Option Investor

Daily Newsletter, Wednesday, 8/10/2016

Table of Contents

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

Market Wrap

Stock Market Struggling as Momentum Wanes

by Keene Little

Click here to email Keene Little
Most indexes have been able to push to at least minor new highs this week but they're doing so with waning momentum (as evidenced by lower highs in momentum oscillators) and today's pullback has the potential to develop into something more bearish. But the bulls still have the opportunity to add more points, especially as we head into opex week.

Today's Market Stats

As will be evident in many of the charts shown tonight, the new highs last Friday and into the early part of this week looks bullish but with trading volume at lows not seen for the past couple of years and waning momentum for the rally we have a market that simply looks tired following a strong rally from June. There could be enough money to keep the bears away (the selling pressure has been minimal, although a little stronger today) but we're not seeing the kind of volume the bulls would like to see with a breakout to new price highs. That's a warning sign.

SPY traded 39M shares on Monday, which was the lowest full-day volume for the past couple of years and it was less than half the 50-dma for volume. Traders are simply disappearing from the market and one must wonder where the buying horsepower is going to come from. That's of course a silly question because we know who our Sugar Daddy is.

Part of the problem with attracting more buyers is that more traders are starting to understand better that the fundamentals for the market rally stink. With the earnings season for Q2 winding down, it has turned out to be another disappointing one and the projections for Q3 are no better. Earnings growth for Q2 2016 is shaping up to be about -3.5%, which will be the 5th straight quarter of year-over-year declines and the longest streak since the financial crisis.

With all the reports about how many companies "beat" their earnings expectations you would think it was a good season. But this is how the communication to traders is manipulated so as to keep it looking positive. Most retail traders catch the headlines and the intent by Wall Street is to keep retail traders feeling bullish.

Companies have been consistently revising their earnings projections downward and making sure the Wall Street analysts get this information as early as possible. That way the earnings expectations by the analysts are known before the companies announce the actual results and voila!, the company manages to beat expectations by a penny, joining the many companies beating their (lowered) estimates. Amazing performance, or so the average retail trader believes. It's important to remember the goal of politicians, the Fed and Wall Street is to keep people feeling good about the economy and the stock market because when the mood changes it will have a huge negative impact on both.

As the stock market continues to march higher, as earnings decline, the P/E ratio continues to climb into nosebleed territory, which of course puts us back into bubble territory. Goldman Sachs reports a forward P/E of 18.2, which ranks it in the "98th percentile since 1976." When the P/E ratio has climbed this high in the past it has historically led to subpar (negative) performance for the stock market over the next several years.

As of last Friday sellside analysts now project Q3 earnings to be down -1.7% and these estimates typically get downgraded as the quarter develops (due to companies start downgrading their estimates early in the quarter and feed that info to the analysts). That would make it six quarters in a row with negative year-over-year earnings. According to Factset, "year-over-year earnings are now set to decline -0.3% for the full year, after starting the year at +6%. This would mark the second time the S&P has reported 2 consecutive years of earnings decline since 2008 and 2009." But this time the market is pressing to new all-time highs instead of hitting significant lows. That's a real disconnect between stock market prices and company performance and the resulting high P/E ratio. Eventually the market will correct and my concern is that the market is sitting on top of a huge air pocket with nothing underneath to support it.

The chart below highlights the problem with forward guidance, which has been regularly downgraded as the quarter develops. The chart shows how earnings estimates have changed since March 2015 and how forward estimates have changed since January. As stated on the chart, hope springs eternal with high estimates at the beginning of each quarter and then drops significantly as the quarter develops. And then at the end the companies manage to beat their lowered expectations and everyone is happy. The coming correction to this Bizarro World is likely to be a painful one.

Forward Estimates, 2014 through Q4 2016, chart courtesy RealInvestmentAdvice.com

I'll start tonight's chart review with a look at the granddaddy of the indexes, the Wilshire 5000 (which I just read actually has a little more than 3600 stocks) and then as you'll see, SPX looks very similar and remains a good proxy for the broader market.

Wilshire 5000 index, W5000, Weekly chart
W5000 rallied up to and slightly above its May 2015 high at 22537, which like the other indexes, has many feeling very bullish about the market. But I think the overshoot of resistance at that level will hold on a monthly closing basis. Last week's hanging man doji at resistance could lead to a red candle for this week and that would leave a reversal signal. We don't have that yet so it's just speculation but something I'm watching for.

The bullish pattern is very bullish -- it's looking for a pullback to correct the rally from June 27th and then a screaming rally from there in a 3rd of a 3rd wave. It's the kind of move that would take W5000 well above 25K before the end of this year and up to the 30K area next year. Call me a Doubting Thomas on that one but it's what the bullish pattern supports. The bearish pattern says the May 2015 high was the completion of the rally from 2009 and this month's slight new high is only part of a corrective pattern that is the start of the next cyclical bear within the larger secular bear. It calls for a sharp decline below the February low (18462) before the end of the year. There's a good chance we're going to have a much more volatile market between now and the end of the year than we've seen so far this year.

Wilshire 5000 index, W5000, Daily chart

On Monday and Tuesday W5000 pushed up to the trend line along the highs from April-July, making a new price high but leaving behind a significant bearish divergence on MACD, which tells us the momentum is drying up. The market is simply running out of buyers, be it short covering or real buying. At the same time trading volume is hitting lows not seen all year. This could simply be a sign that we're into the summer doldrums or it could be more bearish than that but in any case, it's a warning sign for bulls to heed. But the bulls have the opportunity to take advantage of a bullish setup with the pullback to the May 2015 high at 22537 (today's low was 22531 and it closed at 22559). It would leave a bullish kiss goodbye following the back-test if it can get a rally going tomorrow. Upside potential is back up to the trend line along the highs, which will be near 22750 by the end of the week. It would turn more bullish above 22800.

S&P 500, SPX, Daily chart

SPX looks very similar to the W5000 but it came a little closer to testing its 20-dma today, near 2170 with this afternoon's low at 2172. If that acts as support to launch another push higher, keep an eye on the trend line along the highs from April-July, which will be near 2195 by Friday. Higher than that I'd then look for the price projection at 2220-2223. But if drops lower and breaks below its August 2nd low near 2147 we should get at least a deeper pullback and the May 2015 high near 2135 and its 50-dma, currently near 2124, would be good downside targets for now.

Key Levels for SPX:
- bullish above 2195
- bearish below 2147

S&P 500, SPX, 30-min chart

The SPX 30-min chart has been providing a good pattern to analyze the short-term wave count, which I am always suspicious of because of the amount of blatant manipulation in this market (EW measures sentiment swings in traders' behavior), but for now it's providing a good road map to follow. The bearish wave pattern would look best with another drop lower, with a downside target at 2167, followed by a larger bounce correction and then lower again. But I could argue for a larger bounce from here and then lower for at least a larger a-b-c pullback pattern (that would keep things bullish and could be a good setup for a pullback before opex week and then launch the buy programs). If we get an immediate drop Thursday morning (reversing the series of small gaps to the upside recently) and it drops below 2167 we could see an acceleration of the selling. Back above 2184 would have me thinking new highs sooner rather than later.

Dow Industrials, INDU, Daily chart

The Dow has not been able to make a new high above it July 20th high at 18622 (the high on Tuesday was 18585) but there's upside potential to a Fib projection at 18778, which is where the 5th wave (leg up from June 27th) of its rally from January would equal 162% of the 1st wave. That projection crosses a trend line along the highs from April-July next Wednesday, August 17th. Could we get an opex rally to get the Dow to achieve that level? At this point it's looking doubtful if only because the rally has lost so much momentum but it's only about a 200-point rally in a week's time, something that could easily be achieved if there remains enough money to counter any selling in the coming week. But a drop below the August 2nd low at 18247 would be a strong indication the top is already in place.

Key Levels for DOW:
- bullish above 18,800
- bearish below 18,247

Nasdaq-100, NDX, Daily chart

NDX got within 5 points of hitting its all-time high back in March 2000 at 4816.35. To fail there would be an epic fail and I have a hard time believing the manipulators would let that happen. I see a short-term pattern that suggests we'll get at least a larger pullback but bulls probably don't need to worry if NDX can stay above its December 2015 high near 4740. Below that would then risk a further drop to its 20-dma, near 4700, and its August 2nd low near 4689. Below that level would strongly support a top already in place and then it would be time to figure out if we're looking for just a larger pullback correction to the rally from June or something more bearish.

Key Levels for NDX:
- bullish above 4820
- bearish below 4689

Russell-2000, RUT, Daily chart

Last Friday the RUT tried to get through a trend line along the highs from June-July, which has stopped all rally attempts since July 12th, including the last attempt. Today's larger red candle looks like a firmer rejection at that trend line and leaves a significant bearish divergence on MACD against its highs since mid-July. It can still press higher but the rally is looking weak. It has plenty of support between here and the August 2nd low near 1198 and not until that 1198 low is broken will the bears have a better sense that a top is in place. That's the setup here but there's no confirming evidence yet.

Key Levels for RUT:
- bullish above 1250
- bearish below 1198

20+ Year Treasury ETF, TLT, Daily chart 10-year Yield, TNX, Daily chart

Since Monday's update for TLT it rallied back up to its downtrend line from July 8th today and pulled back. Its short-term pattern suggests a pullback before proceeding higher and there's still the possibility it will drop back down to the bottom of the down-channel from July 8th, currently near 134.50. But a break of its downtrend line with a rally above today's high at 140.51 would be bullish, which would be confirmed with a rally above its July 29th high since that would leave a 3-wave pullback correction from July 8th. A rally in bonds would likely put pressure on the stock market, which is why it's important to keep an eye on this ETF.

KBW Bank index, BKX, Daily chart

Monday's high for BKX, with the small poke above its downtrend line and then close below it (leaving a small spinning top doji at resistance), has been followed by a turn back down. This could be a significant reversal in the making or it will lead to just a correction to the rally from June 27th and then a continuation higher. I think price-level S/R near 66.50 remains the key level for the bears to break. This level supported the last pullback into the August 2nd low.

U.S. Dollar contract, DX, Daily chart

Last Friday through yesterday the US$ tried to get back above its 20-dma, near 96.40, but was unable to crack it and yesterday and today it gave up the fight and has pulled back, dropping back below its 50-dma at 95.62 in the process (it closed at 95.57). The bottom of an up-channel from May is near 94.60 so it would be a little more bearish below that level but in reality the dollar's pattern is a choppy mess and my expectation is for another choppy rally into September as it makes its way back up to 100.

Gold continuous contract, GC, Daily chart

While the dollar found its 20-dma to be resistance since testing it last Friday, gold found its 20-dma to be support and today managed a little higher bounce off that support level, currently near 1340. From a bullish perspective, although it requires another leg down for a larger pullback from July 6th, I can see a rising wedge pattern for the rally from December that would look best with another leg up (following a pullback to the uptrend line from December, near 1280. That possibility will have to be evaluated if and when gold drops down to its uptrend line. A drop below 1280 would be more bearish. If gold simply heads higher from here I continue to like a price projection near 1415, which is also where its downtrend line from 2011-2012 crosses the trend line along the highs from February-July.

Oil continuous contract, CL, Daily chart

Oil was also rejected by its 20-dma, and the top of its down-channel from June highs and now we watch to see its 200-dma at 40.54 will hold as support (today's low was 41.42) so it has a little room to run before testing support. A rally above yesterday's high at 43.52 would obviously be more bullish but at the moment the price pattern, down-channel and lack of bullish divergence suggest we'll see oil drop lower.

Economic reports

There were no market-moving economic reports this morning and there won't be any Thursday morning either. Friday's reports could move the market some but Thursday and Friday will be the start to the shenanigans that we often see in front of opex week.


The stock market has defied all odds that we'd see at least a pullback in August since the earnings news continues to get worse, not better. But with a strong Wall Street "interest" in keeping the market elevated into election season (Wall Street would rather Clinton than Trump) and the "good" news flowing from government reports (the political establishment clearly would prefer Clinton over Trump) we have to expect more "influence" in the market by those with a lot more money than you and I have. New market highs, despite the plethora of bad fundamental news for the market, tell us what we need to know about who's in control of the market. They make no denial anymore about the support.

The risk for market bulls, as I see it, is that the market has been propped up on the fluffy stuff of dreams and there's a big air pocket below the market. When the market starts down and big money can't stop it, HFTs will run for the shadows and most everyone is going to be looking to sell, but without any takers. The market is fun for the bulls until it's not and then I suspect it's going to be sheer panic and all the King's horses and all King's men are going to find it difficult to put the pieces back together again. This "free" market is anything but and the level of distortion will correct someday. The big question of course is the "when" part but keep in mind that the very low trading volume and low liquidity as a result of that could create problems sooner rather than later. Be careful out there.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Option Plays

Big Insider Buy

by Jim Brown

Click here to email Jim Brown

Editors Note:

The best indicator of management's confidence in a rising stock is when they buy shares. When they buy a lot of shares it suggests conditions are about to get significantly better. Penske is one of those companies.


PAG - Penske Automotive Group - Company Profile

Penske Automotive Group, Inc. operates as a transportation services company. The company operates through three segments: Retail Automotive, Retail Commercial Truck, and Other. It operates retail automotive and commercial vehicle dealerships principally in the United States and Western Europe; and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services primarily in Australia and New Zealand. The company engages in the sale of new and used motor vehicles; and related products and services, such as vehicle service and collision repair services, as well as placement of finance and lease contracts, third-party insurance products, and other aftermarket products. The company also operates 14 dealerships locations of heavy and medium duty trucks primarily under Freightliner and Western Star brand names, as well as offers a range of used trucks, and service and parts. Further, the company distributes commercial vehicles and parts to a network of more than 70 dealership locations, including 3 company-owned retail commercial vehicle dealerships. At the end of 2015 they operated 355 automotive retail franchises with 181 in the USA, and 174 outside the US, primarily in the UK.

For Q2 they reported earnings of $1.11 and beat estimates for $1.08. Revenue rose 6.8% to $5.3 billion and also beating estimates for $5.1 billion. On a constant currency basis revenue rose 9.2%. They sold 115,106 vehicles in Q2. Gross profits rose 5.5% to $771.3 million. Cash on hand rose from $62 million to $97 million.

On July 27th Penske Automotive acquired an additional 14.4% interest in Penske Truck Leasing from GE Capital for $498.7 million. That raised their ownership to 23.4%. They expect this to add 25 cents to earnings on annual basis. In April a Penske subsidiary, Premier Truck Group acquired Harper Truck Centers, a commercial truck dealership in Ontario Canada. The acquisition will add $130 million in annual revenue.

On August 2nd Chairman and CEO, Roger Penske, acquired 710,121 shares for an averge price of $39.10 for a total value of $27,765,730. Since 2010 Roger had sold 501,326 shares in three transactions. That makes his recent buy even more important because if marks a change in sentiment.

Earnings Oct 27th.

PAG shares are about to break over long-term resistance at $40. Shares closed at $40.20 and that complicates the trade. If we buy the $45 call, which is only $1, the stock has to move $5 to really make a difference in the option price. If we buy the ITM call at $40, which is $2.95 we are paying an ATM premium that will decline as it moves farther into the money. However, for every $1 the stock raises the option will appreciate significantly. Currently the $35 call is $6.30. That is what we could expect the $40 call to be worth if the stock rises to $45. At the same time, the $45 call would rise from the current $1 to $2.95. Do we invest $3 to make $3 or do we invest $1 to make $2? I am going to recommend the $45 call because of the lower cost, lower risk and higher percentage return if PAG rises to $45. The risk is that it stalls somewhere between $40 and $45 and we never reach the ITM premium level before the Oct earnings. I believe this chart is worth the risk. I am going to put a $41 trigger on it to make sure it breaks through that resistance.

With a PAG trade at $41.00

Buy Nov $45 call, currently $1.00, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Minor Retracement

by Jim Brown

Click here to email Jim Brown

Editors Note:

Do not get too excited about the market decline because it was only minimal and one day does not make a trend. The S&P only lost -6 points and closed on support at 2,175. The Dow only lost -37 points and bounced at support of 18,465. The Nasdaq dipped slightly below support at 5,200 but recovered to close at 5,204. The Nasdaq was pulled lower by the biotech sector, which lost -3% and far more than the broader indexes. This also pulled the Russell 2000 lower.

Thursday could be a pivotal day for the market. So far, this is just a normal bout of profit taking. If it morphs into something more sinister with a bigger drop on accelerating volume then the bears could gains some conviction at the same time the bulls are heading for the exits.

Current Portfolio

Current Position Changes

NVDA - Nvidia

The long call position was closed at the open.

TASR - Taser

The long call position was stopped at $28.45.

XBI - Biotech ETF

The long call position was stopped at $61.85.

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 is reportedly planning the first MacBook Pro laptop overhaul in four years. Another leak confirmed the iPhone 7 launch is scheduled for Sept 7th.

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 declined on Tuesday in response to the Wayfair earnings miss and posted a gain today on the Ralph Lauren (RL) earnings beat and spike in the stock.

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. Minor decline from the six-month high on Tuesday. New resistance has formed at $32.75.

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. Holding the recent gains despite a choppy consumer sector.

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. The Wendy's CEO said in their earnings report that sales were down at all fast food chains because of uncertainty over the elections. He said people were not eating cheeseburgers because they were worried over who would be elected and how it would impact their earnings in the future.

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


The position was closed at the open for a nice gain ahead of earnings on Thursday. Now we can watch from the sidelines as they either rocket higher or crash and burn.

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

Closed 8/10/16: Long Oct $60 call @ $1.55, exit $3.75, +$2.20 gain

TASR - Taser Intl - Company Description


No specific news. After weeks of moving slowly higher the position was stopped out with a dip to $28.45 for a minor loss. The pace of the gains was not enough to keep the call premium inflated and TASR could not hold the $29 level.

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

Closed 8/10/16: Long Sept $29 call @ $1.49, exit $1.10, -.39 loss.

XBI - Biotech ETF - ETF Profile


No specific news. The biotech sector rolled over and crashed after hitting resistance at the 300-day average. We were stopped out at $61.85 for a decent gain.

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: Closed 8/10/16: Long Sept $60 call @ $2.41. Exit $3.50, +$1.09 gain.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


The market appears to be weakening. There was no follow through to the Friday short squeeze and the Dow stalled at resistance for the last three days. Thursday could be critical for market direction.

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 lost nearly a point but it would take a major market crash to rescue this position. I considered selling a $118 strike put to reduce the cost in the position but the premium was too small and we could actually see a decline under $118 if the market decides to correct.

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. Big drop to $51.82 but equally big rebound back into positive territory. It will be interesting to see if it sticks.

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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