Option Investor

Daily Newsletter, Monday, 7/18/2016

Table of Contents

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

Market Wrap

Quiet Market Waits On Earnings

by Thomas Hughes

Click here to email Thomas Hughes


The market hovered at newly set all time highs waiting the first full week of earnings season. Today's action set a new high for the S&P 500 but the range was tight, less than 0.4%, and the gain was only worth half that. Even so the market appears to be resilient following a weekend of geopolitical and domestic violence, looking ahead to earnings. So far earnings have been better than expected, just not enough to reverse year over year declines.

Asian markets were flattish today as well. Japan was closed for a holiday, action was light everywhere else. The coup in Turkey did not appear to have much impact on trading and there was little news otherwise. European markets were choppy and ended the day little changed. Early trading saw them up about a half percent or so only to fall back to flat line or below by the close. Turkey was one reason for jittery markets, a fall in oil prices was another.

Market Statistics

Futures trading indicated a flat to positive open for the US market all morning. The S&P 500 was expected to rise by 2 -3 points and this is what happened. The market held above flat line for the first 10 minutes and then briefly fell into negative territory. The move was without conviction, by 10AM the indices were moving back above flat line and then up to the highs of the day. By 11:15AM the indices had hit those highs and proceeded to trade sideways within a narrow range until late afternoon when another new high was hit, about a tenth above the previous high. The market pulled back slightly from this level going into the close but finished the day very near the high of the session.

Economic Calendar

The Economy

There was no economic data released before the opening bell. The National Association Of Home Builders Home Builder's Confidence Index was released at 10AM. The index shows a decline of 1 point to59 from a downward revision to last month. Over the last 13 months the index has held a range of 58 to 65, median of 61. The present conditions index fell -1 point to 63, 6 month outlook fell -3 points to 66 and traffic fell -1 to 45. Sentiment remains positive but at the lower end of the 13 month range.

Moody's Survey Of Business Confidence fell -0.9 points to hit another new low, 24.9. Mr. Zandi says the US remains strong but most other areas of the world are affected by geopolitical events. Last week the China/Phillipine ruling over the South China Sea stirred up tensions in Asia, compounding issues already present; South America is dealing with political unrest and a growing Zika problem and the Brexit.

This week there are 140 S&P 500 companies expected to report. That is 28% of the index and added to the 7% already reported a fair indication of what to expect the rest of the season and into the end of the year. So far 66% of those reporting have beaten earnings expectations, however earnings growth remains negative. The blended rate of earnings growth for the quarter rose slightly in the last week, up a tenth to -5.5%, but this was offset by declines in forward outlook. The index P/E multiple is also expanding, up to 17.1 and well above the 5 year average.

Looking forward earnings growth is still expected to return with the 3rd quarter but the amount continues to decline. The third quarter estimate fell 0.3% to 0.4%, nearly cutting the previous estimate in half, and setting a new low for the series. At the rate it has been falling it could very easily turn negative in the next week or two. The fourth quarter estimate also fell by 0.3% and is now 6.9%. Full year 2016 estimates fell to 0.3% and very close to turning negative for the year as well. Full year 2017 remains strong in terms of outlook at 13.4%, down a tenth from last week, but so did full year 2016 until it didn't.

The Dollar Index

The Dollar Index lost a little ground today but remains near the top of the 1 month consolidation range. Today's action was light and created a very small black candle moving down from resistance at the top of the range. The indicators are a bit mixed but momentum remains bullish while stochastic fires a weak bullish crossover so resistance could be tested again. Resistance is at the $96.60 level, a move above here would be bullish and could take it up to $97.50 or higher. A failure to break above resistance could send the index down to $95.60, the bottom of the range, or lower to $94 if support is broken. Such a move could come this week, there is a bit of data due out over the next few days and three important central bank meetings on the horizon. One possible catalyst is Thursday when the ECB meets, another next week when the FOMC meets and then another the following week with the BOJ. There is not expected to be much change at any of the meetings, it will come down to what they say and how the data comes in.

The Oil Index

Oil prices fell more than -2% intraday to trade below the $45 level. The price of WTI continues to consolidate above $45 as supply and demand remain out of balance. Moving the market today was news of a build at the Cushing storage depot that raises concerns production remains too high for current demand. Should WTI fall below $45 next downside target is near $40.

The Oil Index continues to trend within its trading range and gives no sign of breaking out. Today the index fell about -0.5% to close with a loss near -0.25% and created a very small spinning top candle near the center of the trading range. The indicators are rolling over and very weak, consistent with range bound trading. First target for support is the short term moving average, below that the middle of the range near 1,120 and then below that near the bottom of the range near 1,080.

The Gold Index

Gold prices held steady near $1,330 today despite widespread global woe. Even so prices remain well above $1300 on safe haven plays. Today's move was small, the market quiet, as traders eye news and wait on the round of central bank meetings that begins this week. Central bank policy over the next 2 weeks will be a big mover of prices but it is possible the correlation with currency isn't working like usual due to the underlying flight-to-safety that has gotten prices up to these levels in the first place. A shift in the value of the dollar may not move gold as expected.

The gold miners continue to trade near their multi-year highs. The Gold Miners ETF GDX just below $30. Today is the 10th trading in a tight range around this level, a consolidation that is looking more and more flag-like. Although the indicators have peaked both MACD and stochastic are convergent with the current highs, indicative of higher prices. If this pattern plays out the miners could move up as much as $5 in the short term to reach a target of $35. This move has potential to be strong, gold prices are 10% higher now than during the preceding quarter inflating profit outlook and possibilities for returning cash to shareholders.

In The News, Story Stocks and Earnings

Bank Of America reported earnings before the bell and became the third of four big banks to beat profit estimates. EPS of $0.36 beat by 3 cents but is down $0.09 or 20% from last year. Revenue also beat but was also down from last year. Company CEO says their responsible growth strategy has been working. Looking forward, he also says that if rates remain low the bank will still be able to make money but will likely have to reduce its work force. Shares of the stock were one of todays' leaders, gaining more than 3.5% but met resistance at the 150 day moving average.

So far JP Morgan, Wells Fargo, Citigroup and Bank Of America have all met or beaten estimates. They also all reported revenue and earnings below that of the same period last year. Shares of the sector have risen on the news, outlook remains stable to positive, but no one of these banks looks like it is on the cusp of breaking out into a major rally. The Financial Sector SPDR XLF is the same. The ETF was able to gain about 0.4% in today's action but is still trading well below resistance targets at the $24 level. The indicators are on the rise so resistance may be reached but they are also showing some signs of rolling over and weakness.

Netflix reported after the bell, beat EPS estimates but failed to please investors. The company reported EPS of $0.09, consensus was $0.02, but shortfalls in subscribers and new subscribers weighed on share prices. According to the CEO the company "is not growing as fast as we would like". Shares of the stock fell -15% in after hours trading.

IBM also reported after the bell. The company reported a top and bottom line beat on strength in the cloud computing business. Despite the beats eps and revenue fell on a year over year basis, the 18th consecutive quarter of falling revenue. Shares gained about 3% on the news.

Yahoo reported revenue ahead of expectations but a miss on earnings. Shares fell -3% on the news.

The Indices

The market drift higher today but not all indices were able to make gains. The Dow Jones Transportation Average was today's laggard and the only to close with a loss. The transports fell about -0.11% in today's session, closing a small gap opened last Thursday. The index appears to be taking a breather mid-rally and the indicators are consistent with this. The current MACD peak is strong and stochastic %D is crossing the upper signal line so a test of resistance at the 7,800 level is likely. A break through is possible, if so next target would be 8,250.

The Dow Jones Industrial Average made the smallest gains in today's session, setting a new all time high. The blue chips drifted higher, creating a very small spinning top candle, in a move that could be signaling the rally is reaching a peak. MACD momentum is weak and retreating from its peak, stochastic is high in the overbought range, both suggestive the rally is vulnerable to correction. A correction could actually be a good thing for the bulls, if it confirms support in the 18,000 to 18,250 range. If not a further fall may follow.

The S&P 500 made the 2nd largest gain in today's session, about 0.30%. The broad market created a small white candle, closing near the high of the day, and set a new all time high. Today's action is a positive for the bulls but should still be approached with caution. The indicators are starting to show some sign of rolling over, suggestive of resistance. If resistance does set in at this level a pull back to 2,120 is likely. If however, earnings impress the market the rally could continue.

The NASDAQ Composite made the largest gains in today's session, about 0.55%. The index did not set a new all time high but it did break above a resistance line and set a new 6 month high. It looks like the index is creeping higher with the all time high in sight although the movement is not too strong at this time. Momentum is falling off as the index breaks resistance which makes stochastic look more overbought at its level than not. Should it continue to move higher next upside target is near 5,200.

Today's action was very light but hopeful. The market is eagerly awaiting earnings and so far it looks like the season will be better than expected. The question is how much better than expected, and will forward outlook every begin to improve. This is going to be a pivotal week, there are a lot of earnings reports on tap, by Friday we know should have a better idea what to expect with the next quarter. Sure, growth is in the forecast but the way estimates are falling I wouldn't count on it for the 3rd quarter just yet. If outlook falls into negative territory the rally could easily fade. I am hopeful but remain cautious, if the rally has legs there will be another chance to get in without chasing prices now.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Chipotle Challenger

by Jim Brown

Click here to email Jim Brown

Editors Note:

There is a lesser-known competitor to Chipotle Mexican Grill and they are gaining ground fast. The competitor is Qdoba Mexican Eats and they are part of Jack in the Box, which has been around since 1951.


JACK - Jack in the Box - Company Description

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of February 17, 2016, it operated and franchised approximately 2,200 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada.

Jack in the Box bought Qdoba from ACI Capital, Western Growth Capital and other private investors in 2003. That chain started with the Zuma Fresh Mexican grill in Denver Colorado in 1995. The chain became famous because of the fresh food and fast service even though lines often stretched well out the door. Their claim to fame was the fresh food. They replaced the traditional animal fats with vegetable oils and used fresh vegetables whenever they were available. The name was changed to Z-Teca in 1997 because of trademark claims and then changed to Qdoba in 1999 for the same reason.

They captured another segment of fans in 2014 when they changed the price structure to a fixed price based on the protein and everything else was included. A chicken burrito cost $7.80 and steak burrito $8.49. You can add anything you want for no additional charge.

Qdoba also serves breakfast and some locations are open 24 hours.

Chipotle Mexican (CMG) also started in Denver two years before Qdoba. Chipotle has had multiple food issues over the last three years and business is falling fast. Same store sales have routinely declined more than 10% per quarter. Morgan Stanley penned a brutal downgrade last week and cut the price target from $500 to $405. Maxim Group reiterated a sell with a target of $300. DB is targeting $350. Morgan Stanley surveyed 2,000 customers in June and 13% of those questioned said they would not go back to Chipotle. Another 13% said they have returned rarely compared to frequently before the food problems started. Some 45% said they are eating there less often and 26% said they had not eaten there since the food problems.

Morgan said customers had found alternate dining locations during their abstinence from Chipotle. One of those locations is Qdoba where business has been increasing rapidly.

In their Q1 earnings, the company said they were going to open more Qdoba stores with 50-60 in 2016 and 20 additional Jack in the Box stores. They reported a 39% increase in earnings to 85 cents that beat estimates for 70 cents. Same store sales (SSS) at Qdoba rose 2.1% for company owned stores and 3.1% for franchised stores. The number of transactions increased 3.7%. They guided to SSS at 1.5% to 2.5% for the full year.

Shares popped 12% on the earnings news to $87. Since then they consolidated for a month and are back at a 52-week high at $88.50, which is also resistance. A break over that level could retest the 2015 high at $99.99.

With a trade at $89.25

Buy September $95 call, currently $2.15, initial stop loss $86.25.


No New Bearish Plays

In Play Updates and Reviews

Not a Loss

by Jim Brown

Click here to email Jim Brown

Editors Note:

Five points is not a big gain for the S&P after the big market rebound but at least it is not a loss. The Dow added another 16 points after a 10 point gain on Friday. The momentum has definitely slowed but the Nasdaq is attempting to catch up with a 26 point gain. The Nasdaq had been the laggard of the major indexes.

The S&P and the Dow are consolidating in place over the last five days rather than the normal two steps forward, one step back process. Buyers are not really pushing the indexes higher in a frantic price chasing event but appear to be content to continue nibbling at any minor dip.

IBM reported earnings and rose $4 in afterhours. Netflix reported earnings and fell -$13. That is the way our earnings cycle is likely to go. Big gain for those that beat and bigger loss for those that disappoint.

Current Portfolio

Current Position Changes

AMCX - AMC Networks

The long put position was entered at $56.45.

SYNA - Synaptics

The long put position was stopped at $51.75.

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

LL - Lumber Liquidators -
Company Description


No specific news. Nice 3.4% rebound in a weak market. 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 July 27th.

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 July 27th 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.

PVH - PVH Corp - Company Description


No specific news. 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. The Baton Rouge shooting caused TASr to retest the intraday highs from last week with a 3% gain.

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 gain 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)

AMCX - AMC Networks - Company Description


News today is that AMC is offering buyouts to employees offering them a fat check if they would just leave rather than be laid off. The Walking Dead average viewers fell -8.5% for the season just ended and advertiser ratings fell -11.9%.

Original Trade Description: July 16th.

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.

Position 7/18/16:

Long Sept $55 put @ $2.30, see portfolio graphic for stop loss.

HSY - Hershey Company - Company Description


Most of the Friday gains were erased. The website GuruFocus listed Hershey as one of the top 5 stocks to avoid because it is significantly overpriced for the expected $3.45 in 2016 earnings and 11.43% estimates earnings growth the market has already factored into the price.

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 2 points today as the markets struggled to add any gains.

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


Shares spiked $2 on a new product announcement and strongly positive Nasdaq. We were stopped out at $51.75.

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:

Closed 7/18/16: Long Sept $45 put @ $3, exit $2.25, -.75 loss.

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