Option Investor

Daily Newsletter, Saturday, 7/2/2016

Table of Contents

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

Market Wrap

Consolidation Pause

by Jim Brown

Click here to email Jim Brown

A combination of factors helped lift the Dow 940 points in four days but resistance remains strong and sellers were waiting.

Weekly Statistics

Friday Statistics

Traders used Friday as a consolidation day. Nearly every stock that was up big over the prior three days saw some profit taking. However, it was light and there was not a herd of bulls stampeding to the exits. I think investors are unsure of what the next week will bring but most were willing to wait and see rather than taking their chips off the table.

The Dow hit 18,000 and came to an abrupt halt. The S&P traded as high as 2,108 before sellers overpowered buyers and pushed the index back to 2,103 at the close. The Nasdaq touched resistance at 4,880 before giving up 18 points to close at 4,862. All the material resistance levels held in a low volume environment.

The factors that helped lift the market from the lows have ended. Equity funds used some of their near record cash hoard to window dress their portfolios for the end of the quarter. Pension funds spent as much as $18 billion to bring their bond/equity ratios back into balance. Bargain hunters bought the dip but now there are only a few bargains left after the big rebound. With the Brexit uncertainty still a cloud over the markets, we will need a new headline to power us higher next week.

The ISM Manufacturing Index for June surprised at 53.2 compared to 51.3 in May and estimates for 51.4. After several declines in the regional reports there was a risk the national ISM would miss estimates. Instead of a miss, that was the highest reading since the 53.5 in June-2015. After spending five months (Oct-Feb) in contraction territory, the index has surged and is showing some strength. Unfortunately, the sharp drop in the pound and spike in the dollar is likely to create some headwinds in the months ahead.

The production component rose from 52.6 to 54.7, new orders 55.7 to 57.0 and order backlogs from 47.0 to 52.5. Employment actually edged back into expansion from 49.2 to 50.4. Export orders rose slightly from 52.5 to 53.5. Twelve industries reported manufacturing growth and five reported a decline. Those declining included wood products, electrical equipment, primary metals, plastics/rubber and transportation equipment.

Construction spending improved slightly for May from a decline of -1.8% in April to a decline of -0.8%. Analysts were expecting a rise of +0.6%. Total construction spending in May was $1.14 trillion.

Vehicle sales for June fell to an annualized pace of 16.66 million compared to 17.45 million in May. The trailing 12-month average was 17.5 million so the decline was significant. Auto sales declined from 7.1 million to 6.8 million. Light truck sales declined from 10.3 million to 9.9 million. Truck sales were helped by the continued low gasoline prices and low interest rates. Consumers are saving an average of $183.5 million per day on lower fuel prices over the same period in 2015.

The flight to quality and search for yield is continuing with the yield on the ten-year treasury falling to 1.456% at the close after a 1.414% intraday low. Those are four year lows and very close to a historic low at 1.394%. The yield on the 30-year treasury hit 2.205% intraday, which was a historic low. The record close at 2.241% is just below the prior record low close of 2.251% in January 2015. These yields reflect the movement of cash from overseas in search of yield and safety. More than $13 trillion in overseas government bonds are now trading at a negative interest rate. You have to pay the government to hold your money.

This is one of the few things that could lift the equity markets next week. Investors looking for a return greater than those government bonds may be forced to look at high yield bonds or equities.

This is payroll week with the ADP Employment on Thursday and the Nonfarm Payrolls on Friday. The consensus estimate on the ADP is 150,000, down from 173,000 jobs reported for May. The consensus range was 100,000 to 209,000. The consensus estimate for the Nonfarm report is 180,000, significantly higher than the 38,000 actually reported for May. The consensus range is 130,000 to 235,000 so a diverse group of opinions. After the Brexit vote, the job numbers no longer matter to the Fed. There is almost no way they could hike in July so the jobs are just a data point for later in the year.

The FOMC minutes for the June meeting will be released on Wednesday and after the sudden change in direction for the majority of Fed members, this report will be scrutinized even harder than prior reports to try and determine what happened.

In stock news Tesla ($TSLA) shares recovered from a sharp drop in afterhours trading on Thursday when the NHTSA said it was investigating a fatality that occurred in a Model S while being controlled by the autopilot. Tesla said that was the first fatality in more than 130 million miles.

The car was traveling at a high rate of speed and a truck and trailer coming from the other direction turned in front of the Model S. The car did not brake because the autopilot did not differentiate between the sudden appearance of the white trailer and the very bright sky. The car went under the trailer and sheared the roof completely off the car. The Model S continued down the road another half mile before hitting a telephone pole and snapping the pole in half.

The driver was a strong supporter of Tesla and bragged about using all the technological features of the car to their limits. When bystanders approached the car there was a DVD player still playing a Harry Potter movie so apparently the driver was not paying attention to the road.

Tesla and Mobileye (MBLY), the maker of the Autopilot software, were quick to remind everyone this is not a self-driving car. The Autopilot is designed for keeping you in your lane, changing lanes, etc. It is more of a cruise control on steroids and not a self-driving system.

Tesla shares fell to $205 from a close at $212 in afterhours when the initial news was released. After the full details became public, shares rebounded to close at $216 on Friday.

Micron (MU) reported an adjusted loss of 8 cents that beat estimates for an 11-cent loss. Revenue of $2.9 billion fell -24.8% and missed estimates for $2.95 billion. The company lowered guidance and said it would slash 2,400 jobs as part of a cost-cutting plan to combat challenging market conditions. The company said demand for DRAM chips used in PCs continued to fall and the market for NAND chips used in devices like Smartphones was becoming very competitive. Revenue has declined for three consecutive quarters. Now the company said it would focus on fewer products and try to streamline operations for that smaller product base. Current quarter revenue is expected to decline from 11% to 19%. Shares fell -9% on the weak guidance.

Oracle (ORCL) shares were up fractionally despite a jury award of $3 billion in damages to HP Enterprise (HPE) for breaking a contract back in 2011. The company contracted to support HP's Itanium servers and then changed its mind after CEO Mark Hurd was booted from HP and hired by Oracle. A five-week jury trial found the contract to be valid and awarded the $3 billion to HPE. Oracle said it would appeal and I am sure they will appeal it through every court available rather than pay those damages. They can spend several million a year in attorney's fees and they might get lucky several years from now and have a higher court overturn the judgment.

Disney (DIS) is in talks to acquire a one-third stake in the technology services unit of MLB Advanced Media, known as BAM Tech. This values the company at roughly $3.5 billion. Disney would also get a four-year option to buy another 33%. The streaming service is very popular with consumers. The service streams live broadcasts of out-of-market games. MLB had about 3.5 million subscribers at the end of last season.

Disney is riding the wave of record setting revenue from the Finding Dory movie and The Big Friendly Giant (BFG) starts this weekend. This could be another strong movie with its production budget of $140 million.

Hershey's (HSY) board unanimously rejected the $23 billion acquisition offer from Mondelez (MDLZ). A charitable trust set up by Hershey's founder owns 81% of the company's voting stock. Without the trust approval, a sale is impossible. There have been multiple acquisition attempts in the past and all have failed. In 2002, the Wrigley Company tried to buy it and failed. In 2007, Cadbury also failed. In 2010, the trust prevented Hershey from bidding to buy Cadbury. The trust was set up more than 100 years ago to benefit underprivileged children. However, it is being investigated by the Pennsylvania AG regarding its spending habits and how long its directors serve. The AG's office has called for the resignation of three of the longest serving directors. The trust has created a $12 billion endowment that funds a school and amusement park in Hershey PA.

Mondelez may have thought that the current investigation might have provided a crack in the armor surrounding the trust and made them more agreeable to a sale. However, the AG's office also has veto power of any deal if it deems it "unnecessary for the future economic viability of the company." I would say there were some nearly insurmountable hurdles for a Mondelez deal. That being the case, Hershey could be a huge short opportunity on Tuesday.

Apple (AAPL) may be in talks to buy Jay Z's streaming music service Tidal. The artist bought the service in 2015 for $56 million. Apple is apparently considering the acquisition to enhance its existing Apple Music product. Tidal has quite a few big name artists including the majority of the Prince catalog. Potential competitors for a Tidal deal include Samsung, Google and Spotify. The rumor could not lift Apple shares because of even bigger rumors about the iPhone 7.

There is a growing stack of evidence that the iPhone 7 will be a lackluster offering. Even worse, apparently, Apple is planning on releasing the iPhone 8 in 2017 and skip the model S update cycle for the iPhone 7. The lack of must have features on the 7 according to the dozens of leaks, could fail to excite the buying public.

The WSJ recently revealed "At a meeting with an Apple executive last month, one of the company’s China-based engineers asked why this year's model lacked a major design change in keeping with Apple's usual two-year cycle. The answer, one person at the meeting recalled, was that the new technology in the pipeline will take time to implement. People familiar with the matter said some features that Apple hopes to integrate into iPhones, such as curved screens, weren't ready for this year's models." The iPhone 7 is rumored to be "almost identical" to the 6/6S. With so many leaks about the lack of features on the 7 and radical new features on the 8, the buying public may wait until 2017 and buy the 8. That would be a serious blow to the 7 and to Apple's revenue. There is also a strong recurring rumor of an iPhone Pro in 2017.

Mizuho downgraded Apple suppliers on Friday on worries about smaller orders for components. They downgraded Skyworks (SWKS) from buy to neutral and slashed the price target from $99 to $68. The analyst cut Qorvo from buy to neutral with a price target of $55.

Canaccord Genuity initiated coverage on Netflix ($NFLX) with a buy rating and a price target of $120. The analyst cited the strong viewership of the shows streaming on Netflix. The premier episode of Orange is the New Black was seen by 6.7 million in the U.S. and comparable with the HBO hit Game of Thrones. He said Netflix has a long runway for growth internationally even if Q2 subscriber growth fails to impress. The long-term outlook is very strong after they opened in 130 countries in January.

He said Netflix only has about 5.3% penetration in international markets compared with 37.3% in the USA. In his studies of market penetration he found that by the third year subscribers exceed 10% and by the fifth year it is over 20% on average. Emerging markets take longer than developed markets but the overall trends still apply. Canaccord expects 112 million international subscribers by 2020 compared to 27.4 million today. That rises to 187 million by 2025.

In the map below, the red areas were open in December 2015. The green areas were opened in January 2016. The only area not yet open is China because of their censorship. January was a major growth spurt for Netflix and according to Canaccord they are just scratching the surface. Netflix Growth Forecast

Harley-Davidson (HOG) shares spiked 20% on rumors it had received a bid from private equity firm KKR. The rumor came from "TheFly.com" and neither HOG or KKR would comment on the news. This could be another shorting opportunity.

U.S. Steel (X) rallied 8% on news of very heavy option activity in the calls. More than 12,000 January $24 calls were purchased compared to an open interest of 1,157. That is a long window and the stock was only about $17.50 when they were bought. That is about a $1 million bet.

Another potential short candidate would be Jones Lang LaSalle (JLL). Shares have turned negative after Brexit because they generate 26% of their revenue from Europe and the UK. Research firm Green Street Advisors warned that London office building values could fall as much as 20% within three years as companies move out to find new locations that are still in the EU. New leasing activity is also expected to fade with companies being reluctant to lease new space until after the actual exit and then any new leases could be in EU countries depending on the post exit commerce rules imposed on the UK.

The Q2 earnings cycle does not really take off until the following week. So far, 81 of 113 S&P companies issuing guidance have warned on earnings. That is expected to worsen. That compares to 96 out of 122 warning in Q1. To date only one company has warned because of Brexit and that was Carnival Corp (CCL). Q2 earnings for S&P companies are expected to decline -5.3% compared to the final -6.7% decline in Q1. Historically earnings typically end about 2% above their estimates at the beginning of the quarter. At the start of Q2, earnings were expected to decline -8.8%. This will be the fifth consecutive quarter of earnings declines. Revenues are expected to decline -0.8% for the sixth consecutive quarterly decline.

The tech sector has seen the largest decline in earnings estimates led by Apple with a cut from $1.78 to $1.40 per share. Tech earnings are now expected to decline -7.2%. Overall, 36 of the 72 companies in the S&P tech sector have seen estimate cuts. IBM estimates were cut from $3.44 to $2.88, Microsoft from .67 to .58 and Seagate from .78 to .13 per share.

The energy sector is going to lead the losers list when they report in Q2. Analysts are expecting a 77.7% decline in energy earnings.

The current market PE on a forward basis is 16.4 compared to the 10-year average at 14.3.

Crude Oil

Crude prices have been trading in a range from $46-$50 over the last several weeks as inventory declines have been spotty and the dollar has been increasingly volatile. U.S. inventories declined -4.1 million barrels last week as we head into the busiest driving weekend of the summer. Gasoline demand is expected to hit a record of more than 10 million barrels per day thanks to the low fuel prices. The national average was $2.28 per gallon on Friday. The average for the first six months was $2.04 per gallon and the lowest prices since 2004. Because of the oil glut, gasoline prices are expected to remain between $2.25-$2.40 for the rest of the summer. Gasoline demand could exceed the record demand set back in 2007. U.S. oil production was 8.622 mbpd last week and that is one million bpd lower than the 9.61 mbpd peak on June 5th last year.

Active oil rigs spiked +11 to 341 last week with gas rigs falling -1 to 89. Offshore rigs fell -2 to 19 and a new low for this cycle. This compares to 60 two years ago.

The price of natural gas is exploding higher because of low injections into storage and the falling rig count for gas rigs. With the Cheniere LNG facility in Louisiana ramping up production there is additional demand that was not in the system last year. We added only 42 Bcf to storage last week and we are heading into the high demand cooling season where gas is used to generate electricity.


The last seven trading days have been a lesson in extremes. The Dow declined from the 18,011 close on Thursday before the Brexit results to 17,063 on Monday. That 948-point drop in two days was erased by a rebound to 18,002 intraday on Friday. The S&P fell from 2,113 to 1,991 and returned to 2,108 at the high on Friday.

However, it was the volume that is the most amazing. The market rallied last Thursday on expectations the UK would vote to stay in the EU. The S&P hit a four-week high at 2,113 at the close. However, the volume was anemic at only 6.387 billion shares. For that kind of rally, the volume was very low.

On Friday, the market traded more than 15 billion shares or nearly 2.5 times the volume on Thursday. Complicating an apple to apples comparison was the Russell index rebalance at the close. But the volume was still extreme even without the rebalancing. Monday traded 10.6 billion shares in another huge decline.

The last three days of the quarter saw more than 8 billion shares each thanks to equity fund window dressing, investors bargain hunting and pension funds rebalancing their bond/equity ratios.

If you had any doubt that those factors were impacting the market you only need to look at the volume for Friday and the first day of Q3. It was right back at the 6.7 billion shares we were trading before Brexit happened.

This is what I expect next week. Light volume and choppy markets. Without the funds being forced to put money to work, we may not have any upward momentum. In fact, we could see some window undressing because of the continued uncertainty out of Europe, the strong dollar and the plunging pound.

Make no mistake. We witnessed a rare market event last week that would have had significantly different results if it had occurred a week later on the calendar and the fund moves were not a factor.

The market volatility has collapsed. The VIX hit 26 on Friday but immediately began to decline even while the markets were still falling on Monday. Traders did not expect the Brexit decline to last and the falling VIX was the proof. At Friday's 14.77 close, it is nearly back to the 13 lows from the prior three weeks. There is no fear in the market. The monster rebound has put everyone back into complacency mode.

The S&P climbed right back into the resistance band that has prevented further gains since last summer. We have been here many times and each time has resulted in a failure and a decline. Now that we are in the summer doldrums between July 4th and Labor Day, the volume will be very low and conviction on the part of the bulls will probably be lacking. There are too many factors hanging over the market.

The EU is refusing to negotiate with the UK over their future trade agreements until after they submit the Article 50 request to exit the EU. The UK has said they will not do that until after a new PM is installed in September or even as late as October. Some voices in the EU are recommending harsh penalties on the UK in order to prevent other countries from duplicating their exit. This was always a worry before the Brexit but now it is growing.

The strong dollar, weak pound will cause earnings warnings in the Q2 earnings cycle that starts in two weeks. We can count on it. With earnings already expected to decline more than 5% the outlook is already shaky. U.S. economics are improving slightly but it is spotty, not nationwide. Whether that is enough to energize the bulls remains to be seen.

The key is going to be resistance. If the S&P can make a new high over that 2,119 close back in early June then we could be off to the races. That is a capital "IF" because they have not been able to do that over the last 11 months in a better market environment. While it is possible to continue last week's rally, it is not probable. I hope I am wrong.

Resistance from 2,100 to 2,128 is very strong as we have seen for the last year. The market is now overbought after a 1,000 point and 111 point rebound on the Dow and S&P. That is a huge gain in only four days.

Support remains 2,040 and we can start to get excited with a move over 2,115.

The Dow has the same problem as the S&P with major resistance from 17,925 to 18,165. The dead stop at 18,000 on the last three attempts suggests there are plenty of sellers waiting to exit at that level. The Dow stocks are international and they will see a greater impact from the strong dollar, weak pound/euro combination. I would be very surprised if the majority did not warn on guidance.

For Tuesday, the resistance at 18,000 is key. If the market continues to fail at that level it could sour sentiment and force some more consolidation at a lower level. A decent range has been established between 17,400 and 18,000 and we could spend some more time chopping around in that range.

The Nasdaq Composite had a nice rebound but unlike the other major indexes, it failed to return to the strong resistance at 4,900. It did come close but it also declined more in the afternoon. The Nasdaq has strong resistance at 4,900 and again at 4,968 and that is well below the major resistance from 5110-5160. If the Nasdaq remains the weakest link in the market the other indexes will feel the drag.

The Russell 2000 performed a textbook rebound from support at 1,095 and is now back in the congestive resistance from 1150-1165. This is the same relative level to the Nasdaq rather than the strong performance of the Dow and S&P. The Russell 2000 benefitted from the rebalance the prior Friday as funds continued to add to positions last week to get their weightings right after the reconstitution. That extra lift will be absent next week.

The Russell will not be a plus for the market until it moves over 1,200. With a broad resistance range that is the key level to watch.

Last week I suggested buying a rebound on Monday. That came at 11:AM and again at 3:PM. Both rebounds came from support at 1,990, which I have been showing on my charts for months. If you bought that rebound, you should be a happy camper. If you took Art Cashin's weekend suggestion of buying at 11:AM on Tuesday you would still be a happy camper.

This week I would caution you not to be overly long. The market is short term overbought and sitting right at strong resistance. What headline could produce a continued rally? I do not know of one this weekend. Volume is going to be very light in a holiday week and the markets can either go dormant ahead of the following week's start to earnings or they could be volatile in that light volume. Time will tell.



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Random Thoughts

Bullish sentiment spiked +6.9% to 28.9% for the week ended on Wednesday. The survey ends on Wednesday so there were two days of very strong gains to offset the Fri/Mon drop. Neutral sentiment fell 5.1% to 37.7% and bearish sentiment declined -1.8% to 33.4%. Apparently, the bears were not convinced the rally was going to stick since the majority of change came out of the neutral camp.

The CME FedWatch Tool is predicting a 100% chance of no rate hike at the July meeting. There is actually a 2.4% chance of a rate cut. Obviously, it is way too early to be talking about rate cuts but that is what the Fed funds futures are showing.

The September meeting is showing a 5.9% chance of a rate hike and a 2.2% chance of a rate cut. The biggest increment at 91.9% is showing no change. You can go all the way out to the February meeting and there is only a 22.9% chance of a rate hike.

Your home address is about to change. A new startup is going to change the way we find addresses by shaking up the global addressing system. The U.S. has figured out how to address locations in a somewhat logical way but the rest of the world has not. Finding an address in Latin America or Africa is a tough job. Some 126 countries do not have a countrywide addressing scheme. Global shipping companies are constantly struggling with locations without physical addresses. Finding the "fourth house on the left after the road turns to gravel" or the "third business past the lamp post" is hardly a desirable address. What3Words claims more than 4 billion people are invisible and cannot get mail or deliveries or receive aid because they do not have a valid address.

The startup, What3Words, is planning on fixing that problem. Instead of road names and zip codes, the company has divided the world up into 57 million 3x3 meter squares and assigned each square a three word identifier such as "dog.cat.stick."

Using the company's system, anyone can find any address on the planet by speaking/typing the three words into a smart watch, mobile phone, GPS device or automobile navigation system. Several countries have already signed up to have their country addressing system converted to What3Words. Mongolia's state-owned postal delivery service, Mongol Post, is making the system the national addressing standard. The system is currently in use in more than 170 countries.

The beauty of this system is that the 3x3 meter location can be anywhere. It does not have to be on a road, highway, city, etc. It can be at the bottom of the Grand Canyon or deep in the Amazon rain forest. Like GPS but easier to operate you can find anything or anywhere with just three words. The same capability exists with GPS but the nomenclature is harder to work with. For example the GPS coordinates for the Empire State Building are N40° 44.9064', W073° 59.0735'. In W3W terms, the actual address is "veal.notion.loses." What3Words is not writing their own mapping software but partnering with existing companies like Garmin or Navmi to integrate the three words into their existing systems. The only problem I see in the future is people wanting to assign their own three words to their location like "good.singles.bar" instead of "stinky.dead.snake."


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"If your car could travel at the speed of light, would your headlights work?"

Steven Wright

Index Wrap

OK, Now What?

by Jim Brown

Click here to email Jim Brown

The Brexit crash was not a one-day wonder but a two-day crash. In terms of market crashes the -940 Dow points was up near the top in the record books but in terms of duration, it had to be even higher. The two-day drop was completely erased in only four days. We could call it three days because the 19-point gain on the Dow on Friday was not material compared to the 940-point drop.

The volume on the two crash days totaled 25.8 billion shares. The volume on the three rally days totaled just over 25.1 billion shares. It would appear it was an even trade BUT quite a few stocks failed to recover their losses. The big cap indexes saw most of the leaders regain the losses and even add a few points but the stocks in the bottom half of the indexes are still down by 20% to 50% from the prior Thursday's close.

That market weakness was being hidden by the outperformance of the Dow stocks. The generals were leading the charge but the troops were lagging behind.

This sets up an interesting problem for next week. Do traders take profits in those leaders and if so do the laggards sink lower as well? OR, will the generals stand their ground and wait for the troops to catch up?

With the strong resistance, it is going to be a fight to move higher without a broad market consensus. The bargain hunters have run out of bargains with the most loved stocks already back at resistance. Now they are faced with the age-old question. If a stock did not rise appreciably in a strong rally should I buy it now that the rally is over? I suspect the answer is no. Those lagging stocks will not be in favor next week.

The S&P is right at the resistance level that has held it back for the last year. Will next week be any different in a low volume environment?

The broader NYSE Composite came to a dead stop at primary resistance on Friday at 10,515 with secondary resistance at 10,640 and the prior Thursday close. Would you place a bet on a breakout on the NYSE given the recent track record?

The British pound rebounded slightly from the post Brexit lows early in the week but then faded again on Friday when the EU heads were talking about enacting stiff penalties on the UK trade deals. Whether they will be able to actually get away with that attempt will not be known for months. The pound should continue to fall as negative headlines appear.

The falling pound, euro and the rising dollar are going to seriously impact earnings for U.S. corporations doing business in the UK and Europe. The euro dropped from 111 to 107 by Monday's lows but has rebounded to 108.60 on Friday.

Gold is continuing to move higher with a close at $1,344 on Friday and that is a 52-week high. However, that was only a 1.8% gain for the week. Silver actually exploded with an 11.4% gain as the poor man's gold was in high demand. With more EU countries talking about exiting the EU there is a potential for a real breakup of the organization in the long term. As countries talk about holding referendums, the precious metals are seen as a flight to quality and a safe haven for volatile currencies.

The Dow Transports declined to 7,029 from 7,700 and nearly recovered all the lost ground by Friday. The initial concern was potential travel restrictions once the UK actually left the UK but that is two years from now so the fears were premature. Low oil prices should be fueling a rally in the transports but constant cuts to global GDP predictions are weighing on the sector.

The semiconductor sector was a laggard last week after Merrill Lynch cut the chip stocks and multiple analysts cut Apple suppliers again on worries about low shipments. This was a factor preventing the Nasdaq from moving higher than it did.

The S&P-400 midcap index is still the strongest of the pack. The S&P-400 ETF is only 9 points from a new high. The dollar/pound/euro is not as big of a problem for the midcap sector and we could see that high tested in the coming weeks, assuming the big cap indexes do not roll over into the summer doldrums.

The percentage of S&P stocks over their 50-day average dipped to 22% on Monday but rebounded to 60.9% on Friday. That is a major reversal and indicates how many stocks were already trading near their 50-day when the Brexit occurred.

The percentage over their 200-day average dipped to 53% and rebounded to 69%.

This should be an interesting week as we watch to see if the rally continues or the gravity from the summer doldrums pulls the indexes back into the recent congestion ranges. We have about a 600 point Dow range and 100 point S&P range where the indexes can chop around for the summer without doing any major damage. With the continued uncertainty over the UK exit and the political conventions ahead, we could see some market weakness appear.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Not An Easy Target

by Jim Brown

Click here to email Jim Brown

Editors Note:

Acquisitions are never easy even when the company to be acquired is a willing participant. In this case the company to be acquired is Hershey and there is a big list of problems to be overcome.


No New Bullish Plays


HSY - Hershey Company - Company Description

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hersheys, Reeses, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands.

Snack maker Mondelez bid roughly $23 billion for Hershey last week and the offer was quickly refused. Hershey has turned down several acquisition offers since 2002. In 2002 the Wrigley company tried to buy it and failed. In 2007 Cadbury also failed. In 2010 the trust prevented Hershey from bidding to buy Cadbury. The problem with acquiring Hershey is that the Hershey Trust Co. owns 81% of the voting stock and 8.4% of the common stock. Nothing will happen unless the trust approves.

The trust was setup in 1909 to benefit the Milton Hershey School for underprivileged children and the community of Hershey Pennsylvania. The trust has built up a $12 billion endowment for the school and is well liked for the good works done around the community.

The board has also said multiple times they do not want to sell the company.

Another factor is the Pennsylvania Attorney General. Any sale would require the approval of the AG under a 2002 state law. He has the power to overrule the trust if he feels any sale would not benefit the citizens of Pennsylvania.

Here is where the challenge comes in. If Mondelez buys the Hershey Company then the trust gets a lump sum of money but that is all they will ever get. Once they spend it the benefit is over. If Hershey stays independent the trust will remain the benefactor of Hershey PA for another century. The profits from Hershey will continue to flow through the trust to the school and other entities to support the community. Hershey pays out about $500 million a year in dividends. The AG is not likely to allow the golden goose to be sold.

I believe this acquisition bid will fail. Mondelez may raise the offer but I doubt the board, trust or AG will accept it. The spike in the stock to $115 will fail and shares will return to the $95-$100 level where they were trading lat week.

This is a speculative position so do not play with money you cannot afford to lose. I am making this a spread because the put options are expensive for obvious reasons.

Earnings July 28th.

Buy August $110 put, currently $4.75, no initial stop loss.
Sell short August $100 put, currently $1.36, no initial stop loss.
Net debit $3.39

IWM - Russell 2000 ETF - ETF Description

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

The Russell 2000 is facing strong resistance from 1150-1165. The index actually touched 1,190 in early June but I seriously doubt we will see that level again. The S&P closed right at 2,100 and has strong resistance from 2100-2115. The Dow closed only 72 points under the post Brexit close at 18,011.

We recovered from the post Brexit crash on a combination of equity fund window dressing for the end of the quarter and pension funds rebalancing the ratio of bond to equities. Reportedly they had to buy up to $18 billion in equities.

Now we are at resistance and all those uplifting events are over. The uncertainty over the UK exit still exists and the dollar/pound imbalance will cause a significant number of earnings warnings for Q3.

All the fundamentals point to a weak July and the artificial lift from the end of the quarter buying is over.

Note the volume in SPY and IWM puts for August on Thursday. The far right column is the open interest and the second from the right is the volume traded on Thursday. This is about 3 times the number of calls for the same period. The vast majority of traders are expecting a market decline.

I am recommending we buy puts on the IWM because the premiums are cheaper. I am recommending an entry trigger because we could still move higher ahead of the long weekend. S&P future are down -4 but that could be temporary.

With an IWM trade at $113.95

Buy August $112 puts, currently $2.31. No initial stop loss.

SPY Option Volume Thursday

ISM Option Volume Thursday

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Editors Note:

The S&P rebounded from the 1,991 low to close at 2,003 in only four days. It took us only two days to drop from the 2,113 close the prior Thursday and decline -122 points. It took four days to erase that decline but we had a lot of help. First, the decline was a headline event not an economic event so there was no fundamental reason for the sharp selloff other than the drop in the pound.

The rebound was powered by bargain hunting, equity funds putting some of their near record cash pile to work and end of quarter window dressing programs. Pension funds had to buy $18 billion in stock to balance their bond/equity ratios at the end of June. All of these factors helped to lift the market and now they are gone.

There is very little left to bargain hunt because of the big rebounds. Now it is time for traders to take profits on those dip buys. The funds are no longer a factor because they are done with the quarter end restructuring. Now the market will have to move higher on its own and that may be an insurmountable task because of the strong resistance.

Friday was a consolidation day. Everyone will be holding their breath all weekend as we await market direction next week.

Current Portfolio

Current Position Changes

IWM - Russell 2000 ETF

The long call position was closed at the open.

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. Shares only gave back 8 cents after a new 10-month high on Thursday.

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. Minor profit taking.

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.

GRUB - GrubHub - Company Description


No specific news. Minor profit taking put it back in reach of the prior resistance at $30.50.

Original Trade Description: June 27th.

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.

Position 6/28/16:

Long Aug $30.00 call @ $2.30, see portfolio graphic for stop loss.

IWM - Russell 2000 ETF - ETF Description


We closed this call position at the open on the idea that the market rally had run its course and met strong resistance.

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:

Closed 7/1/16: Long August $115 call @ $1.35. Exit $2.68, +1.33 gain.

JPM - JP Morgan - Company Description


No specific news. Minor profit taking. Shares traded ex-dividend of 48 cents so down -40 cents is right in line.

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, see portfolio graphic for stop loss.

NVDA - Nvidia - Company Description


No specific news. Minor profit taking.

Original Trade Description: June 28th.

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.

Position 6/28/16:

Long August $47 call @ $2.55, see portfolio graphic for stop loss.

PVH - PVH Corp - Company Description


No specific news. Minor gain in a choppy market but the momentum continues.

Original Trade Description: June 27th.

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.

Position 6/28/16:

Long August $90 call @ $4.23, see portfolio graphic for stop loss.

QRVO - Qorvo Inc - Company Description


Downgraded by Mizuho from buy to neutral on worries over iPhone sales. Big drop at the open but rebounded to erase 80% of the loss.

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, see portfolio graphic for stop loss.

SWHC - Smith & Wesson - Company Description


No specific news. Another new 3-month high.

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, see portfolio graphic for stop loss.

Z - Zillow Group - Company Description


No specific news. Minor profit taking after a 3-month high.

Original Trade Description: June 29th.

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. It offers a portfolio of brands and products to help people find vital information about homes, and connect with local professionals. The company's brands focus on various stages of the home lifecycle, such as renting, buying, selling, financing, and home improvement. Its portfolio of consumer brands includes real estate and rental marketplaces comprising Zillow, Trulia, StreetEasy, and HotPads. The company also provides advertising services to real estate agents and rental and mortgage professionals; and owns and operates various brands that offer technology solutions to real estate, rental and mortgage professionals, including DotLoop, Mortech, Diverse Solutions, and Retsly.

Back in August 2015 Zillow Group split its stock 2:1 but the new stock had no voting rights. The Class C stock trades under the symbol Z while the Class A stock with rights traded under the symbol ZG. The company did this so the voting rights would not be diluted. Multiple companies have done this including the biggest to date with Google and Facebook. The split has no impact on the company operation except that employees now receive Z shares and any acquisitions will be made with Z shares.

The company acquired Trulia.com for $2.6 billion in 2015 and contrary to analyst concerns the integration has been relatively smooth. There were some hiccups but everything is functioning normally today.

They reported Q1 earnings of 13 cents that beat estimates for a loss of 9 cents. Revenue rose from $127.3 million to $186 million and beat estimates for $177 million. They also raised full year guidance from $805-$815 million to $825-$835 million. Analysts were expecting $794 million. They ended the quarter with $514 million in cash. Marketplace revenue rose 23%, real estate revenue rose 34% and mortgage revenue rose 65%.

Earnings August 2nd.

In early June, the company made a windfall settlement with Move.com for $130 million after two years of litigation. Analysts were expecting $1.8-$2.0 billion. This pending litigation had been a cloud over the stock for the last 8 months. After the settlement shares spiked to $32 and traded sideways for two weeks before moving up to new highs at $35.50. The Brexit crash knocked the shares back to $32.75 but after the last two days of gains it is threatening to breakout once again.

Shares closed at $35 so the August $40 strike is a little far out for a short period of time. I am going to stretch to the November $40 strike, which will have significant expectation premium when we exit before earnings.

Position 6/30/16:

Long Nov $40 call @ $2.30, initial stop loss $32.50.

BEARISH Play Updates (Alpha by Symbol)

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