Option Investor

Daily Newsletter, Saturday, 7/30/2016

Table of Contents

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

Market Wrap

Still Consolidating?

by Jim Brown

Click here to email Jim Brown

Over the last two weeks, the Dow has lost a total of 84 points and remains just over critical support at 18,400.

Weekly Statistics

Friday Statistics

On the surface, the market appears to be bullish. The S&P closed -2 points from its historic high and the Nasdaq closed 2 points over strong resistance at 5,160. However, the Dow, S&P, NYSE Composite and the Dow Transports all lost ground for the week. The declines were not dramatic and overall we still have a positive market but the cracks are starting to show ahead of the normal seasonal weakness in August and September.

The economic reports did not help on Friday. The Q2-GDP at 1.22% came in at less than half the expected rate of 2.6%. Even worse, the Q1 GDP was revised lower from 1.07% to 0.83% and the Q4 GDP was revised down from 1.39% to 0.87%. That means the economy has grown at an average rate of only 0.97% over the last three quarters and only 1.23% over the last year.

Consumption was the main driver of the Q2 release at 2.83% followed by exports at +0.23%. Fixed investment reduced GDP by -0.52%, inventories -1.16% and government -0.16%. The PCE index showed inflation of 1.9% in Q2, up from 0.3% in Q1. With GDP averaging 0.97% over the last three quarters and inflation spiking from 0.3% to 1.9%, that is the textbook definition of "stagflation."

The only positive for the market from this GDP report is that the Fed is not going to be hiking rates in September or December. According to the CME, the chance of a September hike has fallen to 12%, November 12% and December 33% but those numbers are likely to drift lower next week.

The strong dollar has hampered exports and weak oil prices have reduced the purchasing power for more than a dozen normally high spending nations. The weak economy in China is hurting exports to Asia. None of these problems are expected to go away soon and they will continue to be a drag on the U.S. economy.

Consumer sentiment improved only slightly from the initial reading. The headline number rose from 89.5 to 90.0 but that was still down from the 93.5 in June. This was the lowest level since April. The present conditions component declined from 110.8 to 109.0 and the expectations component declined from 82.4 to 77.8.

Next week we get the payroll data but the numbers would have to be as high as last month before the Fed would come back into the picture. Since June's spike to 287,000 was a correction from May's 38,000 print the odds of a repeat performance over 250,000 are very slim. The consensus view is for a drop back to the 180,000 range and a level that is reasonable for the current economic environment.

The ISM Manufacturing Index on Monday could be a pothole but recent regional reports have shown some strength in spots. Whether this is enough to lift the national ISM is unknown. There is still weakness in some areas and the recent uptick in others could have been transient.

The rest of the economic calendar is busy but the reports are not market movers. One other area that could be a challenge is the Bank of England economic outlook on Thursday. The bank is expected to paint a bleak picture because of the Brexit vote. If the outlook is "gather up the food and the kids and run to the cellar" type of bleak it could be a problem for the U.S. markets. If the report is just a "dang, that was disappointing but we will get through it", bleak then the market will ignore it.

The dollar crashed -1.26% on the GDP news and that rescued the commodity sector from closing lower for the week. The GDP revisions paint a much weaker economic picture and the dollar is the reflection of that picture.

The yield on the ten-year treasury collapsed with a -3.5% drop to 1.458% and a multi-week low. The end of the world trade is coming back into focus with rising fears of a U.S. recession in 2017.

Gold prices rallied off their early week low at $1,315 and back to $1,350 on a flight to quality spike. With inflation rising sharply and economic growth slowing, gold suddenly looks a lot better as an inflation hedge.

Friday's earnings were dominated by the energy giants. Exxon (XOM) posted earnings of 41 cents that missed estimates for 64 cents. Revenue of $57.69 billion missed estimates of $59.83 billion by more than $2 billion. Production fell -0.6% to 3.9 million Boepd. Exxon cut its capital budget by 38% to $5.16 billion but the falling oil prices continued to weigh on earnings. The company only generated a profit of $294 million from the E&P segment. Profits in the refining sector fell by 60% but managed to offset some of the pain from the low oil prices. They will not be able to do that in Q3 because of the glut in refined products and the lack of available storage space. Gasoline prices have declined to $2.14 a gallon as of Friday. That is the cheapest gasoline for this time of year since 2004. Exxon said it will "remain resolute in commitment to pay a reliable and growing dividend."

The $1.7 billion in quarterly profits was still more than most of the S&P-500 stocks will earn but it was Exxon's lowest profit since Q3-1999. The earnings miss by Exxon is a wakeup call for the rest of the sector. If Exxon, the largest U.S. oil company, cannot meet its estimates, the rest of the sector reports could be equally as ugly.

Looking at the Exxon chart, it almost looks like the data was leaked. The sharp decline since last Friday's close at $94 is very unlike Exxon. They normally meet their estimates and there is rarely a sell off ahead of their earnings. Did somebody get the news early?

Chevron (CVX) reported adjusted earnings of 35 cents compared to estimates for 32 cents. Revenue fell from $40.4 billion to $29.3 billion and slightly below estimates for $29.9 billion. Production fell -2.6% to 2.528 million Boepd. Production in the U.S. fell -6% to 682,000 Boepd. The E&P division lost $2.462 billion after a non-cash charge of $2.8 billion for writing down reserves to match current oil prices and writing off projects and investments that may never be developed or completed until oil moves back over $100 a barrel. Some leases may expire before that happens.

Chevron had operating cash flow of $4.5 billion. They spent $5.2 billion on capex and $3.1 billion on their dividend. This represents a funding gap of $3.8 billion. They are making up this shortfall by borrowing money and selling assets. Chevron said "Dividend return to shareholders is our first priority."

Shares dipped to support at $100 and rebounded to close at $102.58 on the dividend promise.

UPS (UPS) reported earnings of $1.43 that were in line with estimates. Revenues rose +3.8% to $14.63 billion and narrowly beat estimates for $14.62 billion. Overall package volumes rose 2.5% with a rise of 2.4% in ground shipments and 5.6% gain in Next Day Air services. Thank you Amazon Prime. Export shipments rose 3.9% thanks to growth in Asia and Europe. The company bought back 13.3 million shares for $1.3 billion in the quarter. Shares declined slightly on the lukewarm earnings.

Dow component Merck (MRK) reported earnings of 93 cents that beat estimates by a penny. Revenue rose 1% to $9.84 billion. Prescription drug sales rose 2% to $8.7 billion. Only a couple of drugs rose but quite a few declined in sales. Their new Hep-C drug Zepatier had sales of $112 million compared to billions for Gilead's Harvoni and Sovaldi. The melanoma drug Keytruda had sales of $314 million and three times the year ago quarter but Bristol Myers reported $1.1 billion for their competitor drugs Opdivo and Yervoy. The company is reportedly looking for acquisitions to build up its pipeline of new drugs to offset the number of drugs it has going off patent and will face generic competition. Shares gained only fractionally.

AbbVie (ABBV) reported earnings of $1.26 that rose 16.7% and beat estimates for $1.20. Revenue rose 17.5% to $6.43 billion and beat estimates for $6.24 billion. Humira sales rose 17.4% to $4.1 billion. U.S. sales of the drug rose 26.7% to $2.7 billion. The company is expanding the uses for the drug into rheumatology, dermatology and gastroenterology. Duodopa sales rose 31.2% and Creon +12.9%. Hep-C drug Viekira sales were $414 million and flat with Q1. With Gilead offering 3 Hep-C drugs and Merck also competing, it is tough to get any traction in that market.

AbbVie raised full year earnings guidance from $4.62-$4.82 to $4.73-$4.83. Analysts were expecting $4.76. The company has said it will fight to maintain the Humira patent but several other companies are already preparing biosimilars to compete with that product. Shares rallied to a 52-week high.

Anheuser-Busch InBev (BUD) reported earnings of $1.06 that missed estimates for $1.09 and well below the $1.21 in the year ago quarter. Revenue declined -2.2% to $10.806 billion but beat estimates slightly. Revenues for the three leading brands, Budweiser, Corone and Stella Artois, rose 8.4% for the quarter. That was powered by a 13% rise in Corona and 9% in Stella Artois and 6% in Bud.

The company also said it raised its bid for SABMiller to 45 pounds or $59 in a cash and stock deal. The company had to raise it one pound because of the drop in the British currency after Brexit. The board of SABMiller immediately recommended shareholders approve the offer. The offer upgrade came as China officially approved the merger. The two largest shareholders, Altria (MO) and Columbia's Santo Domingo family, both urged approval of the deal. The merged companies would account for 30% of global beer sales.

Lexmark (LXK) shareholders voted 99% in favor of the acquisition by a consortium of investors. Over 70% of the outstanding shares voted and of those shares voted more than 99% were in favor of the acquisition for $40.50 per share in cash. However, shares fell -2% to $36.67 because the company reported a loss of 56 cents on revenue of $862.6 million for the quarter.

Tyco (TYC) reported earnings of 54 cents that beat estimates by a penny. Revenue of $2.449 billion missed estimates for $2.457 billion. The company said it was on track to complete the merger with Johnson Controls (JCI) by September 2nd. Earnings guidance was withdrawn because of Irish and European rules related to the proposed merger. Shares are holding near historic highs ahead of the merger.

Xerox (XRX) reported earnings of 30 cents that beat estimates for 25 cents. Revenue fell -4.5% to $4.39 billion but matched estimates. The company cut 1,300 jobs in the quarter and reduced costs by 6%. They have reduced staffing by 11,800 since the end of December but still employ 131,800. They are on track to reduce costs by $700 million in 2016. They have announced a split into two companies. One will be the copier business and the other the services business. The company guided for earnings of 26-28 cents in the current quarter and analysts were expecting 28 cents.

The quantity and quality of earnings will decline next week but there are still a few large companies reporting. The only two Dow components for the week will be Pfizer and Procter & Gamble on Tuesday. The most watched earnings will probably be Tesla, Jack in the Box and Priceline. Normally Linkedin would be in that group but since Microsoft is acquiring them their relative importance evaporated.

Factset said the blended S&P earnings for Q2 have improved to a -3.8% decline compared to the expected decline of -5.5% as of June 30th. Blended revenues are actually showing a minor +0.1% increase for the quarter and it would be the first time in six quarters that revenue did not decline.

With 63% of the S&P-500 reporting earnings, 71% have beaten on earnings and 57% on revenue. For Q3, 36 companies have issued negative guidance and 20 companies have issued positive guidance.

During the month of July, analysts reduced earnings estimates for Q3 by -0.7%. That is the smallest reduction since Q2-2014. Over the last four quarters the average decline in estimates has been -2.7%. Over the last 20 quarters the average decline has been -2.3%. So far, Q3 is shaping up to be the smallest earnings decline in 6-quarters at only -0.6% but odds are good the actual earnings will be positive. Earnings typically come in slightly over estimates thanks to big surprises by a few companies.

The trailing 12-month PE is now 19.4 and the forward 12-month PE is 17.0 and the highest since Q4-2014.

Hewlett Packard Enterprise (HPE) spiked 6% intraday on Friday after news broke that a consortium of private equity firms were considering an offer to take the company private. That would have been a $40 billion acquisition. Later in the day, Reuters broke a story that the group only wanted to buy some software assets from HPE and shares declined to only a 3% gain. That is still a record high.

The falling dollar helped rescue oil prices from a possible break under $40. The low for the day was $40.57 right at the start of the regular session. When the dollar imploded on the GDP report, the price of oil rebounded to close at $41.56. That is a temporary reprieve unless the dollar continues to plummet.

The oil glut is continuing and the new glut of refined products led to a rise in crude inventories of 1.7 million barrels in a month when declines should be normal. With a lack of storage space for refined products, the refinery utilization fell from 93.2% to 92.4% for the week and should continue to decline with the summer driving season over in just four short weeks.

The odds are very good prices will dip under $40 before rebounding in October. I would be a buyer of energy stocks when oil dips under $40. That dip could be brief.

Active rigs rose only 1 to 463 but oil rigs rose +3 to 374. Active gas rigs fell -2 to 86 and the lowest level since June 10th. The small number of gas rigs and the slowing production rate has spiked gas prices significantly.

With only 86 active gas rigs in the U.S., gas production in the first five months of 2016 has been 12,000 Bcf. That is a gain of only 194 Bcf over the same period in 2015 at 11,806 Bcf. For reference in 2014 we produced 10,964 Bcf over the same period, which equated to a jump in production of 842 Bcf in 2015 compared to the 194 Bcf this year. Gas injections into storage for winter consumption were only 17 Bcf last week. The average injection for the last six years for the last week of July was 58 Bcf. Shale wells also produce natural gas. With a decline in new wells of almost 5,000 per quarter for the last 6 quarters compared to the 2014 drilling rate, there are more than 30,000 oil wells that were not drilled and therefore are not producing natural gas to offset declining production in older wells. This slowing gas production has lifted prices from a 16-year low in March at $1.61.

The European banking stress test results were released on Friday after the close of the U.S. markets. The results could cause some volatility at the open on Monday.

The stress test results were not as bad as some analysts expected but they were not good. The European Banking Authority (EBA) reported the Common Equity Tier 1 capital (CEIT) ratio for the 51 largest banks in Europe under a severe stress scenario. The CEIT ratio does not have a pass/fail level but anything under 8.0 is considered weak and over that level is considered safe.

The Banca Monte dei Paschi di Siena (BMPS) saw its CEIT ratio fall to -2.23 and a crisis level. However, the bank announced on Friday it had sold 9.2 billion euros ($10.3 billion) in bad loans and received a 5 billion euro investment from a consortium of underwriters. While that did not repair the bank's balance sheet, it was a step in the right direction.

Other results in the "weak" category included:

Austria's Raiffeisen Landesbanken 6.14%
Spain's Banco Popular 7.1%
Italy's Unicredit 7.12%
UK Barclays 7.3%
Ireland's Allied Irish Banks 7.39%
Germany's Commerzbank 7.42%
Bank of Ireland 7.69%
Germany's Deutsche Bank 7.8%
French Societs Generale 8.3%

With more than 1 trillion euros of nonperforming loans across Europe the banking authority is very concerned about the health of the banks if there is a further deterioration in the economy. The loans depress profits and prevent the accumulation of capital to make new loans. If the pace of bad loans increases in an economic decline the problem will only get worse.

Because the majority of the banks were over the 8% CEIT level the market could celebrate on Monday. There were quite a few analysts preaching doom and gloom that did not come to pass.


Friday was the end of the month and the $600 million in buy on close orders on the NYSE could have been month end buying rather than bets that the market is going to continue higher. Monday could also see a positive bias from the month end cycle.

The markets have now traded sideways for the last 12 sessions. Eventually this consolidation will end with a breakout or a breakdown. The longer we remain in these tight ranges the stronger the move when it comes. The Dow and S&P have been the tightest but the Dow broke down over the last couple of sessions with post earnings depression causing prior Dow reporters to fade.

On the flip side, the Russell 2000 has exactly the opposite trend with a positive bias. Meanwhile, the S&P has failed to move out of its range and continues to move sideways. The gains by Amazon and Google on Friday helped push it to the upper end of the range but that may be temporary.

Fortunately, with the super tight range we have a clear decision point on a breakout or breakdown. If the S&P moves under 2,160 it would be a signal to close bullish positions. If it were to break over the historic high close at 2,175 it would be a signal the rally has farther to run. I would want to see an increase in volume in either direction before I jumped on for a ride. The path of least resistance is still down.

The level to watch on the Dow is 18,400. The Dow has traded below that level intraday on 3 of the last 4 days and closed at 18,429 thanks to those buy on close orders. The post earnings depression is starting to weigh on the Dow. Only six Dow components have yet to report and only two report next week. Neither of those two are generally market movers. If the market is looking for leadership, it will have to look elsewhere.

PG 8/2
PFE 8/2
DIS 8/9
HD 8/16
CSCO 8/17
WMT 8/18

The Nasdaq is not showing any weakness. The index closed over 5,160 and just under the December high at 5,165. This is the last major resistance before testing the historic high close from last July 20th at 5,218. If the earnings continue to be more positive than negative the Nasdaq has a chance of retesting that high but we should remember what happened last year.

The Nasdaq hit that high on July 20th and was trading 926 points lower (-18%) only 25 days later on August 24th. We say that August and September are seasonally weak and are the two weakest months of the year. There is a good track record of declines but there are sometimes rallies. I reported several weeks ago that the years with rallies in August tend to have blowout gains because investors are betting on the seasonal weakness.

If the majority of traders bet on the seasonal weakness and the market goes up there is a monster short squeeze that can keep on squeezing as traders try to reload their shorts at every pause. Likewise, if everyone is betting on a drop and that drop occurs it can accelerate rapidly as everyone piles on when the trade works out as they expected.

The big earnings beats by Google and Amazon helped to lift the Nasdaq on Friday. Unfortunately, all the major market moving tech stocks have already reported. There are a few big names next week but they do not have the same power as Amazon and Google and the Nasdaq is VERY overextended. It will take a lot of positive headlines to continue pushing it higher.

The chart indicators are not showing any weakness so the index could continue higher on some earnings follow through but eventually there will be a post earnings depression phase.

The small cap Russell 2000 is struggling higher after breaking through the resistance at 1205-1210. The moves have been small but continuous. It is as though the fund managers are continuing to nibble at the small cap sector but they are afraid to put any real money to work over 1,200. The index is a long way from its highs at 1,295 and I would be very surprised if we tested that level over the next several weeks. The 1,200 level has been tested as support and it held so that is the key level to watch for a breakdown.

Analysts and traders continue to say the market is tired. However, Boston Marathon runners are tired by the time they get to mile 20 but the finishers keep plodding along at a fraction of their starting pace. The market may be tired and we may be entering a seasonally weak period but the market will continue going higher as long as fund managers are buying defensively to prevent other funds from outperforming them in the annual competition.

Unfortunately, there is a new fly in our soup. For the prior two weeks, the market volume has been very low in the 5.4-5.6 billion share range on average. For the last three days the average has been 7.2 billion with a 7.42 billion day on Friday. I have been telling you we were not in "distribution" mode because the volume was so light. With the sharp increase in volume, it now looks like we are undergoing some distribution. That is when large holders slowly sell stock into a rally at market highs. They do not dump their shares but dole them out at a constant rate in order not to impact the price. Retail traders just think the rally has slowed and is consolidating when in fact the smart money is calmly liquidating.

We need to be cautious next week. With the peak in Q2 earnings behind us and the seasonally weak months ahead of us, there is a real possibility we could see some negative volatility.

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Random Thoughts

Despite the Nasdaq, Russell and S&P hitting new relative highs the AAII sentiment survey saw bullish sentiment decline again. Bullish sentiment declined -4.2% to 31.3%. Bearish sentiment rose +1.7% to 28.4%. Neutral sentiment rose the most at +2.5% to 40.3%. This survey ends on Wednesday. Investors must be looking at those overextended charts and coming to the same conclusion we are that profit taking cannot be far off.

On the day Facebook reported earnings the IRS served them with a "statutory notice of deficiency" claiming the company owes more taxes for 2010. Earlier in July, the IRS sued Facebook to surrender some documents saying that Facebook accountants had undervalued some assets it transferred to Ireland in 2010. The current notice is only for 2010 but IRS has similar investigations in progress for other years. If the IRS can prove its case, Facebook could be liable for as much as $5 billion in back taxes plus penalties. The company is appealing and said should the IRS win the ruling would have a "material adverse impact" to Facebook finances.

Stupidity has no limits. This weekend, stunt man Luke Aikins is planning on jumping out of a plane at 25,000 feet without a parachute or a wingsuit. He will only be wearing the clothes on his back. He is planning on guiding himself to hit a net. The 42-year old daredevil has been thinking about the stunt for several years. Of his 18,000 jumps, he has had to use his reserve chute 30 times. The net is one-third the size of a football field or 100x100 feet and 20-stories high. They test dropped several 200-pound dummies to test the net and one of them punched right through the net. That means he has to not only hit the net but also hit it flat to spread his weight over a wide area. He will be going 120 mph when he hits the net. Good luck Luke!

Do not plan on taking any trips to Jupiter. Recent tests showed that the upper atmosphere is about 620 degrees Fahrenheit and significantly hotter than it should be that far away from the sun. Jupiter is five times farther from the sun than earth. The great red spot is a storm that has been raging for at least 150 years and the advent of modern telescopes. However, some observers have reported seeing the red spot as far back as the 1600s. The spot is twice the size of the earth and winds are blowing over 400 mph. The NASA Infrared Telescope shows the temperature in the clouds above the red spot is 2,420 degrees and the warmest spot on the planet. They believe there are sound waves in the storm that are heating up the atmosphere but until the new probe is operational, they are just guessing.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Those who expect to reap the blessings of freedom, must, like men, undergo the fatigue of supporting it."

Thomas Paine

Index Wrap

Solid Ceiling

by Jim Brown

Click here to email Jim Brown
The S&P has not made a new closing high since five days ago on July 22nd.

The S&P has traded in a very narrow 20 point range from 2,156 to 2,176 since July 14th or 12 sessions. We have not seen a range this narrow in years. The index did make a temporary intraday high at 2,177 on Friday but immediately pulled back to close at 2,173.

There were some concerns on Friday about the European bank stress tests but those were offset to some extent by the month end inflows of cash. The S&P gained 3 points and the Dow lost 24 points.

The real indicator for me was the Russell 3000 or R3K. I have been talking about the larger indexes for the last couple of months and this is a true representation of the broader market. The R3K did make a new closing high on Friday at 1,284.27. The index has traded in a very narrow 13-point range since July 14th. That is roughly a 1% range on a 1,280 point index.

However, the trend has had a slight upward bias the entire time to end with the new closing high on Friday.

The indicators are starting to show fatigue from holding in this pattern so long. The MACD suggests the index is about to roll over but the new high suggests there may be a new leg higher.

The 2,400 stock NYSE Composite Index has the reverse trend. The solid top over the last 14 days has begun to fade to the downside. The NYSE is still about 465 points from a new high. Unlike the R3K, which is the 3,000 largest stocks, the NYSE has a lot of small stocks as well as large. There are also a lot of energy stocks, which weighed on it last week. The indicators are negative suggesting the top is in. However, the chart pattern is normally a continuation pattern of the original move, which would be higher.

The Vanguard Total Stock Market ETF (VTI) contains 100% of the "investable" stocks in the U.S. market with 3,650 stocks in the ETF. The ETF also set a new high on Friday at $111.42. The chart looks identical to the R3K.

So what can we deduce from looking at the three largest indexes of the market. First, the two biggest ones closed at new highs on Friday despite the weekend event risk and EU stress tests. Secondly, they have all established strong support levels at their elevated heights. The NYSE is the weakest because of the higher percentage of energy stocks. If we eliminate that index from the discussion, the outlook becomes clearer.

From a purely technical basis the market appears to be going higher. It would take a major event to crash through that three weeks of support that has been formed. Every minor dip is immediately bought.

On a fundamental basis the earnings picture is improving and more companies than normal are beating on earnings. Revenue has actually turned fractionally positive after six months of declines. If you are going to invest in stocks you want to do it when the earnings cycle is about to turn positive.

On an economic basis the economy is in ultra slow growth mode at about 1% over the last 9 months. It does not appear to be getting worse and the strong jobs numbers were encouraging.

Oil prices are collapsing and that will hurt energy equities but crude prices should turn up in October as we reach a balance of supply and demand or so the EIA is predicting. We would want to buy energy equities whenever crude prices dip under $40.

The consumer is seeing a windfall with fuel prices averaging $2.14 a gallon this weekend. This is saving U.S. consumers $160 million a day because of the cheap fuel. This is allowing them to buy new cars, go out to eat, take vacations, etc. The cheap oil prices are keeping the economy growing at that 1% rate.

However, Morgan Stanley, Goldman Sachs and JP Morgan are expecting a recession in late 2017. While that is a normal course of events and will depress the market, it should not happen until the recession actually appears.

We are entering the period of seasonal weakness in August and September, the two worst months of the year. They are especially weak in election years.

To summarize the charts are telling us the markets are going higher despite the perceived weakness ahead. The reason is simply. There is no alternative to stocks. With $13 trillion in government bonds yielding a negative interest rate overseas, there is a steady flow of cash into the U.S. markets. Meanwhile U.S. investors are sitting on $12 trillion in cash in money markets and brokerage accounts because they believe the market has topped. Two weeks ago, fund managers were sitting on the most cash since 2001. With the markets going sideways for the last two weeks I doubt they have put that money to work.

We have the fuel to spark a monster counter trend (seasonal) rally but we need a spark to set it off. Up to this point, investors have seen the S&P move over 2,132 and stall at 2,175 and they are still confident in their assumption that the markets will crash in August/September. Bank of America is in the news almost every day calling for a 15% crash in late summer.

IF, and that is a capital IF, the market succeeds in moving materially higher this week, we could move into launch mode. With all the "smart" money betting on a market decline, there could be a huge short squeeze, but we need that spark.

Unfortunately, I do not know what that spark might be other than falling yields in the USA and better than expected stress tests in Europe.

I have been cautioning about being overly long BUT we need to retain a long bias until a market breakdown occurs.

In order to remain fair and balanced, there are risks to a bullish scenario. One of them is the post earnings depression phase. August is known for post earnings depression declines. Last week was the peak in the Q2 cycle so we are at risk for that depression.

This is an election year with two very polarizing candidates and the polls are locked in a dead heat with each showing a 44.3% voter preference. The direction of the country would be 180 degrees opposite depending on who was elected. This should cause additional uncertainty over the next 100 days.

The percentage of stocks over their 50-day average has declined from 87.4% last week to 75.6% this week. This is that post earnings depression settling into stocks. The percentage over their 200-day average is holding right in the 78% range and that is a function of the indexes trading sideways at the highs. When that percentage begins to decline, we should pay close attention.

The relationship between the chip stocks and the Nasdaq continues and the chips have broken out to a new high and they are dragging the Nasdaq higher. This supports the bullish case.

I would recommend that investors retain a bullish bias until those short-term support levels on the major indexes fail. That would be 1,275 on the Russell 3000 and 2,160 on the S&P-500. Obviously, nobody can predict day-to-day market direction so we have to follow the trends rather than guess on direction. With the two largest market indexes closing at new highs on Friday, it suggests we are going higher.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Big Loss, Our Gain

by Jim Brown

Click here to email Jim Brown

Editors Note:

Big losses in a stock after a headline event sometimes lead to big gains. I am hoping that is the case with G-III Apparel Group. I have wanted to play this stock but the right entry point did not appear until last week.


GIII - G-III Apparel Group - Company Profile

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. G-III Apparel Group, Ltd. was founded in 1956.

G-III has been on a buying binge the last several years. They are expanding their brands and expanding the marketing of existing brands with license agreements with other companies.

Last week G-III announced the acquisition of the Donna Karan brand from LVMH for $650 million in a combination of cash, stock and notes. Several analysts immediately downgraded the stock saying they paid too much and it would be dilutive to earnings in 2017. The stock crashed from $50 to $38. The Cowen analyst said the price was too high compared to the brand's potential and return on capital from the acquisition.

Donna Karan has a large international presence and G-III is focused on growing its business in the USA. Analysts thought this was the wrong brand at this time. However, G-III believes they can expand the brand globally and especially in the US. G-III Press release I happen to be familiar with it because it was my wife's favorite brand in the 1980s but she had trouble finding it in the US.

I believe G-III will be successful with the brand but we are talking a couple years. We are not going to hold the stock that long. In the short term the stock is oversold and we are going to enter a position to capture a bounce. G-III has a good reputation and they were in a two-month uptrend when the announcement was made. I beleive that trend will return. If the market rolls over investors are going to be looking for stocks that have already been beaten up as potential safe havens. If the market goes higher, eventually investors are going to be looking for stocks that are not over extended. G-III fits the bill on both counts.

Earnings August 31st.

With a GIII trade at $40.75

Buy Sept $45 call, currently $1.20, initial stop loss $37.85


No New Bearish Plays

In Play Updates and Reviews

Banking Worries

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite some blowout earnings on Thursday evening, the markets were weak ahead of the EU stress tests. Big moves in Google, Amazon and Priceline helped to offset big declines in MSTR, SRCL, BIDU and WYNN to keep the Nasdaq in positive territory. However, a weaker than expected Q2 GDP and weak oil price took some of the fire out of the Dow and the broader market. The S&P fell sharply back to 2,163 at the open but rebounded to trade at an intraday high before fading at the close.

The EU stress tests were not as bad as expected and S&P futures traded at their highs at 2,171 after the release of the report. There may be some hangover on Monday one the individual reports are screened more thoroughly.

Current Portfolio

Current Position Changes

WDC - Western Digital

The long call position was stopped out at the open.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

AKRX - Akorn Inc -
Company Description


No specific news. New 7-month high.

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.

ALK - Alaskan Air - Company Description


No specific news. Big $1.24 drop to put it back below resistance at $67.50.

Original Trade Description: July 27th.

Alaska Air Group, Inc. is the holding company of Alaska Airlines and Horizon Air. The Company operates through three segments: Alaska Mainline, Alaska Regional and Horizon. Its Alaska Mainline segment operates the Boeing 737 part of Alaska's business. It offers north/south service within the western United States, Canada, Mexico and Costa Rica, as well as passenger and dedicated cargo services to and within the state of Alaska. It also provides long-haul east/west service to Hawaii and cities in the mid-continental and eastern United States from Seattle. Its regional operations consist of flights operated by Horizon, SkyWest Airlines, Inc. and Peninsula Airways, Inc. Alaska is buying Virgin America and the acquisition is expected to be completed late this year.

In their recent Q2 earnings the company reported $2.12 compared to estimates for $2.08. Revenue of $1.5 billion rose 4% and was in line with estimates. Available seat miles increased 11.2% to 11,062 million. The load factor was 84.9% and flat year over year despite the sharp increase in miles. Passenger revenue per mile decreased 7.7% to 11.42 cents. Cost per available seat mile excluding fuel declined -3.7% to $7.78 cents. Earnings rose 12% to $418 million while expenses rose only 1%. The average fuel price was $1.53 per gallon, down from $2.12 in the year ago quarter. The company had $1.6 billion in cash at the end of the quarter with long-term debt of only $509 million.

Alaska expects capacity to rise by 8% in Q3 and by the same amount for the full year. They are adding 6 additional Boeing 737 planes to bring the fleet to 147 by the end of 2016. By the end of 2018 they expect to operate 156 planes. Despite the rising capacity the number of passengers is also rising to keep that load factor at a healthy 85%. With fuel prices falling their earnings are going to accelerate.

Earnings Oct 20th.

Shares rose on the earnings on the 21st and have continued to rise as other airlines whine about excess capacity cutting into earnings. Shares closed at a 3-month high on Wednesday and slightly over strong resistance at $67.50. If the breakout continues the next material resistance is $82.

Position 7/28/16 with an ALK trade at $68.25

Long Sept $70 call @ $1.65, see portfolio graphic for stop loss.

LL - Lumber Liquidators - Company Description


No specific news. The rebound came exactly where we expect it at $14.

We entered this as a long-term position with the November call. I wish the Q2 earnings were better but that is behind us now. We are going to hold the position and hope the pre earnings rally returns.

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. New historic high. Nvidia was nominated to replace Netflix in the "FANG" acronym. Josh Brown said Nvidia could be the Intel of artificial intelligence, virtual reality and graphics processing.

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.

Update 7/25/16: Nvidia announced two more high-end graphics cards on July 25th for the professional workplace. These are for professionals that need extremely high graphics rendering like video editors, photographers, CAD software users, etc. The P5000 handles up to 4 monitors with 16gb of embedded GDDR5X memory. The P6000 also handles up to 4 monitors with 24gb of GDDR5X memory. 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. Back at an 8-week high.

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


New 52-week high on no news.

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 4th.

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


WDC reported earnings of 79 cents compared to estimates for 72 cents. Revenue of $3.5 billion beat estimated for $3.45 billion. Shares fell on Friday on what was seen as weak guidance. We were stopped out at the open.

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.

Update 7/26/16: WDC announced it had developed the next generation 3D NAND technology with 64 layers of vertical storage capability. Initial production is expected later this year and commercial volumes of BiCS3 in the first half of 2017. Initial production will be in 256 Gigabit modules with a range up to 1 Terabit on a single chip. Susquehanna Financial said the new chip could allow WDC to topple the current leader, Samsung, in 3D NAND. 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:

Closed 7/29/16: Long Oct $52.50 call @ $3.23, exit $2.63, -.60 loss.

XBI - Biotech ETF - ETF Profile


No specific news. Shares gained to close at a new 6-month high.

Original Trade Description: July 25th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index. The fund is equally weighted unlike the IBB which is market cap weighted.

The biotech sector was crushed back in January when Clinton locked on to high priced drugs as un American and pledged to force companies to sell drugs at reasonable prices. Several other candidates picked up the topic and the sector was trashed. The two remaining candidates have moved on to other issues and Clinton is looking less likely to win. Trump is a businessman and understands companies have to make a profit in order to fund future research. He has made comments about drug prices but he is not expected to actually change anything in that area if elected.

After several false starts the ETF is about to break out to a 6-month high over $60. If the XBI does breakout the next material resistance is $70 and it traded as high as $90 last year before the Valeant disaster.

Fortunately, the XBI is not a stock and does not report earnings so we can hold it through the earnings cycle. Any biotech stocks reporting decent earnings will lift the ETF. I am using the September strike because the next series is December and the options are grossly expensive.

Position 7/26/16: Long Sept $60 call @ $2.41. See portfolio graphic for stop loss.

Z - Zillow Group - Company Description


No specific news. Another new high.

Original Trade Description: June 29th.

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

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

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

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

Earnings August 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. Just as I was about to give up on AMC it fell nearly $1 to a new 5-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


Shares declined after the Pennsylvania AG announced the settlement of a long running dispute with the Hershey Trust board. The AG said it was not his place to speak on a potential sale of Hershey. That was up to the company's board, which is different than the Hershey Trust board. The stage is now set for a decline in the price as long as Mondelex does not come back with a better offer. Mondelez made the original offer because the company thought the board dispute might make it easier to get an approval. Now that the dispute is over a new offer is less likely.

Other than their beat on the earnings per share, the rest of the report was negative. The stock price should now begin to decline since they mentioned nothing about Mondelez and the outlook is softening.

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


Minor gain in a mixed market. Thursday was the peak in the Q2 earnings cycle and we could see the market decline the following week. If not, this position will expire worthless.

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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