Option Investor

Daily Newsletter, Tuesday, 8/9/2016

Table of Contents

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

Market Wrap

Dull Market

by Jim Brown

Click here to email Jim Brown

If you are never supposed to short a dull market, what should we do with this one?

Market Statistics

Most of the major indexes spiked to new intraday highs except for the Dow. The Dow's high was 18,585 and missed the closing high of 18,595 before giving back all the gains and trading in negative territory just before the close. Short covering or buy the dippers helped lift it back into positive territory with a +3 point gain. That is hardly a rousing story of a bullish market trading at new highs.

The Nasdaq did close 4 points into new high territory at 5,225 thanks to a 6 point boost by Charter Communications (CHTR) and their +19 point gain for the day. The S&P squeezed out a 1-point gain but missed closing at a new high by one point.

There was very little excitement in the market and investors appeared unsure how to read the negative economic reports.

The Productivity report for Q2 came in at -0.5% and the third consecutive quarter in decline. According to UBS, there has never been three quarters of declines outside of a recession. The last time this happened was in 1974 and 1979 when interest rates were in the 15% range.

Output rose +1.2% while hours worked rose +1.8%. Hourly compensation rose +1.5% contributing to a 2% rise in labor costs. On a trailing 12-month basis, output per hour has fallen -0.4%.

Manufacturing output fell -0.2% as compensation rose +2.9% and labor costs rose +3.0%. The price deflator rose 2.4% and the strongest quarterly increase since 2011. A drop in productivity means workers are getting paid more but accomplishing less. That is not a good sign for the economy.

Morgan Stanley said the negative expectations for the quarter were exceeded with an even worse result.

Economy.com chart

Wholesale inventories for June rose +0.3% compared to consensus for zero and +0.1% rise in May. However, durable goods inventories fell -0.3% while nondurable goods rose +1.1%. Sales were strong with a +1.9% gain and that drove the inventory to sales ratio down from 1.35 to 1.33%. That is the number of months required to deplete inventories at the current rate of sales.

The NFIB Small Business Survey rose only +0.1 to 94.6 for July. That was the smallest movement in months. The expectations components rose slightly. Plans to increase employment rose from 11 to 12, inventory increases from -3 to zero and expectations for economic improvement rose from -9 to -5. The rest of the components were either flat or slightly lower. When we are excited about a report because the components are simply becoming "less negative" we have a long way to go.

There is a serious lack of any material reports for the rest of the week. The retail sales on Friday would be the most important and analysts expect only a minor gain. We have a bunch of dull reports to accompany our dull market.

The biggest news for the morning was a major earnings miss by Wayfair (W). The company posted a loss of 43 cents compared to estimates for a loss of 41 cents. The company has not reported a profit in the last 18 quarters and this was their biggest loss over that period. Revenue of $786.9 million rose +60% and did beat estimates for $782.4 million.

Wayfair ended the quarter with 6.7 million active buyers, a 65% increase. They processed 2.9 million orders in Q2, a 50% increase. Overall, this appeared to be a good quarter with all the sales metrics soaring. However, they have to eventually make a profit and investors did not like the report. Shares fell 19% on the news and weighed on all the consumer companies except Amazon.

Valeant Pharmaceuticals (VRX) reported adjusted earnings of $1.40 compared to estimates for $1.47. Revenue declined -11% to $2.42 billion compared to estimates for $2.46 billion. The company reaffirmed its full year guidance of $9.9-$10.1 billion and adjusted earnings of $6.60-$7.00 per share.

The CEO said they were exploring the sale of $8 billion in noncore assets with annual revenue of roughly $2 billion. They have sold the North American rights to the hereditary angioedema drug, Ruconest, to Pharming Group in the Netherlands for $181 million and potential future royalties of up to $329 million. Papa said they had received numerous unsolicited bids for various assets. He also said they were negotiating new terms with lenders to allow them some breathing room as they focused on rebuilding the company. Papa also said the company will be reorganized into three parts including Branded Rx, Bausch & Lomb and U.S. Diversified products.

Shares rallied 25% or $5.71 on the earnings. There were 29 million shares short and 106 million shares traded. Average volume is 27 million. The guidance and the debt sales were the big movers.

Endo International (ENDP), sometimes called a baby Valeant, reported earnings after the close on Monday of 86 cents that easily beat estimates for 75 cents. Revenue of $920.9 million also beat estimates for $878.3 million. The company guided for the full year for earnings of $4.50-$4.80 with revenue in the range of $3.87-$4.03 billion. Analysts were expecting $4.55 and $3.93 billion. Endo has been on an acquisition binge where it acquired drugs then raised the prices, exactly like Valeant. Endo shares rallied 22% on more than five times normal volume.

After the bell Dow component Disney (DIS) reported adjusted earnings of $1.62 compared to estimates for $1.61. Revenue rose 9% to $14.277 billion compared to estimates for $14.15 billion. Parks revenue rose 6% to $4.38 billion. Studio revenue rose +40% to $2.85 billion. Consumer entertainment fell -1% to $1.15 billion. They are exiting their game console business. Media revenue rose 2% to $5.91 billion. They announced they were acquiring a 33% stake in BAMTech for $1 billion paid in two installments from Major League Baseball and had the option to acquire a majority stake. BAMTech is separating from MLB Advanced Media in conjunction with the Disney investment. The stake will allow Disney to develop a new streaming media delivery platform that will deliver content for ABC, ESPN and other digital initiatives inside the Disney conglomerate. They also announced DirecTV will include Disney's top 7 subscription channels in its over the top service. Shares declined $1.50 on the news.

Yelp (YELP) reported earnings of 1 cent compared to estimates for a 7-cent loss. Revenue of $173 million beat estimates for $170 million. Shares rallied 13% in afterhours. The company saw a gain of 32% in total advertising accounts to 128,400. The mobile app was accessed by more than 23 million unique devices in Q2. That was a 27% gain. They guided for Q3 for revenue of $180-$184 million and beating estimates for $179.6 million.

Fossil (FOSL) reported earnings of 12 cents that beat estimates for 9 cents. Revenue of $685.4 million beat estimates for $674.1 million. They guided for full year earnings of $1.80-$2.65 per share compared to analyst estimates for $2.03. They also guided for revenue to decline between 1.5% to 5.0% in fiscal 2016. Comparable sales in the Americas fell -11% in the quarter. Overall comps fell -3% compared to estimates for a +0.7% gain. The company has announced its next generation smart watches that will go on sale in stores and online on August 29th. They start at $295 and the same price as an entry level Apple watch. They use the AndroidWear operating system. The Fossil Q lineup now offers more than 20 products that compete with Fitbit (FIT) and Apple.

IDC reported that Apple watch sales fell -55% to 1.6 million units in Q2 compared to 3.6 million in Q2-2015. Samsung shipped 600,000 watches in Q2.

SolarCity (SCTY) reported a loss of $2.32 compared to estimates for a loss of $2.44. Revenue of $186 million easily beat estimates for $146 million. However, they guided for a loss of $2.55 to $2.65 in Q3 and revenue of $155-$168 million compared to estimates for $2.26 and $175 million. They warned that as a result of the Tesla acquisition offer it had taken them longer than normal to finalize new project financing agreements. While this negatively impacted Q2, it will have a positive impact on Q3 according to the company.

Last week the company agreed to a take under with Tesla for $25.73 based on Tesla's share price at the time. Shares had been trading over $27 in anticipation of a higher offer. As part of the acceptance, the board cited the easier access to financing once Tesla was in control.

The Q2 earnings cycle is really slowing and the calendar for Wednesday is lackluster at best. On Thursday, there is Alibaba and Nvidia and both could produce fireworks. Nvidia has been setting a new high almost every day and they are either going to have blowout earnings or a major disappointment that tanks the stock. With their almost weekly new product announcements and immediate sell out of anything announced, I am betting on an earnings beat.

The primary volatility ETFs (VXX/VXZ) did a 1:4 reverse split after the close on Monday. The VXX went from a historic low at $9.30 to $36.57 at the close. The Daily 2x VIX Short Term ETN (TVIX) enacted a 1:25 reverse split that was also effective at the open this morning. Shares were trading for 92 cents before the split and $22.26 at the close.

The API reported a 2.1 million barrel build in crude oil inventories late Tuesday. Analysts were expecting a one million barrel drop. Crude declined to $42.74 on the news. More than 16,500 lots of WTI put options with a $40 strike price were traded before the news was released.

The IEA revised its forecast for production declines in the U.S. in 2016 from 820,000 to 700,000 citing an increase in drilling activity.

Morgan Stanley reiterated their outlook for crude saying "the bottom of our trading range remains $35. Despite the recent bounce we see the prospect for lower prices over the next 1-3 months and a deeper contango." They see that $35 level as a soft floor but still a critical level. The primary catalyst that could prevent a return to $35 is the potential for OPEC to try and talk prices up again with talk about a potential production freeze at the next OPEC meeting. Venezuela's President Maduro has already started making headlines calling for a new unity agreement to freeze production. He almost made it happen last time but Saudi Arabia backed out and the deal fell apart. With oil still hovering in the $40 range there is ample incentive for a new deal.

Marc Faber, the publisher of the Gloom, Boom and Doom Report, is even more bearish if that is even possible. He said on Monday that stocks are likely to drop 50% to 1,100 on the S&P. The S&P hit 2,185 about the time he made that call. He warned the market has not gone up because business is good but because of a couple trillion dollars in stock buybacks. Companies have been borrowing money at record low interest and using the money for buybacks. With stocks trading near a record PE levels, Faber says it is not the market that is pushing higher but a relatively few stocks driving the indexes. He warned that the excess liquidity generated by all the central bank easing and QE programs will eventually come back to haunt the market.

Faber has been wrong far more often than he has been right. However, on the "stopped clock is right twice a day" theory, as long as he keeps calling for a bear market he will eventually be right. He will have given up or lost millions in the years prior to the bear's appearance but he will eventually get to say "I told you so."

I have warned many times that the Fed has never successfully unwound a stimulus program without causing a market crash and this is the largest stimulus program they have ever created. What are the odds this will be the one they can unwind safely? I think I have a better chance with the PowerBall lottery.

I do NOT agree with Faber in this call. Even if the market did begin to correct there are far too many factors to hold it up rather than knock it down. Remember, "There is No Alternative" or TINA. This means with interest rates at record lows and $13 trillion in negative territory, investors and institutions have to buy stocks. That could change when the Fed actually begins to raise rates but that should not happen until 2017 at any sustained pace.


The S&P did not close at a record high but it only missed by 1 point. However, the market continues to be very over extended and could decline at any time. They say never short a dull market and this market is going on four weeks of dull with only one material short squeeze along the way. We could always move higher but eventually gravity will take hold. This is the weakest two months of the year for the markets and the second half lows normally occur in Sept/Oct. This is what the bears are betting on but the market refuses to die.

The three weeks of sideways consolidation on the S&P suggests investors believe we are not going lower. Every minor dip was bought and they are still buying the dips. When that trend changes it will be time to exit. The S&P has support at 2,160 and again at 2,150. If those levels break, I would move to the sidelines or get short. Until then, I would keep my stops tight because the market can continue moving higher if fund managers continue their defensive buying. They cannot afford to let other managers get ahead of them in the fund performance competition.

The Dow will not get any help from the Disney earnings tonight. Disney shares are down and they are likely to continue lower on Wednesday. The Dow tried to push higher at the open but was immediately stopped at 18,575 and then pushed lower into the close. Support at 18,400 and 18,250 was tested last week. The short squeeze lifted the index away from those levels but the Dow has only been able to hold those gains and not add to them. The top of the short squeeze on Friday morning was 18,520. The Dow closed at 18,532 today, 2.5 days later.

The Dow stocks are going through their post earnings depression phase and that means traders are taking profits and moving on to other candidates. Since the short squeeze, the Dow has had initial support at 18,500. A breakdown under that level would be the first warning the trend may be coming to an end. Similarly, a breakout over 18,600 would be a signal there could be another leg higher in progress.

There are no additional Dow stocks reporting earnings this week.

The Nasdaq is still making new highs but very slowly. On Friday, the gain was 3 points over the prior high. On Monday, the index gave back 8 points. Today the index made a new high by 4 points. These are not exactly rip-roaring gains that have investors racing to place their bets on tech stocks. The semiconductor sector was the support for the Nasdaq gains today as the $SOX closed at a new high.

The Nasdaq has initial support at 5,200 and then 5,115. A break under 5,100 would be very negative. There are no high profile Nasdaq stocks reporting earnings other than Ctrip.com, Alibaba and Nvidia. Those are not normally market movers. The biotech sector has been down for the last two days on profit taking from the recent run. We need the biotechs to catch fire again and provide some additional lift for the Nasdaq.

The Russell 2000 had a nice rebound from the 1200-1205 support and has streaked for 31 points in the Friday short squeeze and the 2 prior days. Since the squeeze stopped on Friday morning the index has stalled completely at that 1,231 level. Resistance is now 1,234 and support 1,228. That is a very narrow range. If that breaks to the downside, I would be looking at 1,200 once again.

I am neutral on the market. The lack of selling suggests everyone expects the market to move higher but expectations do not always come true. The volatility is nonexistent with the VIX closing at 11.66 after hitting a new 52-week low at 11.02 at the open. When the VIX is high, it is time to buy. When the VIX is low, it is time to go. The caveat there is that the VIX can stay low for some time but when it reverses, the moves can be dramatic. The biggest market losses come from events that are unexpected. Also, the market does not need a reason to correct. Sometimes it just happens for no obvious reason other than the rally has run its course.

I recommend keeping your stop losses tight, try not to be overly long and don't buy the first dip. Keep building your shopping list and the prices you would be willing to pay for each stock on that list. Sometimes Christmas does come in August/September.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Watching Paint Dry

by Jim Brown

Click here to email Jim Brown

Editors Note:

I believe it is time to pay attention to the dull market. With every day that passes we are that much closer to a major move and several attempt at moving higher have ended in failure. To be fair we have seen the same thing when the bears try to push the market lower. Unfortunately the bulls have a handicap. It is harder to maintain a rally than a decline. For nearly four weeks the buyers have been unable to move it higher. As we move deeper into the two weakest months of the year for the market, there is no reason to continue adding to our existing portfolio. We need to make the dull choice and ignore the dull market while we wait for a vertical trend to appear. Futures are down -2.50 and falling.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Markets Struggling

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes traded mixed as the markets struggled to move higher from overextended levels. There were some intraday highs but the indexes did not stray too far from the flat line. The Nasdaq was the leader at +12 thanks to Charter (CHTR) adding 5 points to the index with a +19 point gain. Chip stocks also contributed with the $SOX gaining 6 points to a new high.

I am still cautious on market expectations and the low volume and overbought levels are contributing factors to the lack of lift.

Current Portfolio

Current Position Changes

SIX - Six Flags

The long put 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 rejected the Russian claims of price fixing saying it was up to resellers to decide whether to use the suggested retail prices or set their own prices.

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 on G-III. Shares dropped sharply in reaction to the big earnings miss from Wayfair (W) and the -17% decline in the stock price.

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. New 6-month high.

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. Down in a weak consumer sector after the Wayfair earnings miss.

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.

MCD - McDonalds - Company Profile


No specific news. Friday's rally was erased with the Dow's decline.

Original Trade Description: August 6th.

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.

Position 8/8/16:

Long Oct $120 call @ $2.71, no initial stop loss.

NVDA - Nvidia - Company Description


I give up. I really want to hold Nvidia over earnings but the market is not cooperating. The mixed performance on Tuesday suggests the market is getting "toppy" and could collapse at any time. In a mixed market Nvidia shares may not respond as strongly to an earnings beat. If the market does roll over the stocks that are up the most over the last sevral weeks will be the ones that sell off the most. I am recommending we close the Nvidia position at the open on Wednesday.


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


No specific news. Shares retreated slightly again. The stop loss is very tight at $28.45.

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. Dead stop at the 300-day average but only a minor decline today.

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


Very minor gain with the Dow really choppy today. There was no follow through to the Friday short squeeze.

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 stalled again but it would take a major market crash to rescue this position.

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.

SIX - Six Flags - Company Profile


No specific news but nice decline to open this position.

Original Trade Description: July 2nd.

Six Flags Entertainment Corporation owns and operates regional theme and water parks under the Six Flags brand name. The company's parks offer various thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues, and retail outlets, as well as family-oriented entertainment. It owns and operates 18 parks, including 16 parks in the United States; 1 park in Mexico City, Mexico; and 1 park in Montreal, Canada.

In their Q2 report they only generated earnings of 64 cents that missed estimates for 70 cents. Revenue of $407 million was only slightly above estimates for $406.4 million. The company said it sold $300 million in notes in a private placement and would implement a stock repurchase plan.

The problem for Six Flags is that even with low gasoline prices the 2016 attendance only rose 2% in Q2 despite promotions and discounts. People are not rushing out to theme parks this year like they were in the past. Tickets to similar attractions have become so expensive that consumers would rather spend the money on a new cellphone, video game or clothes. Six Flags is currently discounting tickets from $72.99 to $47.99 in an effort to squeeze a few more customers in before Labor Day. Young adult families are faced with spending $400 for 2 adults and 2 kids for a one-day visit including parking and food. Parking is $23.00 and obviously another way to squeeze you for extra money at the gate. $400 is a lot of money in this economy.

Consumers are also staying away from high traffic locations in fear of a terrorist attack and this is not going to change in the near future. In America we have been fortunate but our time is running out and quite a few consumers are avoiding malls, theaters, concerts and theme parks.

Shares fell $3 on the report and bounced for only one day. A new downtrend has developed and Monday's close was a four month low. Shares have risk to $50 or even $45 depending on the overall market.

Position 8/9/16:

Long December $50 put @ $1.94. See portfolio graphic for stop loss.

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