Option Investor

Daily Newsletter, Saturday, 7/16/2016

Table of Contents

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

Market Wrap

Impressive Stamina

by Jim Brown

Click here to email Jim Brown

Investors resisted the urge to close positions ahead of the weekend event risk and the Dow even made a new high.

Weekly Statistics

Friday Statistics

I was impressed with the relative strength of the markets on Friday. They should have declined into the close because of option expiration pressures and weekend event risk. I am sure some investors were rethinking their actions when news broke of the potential coup in Turkey. The S&P futures dove -10 points after the close but that should be erased before the open on Monday. Turkey has seen military coups in 1960, 1971, 1980 and 1997. Whenever the "elected" government, and I use that term loosely, strays too far from a secular democracy the military uses force to evict that government and start over again. This coup failed and a lot of people got hurt. At least 161 died, 1,440 were injured and 2,839 military officers have been arrested. Analysts believe this will push Turkey farther into a dictatorship.

Friday saw a very calm market. The Asian markets were slightly positive and the European markets were slightly negative. Nobody was trading ahead of the summer weekend.

China released their Q2 GDP at 6.7% that narrowly beat estimates of 6.6% growth. Another round of government and monetary stimulus kept the economy from sliding lower. Very few people believe the Chinese economic numbers and that was one reason there was not a large market move after the release.

IHS Global Insight said the number will fuel further doubts over the quality of Chinese numbers. "The first misgiving reflects concerns that the government is squeezing as much growth as plausible from relatively opaque sectors via accounting techniques." This was the first release since China said it was changing the way it calculated GDP.

In the USA, the Retail sales for June came in at a healthy +0.6% compared to estimates for +0.1%. However, May's +0.5% number was revised lower to +0.2%. Building materials was the standout with a +3.9% gain followed by gas stations at +1.2%, sporting goods +0.8% and nonstore retailers at +1.1%. Laggards were clothing with a -1.0% drop, electronics and appliances flat at zero, furniture +0.5%, food +0.5% and general merchandise +0.4%. Restaurants and bars declined -0.3%.

Overall sales were up +2.7% compared to June 2015 and +2.2% for May after the downward revision.

The NY Empire Manufacturing Survey for July came in at 0.6 compared to 6.0 in June. New orders fell from 10.9 to -1.8 and backorders fell from -10.2 to -12.1. Employment declined from zero to -4.4. Analysts blamed the headline weakness on Brexit and the uncertainty over orders from the UK. Manufacturers do not know if their overseas business will remain the same or decline as the new Brexit rules are determined.

The Consumer Price Index for June was 0.2% compared to 0.2% in May. Analyst estimates were for a 0.3% gain. Internally food prices declined -0.1% while energy prices rose +1.3% ahead of the July 4th driving weekend. The core CPI, excluding food and energy, rose +0.2% for the third consecutive month. Goods prices declined -0.2% while services prices rose +0.3% for the third consecutive month suggesting rising wages were pushing prices higher for services.

On a trailing 12 month basis the headline CPI is up +1.1% and core CPI is up +2.2%. Medical care costs rose +1.1% while prescription drugs rose +1.3%. Used vehicle prices fell -1.1%. Airfares rose +1.6% after falling -1.5% the prior month. Analysts expect prices to rise +1.6% for all of 2016 and less than the Fed's target of 2%.

June Industrial Production rose +0.6% compared to estimates for +0.2% and a -0.4% reading in May. The majority of the gain came from motor vehicles and parts rising +5.9% after a -4.3% decline the prior month. The second biggest factor was a 2.4% surge in utility production as warm weather caused people to turn on the air conditioning. High tech equipment fell -0.3% and nondurable goods fell -0.1%. Business equipment rose +0.7% and mining (energy) rose +0.2% for the second monthly gain suggesting the oil patch is slowly going back to work.

Business Inventories rose +0.16% in May and slightly better than the +0.14% in April. This is the third consecutive month of gains. Retail inventories rose 0.29% and wholesale inventories +0.13%. The inventory to sales ratio was flat with April at 1.40.

July Consumer Sentiment fell sharply from 93.5 to 89.5 and a three-month low. The present conditions component fell from 110.8 to 108.7. The expectations component declined from 82.4 to 77.1 and the lowest level since September 2014. This is the widest gap between current conditions and expectations since 2006. This is likely related to election expectations. Voters from both parties are severely depressed about the current candidates. Those respondents expecting economic conditions to worsen over the next 12 months increased from 36% to 46%. That is a huge increase and survey respondents are your normal working class person and not specifically interested in economics. With those expecting conditions to worsen nearing 50% they could actually cause weaker conditions because they will be conserving money for the proverbial rainy day rather than spending it and supporting the economy.

We have a small list of events for next week. The most important is the Philly Fed Manufacturing Survey on Thursday. That could set the tone for the ISM and the rest of the regional reports for the coming month. The home construction and sales reports will also be important but they are expected to be flat to weaker than the prior month.

The recent economic reports have actually been improving. It is not an economic surge but they are improving. This suggests there may be some green shoots forming but they are still fragile and not ready for direct sunlight. There are a still a lot of other economics that will weigh on the USA. China may not be reporting economic declines but the country if still weak. Europe is going to be weak for the next year but there are signs there will be additional stimulus in the months ahead. Japan is still circling the drain but they are determined to create enough buoyancy with monetary stimulus even if they have to hire Ben Bernanke to run the printing presses.

Investors appear to believe the current situation is improving. The yield on the ten-year treasury rose from 1.33% the prior week to 1.59% at Friday's close. Those .26 basis points were a huge move.

Gold sold off hard and is down sharply from the $1,377 high to $1,337 on Friday. The flight to safety trade has faded thanks to a rebound in the British pound.

The dollar has slowed its ascent and appears to be struggling to move over the 96.50 range on the Dollar Index. If the dollar would firm at this level until the Brexit fears subside, U.S. companies could hedge against the risk and the earnings outlook may not be that bad.

The British pound was up sharply on the new Prime Minister Theresa May. The relief rally lifted the pound from 126 to 130.50 but it was a shaky rebound. There are still sellers on every uptick but most of the gains are holding.

The earnings cycle is just getting started with 7% of the S&P-500 already reported. The blended earnings decline stands at -5.5% and 66% have beaten on earnings and 51% have beaten on revenue. Revenue has declined -0.6%. Currency issues were mentioned in 21 of the 30 companies that held a conference call. Concerns over Brexit were mentioned in 10 of the calls. According to FactSet no companies have mentioned an impact from Zika or terrorism during their calls.

With the S&P at a historic high at 2,163 the trailing 12-month PE is at 19.4 with earnings estimates at $111.36 and the highest point since February 2010 when the S&P was 1,075 and earnings were $48.11.

In the coming week, 140 S&P companies and 11 Dow components are scheduled to report earnings.

Netflix and IBM will be the headliners on Monday followed by Goldman Sachs, Microsoft and Johnson & Johnson on Tuesday.

The banks have reported decent earnings considering the low interest rate environment and the amount of regulation they have to endure. However, Wells Fargo (WFC) was a disappointment. The bank reported earnings of $1.01 that matched analyst estimates but was lower than the $1.03 reported in the year ago quarter. Revenue of $22.2 billion was also in line with estimates. Net income of $5.56 billion was slightly less than the $5.72 billion in the same quarter last year. The CFO said they had reported more than $5 billion in earnings for 14 consecutive quarters. That is a decent record in this low rate environment. Total loans rose +8% to $957.2 billion.

The bank's net interest income rose 4% to $11.73 billion but the net interest margin fell to 2.86%. Mortgage loan originations rose +43% from the prior quarter and +2% from Q2-2015.

Wells said their loan charge-off rate rose from 0.16% to 0.29% primarily because of oil and gas loans. Shares declined -2.5% on the earnings news.

Citigroup (C) reported only a 14% decline in earnings compared to the 25% predicted by the CEO in early June. They credited the surge in trading for currencies and bonds in the wake of Brexit for the better performance. The bank reported earnings of $1.24 that beat estimates for $1.10 but it was well below the $1.45 earned in the comparison quarter. Their net interest margin declined from 2.95% to 2.86% and they predicted a return to 2.9% later in the year. Shares were flat after rising for the last week in advance of earnings.

US Bank (USB) reported earnings of 83 cents that beat estimates for 81 cents. That also beat the comparison quarter of 80 cents. Net revenue rose 8.1% to $5.4 billion and beat estimates for $5.2 billion. Net interest income rose 4.5% to $2.9 billion. Net interest margin of 3.02% beat the other banks and only declined -0.01% from the prior year. Noninterest income spiked 12.3% to $2.6 billion. That is a lot of overdraft and NSF charges. Total loans increased 8.1% to $266.6 billion thanks to a rise in commercial loans. Deposits rose 7.6% to $307.4 billion. USB shares actually rose on the earnings.

Herbalife (HLF) dealt Bill Ackman an expensive blow on Friday when it announced a settlement with the FTC for $200 million. The billionaire hedge fund manager has a $1 billion short on Herbalife and intraday spike to $70 and a two-year high was very painful. However, Ackman may eventually be right. The FTC said HLF had to operate "legitimately" from now on and that suggests they were not doing so in the past. Herbalife said it disagreed with many of the FTC allegations but decided to settle so they could put the problem behind them. They also agreed to pay $3 million to settle an investigation by the Illinois attorney general's office. Herbalife has now resolved all active investigations.

The problem for Herbalife is the agreement to restructure the compensation plan so that at least two-thirds of compensation for distributors is paid on the actual sale of the products, not recruiting. Also, the company must prove that 80% of future sales are to legitimate end-users or compensation must be reduced. The change in compensation will be a major change for Herbalife. The plan will change completely to a sales based plan rather than a recruitment plan.

The settlement only applies to the U.S. but other countries are not stupid. They will likely review compensation structures in their country and demand changes as well to protect their citizens from overzealous recruiters.

Without the recruiting bonuses, current distributors are likely to dry up and drop out. This is where Ackman could still be right. Earnings are likely to plunge over the next year and the stock should follow. I looked at buying a LEAP put on HLF but the prices are enormous. Maybe in a few weeks the volatility will subside.

On a side note, Carl Icahn owns about 18.3% of Herbalife stock and he was just granted an exemption to raise that stake to 34.9%. Icahn took the position after Ackman went public with his big short and some said he did it just to get back at Ackman for a prior conflict. There is some discussion that HLF might go private but I think that is smoke. With the uncertainty over future earnings, it would be tough to convince any PE firm to put up the money until there is actually a track record. I seriously doubt Icahn will increase his stake for that very reason. The next thing we hear from Icahn is that he liquidated his position for a tidy profit since he got involved in the $30s and $40s and the stock is $65 today.

Shares spiked to $72 at the open and faded to close at $65 for a $6 gain. I would not be surprised to see it back under $60 very quickly. Volume on Friday was 35.3 million with only 93 million shares outstanding. Average daily volume is only 1.3 million shares. That was 27 times normal volume. A lot of shorts following Ackman were crushed in the spike.

AMC Networks (AMCX) was downgraded by UBS to sell on worries the ratings on it most popular shows are falling. The hit series The Walking Dead is seeing ratings decline sharply after 6 years. You can only kill so many zombies and kill off so many regular cast members before viewers start looking for other shows to watch. The new spinoff called Fear The Walking Dead is already being called a flop and viewers have been declining steadily since 10 million watched the premier in August 2015. The Better Call Saul series has been seeing double-digit ratings declines. UBS said they do not see any near term catalysts to resolve these concerns. They are also worried AMC will be shut out of the new online pay TV service offered by Hulu next year. UBS also cut CBS and Discovery Communications to sell as well.

Yahoo (YHOO) will report earnings on Monday but that will be just a prelude to the real show. Reportedly, Monday is the deadline for the final bids on buying the company and its various assets. Estimates range from $3 billion to $6 billion depending on which assets the buyer is willing to take. The deal will be very complicated and actually getting a deal accepted and closed will be very difficult.

Earnings are expected to be 10 cents compared to 16 cents in the year ago quarter. The whisper numbers are in the 8-9 cent range. As part of their sale process, they have been forced to disclose agreements that were not previously public. For instance, Yahoo has a contract with Mozilla (Firefox) that costs Yahoo $375 million a year for five years. It expires at the end of 2019. For that fee, Firefox defaults to Yahoo search in that browser. That means any buyer is on the hook for more than $1.2 billion in fees to Mozilla the day the deal closes. The bad news is that Firefox users and usage shares have been in a steep decline. Google's Chrome browser and Microsoft's new Edge browser are stealing users from Firefox and Opera at a rapid rate. Since the deal was signed in 2014, Firefox share of the browser market has fallen 21%.

Last week Yahoo further complicated its revenue prospects when they implemented a new finance.yahoo.com site. That has been the number one stock news research site for the last 15 years. Now it is practically unusable with bloatware and more ads than news. The investor community is very upset. Yahoo was getting so many complaints they had to deactivate their message boards and complaint links.

I am really tempted to buy a 35/40 August strangle, currently $1.33, on Yahoo on Monday before earnings.

Oil prices rebounded slightly on Friday but glut fears are growing. SocGen, BNP Paribas, UBS and JBC Energy all warned of the risk of another decline in prices. They believe $40 is the floor that will trigger buying again. The IEA warned "the road ahead is far from smooth." Inventory storage is at maximum capacity and production is still flowing. There are more tankers at sea with floating storage than any time since 2009. There were significant supply disruptions early in the summer and most of those have been resolved. With production back in a surplus over demand we are running out of places to store the oil.

Gasoline inventories are at "epic" levels according to Energy Aspects Ltd, an energy consultancy. At least five tankers hauling gasoline to New York were turned away over the last several weeks due to lack of storage. The IEA said stockpiles are at all time seasonal highs. Refiners running out of room to store oil refined it into gasoline they could ship anywhere in the world. Unfortunately, some of those tankers are now anchored because there is nowhere to store it.

China added to the problem after extreme weather damaged roads and pipelines in the country and killed domestic consumption of fuel. Instead of shutting down their refineries, they tried to export all their surplus production. Normally Chinese gasoline exports begin to fall in March. This year they were still rising through May. In May, exports were more than double the five-year average.

This means oil prices are likely to fall and gasoline prices are already falling. The national average was $2.22 on Thursday after a 7% decline over the last month.

Active oil rigs rose +6 last week bringing the total gain to 27 over the last three weeks. Offshore rigs rose 3 to 22 for the first gain in more than two months. Gas rigs rose +1 to 89 but they have been in the 85-90 range for months. There is no growth in active gas rigs.


The S&P surged +32 points last week and narrowly missed setting a new closing high for all five days of the week. That has not happened since 1998. The S&P closed down -2 points on Friday to prevent that from happening.

The S&P is now more than 30 points above its prior high from May 2015 at 2,130. The weekly chart is highly bullish and the lack of a material decline on Friday ahead of the weekend event risk suggests buyers are not going to slack off next week.

The MACD and RSI are bullish and there is no immediate resistance to slow the advance as long as the headlines are favorable. The earnings cycle kicks into high gear and I am not sure even weak earnings and guidance could be a significant drag.

When there is no alternative to equities for a return of more than 2%, we may be seeing the start of the great rotation out of treasuries and bonds. Treasury yields spiked all week indicating selling and equities rallied all week.

Technicians claim 2,061 and 2,071 are the current resistance levels and the S&P stopped on 2,061 on Friday.

The Volatility Index is back in the mid 12 range and showing complete complacency. Nobody expects this rally to fail or at least they are not buying puts for insurance against a potential decline.

When rallies appear when they are least expected they have a tendency to continue longer than normal. Traders in denial will continue to short any weakness and portfolio managers will continue to chase prices to avoid being left behind in an extremely competitive industry.

The Turkey coup attempt should not weigh on the market but it could cause some volatility at the open on Monday.

The Dow chart is a duplicate of the S&P with the index stopping just over tentative resistance at 18,500. The MACD and RSI are strongly positive and could run for another week before hitting the top of their normal ranges.

If we were to get a couple days of serious profit taking I would expect prior resistance at 18,000-18,100 to be support and a second rebound could be equally as strong as the first because everyone would back up the truck on a dip.

There are 11 Dow components reporting earnings next week and it is possible they could spoil the party but the earnings and guidance would have to be really bad and I do not see that happening. Multinational companies are going to warn on currency issues but that is already baked into the market cake. After the first few warnings next week, that excuse will be ignored for the rest of the earnings cycle. "Brexit ate my earnings" is going to be a familiar refrain.

The Nasdaq Composite is the index laggard. The Composite only gained 1.47% and the Nasdaq 100 gained 1.36% to post the smallest gains of the major indexes. The Nasdaq did punch through the resistance at 4925-4950 to close at 5,029 but the next 200 points could be difficult. There is significant resistance between 5100-5225 that the index has to cross before it can make a new high.

With the biotech sector posting alternating gains and losses and portions of the chip sector weak on worries over Apple's production cuts, the Nasdaq is not keeping pace with the rest of the market.

There are some heavyweight techs reporting next week and the volatility could be huge. IBM, NFLX, MSFT, FFIV, EBAY, INTC, QCOM, PYPL and BIIB are just a few. If most of those names were to beat on earnings and give decent guidance it would be an entirely different market by next weekend. Conversely, if they really stink up the place it could kill the current rally.

The Russell 2000 gained +2.37% last week to lead the winners list of the major indexes. This is very positive since a surge in small cap buying suggests portfolio managers are not afraid of future volatility and that is good for market sentiment. However, the Russell did stop right on strong resistance at 1,205 and nearly 100 points from a new high at 1,295.79. That would be a very nice run if it happened. If the Russell were to make a new high, the broader market would be sprinting towards 2,250 or higher.

Remember, traders are always fixated on new highs. Once they are hit the market normally loses traction while a new target is discussed and profits are taken and then the market moves higher. So far, this has not happened in this rally. New highs tend to beget new highs. If Friday's fractional losses on the indexes are all we are going to get, then buckle your seatbelts.

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

subscribe now

Random Thoughts

Bullish sentiment surged 5.8% to 36.9% in the AAII Sentiment Survey that ended on Wednesday. That is the highest level since March 9th at 37.4%. Neutral sentiment declined -3.6% to 38.7% and the 24th consecutive week over its historical average of 31%. Bearish sentiment fell -2.2% to 24.4% and the lowest level since April 20th at 23.9%.

Bullish sentiment hit a low of 22.0% on June 22nd and has rebounded 14.9% but remains under the historical average at 38.5%. Investor comments were generally bullish and Brexit has been forgotten.

Bank of America Merrill Lynch said investors poured more money into the market through equity funds than any week in the last nine months. More than $10.8 billion flowed into funds in the week ended on July 13th. That ended the streak of 17 consecutive weeks of outflows. Next week could be even stronger now that the market is making new highs. European equity funds saw outflows of $5.8 billion and the 23rd consecutive week of outflows.

Bond funds also saw inflows. A record $2.1 billion flowed into high-yield bond funds on Monday. That was a historic record and led to a total of $4.4 billion for the week. Investment grade funds saw inflows of $1.8 billion and the 19th consecutive week of inflows.

BAML said investors were "stampeding" into equity funds on fears of missing out on a continued rally. BAML called it "Bear Capitulation."

The same bank that reported those fund flows above also believes the markets could decline up to 15% this summer. Savita Subramanian, head of U.S. equity and quantitative strategy for BAML Global Research, said on Wednesday the S&P could test its lows near 1,800. That would have been more than 16% below Friday's close. She cited valuation, seasonal weakness and uncertainties surrounding the election and Brexit negotiations in Europe. Also, another leg down in oil prices could drive the market lower.

Subramanian reiterated her yearend target of 2,000 for the S&P. She lowered that target from 2,200 on February 12th. She recommended owning volatility during election years. She said the VIX normally spikes to 24 in the month before the election. She said the uncertain impact of a Trump presidency could create a more hawkish Fed and put a cap on PE multiples for the S&P.

Another BAML strategist, Stephen Suttmeier, Chief Equity Technical Strategist, said it took more than 300 days for the S&P to make a new high. That is a relatively rare occurrence that historically tends to send the index significantly higher as buyers overcompensate on the breakout. There were 414 days between the May 2015 high and the recent new high. Since 1929 there have been 24 instances when the market went more than 300 days. Historically, 250 days from the breakout the average return is about 15.6% according to Suttmeier. The median return is 14.8% and the market rose 91% of the time. He also noted that market breadth was increasing rapidly along with new 52-week highs.

Friday's volume was only 6.02 billion shares are slightly stronger than a normal summer Friday. Advancers and decliners were almost dead even. Since Friday was technically a down day the low volume is a plus. We have been seeing higher volume on the days when the market is advancing. That is a definite change in trend.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Champions are not made in gyms. Champions are made from something they have deep inside them, a desire, a dream, a vision. They have to have the skill, and the will. But the will must be stronger than the skill."

Muhammad Ali

Index Wrap

New Highs Beget New Highs

by Jim Brown

Click here to email Jim Brown

After a long period of stagnation a breakout to new highs tends to create a string of new highs once investors believe it is not a double top formation. Typically hitting a new high triggers some selling as investors take profits when their target was hit. That did not happen this time. The only weakness we saw was on Friday and that can hardly be called weakness. The S&P was down -2, Nasdaq -4 but the Dow was +10 and the Russell +3. That is called treading water. Nobody really wanted to sell and every dip met willing buyers but not enough to really push the indexes higher ahead of the weekend event risk. If nothing else happens before Monday, I would expect the market to try and move higher as long as Asia and Europe are not melting down.

The Russell 3000, the top 3000 stocks by market cap in the market, closed at a new high on Friday. The old high close was 1,273 back in June 2015 and it closed at 1,275 on Friday. That is a strongly signal and it would be very bullish if the R3K continued to move higher from here. That would send shockwaves through the other indexes.

The Vangard Total Market Index (VTI) traded at a new intraday high on Friday at 110.97 but failed to close over the prior high at 110.72. This is an index representing 3,814 stocks of all sizes and market capitalization. This is "the market" for all practical purposes. Like the R3K if the VTI can continue to move higher it would be very bullish.

On the negative side of the ledger the NYSE Composite, an index of more than 1,900 stocks, remains well below its prior highs. Only about 1,500 of these stocks are U.S. companies and the index is heavily weighted to the energy sector. There are listed stocks from more than 38 countries so a market decline in China or Brazil or elsewhere would be a drag on the index.

The historic closing high is 11,239.66 and the index closed at 10,773 on Friday. That was a major breakout from the solid resistance at 10,640 so the trend is positive but it needs to gain nearly 500 points to make a new high. I suspect it will remain a laggard while the R3K and VTI continue their moves higher.

The Dow Transports ($TRAN) halted their rally at resistance at 8,000. The falling oil prices are good for airlines but bad for railroads. The Transports need to continue rising over the resistance at 8,260 to confirm the Dow breakout. I have no hope for a Transport breakout to a new high in the near future. We just need it to move over that Q4 resistance level to contribute to the broader market rally.

The weeklong rally did wonders for the internals. The percentage of S&P stocks over their short term 50-day average spiked to 86.6% from the 72% the prior week. This indicator is approaching the highs from March and November 2014. Unfortunately, this is also an indicator of an overbought market.

The percentage of S&P stocks over their 200-day average rose to 77% and just slightly below the 77.6% higher in April and the 78.0% high in February 2015. This is also an indicator of an overbought market.

The percentage of S&P stocks with a buy signal on a Point & Figure chart rose to 71.8% but remains under the April high at 79.4%. The 2014 high was 84.6% in July and the 2013 high was 84.4% in both July and November. This suggests the market has room to run but we are approaching nosebleed levels.

The correlation between the High Yield ETF (HYG) and the S&P is still intact and the HYG has broken out to a new high. The S&P always follows the HYG and this suggests the S&P will move higher as long as the ETF continues to lead. Note the correlation over the last five years.

The relationship between oil priced and the dollar are intact BUT the dollar strength appears to be pulling away from a direct relationship. This is due to the fundamental problems in excess oil production and the glut is impacting the normal relationship.

Assuming there are no earth shaking headlines next week and earnings are at least decent, I would expect the market to continue to new highs and the lagging indexes could accelerate as those stocks catch up with the leaders. Portfolio managers are having problems with performance anxiety and are forced to chase prices higher in order to keep pace with their competitors.

This is a very competitive business and managers cannot afford to be too cautious when the market is breaking out. They have to hold their nose and buy something. If fund A and fund B are buying the hit stocks in a breakout then fund C through ZZZZ also have to buy to keep from being left behind. This herd mentality means they will all perform about the same and there is comfort in numbers. If the market were to suddenly reverse, they would all be in the same boat when it came time to produce the year-end numbers.

I would try to avoid being overly long but we do need to follow the trend until it ends.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays


by Jim Brown

Click here to email Jim Brown

Editors Note:

UBS cut their rating on this stock to a sell and a 52-weel low is not that far away. One rating does not guarantee that a stock will decline but the stock was in a downtrend already. This should grease the skids for a continued drop.


No New Bullish Plays


AMCX - AMC Networks - Company Description

AMC Networks Inc. engages in the ownership and operation of various cable television's brands delivering content to audiences, and a platform to distributors and advertisers in the United States and internationally. The National Networks segment operates five distributed entertainment programming networks under the AMC, WE tv, BBC AMERICA, IFC, and SundanceTV names in high definition and standard definition formats. This segment distributes its networks in the United States through cable and other multichannel video programming distribution platforms, including direct broadcast satellite and platforms operated by telecommunications providers.

RBS says AMCX is a dead man walking. They downgraded the network to "sell" because some of its most popular shows are seeing their ratings walk off a cliff. The previously popular series "The Walking Dead" (TWD) has declined significantly in the ratings with a 40% drop in the 2016 season. The show routinely kills off cast members that have been with the program for years. The finale for the sixth season saw viewership significantly lower than the prior season finale. Spoiler alert, another prominent cast member is not going to make it through the next season opener. The cliff hanger left viewers unsure which one it will be but all the major players are at risk.

The new show that was spun off from TWD was "Fear the Walking Dead" and it barely made it out of the first half of the second season season alive. AMC has said it will air the second half of season 2 starting on August 21st. if viewership does not pick up fast there may not be a season 3.

Another previously popular show "Better Call Saul" saw "strong double digit ratings declines" while viewership on the new shows "Preacher," "Night Manager" and "Feed the Beast" has been lackluster at 50% less than analysts expected.

UBS is also worried that AMC will be shutout of the skinny bundles that will be offered by Hulu in 2017. That would be a further cash drain on AMC.

Earnings August 4th.

Shares dropped -4% to $56.59 on the RBS downgrade on Friday but that could be the start of a larger decline. The 52-week low was $55 in late June. Morgan Stanley cut AMC from buy to neutral in late June. Shares spiked on the 30th after Lions Gate bid for Stars. AMC was thought to be up for grabs if there was further media consolidation. Since that spike shares have traded sideways despite the strongly bullish market. The drop on Friday killed that sideways trend.

Buy Sept $55 put, currently $2.35, initial stop loss $59.85.

In Play Updates and Reviews

Market Pause

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P dipped a minimal -2 points as the market consolidated ahead of the weekend. I was impressed with the strong relative strength. The market should have sold off on Friday and the lack of a drop indicated we are probably going higher again next week, assuming a shortage of negative headlines.

We finally exited a couple of our really profitable positions in Costco and Nvidia. We also exited the CNC call. Two of those were August options and we needed to exit before premiums began to shrink even faster after Friday's expiration.

Current Portfolio

Current Position Changes

TASR - Taser Intl

The long call position was entered at $27.80.

CNC - Centene Corp

The long call position was stopped at $71.35.

COST - Costco

The long call position was stopped at $165.65.

NVDA - Nvidia

The long call position was stopped at $52.50.

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. Despite an upward bias we did not make any money from the CNC position. I kept raising the stop loss because we needed to exit the position before the earnings on July 26th. There was a positive bias but we endured 3 weeks of dips along the way. The position was stopped at $71.35.

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

Closed 7/15/16: Long August $72.50 call @ $1.97, exit 2.10, +.13 gain.

COST - Costco - Company Description


No specific news. Momentum finally failed and we were stopped out at $165.65 for a nice gain. We needed to be out of this position so we can launch a new position when the market finally corrects.

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:

Closed 7/15/16: Long Oct $160 call @ $4.40, exit $9.02, +$4.62 gain.

LL - Lumber Liquidators - Company Description


No specific news. Minor decline. Support is $16.20.

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


We were stopped at the open when Wells Fargo downgraded NVDA from market perform to underperform citing possible growth headwinds from Intel and AMD. Obviously an idiot analyst. Neither company has anything close to Nvidias technology for GPUs. Intel does have a new chip for servers that is faster but it is a different class.

Mizuho initiated coverage with a buy rating and $60 price target.

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 company’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:

Closed 7/15/16: Long August $47 call @ $2.55, exit $6.29, +$374 gain.

PVH - PVH Corp - Company Description


No specific news. Minor decline but still holding near $100.

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.

TASR - Taser Intl - Company Description


No specific news. Shares were down slightly as the market rested. Having the entry trigger at $27.80 did not help us today. Shares spiked up to $27.86 at the open and immediately rolled over with the market.

Original Trade Description: July 14th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection.

With all the shootings both by police and at police the need to be able to accurately document the events is becoming even more important. The multiple shootings by police and captures on cell phone video only shows one side of the event. If those cops had body cameras to document what they were seeing, hearing and saying, it would go a long way towards making those events less of a flash point if they can present their side of the event.

Since the Dallas shootings, Taser has won orders for more than 1,591 body cameras from the San Jose Police Dept and the Minneapolis Police Dept along with a 5-year subscription to Evidence.com, Taser's cloud based digital evidence management platform. Taser said demand was growing rapidly and they were in discussions with many more departments about their full range of evidence technology.

According to Taser more than 3,500 agencies and departments from 33 major cities now use their cameras.

Earnings August 3rd.

Shares spiked to $28.50 after the Dallas shootings and then pulled back to $26.50 after the headlines cooled. The news of the big orders lifted shares back to $27.50 and rising. Taser was already in a strong uptrend and the temporary spike has now been digested and the trend is returning.

I am recommending we buy the Sept $29 call, currently $1.60. If the market rolls over as I expect on Friday we could get a better entry on Monday. I am recommending an entry trigger at $27.80, which is above today's high. If the market opens lower, we will not be triggered and we can reevaluate the entry point for Monday.

Position 7/15/16 with a TASR trade at $27.80

Long Sept $29 call @ $1.49, no initial stop loss.

WDC - Western Digital - Company Description


No specific news. A minor loss but still holding over support.

Original Trade Description: July 9th.

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.

Position 7/11/16:

Long Oct $52.50 call @ $3.23, see portfolio graphic for stop loss.

Z - Zillow Group - Company Description


No specific news. Just another minor gain to a new closing 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


Buyers suddenly appeared on Hershey with a +2.57 gain on no news. All our gains for the week disappeared in the one day reversal.

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 ETF continues to struggle with resistance at $120 and the Russell 2000 gained only 3 points today as the markets paused ahead of the weekend.

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.

SYNA - Synaptics Inc - Company Description


No specific news. Shares are moving sideways while we wait for the next leg down.

Original Trade Description: July 11th.

Synaptics Incorporated develops, markets, and sells intuitive human interface solutions for electronic devices and products worldwide. The company offers its human interface products solutions for mobile product applications, including smartphones, tablets, and touchscreen applications, as well as mobile, handheld, wireless, and entertainment devices; notebook applications; and other personal computer (PC) product applications, such as peripherals comprising keyboards, mice, and monitors, as well as remote control devices for desktops, PCs, and digital home applications.

Back in mid April Synaptics said it was in active discussions with a state-backed Chinese investment group on a deal that valued the company at $110 per share. The company said it was anticipating a formal announcement at month end when it reported earnings. Shares spikes 7% to $87.

On April 28th the company reported adjusted earnings of $1.21 per share compared to estimates for $1.51. Revenue of $402.5 million also missed estimates for $450.5 million. Shares collapsed $15 on the news to $68.

In early June, the company said it was no longer in active talks with the Chinese group about an acquisition. On June 16th, the company said it was laying off 160 employees and closing some offices. That is about 9% of the workforce. The company will have an $11 million charge for severance and take another $4 million charge for lease cancellation fees on the office rent. Synaptics said the move was to align the company's cost structure close to its revenue. The company said they had experienced a "sizeable revenue shortfall" in Q1 that would carry over into the current quarter. "We saw a precipitous drop in order levels within the smartphone market." They are a supplier to Apple.

Recent reports suggest Apple is still cutting component orders for the next iPhone due out in September so Synaptics revenue should still be in decline.

Shares closed at a 2-year low last week and earnings are July 28th.

I am recommending a September $45 put in order to avoid the sharp drop in front month premiums when July expires on Friday. I do not plan on holding over that earnings report. We are buying time but we are not going to use it.

Position 7/12/16:

Long Sept $45 put @ $3, see portfolio graphic for stop loss.

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

subscribe now