Option Investor

Daily Newsletter, Saturday, 7/9/2016

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

The blowout in the June Nonfarm Payrolls led to a monster short squeeze and a short squeeze in the markets.

Weekly Statistics

Friday Statistics

The market was poised for a positive open after the European markets had a green Friday. The shock value of the Brexit appears to be wearing off in Europe but this could be cyclical and return to haunt us multiple times in the future as events unfold.

The S&P futures were trading up slightly at +4 in the pre-market but that turned into a strong rally and a +14 point jump to +18 points after the job numbers were released at 8:30. That set the market up for a giant short squeeze after the S&P closed right on resistance at 2,100 on Thursday. The shorts were ready for another dismal report and were caught off guard with the big number.

New jobs for June came in at +287,000 and well over estimates at 175,000. The miserable +38,000 gain for May was revised down even further to +11,000 but the +123,000 number for April was revised higher to +144,000 for a net decline over the two months of -8,000.

The unemployment rate jumped from 4.7% to 4.9% because 414,000 people joined the workforce after 820,000 left the workforce over the prior two months.

Helping to push the headline number higher was the return of 35,000 striking Verizon workers. Leisure and hospitality gained a whopping 59,000 low wage jobs, information technology +44,000, retail +29,900, manufacturing +14,000 and temporary workers 15,200. Construction was flat after falling -16,000 in May.

Unfortunately, you know there it always a fly in the soup. The separate Household survey showed a gain of only 67,000 jobs. The number of unemployed workers rose +347,000.

Even worse 259,000 of the 287,000 new jobs went to workers age 55 or over. Only 28,000 went to workers in the critical 25-54 age bracket. The under 24 age group lost 107,000 jobs. Do not let people tell you the falling labor force participation rate is because of people retiring. Workers 55 and over are the fastest growing employment bracket. Since 2007 more than 8 million jobs have been gained by the 55 and over group while the 25-54 bracket has lost -3.4 million jobs. Source

On the positive side the number of workers employed part time for economic reasons fell dramatically by 587,000 suggesting full time jobs were more readily available.

The rebound in jobs was directly related to the abnormally low number in May. Some analysts theorize the uncertainty over the Brexit vote may have kept employers from adding staff in May. Other believe it was the strong comments by the Fed members in May suggesting there may be 2-3 rate hikes in 2016. After the Fed's tone changed at the June 14th meeting to almost no hikes in 2016 those business owners may have breathed a sigh of relief and immediately started adding workers. Whatever was holding back employers in May completely evaporated in June.

Analyst David Rosenberg at Gluskin Sheff, warned that at turning points in the economy it is the Household survey that gets the numbers right. He also pointed out that applying the same "adjustments" to the Household survey that we have in the Nonfarm payrolls, would have the Household number falling -119,000 jobs in June and down -517,000 jobs over the last three months. He also pointed out that the annualized six-month jobs trend has fallen below zero and clearly a warning.

The jobs numbers raised the chance of a Fed rate hike at the September meeting to 11.7%, the November meeting to 11.5% and December meeting to 27.6%. A couple more jobs report like the one we had on Friday and the September meeting could come back into focus. The market will catch on to this increase in expectations eventually but for right now the forecast is so far into the future the market is not worried.

The California Manufacturing Survey for Q3 rose 1 point from 58.3 to 59.3. This is up from a low of 56.7 in Q1 and three quarters of declines. This report was ignored.

The calendar for next week does not have any critical economic reports but there are a whopping 13 Fed speeches. I am sure we will hear the full range of outlooks for rate hikes from "maybe in 2018" to "still expecting two hikes in 2016." This will confuse investors and send them to their safe places.

The biggest event is the start of the Republican convention the following Monday. Democrats are spending more than $1 million to organize protests and demonstrations outside the convention. This could be really ugly and could weigh on the market.

The horrific shooting in Dallas did not seem to impact the markets. It did provide some gains for gun makers Sturm Ruger (RGR) and Smith & Wesson (SWHC) and body camera makers Taser (TASR) and Digital Ally (DGLY).

The gun used in the Dallas shooting was reportedly an SKS. The guns were originally designed in 1943 in the Soviet Union by Sergei Garvilovich Simonov. They have been made in Russia, Yugoslavia, Romaina, Albania, East Germany and North Korea and copied by several other countries including China. They were used by the Viet Cong in the Vietnam War. The Norinco brand in China made millions in the 1980s/1990s and they sold in the U.S. for about $90. They are not especially accurate but that did not seem to stop the shooter, who was in the Army reserves and had received tactical training. A 20 to 50 year old gun imported from overseas might take some of the heat off the U.S. gun manufacturers but citizens are going to be hitting the gun stores this weekend to buy any gun they can before a new law is passed.

One version of a SKS Rifle

The FBI released the background check numbers for June. They processed 2,131,485 checks for a 39% increase in purchases over 2015. The 2015 number was a 10.5% increase over 2014. For the first six months of 2016, they have processed 13,829,491 background checks which was 60% of all 2015. Assuming nothing changes in the economy, we are well on our way to a new record for the year.

Intel (INTC) was upgraded by Bernstein from underperform to market perform and hiked the price target from $26 to $30. Shares rallied +2.4% on the uninspiring upgrade. The analyst said Q2 results are "unlikely to miss consensus projections" due to the relatively positive view for the PC channel and baseband markets. He also said his efforts to, "short Intel has not worked." I doubt I would rush out to buy Intel just because they were unlikely to miss estimates.

Shares of The Gap (GPS) rallied 5% after the company said same store sales rose +2% in June. That was the first increase in same store sales after fourteen months of declines. However, there was a catch. That was the average across all three brands. The Gap chain declined -1% and the Banana Republic brand fell -4% while the Old Navy brand rose +5%. Analysts warned that the shift of the Memorial Day weekend into June probably accounted for the gains.

Polycom (PLCM) has agreed to sell itself to privately held Siris Capital group for $12.50 a share in cash. That is a 15% premium to the prior close or roughly $2 billion. Polycom already had a deal to be acquired by Mitel (MITL) and will have to pay a $60 million termination fee. The Mitel deal was for cash and stock and a slightly lower price than the Siris deal, which is all cash. Polycom said the telecom business is transitioning from a hybrid on-premise and cloud based Unified Communications environment. They felt they had a better chance to continue as a best-in-class communications provider as a private company.

Shares of Juno Therapeutics (JUNO) were crushed for a 32% loss after a pivotal study on the chemotherapy drug JCAR015 was halted. This is a chemotherapy drug for acute lymphoblastic leukemia. The FDA put a clinical hold on the study after two patients died. The FDA wants Juno to submit a new Complete Response (CR) to the clinical hold as well as a revised patient informed consent form, a revised investigator brochure, a revised study protocol. Juno intends to present all the requested documents next week. The company said plans for its other CAR-T cell products candidates, including JCAR017 were not affected by the clinical hold.

The JCAR015 drug is one of Juno's most advanced pipeline candidates. RBC Capital, Michael Yee, said the stock would recover because the halt was temporary and the drug had passed earlier trials. He said shares were trading as though JCAR015 was dead and it is not. JP Morgan was not as optimistic and they cut Juno from overweight to neutral.

Barracuda Networks (CUDA) said it earned 20 cents last quarter compared to estimates for 11-cents. Revenue of $86.7 million also beat estimates for $83.9 million. The network security provider said recurring subscription revenue rose 20% to $65.3 million while appliance revenue declined -10%. Active subscribers rose 14% to 286,000. Shares rose 19% on the news.

The Q2 earnings cycle kicks off next week with the major banks reporting. Add to that YUM Brands and Delta Airlines and the Q2 cycle will be off and running.

FactSet is predicting a -5.6% decline in Q2 earnings and the fifth consecutive quarter of earnings declines. On March 31st, the estimate was for a -2.8% decline but warnings from the tech sector and analyst downgrades have doubled that decline estimate. For Q2, 81 S&P companies have warned on guidance (72%) and 32 have issued positive guidance. Revenue is expected to decline -0.7% for the 6th consecutive quarter of declines. For Q3, earnings are expected to grow +0.7% and then a +7.2% growth spurt in Q4. Revenues are expected to rise 2.2% in Q3 and 5.1% in Q4. The reason for the growth is the lower comps in the year ago quarters.

Facebook (FB) said it has begun testing end-to-end encryption on its popular Messenger application to prevent snooping on digital conversations. Messenger has 900 million users. They began offering encryption on the WhatsApp platform three months ago. That platform has more than 1 billion users. Multiple other companies already offer encrypted conversations. Messenger will use the same encryption as WhatsApp, that uses a protocol known as Signal, which was privately developed by Open Whisper Systems.

Facebook users must turn on the encryption but all WhatsApp messages are already encrypted. The problem Facebook will have with Messenger is that encrypted messages can only be read on the device that started the conversation. You cannot switch from your phone to your tablet or continue the conversation on your PC. The encryption key is tied to the device not the message. You cannot send videos over an encrypted conversation or make payments. The messages can also be set to self-destruct after a certain period of time. Both of these applications are going to cause trouble for SnapChat. That app has 10 billion disappearing messages a day.

Crude oil tumbled -7% last week on worries over a continued glut and a fast recovery in inventory levels when summer driving demand ends on Labor Day. The EIA inventories on Thursday showed a decline of only 2.2 million barrels when analysts were expecting a decline of 6 million because of the buildup to the July 4th weekend. Gasoline supplies are still high and only declined slightly. Ships trying to unload in NY/NJ have been forced to wait offshore because there is no available storage.

Libya is set to resume exports from two of its largest oil terminals next week after being closed since 2014. The Es Sider and Ras Lanuf are the 2nd and 3rd largest terminals in Libya. ISIS has abandoned the terminals under constant pressure from the Petroleum Guard. The country has only been exporting 330,000 bpd compared to the 1.6 mbpd before the civil war destroyed the country. They could quickly return to 800,000 bpd because the country's rival oil companies have agreed to merge into a single National Oil Company and that would improve communication and cooperation between the various fields and facilities.

Oil prices typically peak in August and decline into the fall. We may have already seen the peak when prices moved above $50 when the Canadian wildfires shutdown production by -1.5 mbpd and another 1.5 mbpd was offline in other countries led by Nigeria.

Analysts are starting to talk about prices under $40 again after demand slows in the fall.

Drillers do not seem to be afraid of a second dip in prices. Active rigs rose by another 9 rigs to 440 after a gain of 10 rigs the prior week. This is still more than 1,500 rigs below the peak in 2015. Oil rigs rose +10 to 351 and gas rigs declined -1 to 88.


This could be a really pivotal week. With the Dow and S&P close to new highs we could either break out and run like the wind as unbelievers race to cover shorts OR we could fail at this level again and create a potential double top.

Despite the questionable jobs numbers the economy is muddling along at a 2% rate. While that is hardly setting the world on fire, we are the best house on a bad block for storing your money. Since you will not earn much in treasuries that makes equities more appealing.

Ironically, the markets are threatening to breakout to new highs but Lipper claims mutual funds have seen 17 consecutive weeks of cash withdrawals. Gold funds have seen 10 consecutive weeks of inflows with $2 billion being added last week alone. Stock funds saw outflows of $6.1 billion. Source

Investors are fleeing the market but the Dow and S&P are at new highs. The strength of the post Brexit rally caught investors by surprise. Portfolio managers are suffering from performance anxiety and a breakout to new highs means they will have to chase prices to keep the market from running away from them.

Since most portfolio managers are already negative for the year there could be an aggressive race to buy the leaders in hopes of capturing some gains before the rally runs out of steam.

The indexes could lose traction at any time. Friday's rally was purely short covering on the payroll numbers. This close to new highs there was already some price chasing in progress and each factor fed the spike.

On the S&P the high close last July was 2,128.28 and Friday's close was 2,129.90. Technically we closed at a 52-week high but the actual historic high close was 2,130.82 from May 2015. If you are following along you probably realized we were right here one year ago and the rally failed. Markets do have a memory and that July 20th failure was traumatic with a -267 point drop to 1,867 on August 24th. That was a significant decline!

The stage is set for either a repeat of last summer's decline or a breakout to new highs and a new chapter in this 7-year-old bull market.

Unfortunately, the volume was light at 7.1 billion shares. When the Dow rallies +250 points, you would like to see a significant increase in volume. Recently the higher volume has been on the days with a market drop.

The internals were positive with up volume 8:1 over down volume, which is normal in a massive short squeeze. The advancers were 6:1 over decliners, which means almost everybody got squeezed.

There were 648 new highs and 92 new lows so quite a few stocks are in breakout mode. That is not the definition of a classic short squeeze to have stocks already at their highs pushed even higher. Normally a "short" squeeze means stocks that were heavily shorted are pushed higher and normally those stocks have been under recent pressure. That would be stocks like TWTR, GPRO, SQ, etc that have been under pressure for a long time and short interest is high.

I saw a lot of buying on Friday in stocks like NVDA and ATVI that were already at new highs. This looks like price chasing where portfolio managers are buying performance in hopes of riding the wave higher.

I look at about 1,000 charts a week in managing the roughly 95 active plays in the various newsletters. The last several days I have seen a lot more bullish activity in the "crowd" with stocks of all types starting to turn positive or extending an already positive streak.

This is perplexing because I have been bearish due to repeated failures at 2,100 on the S&P and 18,000 on the Dow. I have tried to keep a balance of longs and shorts just in case a summer rally appeared. Historically the July-September period is weak and when summer rallies do appear, they can be aggressive because everyone is betting on the historical weakness.

IF we do breakout to a new high next week and hold it for a couple days, the rules of the game will have changed. That would suggest the potential for an aggressive market surge. That is still a capital IF. Markets rarely bottom on Fridays but they often continue gains on Mondays.

As Johnny Carson would say, we are at the fork in the road. I would like nothing better than to see Adam Parker's (MS) original bullish target of 2,425 from last August come to pass. That has since been reduced to 2,175 because of the continued drop in earnings. I do not know if he has reduced his target of 3,000 for 2020 yet but while that would be nice we just need to get through July first and then worry about surviving August. We can worry about 2020 later.

Remember, the Republican convention starts next Monday and it promises to be a daily riot. The market is likely to pause and try to understand the potential outcomes once that convention starts. That still gives us a week and it is an option expiration week. That suggests heightened volatility in both directions.

If I were forced to bet on direction for Monday, I would bet on a new high assuming Asia and Europe do not meltdown over the weekend.

The weekly MACD and RSI are positive and getting stronger. The Brexit crash eliminated all the weak holders and allowed portfolio managers an entry point. The setup appears to be bullish and the bears are going to have a nervous weekend.

The Dow chart is not as convincing because it has a few more points to capture before it hits a high. The high close from last May was 18,312.39. The intraday highs on May 19th/20th were 18,351 and 18,350. The decline began on the 21st and ended with the 15,370 low on August 24th for a decline of about 3,000 points.

On my chart, the line I drew at 18,200 is a personal preference. That connects the tops on the most candles representing the number of times the Dow failed at that level on the weekly chart. That is the level where it has the greatest chance of failure again. However, we are so close I believe traders have that bulls-eye goal in sight. When the indexes near historic highs they tend to hit them. Once there it is not unusual to see weakness because there is no longer a target. Traders take profits and wait to see what develops.

The market has been choppy and lackluster for a year. This may be the time that we actually exceed those highs and keep going. While Q2 earnings are going to be negative, Q3 and especially Q4 earnings are going to be positive. Portfolio managers like to look out six months in advance and that would be year-end after a strong Q4. While those earnings will not be released until Jan/Feb the election will be two months behind us and the market typically rallies after the results are known. I would not be surprised to see portfolio managers setting up for year-end and any Aug/Sept dips could be weak.

I know half the people reading this will think I have overdosed on the Kool-Aid but I am just trying to speculate on the future. If the markets fail at these levels on Mon/Tue and crash back to the lows we can all have a good laugh about my bullish fantasy.

I am not convinced we are going higher. I am just considering the options and trying to prepare in case that is the direction. The market exists to make fools out of the most analysts possible at any given time.

The Dow broke over 18,000 and that has been strong resistance for a year. That should count for something even if it is just temporary.

The Nasdaq blew through resistance at 4,900 but failed to reach its prior failure point at 4,968. The big cap Nasdaq stocks were on fire led by Amazon, Google and Priceline. The rest of the support came from the biotech and semiconductor sectors. However, biotechs were spotty. There were some big gainers and some that did not gain at all. The Biotech Index only added 25 points or 0.8%.

Traders will probably be adjusting some positions next week in order to avoid holding over earnings reports the following week. When tech stocks disappoint they tend to drop sharply the following morning. Very few experienced traders want to take that risk.

If the Nasdaq does move over 4,968 and then 5,000 the real resistance band is from 5,100 to 5,165. That has not even been tested since December.

The Nasdaq 100 big cap index has solid resistance at 4,575 and again at 4,737.

The Russell 2000 gapped over resistance at 1,155 and 1,165 but is still below strong resistance at 1,205. The Russell has gained more than 8% since the June 27th post Brexit low at 1,086. That is a lot of accumulated profit at risk for those that bought the dip. Extending those gains through 1,205 could be a challenge.

Traders appear to be fixated on the historic highs. If they can continue the momentum from Friday, we could see those highs on Monday. What happens after that is anybody's guess. I know we would like to see portfolio managers with performance anxiety continue chasing prices higher but we rarely get exactly what we want. While it is possible, there is still a large contingent of traders that see the rally for what it is and that is a liquidity fueled buying binge caused by $13 trillion in overseas government bonds yielding a negative interest rate. It is not driven by economic fundamentals in the USA or the expectations of a big Q2 earnings surprise. Remember, US equity funds have seen net cash outflows for the last 17 weeks. Fund managers are not driving prices higher. This was institutions and probably a lot of money being shifted to the USA markets because we are the best house on a bad block.

If this continues, the U.S. fund managers will have to participate regardless of the reason. They cannot afford to sit idly by and watch the market run away from them. The week before Brexit, equity funds had near record cash levels. I am sure some of that was put to work window dressing for quarter end but they probably still have some dry powder.

I would continue to caution about being overly long until we know if this is a breakout or a double top. Remember last year. The S&P fell -267 points from May 15th to August 24th.



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Random Thoughts

Bullish sentiment rose to 31.1% and the highest level since April 20th at 33.4%. It has been below its historical average of 38.5% for 35 consecutive weeks and for 68 out of the last 70 weeks. Neutral sentiment rose 4.6% to 42.3% and well above its historical average of 31.0% for the 23rd consecutive week. Bearish sentiment fell to 26.7% and the lowest level since April 20th. The historical average is 30.5%.

Survey respondents (45%) said the uncertainty over the presidential election was the top factor for caution and 39% said global economic uncertainty was the second major worry. Only 17% cited valuations as a concern. Only 13% said earnings were a problem.

JP Morgan said their odds of a recession within the next 12 months rose to 37%. This is the highest level the index has reached in this economic cycle. The sharp 5% decline in auto sales in June and the lack of loan growth in the senior loan officer opinion survey were big contributors. The ISM Nonmanufacturing sentiment was the second biggest contributor. Source

Deutsche Bank said last week their recession prediction model was up to a 60% chance and the highest since 2008. They said the "relentless flattening of the yield curve was worrisome" since a flat or inverted yield curve historically precedes a US recession.

Bank of America has given up on an earnings rally. They warned that corporate buybacks, the main driver of the market over the last two quarters, will be in a blackout period over the next four weeks as the S&P reports earnings. Companies representing more than 89% of the total market cap of the S&P-500 will have reported by August 5th. Analyst Dan Suzuki expects the Q3 earnings estimates will decline into negative territory as the Q2 cycle plays out and guidance is lowered. He warned that an earnings recession lasting well over a year is not normal. He said "the profits recovery is unlikely to live up to expectations." Source

To date in 2016, 509 people have been killed by police. In 2015 there were 990 deaths. The statistics should surprise you given the current hysteria over recent killings.

Male 484, female 25
White 238, Black 123, Hispanic 79, unknown 46, other 23.
Weapon used by the dead person:
Gun 304, knife 88, vehicle 35, unarmed 35, unknown 27, other 20.



Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The end of the world only happens once. You have to plan that trade very carefully"

Art Cashin

Index Wrap

New Highs?

by Jim Brown

Click here to email Jim Brown

Investors and traders are pondering that question this weekend after the S&P closed right at the prior highs. It would take a gap down open on Monday to prevent left over short covering from Friday from pushing the S&P to that new high. Traders in denial on Friday that did not cover their shorts will be worried all weekend in hopes of headlines from overseas to push the markets lower at the open. If those headlines do not appear or positive headlines appear instead, we are likely to make those new highs on Monday at least on the S&P.

That could lift the Dow as well but the Dow is still about 200 points below the 18,312.39 historic closing high. It would take a very strong rally to power the Dow through that level after a 200-point move just to get there.

The S&P is only a point away from the 2,130.82 closing high. This might as well be a done deal for the S&P.

The broader NYSE Composite failed to reach the strong resistance at 10,640 and that is still 600 points below the historic high. The broader market is not as bullish as the big cap S&P-500.

The British pound fell another 3.5 points to 126.54 last week on the way to 120 or even lower according to analysts. The euro only fell 1 point to 107.74 but I expect 105 before the decline is over.

Gold rallied another $23 to $1,367 and coming very close to that psychological $1,400 level. There are currently more than 285,000 long contracts on the gold futures and only about 25,000 short contracts. They call that a "crowded trade" and once everyone heads for the exits it could cause a panic. I do not have a clue what could cause that in the current environment but it is always the unexpected events that cause the most damage. Strangely, gold is rising along with the dollar and that almost never happens.

This is the flight to quality trade and it shows no signs of abating.

The yield on the 10-year treasury fell to another historic low at 1.336% on Wednesday but rebounded slightly to close the week at 1.366%. The 30-year yield did close at a record low on Friday at 2.11%. Refinance your mortgage NOW.

The Semiconductor Index is only 45 points from the historic high at 746.08. The index rose +2.8% on Friday after Bernstein upgraded Intel. Nvidia broke out to a new high and even the beaten down Apple suppliers rose slightly on short covering.

The biotech sector has rebounded steadily since the Brexit bottom and is nearing initial resistance at 3,275 on the Biotech Index. They have recovered nearly all of the post ASCO drop but the rate of climb is slowing. That resistance may be a good shorting opportunity if the market is not surging higher.

The Dow Transports rebounded back over 7,500 but there is stronger resistance ahead. The decline in oil prices is good for the airlines but bad for the railroads because they will be hauling less pipe and frac sand if prices do not rise. The 8000-8260 level is going to be a challenge.

The S&P-400 midcap index is still below its highs at 1,549 but it did recover all the post Brexit losses. The May high at 1,525 should be the next hurdle. If the midcaps can breakout it could pull the rest of the market higher. They have been the strongest sector since the Jan/Feb lows.

The percentage of S&P stocks over their 50-day average rose to 72.55% as of Friday.

The percentage over their 200-day average rose slightly from 69% to 71.54% and I would have thought that would have been more given the 700+ new 52-week highs on Friday.

The markets will be grabbing the center of attention next week as the S&P flirts with the new highs. However, it is what happens after it makes a new high that will matter. If traders bail once that high is reached it could turn into a double top. If portfolio managers begin chasing prices higher we could see an extended breakout until cooler heads prevail. The week could be emotionally charged for the first couple days but worry over next week's convention could cause some profit taking.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Raising Guidance, Lowered Estimates

by Jim Brown

Click here to email Jim Brown

Editors Note:

Very few companies are raising Q2 earnings guidance but this IT company raised over estimates. Western Digital is digesting its acquisition of SanDisk and it raised earnings and revenue guidance on Wednesday. Analysts like to see successful acquisitions.

On the flip side Methanex estimates are continuing to fall significantly. Support has been broken and Friday's bullish market had very little impact. Shorts were not covering on MEOH.


WDC - Western Digital - Company Description

Western Digital Corporation, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs). The company also offers HDDs embedded into WD, HGST, and G-Technology branded external storage appliances with capacities ranging from 500 GB to 24 TB, as well as using various interfaces, such as USB 2.0, USB 3.0, FireWire, Thunderbolt, and Ethernet network connections.

WDC just completed the acquisition of flash memory maker SanDisk on May 12th and the combination will put it significantly ahead of Storage Technology (STX). WDC can include flash memory into its disk drive products to make them significantly faster as well as expand its offerings in the SSD market. By acquiring the SanDisk product line it provides a large amount of marketing breadth and created the premium data storage company.

Last Wednesday WDC raised adjusted earnings guidance to 72 cents, up from 65-70 cents. Analysts were expecting 68 cents. They raised revenue guidance from $3.35-$3.45 billion to $3.46 billion. Analysts were expecting $3.41 billion. This is the second guidance raise for this quarter. Back on May 26th they raised revenue guidance from $2.6-$2.7 billion to $3.35-$3.45 billion.

Earnings July 28th.

WDC has solid resistance at $51 but a breakout over that resistance could quickly sprint to $60. I am using the October options to avoid the rapid decline in August premium after July expiration next Friday. We will exit before earnings on the 28th. This is a short-term play to capture any continued market breakout.

Buy Oct $52.50 call, currently $3.05, initial stop loss $46.85.


MEOH - Methanex Corp - Company Description

Methanex Corporation produces and supplies methanol in the Asia Pacific, North America, Europe, and South America. It also purchases methanol produced by others under methanol offtake contracts and on the spot market.

This is a very niche market and methanol prices have been declining. Like oil there is an abundance of methanol.

Earnings estimates are declining sharply. Full year estimates have fallen from a profit of 42 cents to a loss of 3 cents. That is a major drop. For the current quarter estimates have fallen from a loss of 19 cents to a loss of 27 cents.

Earnings July 27th.

Despite the rapidly falling estimates and stock price Raymond James upgraded it to strong buy on May 17th. Shares rallied on the upgrade from $29 to $35 and almost immediately rolled over again. Shares sank to a four-month low last week. On Friday when the market was exploding higher the stock only gained 38 cents. Shorts were not covering in MEOH.

I am picking the August $25 put because it is cheap and I am planning on holding over earnings unless we are really profitable ahead of the event. I believe the earnings will disappoint and we could see a sharp post earnings drop, but I would be wrong. The option is only $1 so the risk is minimal.

Buy August $25 put, currently $1.00, no initial stop loss.

In Play Updates and Reviews

Major Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P blew through resistance at 2,100 on the strong jobs numbers and streaked all the way to new high resistance at 2,130. There was no doubt Friday was going to be a big day after Europe posted solid gains and the Nonfarm payroll report was a blowout.

We are now at a very crucial level. The S&P stopped right at new historic high resistance and next week will be a make or break week. We will either continue higher and funds will be forced to chase stocks or the bears will find some conviction over the weekend and this becomes a failure point and a possible double top.

Current Portfolio

Current Position Changes

LL - Lumber Liquidators

The long call position was opened at $16.50.

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


Still no specific news. Excellent rebound back to the highs.

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


Costco continued higher in the market short squeeze after Oppenheimer reiterated a buy rating and $175 price target. Shares closed at $165.

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. Closed at a new 8-month high. Wedbush initiated coverage with a BUY.

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.

JPM - JP Morgan - Company Description


No specific news. Earnings on Thursday. We will hold over the report given the 50 cent value in the option.

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.

LL - Lumber Liquidators - Company Description


No specific news. New 6-month high.

Original Trade Description: July 7th.

Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.

LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.

On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.

The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.

The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.

LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.

LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.

Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.

While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.

Earnings August 3rd.

LL shares spiked to $16 on the news back in mid June. They moved sideways until the Brexit crash and lost altitude back to $14. Today's close was a six-month high over that headline spike in June. I believe the stock is poised to go higher now that it is trying to pull out of its yearlong consolidation.

I am going to recommend a longer term option and suggest we hold over the August 3rd earnings. They would be hard pressed to say anything more negative than what the market already expects. The potential for good news and positive guidance is very good.

Position 7/8/16:

Long Nov $18 call @ $2.15. No stop loss because of the cheap option and the longer term.

NVDA - Nvidia - Company Description


Continued breakout to a new high after Nvidia announced the GeForce GTX 1060 high performance video card for gaming with a price tag of $249 on Thursday. That is significantly below its top end cards the GTX 1070 and 1080.

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. Major $2.41 gain.

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.

SWHC - Smith & Wesson - Company Description


Shares spiked to the historic highs after the Dallas shooting but faded as traders took profits. The gun used in the Dallas shooting was a WWII era SKS, originally holding 10 rounds. The guns were originally designed in 1943 in the Soviet Union by Sergei Garvilovich Simonov. They have been made in Russia, Yugoslavia, Romaina, Albania, East Germany and North Korea and copied by several other countries including China. They were used by the Viet Cong in the Vietnam War. The Chinese made Norinco brand made millions in the 1980s/1990s and they sold in the U.S. for about $90.

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.

Update 7/5/16: The FBI released the background check numbers for June. They processed 2,131,485 checks for a 39% increase in purchases over 2015. The 2015 number was a 10.5% increase over 2014. For the first six months of 2016 they have processed 13,829,491 background checks which is 60% of all 2015. Assuming nothing changes in the economy we are well on our way to a new record for the year.

Shares have been in constant rebound since the earnings on June 16th erased fears about slowing sales.

Position 6/27/16:

Long Sept $27 call @ $1.70, see portfolio graphic for stop loss.

Z - Zillow Group - Company Description


No specific news. Another decent gain almost a new 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)

HSY - Hershey Company - Company Description


Shares rallied slightly on no news. This was simply shorts covering in a bullish market.

Original Trade Description: July 2nd.

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.

Position 7/5/16:

Long August $110 put @ $5.15, no initial stop loss.
Short August $100 put @ $1.52, no initial stop loss.
Net debit $3.63

IWM - Russell 2000 ETF - ETF Description


The Russell gapped higher at the open but the gains stopped at noon. The index traded sideways for the rest of the day with a slide developing around 2:30. The Russell is a long way from a new high and small caps are normally weak in the summer months. I believe this was just short covering but I could be wrong. The real test will come at $118.50-120.00.

Original Trade Description: July 2nd.

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.

Position 7/5/16 with an IWM trade at $113.95

Long August $112 puts @ $2.62. No initial stop loss.

RRGB - Red Robin Gourmet Burger - Company Description


Big short squeeze with the market but the gain stopped at 11:AM at 48.80. They traded sideways the rest of the day and declined into the close.

Original Trade Description: July 6th.

Red Robin Gourmet Burgers, Inc., develops, operates, and franchises casual-dining and fast-casual restaurants in the United States and Canada. As of May 9, 2016, it had approximately 530 Red Robin restaurants, including those operating under franchise agreements. Red Robin Gourmet Burgers, Inc. was founded in 1969.

Lately Red Robin has been trying to rebrand itself as Red Robin Gourmet Burgers and Brews because each store has a sports bar area that is underutilized. The restaurants cater to families with high chairs, booster seats and many still have the arcade to gobble up quarters from children. The bar in the stores I have eaten at was never busy.

Red Robin has a larger footprint for its stores and land is expensive as is the large buildings compared to the smaller stores of its hamburger competitors. Red Robin is on an aggressive growth campaign with a new store and sometimes two opening almost every week somewhere in America. This aggressive expansion requires the outlay of millions of dollars for construction for dozens of stores at the same time. They are also remodeling their existing stores and the capital costs are soaring.

In their Q1 earnings Red Robin lowered guidance for revenue growth from the prior level of 8.5% to 9.5% to just 8%. They also lowered same store sales guidance to flat or slightly negative from the prior guidance of low single digits.

Red Robin has been beating on earnings by an average of 8.4% but analysts have been cutting estimates because of falling guidance. You can always beat estimates if you guide lower every quarter. They also announced the departure of their CFO two weeks ago. That does not normally happen if the company is moving in the right direction. A CFO does not want to have a sinking company on their resume so they tend to exit when the outlook dims.

Earnings August 11th.

Zacks cut RRGB to a sell. Keybanc Capital Markets cut them from buy to hold.

With the market likely to be weak over the next month there is a good possibility RRGB will break below support at $47 and make a new three-year low.

Position 7/7/16:

Long August $45 put @ $1.90, see portfolio graphic for stop loss.

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