online menu is 50% faster than ordering from the restaurant on the phone.

The company recently announced participation with national chain restaurants including Boston Market, Johnny Rocket's, California Pizza Kitchen, Veggie Grill, On the Border and Panda Express. This is a natural for fast food chains. They prepare the food fast and it gets to the diner fast.

An analyst at Moness Crespi Hardt just upgraded them to buy from neutral saying the fundamentals are rapidly improving with the addition of the chain restaurants. Secondly they completely overhauled their tech platform in 2015 and the benefits are rising quickly. They are also integrating POS features including Apple Pay. He also believes they are a potential acquisition target by companies like Amazon, Uber and Postmates. His biggest point is the addition of the chain restaurants. Adding companies with hundreds or even thousands of restaurants will catapult them to the next level.

Earnings August 2nd.

Shares have been rising and they closed at an 8-month high on Thursday. In Friday's market crash they gave back only 1.4%, which was nothing compared to the rest of the market. In Monday's market they dropped back to retest Friday's low but that support held. This is very good relative strength.

Buy Aug $30.00 call, currently $2.25, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

This is What Worse Looks Like

by Jim Brown

Click here to email Jim Brown

Editors Note:

I said yesterday the decline could have been worse. Today was worse. The S&P blew through support at 2040, 2025, 2020 and 2000 intraday. Twice the index bounced off support at 1,990 and a little spurt of buying at the close lifted it back to 2,000. The S&P lost -37 points and it now down -5% since Thursday's close.

The European markets crashed again last night and that carried over into the U.S. markets at the open. As long as the European markets are in free fall we can expect the U.S. markets to be weak. Volume was about 50% above normal today suggesting a major distribution day.

I said yesterday,"I expect some further margin selling on Monday but then a rebound later in the week. The S&P dropped right to strong support at 2,040 and this will be a critical pivot point. Any material decline from here would change the outlook for the market to bearish."

I did NOT expect the S&P to drop to 1,990. I was wrong about a potential rebound in the 2020-2025 range. One day is not a trend. Two days on increasing volume are a significant problem. ANY further declines would turn into a trend with a target at 1,865 and possibly even 1,920.

The decline bottomed at 1,991 at 11:AM and a minor rebound appeared. That 1,991 level was tested again at 3:20 and another rebound appeared. This suggests they may be trying to circle the wagons at that 1,991 level.

The market is now significantly oversold on a short-term basis. This is a financial reaction to a government action. This is not an economic or market related event.

On a contrarian basis, Ralph Acampora, is looking for the S&P to decline as low as 1,820. Since Ralph is normally wrong that suggests there may be a bounce in our future.

Lastly the VIX peaked at 26.72 at 11:AM and moved lower the rest of the day to close at 23.85 and below the 25.76 close on Friday. The VIX is calculated on options 30 days into the future and the declining VIX suggests most investors believe this market drop will be short term. They are willing to wait it out rather than load up on August puts.

Current Portfolio

Current Position Changes

IWM - Russell 2000 ETF

The long call position was entered with a trade at $110.

SWHC - Smith & Wesson

The long call position was entered at the open at $25.84.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

CNC - Centene Corp -
Company Description


No specific news. Big drop at the open but $1.50 rebound off the lows to cut the opening loss in half. I removed the stop loss to avoid the volatility.

Original Trade Description: June 21st.

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. It operates through two segments, Managed Care and Specialty Services. The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State childrens health insurance program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and x-ray services, home health and durable medical equipment, behavioral health and substance abuse, 24-hour nurse advice line, transportation assistance, vision care, dental care, immunizations, prescriptions and limited over-the-counter drugs, specialty pharmacy, therapies, social work services, and care coordination. The Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; vision services; dental services; correctional healthcare services; in-home health services; and integrated long-term care services, as well as care management software that automate the clinical, administrative, and technical components of care management programs.

On Monday Centene was upgraded by Barclays to overweight (buy) with an $82 price target. They based the upgrade on the growth and valuation potential after the completion of the $6.8 billion Health Net (HNT) merger at the end of March. Health Net had 5.9 million individuals in plans in all 50 states. They also offered employee assistance plans to approximately 7.3 million individuals. The combined companies now insure more than 10 million individuals. Barclays said the combined management team had improved with the merger.

Barclays said, "we believe shares of CNC have simply corrected too far and too long, and now represent a very attractive investment."

Earnings are July 26th.

Shares spiked $2 on the upgrade and failed to pull back on Tuesday. That spike pushed CNC over resistance and any further move higher would be a breakout.

Position 6/22/16

Long August $72.50 call @ $1.97, see portfolio graphic for stop loss.

COST - Costco - Company Description


No specific news. Costco gapped lower to $152.50 and 50 cents below the Monday low. Shares rebounded immediately but still lost $1.30. I removed the stop loss to avoid the volatility.

Original Trade Description: June 11th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo-processing centers, and hearing-aid centers; and engages in the travel business. They operate 690 warehouse stores plus online shopping.

A Costco membership costs $55. It is almost worth the cost if all you bought was gasoline. The store charges 7-15 cents less than the prevailing rates at other local stations. There are normally lines at the Costco pumps because it is a bargain. If you purchased 15 gallons of gas per week and saved an average of 10 cents you would save $78 a year and more than enough to cover the cost of the membership. Multicar families would save even more.

However, Costco to many people means bulk purchases of items too big to store in your normal pantry. The mental image of Costco is someone pushing a cart with cases of toilet paper, paper towels, laundry soap and canned goods. While that may be true for a lot of shoppers there are still bargains on everything else. My son stopped there on Saturday to buy 15 gallons of ice cream, 10 watermelons, scores of picnic plates and plastic utensils for a party he was throwing. I know people who only shop at Costco and do not go to stores like Safeway, Kroger, etc. Once you get the Costco shopping virus it is hard to not go there. You can even by caskets at Costco. Members bought 465,000 cars through Costco in 2015. The warehouse chain is the number 1 seller of organic food at $4 billion in 2015 compared to Whole Foods at $3.6 billion. Costco has 84 million paying members and you can cancel at any time and get a full refund.

This has helped Costco maintain an average annual growth rate of 13% while other stores are lucky to manage 2-4% a year. Walmart only grew at 0.44% last year and Target 5.4%. In the latest quarter adjusted for fuel and currency fluctuations Costco managed only 3% same store sales growth compared to estimates for 4.6%. They blamed the colder than normal April weather and the weak retail consumer. We already know from other retailers that sales were down sharply all across the sector.

They reported adjusted earnings of $1.24 compared to estimates for $1.22. Revenue rose +2.6% to $26.77 billion and missed estimates for $27.07 billion for the reasons I stated above. Analysts expect earnings to grow 12% annually over the next two years.

Earnings are Sept 29th.

Shares spiked up to $154 after earnings on May 26th and then went sideways for a week while those gains were consolidated. Now they are trending higher again and even closed up on Friday in a weak market.

Position 6/13/16:

Long Oct $160 call @ $4.40, see portfolio graphic for stop loss.

IWM - Russell 2000 ETF - ETF Description


The IWM ETF dropped through our entry trigger at $110 at 10:05 this morning to trigger our entry. There was a dead stop at support at $108.

Original Trade Description: June 25th.

The Russell 2000 ETF attempts to track the investment results of the Russell 2000 Index composed of small-capitalization U.S. equities.

The Russell indexes were "reconstituted" at the close on Friday. Unlike an S&P-500 rebalance where only the weightings change, the Russell indexes have additions and deletions that impact all the weightings and constitution.

The Russell company sorts all the U.S. stocks by market cap and the top 1,000 become the Russell 1000 and the next 2,000 become the Russell 2000 Index. Stocks that grew over the last year can shift out of the R2K and into the R1K. Stocks that saw their market cap shrink can move from the R1K to the R2K. Stocks that were acquired are eliminated and new stocks take their place in the overall order. Stocks that saw their market cap shrink enough to place them far enough down the list to miss the 3,000 stock cutoff are removed from the indexes. It is a complicated procedure and funds that follow the indexes have a lot of restructuring to accomplish in a single day.

The Russell 2000 Index normally has a positive bias in the week after the rebalance as fund managers clean up their portfolios and balance the positions correctly. With a 3,000 stock universe in the Russell 1000, 2000, 3000, it is next to impossible to get it all completed on Friday. Managers know which stocks were dropped and those were sold at the close. Getting the weighting right on the remaining stocks and the new stocks added to the indexes is a little more complicated.

This means managers are buying stocks in small amounts for most of next week until the weightings match the index and their benchmarks. This produces the slight upward bias.

Whether that bias can overcome the negative Brexit sentiment is unknown but remember, nothing changed in Europe. At this point, the Brexit is just a headline. The actual changes will be many months if not years in the future.

Current support for the IWM is down in the $109 range with some congestion around $110. I am going to recommend two entry points. If we rise on Monday, I want to enter the position with an IWN trade at $113. If the market goes lower, I want to enter the trade at $110. If there is volatility and the $113 entry is made first, I still want to add to it with a trade at $110. If we move lower and the $110 entry is made first then the $113 entry recommendation is cancelled.

This will be a short term position for a couple weeks just to capture a rebound and the potential to return to resistance at $118-$120.

Position with an IWM trade at $110:

Long August $115 call @ $1.35. No initial stop loss.

The recommendation for a trade at $113 has been cancelled.

JPM - JP Morgan - Company Description


Another sector decline crushed the banks again. JPM may be the strongest but this is the weakest sector. The Fed will release the second half of the bank stress tests on Wednesday. That should help reduce the negativity.

Original Trade Description: May 11th.

JPMorgan Chase & Co. operates as a financial services company worldwide. It operates through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset Management segments. The Consumer & Community Banking segment offers deposit and investment products and services to consumers; lending, deposit, and cash management and payment solutions to small businesses; residential mortgages and home equity loans; and credit cards, payment services, payment processing services, auto loans and leases, and student loans. The Corporate & Investment Bank segment provides investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication; treasury services, such as cash management and liquidity solutions; and cash securities and derivative instruments, risk management solutions, prime brokerage, and research services. It also offers securities services, including custody, fund accounting and administration, and securities lending products for asset managers, insurance companies, and public and private investment funds.

JP Morgan has 15% revenue exposure to Brexit. That will be the major market mover the rest of the week. They are also expected to increase their capital return percentages for buybacks and dividends. Those will be announced next Wednesday.

I am playing the call side because the potential for a short squeeze on a remain vote or a major buy the dip program on an exit vote. The put options are more than double the call options so it appears everyone is expecting the worst. Shares have declined to the bottom of their uptrend channel.

I am using the August options to capture all the events over the next couple weeks. Earnings are July 14th and we will exit before earnings.

This is probably a 100% loser or a 200% gainer. There is no in between because of the binary nature of the event. We cannot use stop losses on this position because of the potential for opening gaps.

Position 6/23/16:

Long August $65 call @ $1.31, no stop loss.

QRVO - Qorvo Inc - Company Description


No specific news. Morgan Stanley initiated coverage with an equal-weight. Shares crashed -$4.25 as the semiconductor sector was crushed on a Merrill Lynch sector downgrade. On the positive side the decline stopped when support was hit at $50.

Original Trade Description: June 14th.

Qorvo, Inc. provides technologies and radio frequency (RF) solutions for mobile, infrastructure, and defense and aerospace applications worldwide. It operates through Mobile Products (MP) and Infrastructure and Defense Products (IDP) segments. The MP segment supplies its RF solutions into mobile devices, including smartphones, notebook computers, wearables, tablets, and cellular-based applications for the Internet of things. The IDP segment provides low noise amplifiers, switches, radio frequency filter solutions, CMOS system-on-a-chip solutions. This segment supplies its RF solutions to wireless network infrastructure, defense, and aerospace markets; and connectivity applications for commercial, consumer, industrial, and automotive markets.

Qorvo is a major supplier to Apple and other smartphone manufacturers. The slowdown in Apple iPhone sales hurt earnings last quarter but sales increases to Samsung and Chinese handset maker Huawei have helped to offset sluggish demand. The Samsung Galaxy S7 is selling very well and taking over the smartphone market. Strong base station demand rose +25% sequentially and a 9% increase in defense spending is helping offset the perceived slowdown in iPhones.

However, sales of the new iPhone 5E were only expected to be 10-15 million but sales have ramped up and are now expected to be in the 40-45 million range. Citigroup upgraded Qorvo and downgraded Slyworks saying the high performance Qorvo chips were much better than the Skyworks product and the company had a commanding lead in that segment. Qorvo is much better positioned for the carrier aggregation market and the low-band market fed by Skyworks was seeing a lot more competition.

Qorvo should benefit significantly from the ramp of 3G and 4G handsets into India and lower dollar emerging markets. The 5G specifications are starting to emerge and Qorvo is expected to be a leader in that transition, which will involve hundreds of millions of chips.

Earnings August 3rd.

Shares of QRVO gained 74 cents today in a very weak market. I have to stretch some on the strike because shares are just under $55 and that strike is too expensive. I am going out to $60 to get some premium relief.

Position 6/15/16:

Long Aug $60 call @ $2.10, no initial stop loss.

SWHC - Smith & Wesson - Company Description


No specific news. Shares were actually positive most of the morning but faded into the close to lose a minimal 29 cents.

Original Trade Description: June 25th.

Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming again. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or Orlando or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales. The constant gun headlines over the last two weeks have lifted S&W to 3-month highs.

In their Q4 earnings where there was a surge in gun sales after San Bernardino. In their recent Q1 earnings there was no mention of the Orlando shootings because the shooting was only 4 days before their earnings. The Q1 results did not have any sales bump from that event.

In their Q1 report, they posted earnings of 63 cents compared to estimates for 54 cents. Revenue of $221 million also beat estimates for $214 million. They guided for the full year for revenue between $740-$760 million and analysts were expecting $723 million. They guided for full year earnings of $1.83-$1.93 and analysts were only expecting $1.66. Q1 sales rose +22% and the CEO said demand was strong. They forecast current quarter revenue at $190-$200 million and analysts were only expecting $162 million. That is a massive improvement.

Since the Orlando shooting there has been nonstop headlines about gun control. Gun stores are reporting four times the volume in traffic and many stores are having trouble keeping guns in stock. This is going to be a banner quarter for S&W.

Earnings August 25th.

Shares have been in constant rebound since the earnings on June 16th erased fears about slowing sales. The stock gained 51 cents on Friday despite the severely negative market.

Position 6/27/16:

Long Sept $27 call @ $1.70, no initial stop loss due to volatile market.

BEARISH Play Updates (Alpha by Symbol)

FL - Foot Locker - Company Description


No specific news. New closing low. The trend is our friend until it ends.

Original Trade Description: June 15th.

Foot Locker, Inc. operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and SIX:02, as well as Runners Point, and Sidestep. As of January 30, 2016, it operated 3,383 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand.

Unfortunately, mall traffic is slowing as we have seen repeatedly in retailer earnings comments. Sports Authority just closed all 450 of its stores because of declining sales. The NPD Group Consumer Tracking Service said the "performance" shoe business has never been worse but the total sneaker business remains solid. That means all the high dollar shoes with a sports star name attached to them are not selling, with the exception of Stephen Curry.

Only about 24% of people who buy a specific type of shoe actually wear it for that purpose. That means 75% of the shoes are just bought to wear as a daily living shoe rather than the specific sport. Running shoes are the strongest with 50% of buyers actually running. Basketball logs in at about 33% and outdoor shoes are low at 10%. Asics has been a top selling brand for sports with 66% saying they use them for that particular sport. Skechers was the lowest brand at 10%.

The luxury brands with names like Michael Jordan, Le Bron James, etc are not selling near as well as they did in the past. Foot Locker had a 50% off sales on the high dollar shoes in April in order to reduce inventory.

With shoe makers paying more and more money for super star endorsements they have to charge more for their shoes. In the current economy that is not working out well. A $200 pair of shoes is not a hot item when money is being spent on smartphones and video games instead.

Foot Locker reported earnings back on May 20th and shares dropped $5 on the news. It was not pretty. Foot Locker has been declining since the highs back in October. After the post earnings drop they rebounded about $2 to $56 but could not gain any momentum. Now that basketball is over and the summer doldrums are approaching shares have declined back to $54 and could easily break to a new 52-week low.

Earnings are August 19th.

Given the lack of excitement in shoes and the slowdown in retail, I am recommending we place a bet that Foot Locker does break down before earnings. There is support at $52 but the decline since October is accelerating.

Position 6/16/16:

Long August $52.50 put @ $2.40, see portfolio graphic for stop loss.

PYPL - PayPal - Company Description


No specific news. New 4-month low. Analysts are saying the sharp decline in the pound could impact Paypal earnings.

Original Trade Description: June 13th.

Paypal bills itself as a technology company that enabled digital and mobile payments on behalf of consumers and merchants worldwide. The software allows users to pay and be paid from any computer or mobile device. They have outlasted several competitors but their time in the number one position is running out.

Apple announced Apple Pay for the web. With more than 1 billion Apple devices in use worldwide and 300 million of those are iPhones. When counting Macs and iPads there are more than 500 million Apple users. That is an instant market for Apple Pay on the web and it is going to be a major blow to Paypal.

Paypal has 14 million active merchant accounts and 170 million active consumer accounts. The one feature that works in PayPal's favor is that Apple Pay will initially only be available in the Safari browser and not on Chrome, which has more than 1 billion users.

Regardless the perceived hit to Paypal is likely to be detrimental to the stock price, which is already in decline.

Earnings July 27th.

Position 6/21/16:

Long Aug $35 put, @ $1.05, see portfolio graphic for stop loss.

Previously Closed 6/20/16: Position 6/14/16 Long Aug $35 put, @ $1.35, exit $1.05, -.30 loss.

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