Option Investor

Daily Newsletter, Saturday, 7/23/2016

Table of Contents

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

Market Wrap

Breakouts Everywhere

by Jim Brown

Click here to email Jim Brown

The Dow did not manage to make a new high on Friday but nearly every other broad market index did and others made new relative highs.

Weekly Statistics

Friday Statistics

The market is confounding bears at every turn and Friday's gains helped to push multiple indexes to new highs. The S&P-500 closed at 2,175 and 2 points over the prior high. The S&P-400 Mid-Cap index closed at 1,552 and 3 points over the prior high close of 1,549.

The S&P-600 closed at 741.86 and just under the prior historic high close of 742.13. That is close enough for me.

The Vanguard Total Stock Market Index (VTI) closed at 111.72 and just over the prior high close of 110.72.

The Russell 3000, the top 3,000 stocks by market cap, extended its new high to 1,283.

Whether the bears like it or not there is a summer rally in progress and it is climbing a decent wall of worry to make that happen.

The Nasdaq and the Russell 2000 are still lagging but the Russell closed at an 11-month high and the Nasdaq at a 7-month high.

The internals are positive and growing more bullish by the day. The only fly in our rally soup is the light volume. Volume on Friday was only 5.6 billion shares. The average volume for the week was only 5.9 billion shares. The day with the heaviest volume was Thursday (6.5 billion) when the market declined.

Fund managers are clearly chasing prices with every minor dip in a momentum stock being bought on any sign of a rebound. Netflix is about the only major stock that has not rebounded after their earnings dip.

There were no economics of note on Friday. However, most of the reports earlier in the week showed minor improvement. Unfortunately, the biggest report of the week, the Philly Fed Manufacturing Survey, saw a negative headline number. The good news hiding behind that negative number was an improvement in almost every internal component. New orders went up to 11.8 and the second highest reading over the last year. Backorders turned positive for the first time in a year. The price components were the only two that did not improve but they did remain in positive territory.

There are green shoots in the U.S. economy but they are not readily seen in the headline numbers of the various reports.

We get the first look at the Q2-GDP next Friday. The consensus estimate is for 2.7% growth and the Atlanta Fed's real time GDPNow forecast is currently 2.4% growth. Either of these forecasts would be significantly better than the final 1.07% reading for Q1.

Other reports due out next week include home sales, which are expected to show another increase. Zillow reported that time on the market for a home listing had declined by more than 1 week in the latest analysis. Low mortgage rates are spurring people to buy and prices are rising because of the reduced inventories. The housing reports this week are likely to show gains.

The negative event this week is the Fed announcement on Wednesday. There is still almost zero chance of a rate hike at this meeting with the Fed Funds Futures showing only a 2.4% chance. However, the September meeting has risen to a 20% chance, November 22% and December 48%. Any further improvement in the economic picture will likely raise the chances for a rate hike sooner than December.

The following week we will get the employment reports with the ADP on Wednesday and Nonfarm Payrolls on Friday. Any continued strength in the Nonfarm numbers will produce rate hike anguish in the market.

The Bank of Japan meeting on Thr/Fri could cause some volatility because analysts expect additional stimulus. The stress test results for 50 EU banks are due out on Friday and that could also produce some market volatility.

The market movement this week came from some positive earnings. On Friday, GE reported earnings of 51 cents that easily beat estimates for 46 cents and it is not normal for GE to beat by a wide margin. Normally they report inline or only a penny or two over the estimate. Revenue rose 15% to $33.49 billion. Revenue was boosted by a 31% rise in revenue from their power generation business. If you recall in Q1 they had some issues with deliveries and the surge in revenue in Q2 was the result of those deliveries being completed. During the quarter, GE escaped the SIFI designation by getting rid of the majority of their financial operations. GE said this freed up $18 billion in capital and they are returning it to shareholders through buybacks with $13.7 billion spent in Q2. GE had cash and equivalents of $91.8 billion at the end of the quarter. In a sell the news event shares traded down nearly 2% after earnings.

The CEO said they were seeing a "volatile and slow growth economy."

After the close on Thursday Schlumberger (SLB) reported earnings of 23 cents and a 20% decline in revenues to $7.16 billion. Analysts were expecting 21 cents and $7.13 billion.

The company also announced an additional 16,000 layoffs. The company did say the oil business in the U.S. had turned but would remain weak for the rest of 2016. The CEO said, "In the second quarter market conditions worsened further in most parts of our global operations, but in spite of the continuing headwinds we now appear to have reached the bottom of the cycle." That followed similar comments from Halliburton on Wednesday.

Honeywell (HON) reported earnings of $1.66 compared to estimates at $1.64. Revenue rose 2% to $9.991 billion but missed estimates for $10.134 billion. They raised earnings guidance for the full year from $6.55-$6.70 to $6.60-$6.70. Revenue is now expected to be $40.3-$40.9 billion up from $40.0-$40.6 billion. Shares fell sharply on the revenue miss and anemic guidance upgrade.

Whirlpool (WHR) reported earnings of $3.50 that beat estimates for $3.36. That compared to $2.70 in the year ago quarter. Revenue was flat at $5.2 billion. The company raised its full year earnings guidance from $14.00-$14.70 to $14.25-$14.70. The company said cost reduction efforts offset the unfavorable exchange rates. Shares rose $5 and are nearing the prior high from April.

Stanley Black & Decker (SWK) reported earnings of $1.84 compared to estimates for $1.72. Revenue of $2.93 billion also beat estimates for $2.91 billion. The company guided to full year earnings of $6.30-$6.50 per share, up from $6.20-$6.40 thanks to volume growth and expanding profit margins. Shares rallied 5% on the news.

American Airlines (AAL) reported earnings of $2.81 compared to estimates for $1.68. However, revenue declined -4% to $10.36 billion but still beat estimates for $10.32 billion. They said Q2 revenue was hurt by growth in capacity from competitors, macroeconomic weakness and foreign currency weakness. Revenue per available seat mile declined -6.3% to 12.71 cents. Shares rose 4% on the news.

Starbucks (SBUX) reported earnings after the bell on Thursday of 49 cents and revenue of $5.24 billion. Earnings matched estimates but revenue fell short of estimates for $5.35 billion. Same store sales rose +4% ending a streak of 25 quarters of 5% growth or better in the USA. They raised guidance for new stores from 1,800 to 1,900 in 2016. However, revenue growth is expected to top out at 10% compared to prior estimates for the low teens. Same store sales comps are now expected to be mid-single digits compared to prior guidance for "somewhat above mid-single digits." Current quarter earnings are now projected to be 54-55 cents and analyst estimates were 55 cents.

CEO Howard Schultz said the drop in same store sales growth came from the change in the loyalty card program. Previously the awards were given based on the number of store visits and now they are based on the total amount spent. He said some customers were gaming the old system by asking cashiers to ring up a coffee and bagel separately to simulate two visits. The change angered some customers and caused a drop in total visits. Customers were so angered they failed to show up for the Frappuccino Happy Hour promotion that caused a 20% increase in revenue in the same period in 2015. Despite the hostility by some customers, the number of loyalty club members rose 18% over the same period in 2015 to 12.3 million.

Schultz warned the U.S. is facing a very challenging environment. He said, "I think we have a situation where you have a very uncertain election, you have domestic civil unrest with regard to race, and I think the issues around terror have created a level of anxiety, so we are no longer looking at just an economic downturn, there are a number of things that we are facing as citizens and I think the direction of the country."

Next week is the busiest week of the cycle for earnings and Thursday is the busiest day of the cycle. There are a lot of high profile companies reporting. There are 12 Dow components and more than 175 S&P companies.

FactSet said 25% of the S&P has reported for Q2 and 68% have beaten on earnings and 57% beat on revenue. Only 17% of companies have missed earnings estimates. Earnings growth has improved from the prior week forecast of -5.5% to -3.7%. Revenue is now expected to decline -0.3% which is slightly better than the prior estimate for -0.8%. For Q3 14 companies have warned and 5 companies have issued positive guidance. The earnings outlook for Q3 has deteriorated from +0.3% growth to a -0.1% decline in earnings. On March 31st, the outlook was for 3.3% growth in Q3.

After the close on Friday, news broke that Verizon was the successful bidder for Yahoo in the range of $5 billion. The news was not confirmed but flowing from multiple sources. The bid includes Yahoo's real estate but not their intellectual property. Verizon bought AOL for roughly $4 billion and they believe adding the Yahoo assets into AOL will make both websites more valuable. Verizon wants the roughly 300 million Yahoo users to enhance their existing advertising programs. This will give Verizon more eyeballs and it will give AOL significantly more content. Despite the downtrend in Yahoo's business, they still have a lot of content. Verizon will probably sell the recent Yahoo acquisitions that make no sense. Those would include Polyvore, BrightRoll, Flurry and Tumblr.

While Halliburton and Schlumberger both claim the bottom is behind us in the oil patch the price of crude continues to fall as inventories of refined products continue to rise. We are rapidly approaching the end of the driving season with the Labor Day weekend. Time sure flies when you are having fun. Gasoline inventories are at their highest level for this time of year since 1984 despite record demand for fuel in June. Gasoline demand in June rose 2.7% to 9.64 mbpd. Crude supplies have declined for nine weeks but they are still more than 100 million barrels over the five-year average. Bullish sentiment that drove prices over $50 and had analysts predicting $60-$65 by year-end has evaporated.

Analysts are already talking about oil in the $30s once the summer driving season ends.

Active land rigs rose +15 to 462 with oil rigs up +14 to 371 and gas rigs -1 to 88. Miscellaneous rigs rose 1 and offshore rigs declined -3 to 19. That was the biggest gain in oil rigs since early 2015. The stagnant gas rig count and low injections into storage have pushed nat gas prices up to $2.80 and near an 8-month high.

The dollar hit a 4-month high at 97.35 on the Dollar Index. This helped push crude prices lower along with the rest of the commodity sector. This will continue to pressure earnings for multinational companies.


I know as soon as I turn bullish in my comments here that will be the kiss of death for the rally. However, a longtime reader named John, claims I am already drinking the Kool-Aid despite my constant warnings about being "overly long."

There is always a hesitance to commit to a direction when that direction goes against the obvious fundamentals. However, when multiple indexes are breaking out to new highs and the S&P is 45 points over its last resistance, it is hard not to be bullish.

Typically, there are events along the way that signal a trend change. The current market had been range bound around S&P 2,100 since December 2014. Portfolio managers were lulled into a false sense of complacency that the markets would remain range bound or in decline ahead of Brexit, elections, weak earnings and the weakest two months of the year in Aug/Sep. They have been sitting on the most cash since 2001 and got caught off guard.

Now they have to buy the market as long as it keeps going up. They cannot afford to sit in cash while their competition is buying stocks and the markets are making new highs.

The key question now is how high can the market go while it remains this overbought? I noticed in Keene's commentary on Thursday he is projecting potential reversals at 2,177 and 2,293. Blue sky forecasting is very difficult because all the easily seen resistance levels have already been broken. Traders have no obvious target. The vast majority of traders are not technicians so they are flying blind.

We have to watch other indexes more closely to see if they are going to breakout as well. The broader the index the more representative of the broader market. That is why I listed the VTI and $RUA at the beginning of this commentary. They are both 3,000 stocks and both are breaking out. The Dow and S&P get all the attention but they are the stocks with the biggest market cap. The other 4,500 stocks with a smaller market cap are still important to market direction. We talk all the time during most market rallies that the generals are leading the charge and the troops are following reluctantly. That is true today as well with the Dow and S&P the farthest into their new highs but the troops are also beginning to charge.

Another way we can monitor the market is with the charting tools. Keene uses a shorter duration MACD at (8,13,5) compared to the standard MACD at (12,26,9). I am using Keene's tool settings today because he is a CMT and that stands for Chartered Market Technician not Certified Massage Therapist. According to the shorter MACD the S&P is on the verge of rolling over. However, the index closed at a new high on Friday ahead of the weekend event risk. That suggests the index could continue higher temporarily despite the weakness in the indicator. The only indicator that is foolproof is hindsight.

When the markets are in blue-sky territory, the prior forecasts from market analysts become more important. As each target price is hit, traders will watch to see if the market is going to stop before they put new money to work. According to S&P, the consensus analyst estimates is for the S&P to end 2016 at 2,175 and exactly where it closed on Friday. The average for the 15 analysts below is 2,161. Remember, this is where they expect the S&P to finish the year, not where they expect it to top out. Most do expect a late summer decline ahead of the election.

I apologize if any of these have changed and I missed it. With the recent market volatility, I know estimates have been revised almost daily by somebody. These estimates were collected over the last 90 days.

Bank of America, Savita Subramanian, 2,000.
JP Morgan, Dubravko Lakos-Bujas, 2,000.
Wells Fargo, Chris Haverland 2000-2100.
Goldman, David Kostin, 2,100.
BMO Capital, Brian Belski, 2,100.
Credit Suisse, Andrew Garthwaite, 2,150.
Citigroup, Tobias Levkovich 2,150.
Morgan Stanley, Adam Parker, 2,175.
UBS, Julian Emanuel, 2,175.
Wells Fargo, Scott Wren 2190-2290.
Barclays, Jonathan Glionna, 2,200.
Deutsche Bank, David Bianco 2,200.
S&P Capital IQ, Sam Stoval, 2,250.
Oppenheimer, John Stoltzfus 2,300.
Fundstrat, Tom Lee 2,325.

On a simple trend line projection the S&P could continue to 2225-2240 but over a very long timeframe like the 8-years below it is hard to expect enough portfolio managers to be watching the progression and decide to exit at that resistance level. To put it simply, the market will stop where it stops and a couple weeks later there will be a dozen analysts saying "I told you it would stop there."

One factor that could impact the market significantly is the Q2 earnings cycle. This coming week is the busiest week with Thursday the busiest day of the cycle. Over 175 S&P companies report earnings next week. Once these core earnings are behind us there will be less excitement about the lower quality companies that will follow. Next Friday is the point where the summer doldrums, low volume and diminished earnings interest can produce an inflection point for the market. With Aug/Sep historically the two weakest months of the year, a strong case can be made for the rally to end.

The Dow had an incredible rally of more than 1,500 points but it appears to have stalled at just over 18,500. The index has gone sideways as some companies beat on earnings and others disappointed. There are 12 Dow components reporting earnings next week. As earnings excitement fades, even positive reports will produce a smaller post earnings bounce while negative reports will still cause declines.

In the chart below, notice the congestion at the highs for last week. The index appears to be losing traction. With the Fed meeting this week, we could see some profit taking just to avoid a hawkish statement about the potential for future hikes.

The Nasdaq finally reached the bottom of the resistance band from 5,100 to 5,160. Now the real test can begin for the Nasdaq. The index is up 526 points (+11.5%) since the 4,574 post Brexit low. We can go an entire year and not see a gain of 11% in normal years. With the Nasdaq very overbought and tech stocks at extended valuations it could be tough to get through that 5100-5160 resistance to a new high. With Apple, Amazon, Amgen, Expedia, Baidu and Google reporting next week there is a lot of opportunity to push the index around with post earnings moves.

I am encouraged by the break over strong resistance by the Russell 2000. After 9 days of sideways movement, the pattern appears to be resolving to the upside with an 11-month closing high. That suggests market sentiment is improving and any further gain should trigger additional short covering. This is the chart to watch. A break higher here could support the broader market while a decline under 1,200 would be a sell signal.

The market is tired. Volume is slowing but as long as the upward move continues, the fund managers will have to keep buying. They have plenty of cash so the move could continue next week. We are running on borrowed time and the peak in Q2 earnings on Thursday could also trigger a peak in the market. August begins the seasonal weakness the following Monday. That is no guarantee the markets will weaken but portfolio managers do have a memory. I suspect they would like to keep some cash handy for the normal September/October buying opportunity.

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.

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Random Thoughts

The AAII sentiment survey had an interesting change in direction. Despite the market setting new highs almost every day the bullish sentiment declined -1.4% to 35.4%. Bearish sentiment rose +2.3% to 26.7%. This survey ends on Wednesday and the market was positive the first three days of the week. Investors must be looking at those overextended charts and coming to the same conclusion we are that profit taking cannot be far off.

June was the warmest on record according to the National Oceanic and Atmospheric Administration (NOAA). June temperatures averaged 1.62 degrees over the 20th century average. The six months ending in June were the hottest on record at 2.4 degrees warmer than the end of the 19th century. The El Nino trend boosted global temperatures starting in October but the underlying trend so far this century has been routinely setting records. Arctic Sea ice during the summer melt season covered 40% less area than normal. Source

Elon Musk released his Master Plan Part 2 last week. He said Tesla is going to expand their product line including heavy duty trusks and large passenger transport vehicles like busses. He reiterated they are working towards a fully autonomous vehicle that would be significantly safer than driving yourself. The plans for trucks and busses would be unveiled next year. The bus vehicle is already in development.

He envisions fully autonomous cars that you can summon from anywhere and after it picks you up you could read, sleep or do anything else on the route to your destination.

He said Tesla planned to marry the SolarCity rooftop panels with battery storage and allow individuals to become mini utility companies with a large amount of electricity returned to the grid for a profit.

Tesla changed its web address from TeslaMotors.com to just Tesla.com as it prepares to combine all its products into one gateway website.

Full text of the Master Plan Part 2

Who is this alien on the right in the new Star Trek Beyond movie that debuted this weekend? He is very famous and the third richest person in the world. He is also a Trekie. I guess if you are rich enough you can do anything your heart desires, even appear in a Star Trek movie.

Answer: Jeff Bezos


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"When you say a situation or person is hopeless, you are slamming the door in the face of God."

Charles L. Allen

Index Wrap

Price Chasing Slowing

by Jim Brown

Click here to email Jim Brown
The S&P made a new high on Friday but only by 2 points. Even that minor amount was unexpected.

The dip buyers were out in force on Friday and it was probably a combination of shorts covering and portfolio managers buying the dip to keep the market from running away from them. Markets do not tend to rally on Fridays but all the major indexes finished in the green. The Nasdaq was up a decent amount to end right at the beginning of a resistance band at 5,100. That could be some serious resistance with traders reluctant to buy with so many high profile tech stocks reporting earnings this week. The potential for a disaster or two is very high. We already saw a monster decline in Netflix. If Amazon, Apple or Google repeated that disappointment the tech sector could be knocked for a loss.

Whatever the reason the market gains basically recovered Thursday's losses but failed to really push the indexes higher. I am not surprised portfolio managers would be reluctant to put money to work ahead of the weekend event risk.

The big mover on Friday was the Dow Transports ($TRAN). The index bounced off resistance at 8,000 on Wednesday with a big loss on Thursday. The index rebounded from that decline and closed at 7,965 and very close to a breakout over that 8,000 level next week. That would be bullish for the Dow industrials and confirmation of a broadening of the overall rally. The spike in the dollar pushed oil down to $44.25 and that is bullish for the transports, with the exception of the railroads. American Airlines (AAL) also posted strong earnings despite falling revenue per mile and that helped the airline sector.

With oil prices plunging and now expected by many to dip back into the high $30s I would have expected a bigger decline in the energy stocks. The Energy Select SPDR (XLE) has been battling resistance at $70 since last August. Even with crude oil down the XLE actually posted a minor gain on Friday. Short covering maybe? The dip in crude prices is expected to accelerate the closer we get to Labor Day and the end of the driving season. Oil prices normally peak in August but the big production outages earlier in the summer, led by the Canadian wildfires, pulled the peak forward and the next couple of months could be rocky for prices.

The oil/dollar correlation continues as you can see in this chart. The dollar is spiking higher and oil prices are collapsing. Add in the return of the oil glut and the new glut in refined products and the outlook for oil prices is negative.

The financial sector is also struggling with resistance at $23.70 on the XLF. The financials have reported decent earnings but their fundamentals are shrinking. The very low interest rates and the slowdown in trading for everything except currencies and bonds has put a damper on guidance. With $13 trillion in overseas bonds trading with a negative yield and lingering uncertainty over the actual Brexit damage, the banks cannot catch a break. They did pass the stress tests and got approval for buybacks and dividend increases but other than the post Brexit bounce the sector has stalled again. I do not know why investors are so bearish about banks that routinely make $5 billion a quarter in profits.

The chip stocks are leading the Nasdaq higher. The Semiconductor Index ($SOX) is only 4 points below its historic high at 746.08. The index has been banging on that resistance high level all week and Friday was the highest close. This came despite disappointing earnings from Intel and a sharp drop in Intel shares.

The percentage of S&P stocks over their 200-day average rose to 79.4% and the highest level since December 2014. On Friday an analyst, whose name I forgot, said whenever the percentage moves over 80% it suggests the rally has legs and could run for several more weeks if not months. However, there was no mention of how that would work ahead of the seasonal weakness in Aug/Sept.

The percentage of stocks over the 50-day average rose to 86.2% and close to the level we saw back in March. Note that the rise stalled over the last two weeks despite the indexes continuing to make new highs. We may have reached the point where being overbought is beginning to take its toll.

Another indicator of overbought is also fading. The McClellan Oscillator has declined for the last two weeks suggesting the volume of advancing stocks has begun to fade compared to the overall volume.

Lastly the percentage of S&P stocks with a buy signal on a Point & Figure chart has risen to 74.2%. That is very near to the highs since August 2014. The 76-80% range is a likely peak in this indicator. As we work through the earnings cycle the decline in the stocks that disappoint will weigh on the overall percentage.

Houston, we have ignition. I have posted this chart several times in the past. This shows the 324 point range the market was locked into over the last two years. Technically a breakout of that range should move either higher or lower by the points in the range. Since we broke out of the top the eventual target would be a move to 2,458. However, this is a MONTHLY chart so do not expect this to happen over the next couple of weeks. I will be more than happy to wait for it as long as the progression is steady and we do not have a retracement back below 2,000. Bank of America believes we could drop back to 1,860, which would put us back at the bottom of the range. I believe that would be the mother of all buying opportunities and I would back up the truck.

I am repeating this paragraph from last week.

The mutual fund business 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 hot 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.

This would be the primary reason for a continued rally. Unfortunately, it also means a rollover could be especially violent if they all ran to the exits at once ahead of the seasonal weakness in August and September.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Oversold but Bouncing

by Jim Brown

Click here to email Jim Brown

Editors Note:

Restoration Hardware was crushed in June because of production delays with a new product. These have been resolved and Q3 should show a different picture.


RH - Restoration Hardware - Company Profile

Restoration Hardware Holdings, Inc., together with its subsidiaries, engages in the retail of home furnishings. It offers products in various categories, such as furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company sells products through its stores and catalogs, as well as through its Websites, such as restorationhardware.com, rh.com, rhbabyandchild.com, rhteen.com, and rhmodern.com. As of January 30, 2016, it operated 69 retail galleries that include 53 legacy galleries, 6 larger format design galleries, 4 next generation design galleries, 1 RH modern gallery, and 5 RH baby & child galleries, as well as 17 outlet stores throughout the United States and Canada.

RH surprised investors in early June when they reported an unexpected loss. Shares fell from $36 to $25 as investors panicked. The luxury retailer reported a loss of 5 cents compared to estimates for a 5-cent profit. The CEO said the company "was being pressured by the continued retail headwinds in a market impacted by energy, currencies and a general slowdown in the luxury consumer market." In addition, "the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to impact fiscal 2016 earnings by $.90 to $1.00." However, he said all these factors are short term and performance will improve in Q4 and accelerate into 2017.

Earnings September 8th.

On June 22nd, shares rallied 10% after a BB&T analyst said the company should sell itself or merge with Williams Sonoma (WSM). Several other analysts picked up the thread and agreed it would be a good move. While CEO Gary Friedman may not be ready to join forces, the weak luxury retail market may force him to consider the option. The constant talk could also provide an incentive to other potential acquirers to come knocking on his door. The RH business is a good business. They are evolving and they will be stronger in 2017.

On July 18th Friedman bought 32,918 shares of the stock at an average price of $27.75 or roughly $915,000. He did not need to make this buy since he already owns 2,207,451 shares. A CEO would only buy another million dollars of the stock if he really believed it was going higher. Director Keith Belling bought 4,000 shares on June 28th for $101,000 to bring his holdings up to 18,608 shares.

If the market continues higher I would expect RH to break through resistance at $31.25. Because of the potential for a market decline I am putting an entry trigger on the position. The option is cheap so we will not have much risk.

With a RH trade at $31.50

Buy Sept $35 call, currently $1.10, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

New High Close

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P squeezed out a new high close at 2,175 and 2 points higher than Wednesday's close. People were calling it a relief rally that nothing catastrophic happened at the Republican Convention. I doubt that but it did remove some uncertainty. The terror attack in Germany failed to have any impact on the market.

The markets continued to meltup as many earnings reports came in slightly better than expected. The guidance from some companies has failed to impress and it will be a battle next week as the quality of earnings declines.

Current Portfolio

Current Position Changes

AKRX - Akorn Inc

The long call position was opened at $32.00.

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

AKRX - Akorn Inc -
Company Description


No specific news. New 7-month high close.

Original Trade Description: July 20th.

Akorn, Inc. is a specialty generic pharmaceutical company that develops, manufactures, and markets generic and branded prescription pharmaceuticals, as well as private-label over-the-counter (OTC) consumer health products and animal health pharmaceuticals in the United States and internationally. It operates in two segments, Prescription Pharmaceuticals and Consumer Health. The Prescription Pharmaceuticals segment markets generic and branded ophthalmics, injectables, oral liquids, otics, topicals, inhalants, and nasal sprays. This segment's generic products include Atropine Sulfate Ophthalmic Solution; Clobetasol Propionate Ointment; Dehydrated Alcohol Injection; Ephedrine Sulfate Injection; Hydralazine Hydrochloride Injection; Lidocaine Ointment; Methylene Blue Injection; Myorisan Soft Gelatin Capsules; Nembutal Sodium Solution; and Progesterone Capsules. The Consumer Health segment markets branded and private label animal health products, as well as OTC products for the treatment of dry eye under the TheraTears brand name. This segment also markets other OTC consumer health products, including Mag-Ox, a magnesium supplement, as well as the Diabetic Tussin line of cough and cold products.

Akorn has hundreds of existing products and 86 drugs with applications pending with the FDA. Those applications include 27 ophthalmic drugs, 12 topical drugs and 34 injectable drugs with a target market of $9.2 billion. Six of the applications have already been tentatively approved and 50 are currently being approved. At least 25 will be approved by 2017 and they expect to file an additional 20 applications this year. Akorn is targeting generic applications on the highest volume branded prescription drugs. They exclusively file Para IV applications. The first generic company to submit a substantially completed ANDA (Abbreviated New Drug Application) is given marketing exclusivity for the first 180 days on the market. There is no competition in that period and they can get a head start on prescriptions in that period. Most patients never change from the original generic they are assigned.

Revenue rose from $318 million in 2013 to $985 million in 2015. In 2016, the company expects to earn $1.08 billion. The company's guidance is for 80% earnings growth in 2016.

Earnings August 4th.

Shares of Akorn closed at a 7 month high on Wednesday at $31.80. The current uptrend began with the post Brexit low at $26. Resistance is $38.50.

Position 7/22/16:

Long Sept $35 call @ $1.30, see portfolio graphic for stop loss.

JACK - Jack in the Box - Company Description


No specific news. Big $1.74 gain! This was a new 52-week closing high.

Original Trade Description: July 18th.

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.

Earnings August 10th.

With a trade at $89.25

Buy September $95 call, currently $2.15, see portfolio graphic for stop loss.

LL - Lumber Liquidators - Company Description


No specific news. 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.

NVDA - Nvidia - Company Description


No specific news. Shares rocketed higher on AMD earnings. Another historic high.

Original Trade Description: July 19th.

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.

We were stopped out of the August position last week and I said we would be entering a new position on this stock. I am recommending we enter an October position and hold over earnings on August 11th. Nvidia has everything working for it including a string of recent product announcements and earnings should be good and guidance even better.

This is a risk. We all know what can happen if they disappoint. I believe Nvidia will make new highs, market permitting, and we can go along for the ride.

I am recommending the Oct $60 strike at $1.42 because I believe it will be over $60 by then and $1.42 is not too much to risk to hold over an earnings report.

Position 7/20/16 with a NVDA trade at $54

Long Oct $60 call @ $1.55, no initial stop loss.

PVH - PVH Corp - Company Description


No specific news. Still holding the $100 level.

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. Another new closing high.

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.

The Axon body cameras only cost $399 each but the subscription to Evidence.com is $79 for each camera. The city of Chicago bought 2,031 cameras for $810,369. However, the 5-year subscription to Evidence.com was worth $9.63 million in recurring revenue. 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. New 6-month closing high as shares try to break out of consolidation.

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. Home sales are surging despite low demand according to recent reports. Buyers are trying to get a home before the end of summer and are racing to lock in mortgages before rates rise.

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 4th.

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


No specific news. Minor gain after a new 4-week low.

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


No specific news. Traders are still holding their breath in hopes of a higher Mondelez offer.

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 IWM continues to have strong resistance at $120 but closed slightly above at $120.40 on Friday.

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.

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