Option Investor

Daily Newsletter, Saturday, 8/6/2016

Table of Contents

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

Market Wrap

Welcome to August

by Jim Brown

Click here to email Jim Brown

August rarely turns in a level performance. Markets are either up strong or down hard in August.

Weekly Statistics

Friday Statistics

The Nasdaq was the market focus on Friday as the short squeeze pushed the index to a new high close at 5,221.12. The last new high on the Nasdaq was July 20th, 2015 at 5,218.86. It took a year and a lot of volatility before the Nasdaq was able to recover that level. I should also point out that the Nasdaq has rallied 14.1% since the 4,574 low on June 27th. That is only 28 trading days. Can you say, overextended?

The Friday short squeeze was caused by another blowout jobs report. Friday's buying was not because a hundred thousand investors suddenly decided a good payroll report was the reason to buy stocks on a summer Friday. Investors were heavily short in anticipation of a mediocre report at best and a market decline into late August. The big back to back job gains caused a kneejerk reaction and a monster short squeeze was born.

The Russell 2000 chart is a good example. There was a 14 point gap higher open to 1,227 and then the index went sideways to down the rest of the day to end with a gain of +17, only 3 points higher than the first hour of trading.

The Nonfarm Payrolls showed a job gain of +255,000 compared to the June total of +287,000. That 287K number was revised higher to 292,000 and the previously revised 11,000 for May was revised up to 24,000. The unemployment rate remained flat at 4.9% (7.8 million) as the labor force participation rate rose slightly to 62.8%. Another 407,000 people joined the workforce after the addition of 414,000 in June.

Analysts expected a gain of +175,000 jobs after the ADP report on Wednesday showed a gain of +179,000. Average hourly wages rose +0.3% to +2.6% year over year. The number of workers employed part time because they could not find a full time job was flat at 5.9 million. The broader U6 unemployment rose to 10.1% unadjusted at 16.1 million.

Professional and business services added 70,000 jobs. Health care added 43,000, financial sector 18,000, leisure and hospitality +45,000, food services 21,000 and government 38,000.

The conspiracy theorists were out in force on Friday. The headline number of +255,000 is seasonally adjusted. The unadjusted gain was only +85,000. There was a similar adjustment in the June numbers. SouthBay Research posted the following chart of the seasonal adjustment totals since 2006. The majority of the positive adjustments came over the last two months. Why do you think the adjustments suddenly exploded higher in an election year? It makes it a lot easier for the party in power to get reelected if the numbers suddenly look materially better and support the economic recovery claims. The jobs report is one report that consumers actually understand when they hear the two-sentence sound bite in the news. Of course, they have no clue that the numbers are heavily adjusted.

The jobs boom will put the Fed back on the calendar sooner rather than later. The percentage chance for a rate hike in September rose from 12% to 18% but the December meeting jumped to 47% and any additional positive data will put it over the 50% threshold.

There was another shocking data point released last week. The Atlanta Fed real time GDPNow forecast for Q3 rose to +3.8% and vastly over the +2.3% Blue Chip consensus average. This compares to the recently released Q2 GDP at only +1.2%. There are a lot of investors who would like to know what changed between Q2 and Q3 to triple the GDP growth. The majority of the monthly economic reports are just trudging along with only minor gains and losses each week so what happened? How did the Fed "adjust" this forecast and why?

The conspiracy theorists believe it is all election related. In the 8 years since the Financial Crisis, we have seen the slowest economic recovery since the Great Depression. Suddenly 5 months before the election the major economic numbers rocket higher for no particular reason. I have to agree that is a little unlikely just to be a random coincidence.

The calendar for next week is very light with no market moving reports. There are not even any Fed heads giving speeches. Welcome to the dog days of August. With school starting in two weeks the market volume is going to fall off drastically so it is a good thing there are no critical reports.

After the Q2 earnings cycle peaked last Thursday, the news flow this week has been slowing. Friday was almost devoid of any interesting reports.

Cognizant Technology (CTSH) reported earnings of 79 cents that beat estimates for 73 cents. Revenue of $3.37 billion nearly matched estimates for $3.371 billion. Financial services revenue rose 8.1%, healthcare 6.9% and retail/manufacturing/logistics rose 14.2%. Other revenues rose 11.2%. It looked like a good quarter and the company added $1 billion to its buyback authorization to raise the total authorized to $3 billion. They noted a onetime payment from India of $2.8 billion. That is a heck of receivable.

Priceline (PCLN) reported earnings of $13.93 that beat estimates of $12.67. Revenue of $2.56 billion missed estimates for $2.6 billion. They guided for Q3 earnings of $28.30 to $29.80 per share. Analysts were expecting $28.99. They guided for revenue to rise between 12-17%. Hotel bookings rose 24.4% in Q2 while car rental bookings rose 7.6%. Shares rallied $54 on the news.

After the bell, Berkshire Hathaway (BRK.B) reported earnings that rose +25% to $5 billion or $3,042 per class A share. That compares to $2,442 in the year ago quarter. However, adjusted operating earnings of $2,803 per share missed estimated for $2,911 per share. Revenue rose 6% to $54.46 billion but also missed estimates for $56.47 billion. The class B shares declined about $1 after the bell after being up $2.50 in the regular session. Berkshire shares rarely trade in afterhours.

Linkedin (LNKD) reported earnings of $1.13 compared to estimates for 78 cents. Revenue of $933 million rose 31% and easily beat estimates for $898 million. Premium subscriptions revenue rose 21% to $155 million. Shares did not move since the company is being acquired by Microsoft for $26.2 billion or $196 per share in cash.

Virgin America (VA) reported earnings of 93 cents that missed estimates for $1.17 by a mile. Revenue was $425.7 million. Shares did not react because VA is being acquired by Alaska Airlines (AKLS) for $57 in cash on Sept 30th.

Dentsply International (XRAY) reported earnings of 76 cents that beat estimates for 70 cents. Revenue of $1.02 billion matched estimates. They guided for the full year to earnings of $2.70-$2.80 per share. Shares declined on a sell the news trade.

Earnings for next week include one Dow component on Tuesday and that is Disney. Valeant Pharmaceutical (VRX) will also report on Tuesday and will be the headline leader in the biotech space. On Thursday, Alibaba and Nvidia will report. The Nvidia earnings are going to be highly watched because shares continue to hit new highs almost every day. New products are being announced almost weekly and they are the bleeding edge of computing/graphics technology.

With 86% of the companies in the S&P already reported, 69% have beaten on earnings and 54% have beaten on revenue. The blended earnings decline is now -3.5% and revenue is flat with the year ago quarter. Fifty-three companies have issued negative guidance and 26 have issued positive guidance. The earnings forecast for Q3 is -1.7% and +5.7% earnings growth for Q4.

Tesla reported earnings earlier in the week and Elon Musk spent most of the conference call assuring analysts they really were going to produce 50,000 cars in the second half of 2016 and 500,000 in 2018.

Musk said he went through "production hell" in June as they were trying to upgrade the production line to accommodate the faster rate of production. He said he spent many nights sleeping by the production line so he could be there anytime something went wrong.

Musk reaffirmed they still had 373,000 Model 3 reservations and he threatened suppliers that might be short on component deliveries that he would cut them off and they would get no more business from Tesla. He also said despite the huge waiting list for the Model 3, they were still seeing orders increase for the Model S and the Model X. He also said the next vehicle would be the Model Y, which will be a smaller SUV built on the Model 3 platform. He also said Tesla would unveil the Tesla semi and minibus within 6-9 months and put them into production following the Model Y.

Analysts were unhappy about the $1.06 per share loss compared to the 59 cents analysts had forecast. However, in order to make more cars faster, Tesla had to spend more to beef up the manufacturing process and that is investing for the future and investors were ok with that.

A potential blockbuster cancer treatment from Bristol-Myers Squibb (BMY) failed in a key study as the company tried to further extend its use to lung cancer patients. Bristol's drug Opdivo is already approved to treat melanoma and lung cancer but only after chemotherapy. The study involved 541 patients that had received no prior treatment. The study failed to produce any material results. Shares of BMY fell -16% and the biggest one-day drop in 15 years. Competitor Merck (MRK) markets the drug Keytruda and shares of MRK soared $6 as the biggest gainer on the Dow.

The strong jobs numbers caused a corresponding spike in the dollar from a six week low. The low dollar had helped offset the drop in oil prices and then the strong jobs suggested we were consuming more oil and prices rebounded again on Friday to close at the high for the week. The low for the week came on Wednesday at $39.19 after crude inventories rose for the second consecutive week in a month where we normally see declines.

However, we did see a spike in refinery utilization to 93.3% as refiners ramp up production ahead of the Labor Day weekend and the last surge of driving until Thanksgiving. They will probably produce more gasoline for the next four weeks and then drop back into maintenance mode for a month as they prepare to switch over to the winter blend fuels. Production will begin to increase in mid October as they ramp up winter fuels ahead of that Thanksgiving weekend.

This means oil prices are likely to go lower in the weeks ahead. I seriously doubt they will fall much under $40 but we could see some days in the high $30s until that maintenance period is over.

Active rigs rose only +1 to 464 but that total is misleading. Oil rigs rose +7 and gas rigs fell -5. Offshore rigs fell -2 to 17 and a new low for this energy cycle. We saw a decline in gas inventories with a draw of -4 Bcf from storage. That is well below the average injection of 58 Bcf for this period. The lack of new wells being drilled and the hot summer weather combined to a shortage of new supply. Gas prices did not rise on the news but they should have.


The short squeeze on Friday produced a lot of new highs but the Dow, NYSE Composite and the Russell 2000 did not complete the task. The S&P-100, S&P-400 Midcap, S&P-500, S&P-600 Smallcap, Vanguard Total stock Market Index (VTI), Russell 1000 and Russell 3000 all made new historic highs. Every one of those indexes had one giant short squeeze candle that dwarfed the mediocre moves of the last three weeks.

There were a lot of traders caught leaning the wrong way. This was not a case of a hundred thousand investors suddenly deciding to buy stocks on a summer Friday because the jobs report was better than expected. It was purely a short squeeze.

On the positive side, a lot of market rallies begin with a major short squeeze. Traders get caught leaning the wrong way and they cover, short, cover, short and cover again as fund managers race to chase prices so the market does not run away from them. Whether this will be one of those instances is of course unknown. It is such a clearly recognizable short squeeze that everybody may stand aside and let the market settle and wait for a new direction to form.

The fly in the rally soup is still the volume. Friday's volume of 6.8 billion shares was slightly higher than a normal summer Friday BUT compared to the 6.4 billion shares on Thursday it was nowhere close to the kind of volume you would need as confirmation a real rally had suddenly broken out. The volume increase from 6.4 to 6.8 billion shares was negligible, expecially given the +191 gain on the Dow and the new highs across most of the indexes.

It will take more volume confirmation next week to keep the rally going. Without that volume the odds are good the rally will either be lackluster or fail entirely.

The S&P surged to close at the exact high of the day at 2,182.87. Despite the three weeks of low volume consolidation the index is still very over extended and is not likely to continue much higher without some decent profit taking. The intraday decline to support at 2,150 last Tuesday should not have been enough profit taking to let traders on the sidelines feel comfortable about opening new positions. If anything, it encouraged the shorts to increase their positions and that is what caused the Friday squeeze.

The Dow was helped significantly on Friday by the $6 bounce in Merck shares and the $4 gain in Goldman Sachs. Those two stocks accounted for nearly 80 Dow points. The odds are very good they will not repeat their gains next week. Disney is the only Dow component reporting and it is not likely to have a significant impact on the Dow. With 23 Dow stocks gaining less than $1 or not gaining at all we can see the limited breadth in the rally. Only 7 Dow stocks gained more than $1.

The Dow chart has an interesting pattern repeating from late 2014. The one big rebound was the Ebola bounce when it appeared the contagion had been stopped. It was followed by a couple months of volatility and after a drop back to support at 17,050 it suddenly surged to a new high at 18,213 before moving sideways for several months and finally collapsing. Fast forward to January 2016 and we saw an equivalent bounce from 15,500 to 18,167 and then two months of consolidation. The sudden dip back to support at 17,050 was followed by a similar rebound back to new highs. Markets do have a memory but it is not reliable.

If the pattern were to continue, we should trade sideways from here for a couple months and then have a new support test in October. I am not saying this is going to happen but we can see one consistent pattern in the two-year chart. Every time there was a prolonged sprint higher, it was always followed by consolidation and then a decline. Given the extent of the recent gains, I would be very surprised if we did not see one more decline before we see a ramp into Q4 earnings, which are expected to be the strongest in the last two years.

The Nasdaq sprinted to a new high at 5,221 and just 3 points over the prior high from July 2015 at 5,218. That is hardly a breakout and more of a resistance test. There is nothing stopping the Nasdaq from moving higher as long as the chip stocks and biotech stocks continue to participate. The biotech sector is at a 6-month high. The Semiconductor Index is only 2 points from a new high. The Nasdaq also benefitted from a 55 point earnings gain in Priceline.

If the Nasdaq can continue pushing higher it would be a strong motivating force that could push fund managers to chase prices higher. One other factor is resurgence of the FANG stocks. Facebook, Amazon, Netflix and Google all posted strong gains last week. There are momentum players active in the market and those big cap stocks have a big influence on the Nasdaq.

The Russell 2000 broke out to a 52-week high at 1,231 but it has a ways to go to make a new high over 1,295. The Russell gained +1.44% and was the second biggest gainer behind the Dow Transports at +1.89%. Both of those indexes were heavily shorted and that is the reason they were the biggest gainers.

The target on the Russell 2000 is probably 1,275 and the last major resistance before the 1,295 high. The 1200-1205 level was perfect support on the midweek decline and the Russell could continue to be a strong performer because of the sector constitution of the index. However, should oil weaken it could be an anchor on the index.

While I am not convinced the new highs will last given the weak volume, I am not going to bet against them, again. The trend is your friend until it ends. This trend refuses to die.

The next three weeks will see the lowest volume of the summer. The earnings cycle is in decline and there are very few high profile earnings events to power the market. Continue to raise your stop losses. Remain long until you are stopped out and try not to buy the first dip.

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

Bullish sentiment continues to decline despite the new highs last week. This survey ends on Wednesday and the market was going lower at that time. Bullish sentiment fell another -1.5% but so did bearish sentiment. Neutral sentiment continues to increase at 43.4%. Neutral sentiment has been above the historical average of 31% for 27 consecutive weeks. Bearish sentiment declined to 26.8% and the fifth consecutive week under the historical average of 30.5%. Bullish sentiment at 29.8% has been below the historical average of 38.5% for 39 consecutive weeks and for 72 of the last 74 weeks but the market is setting new highs.

Goldman Sachs penned a piece last week titled, "Does the Treasury Market Still Care about Economic Data?" They talked about the decline in treasury yields as the sensitivity of yields to data has faded. Goldman said the markets are only paying attention to central bank communication and policies. In other words, "Don't fight the Fed" remains the age-old adage in the stock market.

One analyst last week commented on the Fed's constant warning about impending rate hikes and the lack of follow through on those warnings. Given the current global environment, the Fed is actually tightening by non-action. When the majority of the other central banks are cutting rates and doling out stimulus like crack cocaine, the Fed has kept rates flat, which is actually an implied tightening. While other countries are seeing rates go deeper into negative territory, the U.S. treasuries have become the safe harbor for the world's liquidity. One analyst suggested the demand for U.S. treasuries was so strong the Fed should use this opportunity to start liquidating some of those on its balance sheet. That would allow real rates to drift slightly higher without the Fed actually having to hike. Plus it would free up the Fed's balance sheet for future action when a recession eventually appears.

Bank of America pointed out that global central banks have now cut rates 666 times since the Lehman crash.

They also warned again that fund flows were negative. Equity funds saw outflows last week of $4.6 billion while bond funds saw monster inflows of $10.2 billion. That is the largest inflow into bonds since February 2015. This came as the BoJ, BoE and RBA all cut rates. More than $1 trillion has flowed into bond funds since Lehman. The Swiss National Bank and he GPIF upped their allocation of equities and continue to buy using their government printing presses.

Should we worry that money is still flowing out of equity funds even when the market is making new highs? I would think that would be relative to intelligent investors.

Citigroup called the S&P rally "unstoppable" saying this "U.S. bull market just won't die" and urging clients "don't underweight the S&P." Citi said on a fundamental basis since 2011 the U.S. market has risen from a trailing PE of 17x to 23x and remains very overextended.

"The S&P Composite is now 38% above its prior 2007 high. The FTSE 100 has been flat for 16 years. The Nikkei 225 is down 59% below its 1989 peak. Emerging market equities are down 35% from prior highs. The Eurostoxx is 29% lower. Since 2010, U.S. equities have returned 123% compared to 23% for the rest of the world."

IDI is a one-year-old company that has built a database on every adult in the USA. They have compiled a database of public information along with every other piece of private information they can collect. If you use a loyalty card at the grocery store, they know what you buy. If you have a rewards card with your bank they know what you buy and how much you spend. They know what car you drive, who insures it and in some cases where you drive it.

The company said the personal profiles contain "all known addresses, phone numbers, and e-mail addresses; every piece of property ever bought or sold, plus related mortgages; past and present vehicles owned; criminal citations, from speeding tickets on up; voter registration; hunting permits; and names and phone numbers of neighbors. The reports also include photos of cars taken by private companies using automated license plate readers—billions of snapshots tagged with GPS coordinates and time stamps." They operate multiple coupon websites where they collect personal information to "supply you with better offers" but that information includes things like your birth date, home address, email address and even your health history so they can offer you discounts on over the counter medicine. However, the real reason for the personal questions is to fill in the blanks on your record in their database.

IDI sells this data to private investigators, law firms, debt collectors and government agencies. They are also targeting consumer marketers. The company continues to spend millions to acquire existing databases from other companies to combine with its own. They spent $100 million in December to acquire market profiler Fluent and the 120 million profiles it had accumulated. In June, they spent $21 million to buy Q Interactive and their database. Big brother is watching. Source

I have to admit I am a data junkie. I read literally hundreds of articles on dozens of websites almost every day. The common thread on a lot of investing websites is the failure of the market to make a meaningful correction. It seems there are a lot of frustrated bears trolling the message boards and comments fields under articles on this topic. I sometimes read the comments looking for a referenced source to some new article. I got a good laugh out of the reader comment below. This was on ZeroHedge.com, which has a permanently bearish outlook on the market. Enjoy!

BillHilly Aug 5, 2016 4:05 PM

That's it ! I am capitulating, I am done, I am finished with holding on to a picture of reality that will seemingly never be allowed to happen. I have been bearish for 6+ years now (coincidentally coinciding with my embrace of ZH) and I have been beaten into submission by TPTB. (The Powers That Be) I can no longer stand the losses, financial and emotional, that come along with a view which will not conform to the reality which exists, agree with it or not.

I am not bashing ZH here. I am a long time fan and reader. I agree in heart/mind with much of what is posted by the Tyler's, yet their views do not/have not borne sweet fruit, in fact it has been a sour, gut-retching meal that has left me emaciated and weak. Following their take on the economic conditions "as they are/should be" has led nowhere but to the depths of confusion and exhaustion. I wish to be neither confused nor exhausted any longer.

So fare-thee-well all you "red-pill" poppers, I am ready to explore the promised land of bliss and prosperity that is offered so generously by our magnificent political/financial benefactors. I am ready to bow to the highly educated and intelligent members of our leadership. I will listen attentively to their bullish message on all their colorful and glossy media channels. I will praise the 1%-ers and stand aside as they pass by, genuflecting in their presence. I will build a golden idol of the mighty "printing press" and worship it daily with reverence.

I will no longer doubt. I will no longer distrust. I throw away my tin foil hat. My leaders have proven themselves worthy in mine eyes. They would not deceive nor mislead me - they love me, as they do all of us.

Ahh, what a glorious future I now have to look forward to. Unlimited "growth", vibrant economic recovery(s), abundant job creation, government largess where "debt does not matter", and the power and farsightedness of an honest, caring, and all-embracing political/military/corporate complex.

What took me so long to find this glorious path? Why did I fight the system? Why did I not pay heed to all the wisdom offered by "Million Dollar Bonus"? I will finally listen to my handlers and know the True reality which can exist with the proper mindset. I will now be set free !!!

Hand me the Blue Pill please !


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The man who does not read has no advantage over a man who does not know how to read."

Mark Twain

Index Wrap

Two Year Low

by Jim Brown

Click here to email Jim Brown

The S&P finally made a new closing high after three weeks of trying but another index just made a two-year low.

That other index is the Volatility Index or $VIX. The VIX closed at 11.39 on Friday and the lowest close since July 2014. The low before that was January 2007. There is an oil saying in the market, "When the VIX is low, it is time to go. When the VIX is high, it is time to buy." That has always worked in the past, especially when it is high. When the VIX is in the 12-15 range it can remain there for months at a time. That is normally the sweet spot where the market has just enough volatility to keep it interesting but not enough to scare the novice investors out of the market. Over 15 and we start getting some volatility swings in the S&P and over 20 people start running for the exits. They should be running for the exits today with the VIX near 11.

It has only dipped that low for more than a day or two, twice in the last ten years. We did see an intraday drop to 10.88 on August 8th, 2015 one day before we began a spike that would hit 53 on 8/24. Before that there was an intraday dip to 11.52 on September 19th, 2014 and the next day a spike began to 31 on October 15th. When the VIX becomes abnormally low, it is a serious warning signal.

One of my favorite trades is selling calls on the VIX when it spikes over 20. The hang time is normally limited to a few days and it ALWAYS returns to the low teens eventually.

The chip sector has been a major contributor to the rally in the Nasdaq. The Semiconductor Index closed at a new weekly high but the daily high close is still a point higher at 774.93. With the chips in breakout mode, they will continue to power the Nasdaq as long as their rally lasts.

The Nasdaq/SOX comparison chart shows the relationship between chips and the tech index. Right now, they are both setting new highs.

The other Nasdaq contributor is the biotech sector. The $BTK has broken out above strong resistance at 3,250 and could be headed for 3,850. Analysts believe the bad news is already priced in and the political candidates are too busy throwing mud at each other that they have forgotten about drug prices. Even if they do remember their pledge, it will be at least a year before any bill could even begin the arduous task through the House and Senate.

The Dow Transports ($TRAN) have been an anchor for the Dow. The airlines are suffering from excess capacity, increased competition, terror fears in Europe and Zika fears in the Americas. Oil prices back at $40 weakened expectations for railroads on worries they will continue o ship less oil, pipes and frac sand. When prices rebound back over $50 the railroads will recover but that could be months into the future.

The Oil/Dollar chart continues to show the impact of the strong dollar on oil prices. With U.S. economics improving and other central banks easing, the dollar should continue to rise and continue to put pressure on oil prices.

The percentage of S&P stocks over their 200-day average has rebounded to 78.8% and very close to the peak set in 2014. While it is possible for the percentage to rise over 80% it already represents very overbought conditions.

The percentage of stocks on the Nasdaq over their 200-day average has risen to 62.36%. Because the Nasdaq is a broader index than the S&P it is harder to move the percentages much higher. There was a peak at 70% in 2013 but anything over 65% is very rare. This is another indication the market is overbought.

The comparison chart between the high yield ETF and the S&P show the charts of each peaking at a new high with the HYG leading the S&P higher. The correlation is just over 75% as of Friday.

Last week I pointed out that all the broadest of the major market indexes were poised to break out to new highs. That happened and they show no indications of retreat. Normally they will not show indications until disaster strikes.

I would remain long until we are forced out of our long trades by tight stops. The markets can and do move up strongly in August because everyone was expecting the opposite direction. We clearly saw that on Friday. However, volume is going to decline dramatically over the next three weeks as summer winds down. Low volume means a lack of conviction and directions can become volatile. Be prepared and try not to buy the first dip.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

King of the Hill

by Jim Brown

Click here to email Jim Brown

Editors Note:

When you are the biggest in the sector all the little guys are either trying to copy you or topple you. I doubt anyone is going to be copying a Big Mac but there are plenty of competitors implementing their own all day breakfast. Until they have 35,000 stores to compete with McDonalds, it will not matter.


MCD - McDonalds - Company Profile

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 2015, it operated 36,525 restaurants, including 30,081 franchised restaurants and 6,444 company-operated restaurants. McDonalds was founded in 1940 and is based in Oak Brook, Illinois.

McDonalds has been on a roll recently and set a new high in May at $132. Analysts could not say enough about the turnaround the company was making. Since they went to all-day breakfast items in October the customer traffic has exploded. Unfortunately, all those Egg McMuffins had a negative impact on sales.

The company was selling more items but at cheaper prices. Breakfast items are cheaper than Big Macs and other lunch/supper items. The company reported revenue of $6.26 billion and earnings of $1.45. They beat the $1.38 earnings estimate but missed slightly on the $6.27 revenue estimate. Also, same store sales rose only 1.8% in the U.S. compared to expectations for a 3.2% increase.

Analysts credited part of the revenue shortfall with the industry wide slowdown in the fast food sector. YUM Brands and Starbucks also posted sales declines. Others pointed out that McDonalds sales spiked at the same time Chipotle sales plunged because of their food problems.

Analysts were also quick to point out that international same store sales rose 7.7% in the 100 "foundational markets" covering 100 countries.

McDonalds announced it was farther along in eliminating antibiotics from their chicken, previously targeted for March 2017, had removed the preservatives from the Chicken McNuggets and was removing high fructose corn syrup from its hamburger buns in August. The company is moving in the right direction for long-term improvement.

Analysts believe McDonalds will get control of its all day breakfast menu pricing and will benefit from the longer term menu changes.

Deutsche Bank, Credit Suisse, UBS, RBC Capital and Argus all reiterated their buy ratings with price targets averaging $138.

Earnings Oct 21st.

Shares appear to be rebounding from the post earnings crash. I am recommending the October call just in case we need more time for the post earnings depression to wear off. McDonalds is a Dow component so it will be reactive to the gains and losses in the Dow. With August historically the weakest month for the Dow we could see some volatility in MCD and need the extra time.

Buy Oct $120 call, currently $2.71, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

Everyone who was short on Thursday was racing to the exits at the open on Friday. The blowout jobs number caused a massive short squeeze and the exit doors were very crowded. This was not a case of thousands of investors suddenly thinking they wanted to rush in and buy stocks on a summer Friday. This was thousands of traders who were short and expecting a weak jobs number to push stocks lower in a seasonally weak period for the markets.

I am not complaining because all the long positions went up but so did the DIA, IWM positions. The key for next week will be whether the Dow can continue its gains and push over resistance at 18,550.

Current Portfolio

Current Position Changes

LCI - Lannet Pharma

The long call position was entered 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

AAPL - Apple Inc -
Company Profile


Apple announced a bug bounty to hackers that report to them about the bugs they find in the Apple operating system. The company said it would pay up to $200,000 for certain flaws.AT&T, Facebook, Google, Microsoft, Tesla and Yahoo already pay bounties for discovered flaws in their software. Facebook has paid out over $4 million in the last five years. In March Facebook paid a 10-yr old boy in Finland $10,000 for finding a bug in Instagram.

Original Trade Description: August 3rd.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, education, and enterprise and government customers worldwide. The company offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, iBooks Store, Mac App Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

Multiple leaks from vendors now point to an earlier release of the iPhone 7 on September 7th. That is a week earlier than normal and it stems from the iPhone 7 on the 7th. Pre-orders will start on the 9th and the actual first sale date on September 16th. This will give Apple an extra week of sales in Q3 and help boost their revenue for the quarter. I am sure that was also a motive behind the earlier release date. That will help Apple meet earnings and revenue estimates for Q3. Last time around the iPHone 6S and 6S+ did not go on sale until September 25th.

Other leaks confirm Apple is scrapping the 16gb model. The available memory range will no longer be 16/64/126gb but jump to 32/128/256gb. The prices for the 7 are reported to be $649, $749 and $849. The 7 Plus will be $749, $849 and $949. Those numbers roughly equate to a discount of $100 each over the 6s and 6S Plus models because the base memory increment doubled without an increase in price.

Lastly, there are numerous other leaks that suggest Apple is going to announce a brand new iPhone in September 2017 with a massive number of new design features to commemorate the 10th anniversary of the iPhone product. While that will not impact Apple's share price this season it is something to watch in 2017 and we need to get the trade launched immediately after the July earnings.

For this year, Apple shares spiked to $104 on the better than expected earnings. After spending a week consolidating, the shares are starting to move up again. Typically, they rally from early August until the actual announcement then suffer a sell the news event decline. I am recommending October options so there is still some expectation premium left when we exit in early September.

Position 8/4/16:

Long Oct $110 call @ $2.19, see portfolio graphic for stop loss.

GIII - G-III Apparel Group - Company Profile


No specific news. Shares rallied 3% as the rebound from the Kate Spade earnings miss wears off.

Original Trade Description: August 3rd.

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.

Position 8/4/16

Long Sept $45 call @ 90 cents. See portfolio graphic for stop loss.

Previously closed 8/3/16: Long Sept $45 call @ $1.15, exit .60, -.55 loss.

LCI - Lannet Company - Company Profile


No specific news. Nice 2.4% gain.

Original Trade Description: August 4th.

Lannett Company, Inc. develops, manufactures, packages, markets, and distributes generic versions of branded pharmaceutical products in the United States. It offers solid oral, extended release, topical, nasal, and oral solution finished dosage forms of drugs that address a range of therapeutic areas, as well as ophthalmic, patch, foam, buccal, sublingual, soft gel, and injectable dosages. The company provides its products for various medical indications comprising glaucoma, muscle relaxant, migraine, anesthetic, congestive heart failure, thyroid deficiency, dryness of the mouth, gout, bronchospasms, hypertension, and gallstone. It also manufactures active pharmaceutical ingredients. Lannett Company, Inc. markets its products under the Diamox, Lioresal, Fioricet, Fiorinal, Fiorinal w/ Codeine #3, Lanoxin, Levoxyl/Synthroid, Salagen, Benemid, Brethine, Dyazide, and Actigall brands.

The company recently received FDA approval to market Paroxetine extended release tablets in various strengths. Sales of the branded drug in the U.S. last year were over $122 million. There is only one competitor in the market for this drug.

The big news came from the receipt of a FDA Acceptable Filing Letter for Fentanyl patches. The letter allows them to file for approval of the 12mcg/hour, 25mcg, 50mcg, 75mcg and 100mcg patches. This is the generic equivalent of Ortho McNeil's chronic pain treatment Duragesic. According to Lannet sales of the transdermal patches in the U.S. in 2015 were more than $650 million. Lannet partnered with Sparsha Pharma, a specialist in tramsdermal systems, to produce the patches.

Lannet is rapidly increasing its portfolio of generic drugs and sales are booming. This will be a short-term play because earnings are August 23rd. I am looking for a ramp into earnings and we will close the position ahead of that event.

The Sept $35 option is too far out of the money for a short-term position. I am recommending the slightly in the money $30 call. With LCI at $31.78 it is already $1.78 in the money.

Position 8/5/16:

Long Sept $30 call @ $3.40, see portfolio graphic for stop loss.
That is a tight stop because of the ITM strike price.

LL - Lumber Liquidators - Company Description


No specific news. Decent 2.5% gain.

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. Somebody bought 5,700 October $55 calls for $5.30 each on Thursday. That was just over $3 million in premium. Volume was 5 times the open interest indicating it was a new position. You would have to really be a true believer in their earnings next Thursday to spend that kind of money ahead of the event.

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.

TASR - Taser Intl - Company Description


Taser spiked after earnings but there was also some selling. Shares dipped to $28.48 and our stop loss was $28.45 so we barely missed getting stopped out. Shares rebounded to close at a new 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 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.

XBI - Biotech ETF - ETF Profile


No specific news. Minor gain but back to the prior 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.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


Big gain of 1% but did not return to the prior highs. This could be a bear trap because all the gains came in the opening spike indicating short covering.

Original Trade Description: August 1st.

The Dow posted another lower low as it fades from the 18,622 intraday high set back on July 20th. The last three days the Dow has traded under support at 18,400 only to rebound back over that level at the close. The 18,350 level is secondary support and today's low was 18,355.

All but six Dow components have reported earnings and there are only two reporting this week. Those are PG and PFE on Tuesday. The Dow is experiencing post earnings depression. After a stock reports earnings there is typically a period where it declines as traders leave that stock in search of something else to trade that has not yet reported.

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

The Dow is very over extended, suffering post earnings depression and heading into the two weakest months of the year, which are seasonal decliners.

Bank of America expects a 10-15% decline over the next two months.

Goldman Sachs said this morning they expect a 5-10% decline. Goldman said, rising uncertainty in the U.S. and globally, negative earnings revisions, decelerating buybacks and overly dovish Fed expectations would send the market lower over the next several months.

Jeffrey Gundlach of DoubleLine with $100 billion under management, said "sell everything" most asset classes are "frothy and nothing here looks good." "Stock investors have entered a world of uber complacency." "Investors seem to have been hypnotized that nothing can go wrong." He expects the next big money to be made on the short side.

Peter Boockcar, chief market analyst at the Lindsey Group, said, "Take off the beer goggles, the markets are dangerous. To me, the U.S. stock market is the most expensive in the world."

According to Bespoke, over the last 20 years the Dow has performed the worst in August of any other month.

However, just because some big names and big banks turn negative on the market, it does not mean it is guaranteed to move lower. Markets tend to move in the direction that will confound the most people at any given time.

I believe we should accept the risk and launch another index short using the Dow ETF (DIA) since it is the weakest in August. The Dow has risk to 18,000 and a breakdown there could take it back to 17,400.

I am going to recommend an October put spread so we can capitalize on any decline that lasts into September. Typically market bottoms are in October. If you do not want to use a spread, I would buy the September $182 puts, currently $2.55. Just remember, once we are into September the premiums will decline sharply.

Position 8/2/16:

Long Oct $182 put @ $3.98, no initial stop loss.
Short Oct $172 put @ $1.73, no initial stop loss.
Net debit $2.25

IWM - Russell 2000 ETF - ETF Description


The IWM broke through prior resistance but the high of the day was 1:PM and shares weakened into the close. Lots of short covering at the open.

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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