Option Investor

Daily Newsletter, Thursday, 8/18/2016

Table of Contents

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

Market Wrap

A Market Adrift

by Thomas Hughes

Click here to email Thomas Hughes


The market made small gains but nothing substantial, FOMC outlook fails to move the market ahead of OPEX. Yesterday's Fed meeting minutes were a bit on the dovish side but with all their transparency it's hard to know what they really think. The committee spokesperson and chairman Janet Yellen says they aren't in a hurry but comments from other members seem to be at odds with this sentiment. Not to name names but there are Fed members who think a hike could next month, and others who say there won't be more than one in the next 2 years. In terms of the market, it seems as if it is tired of the overly transparent FOMC and is waiting for, as Toby Keith says, "A little less talk and a lot more action". Until then focus could turn to economic data and earnings.

Today's data was positive but in more of a forward looking sense than in a things are great right now kind of way. Retail earnings are rolling in and mixed, as expected. Where one company misses on estimates and lowers guidance, another has beaten and raised guidance. The big name on the roster today was Wal-Mart, falling into the latter category and providing most of, if not of all of, today's support for the Dow Jones Industrial Average.

The international markets were mixed following the FOMC meeting. Confusion abounds and is not helping already shaky markets. In Asia most indices were flattish although the Japanese Nikkei saw losses in the range of -1.5%. Dovish FOMC stance has sent the yen shooting higher versus the dollar, which in turn has taken its toll on local stocks. At the same time Japanese trade data was weaker than expected raising additional concern that Abenomics is not working as expected. European indices were mostly higher at the end of their trading day although gains were minimal and driven primarily by rising oil prices.

Market Statistics

Our markets were fairly quiet in the early pre-opening hours. Futures trading indicated flat to negative opens for most of the morning, with that turning to mostly flat following the 8:30AM release of economic data. The open was a bit weak with the indices opening just barely in negative territory. The first hour was choppy with trading hovering around break even level until about 10:30AM when a small rally was able to push the market up to an intraday high. That high held prices back the rest of the day. It was tested once about a half hour after it was set, and then again later in the day after several hours of market sidewinding near break even level. The last hour of trading saw more side-winding before the market made a final surge higher to leave the indices at or near the highs of the day. Regardless, today's trading ranges were very narrow and gains were small.

Economic Calendar

The Economy

Weekly jobless claims are top of the list today. Initial jobless claims fell -4,000 from a not-revised figure to hit 262,000. This is the 76th week of claims below 300,000, the longest run since 1970. The four week moving average of initial claims rose 2,500 to hit 265,000. On a not adjusted basis claims fell -5.2%, more than -3.7% predicted by the seasonal factors. On a year over year basis not adjusted claims are down -4.2%. The largest increases in claims were in Philadelphia and Puerto Rico, +2359 and +1621, while the largest decreases were in Michigan and Kentucky, -2186 and -536. All in all, initial claims continues to trend near the long term low, consistent with labor market health.

Continuing claims gained 15,000 on top of an upward revision of 5,000 to hit 2.175 million. This is the highest level of 2nd week claims in over 2 months but remains low relative to the recovery and trending near the long term low. The four wee moving average of continuing claims gained 10,750 to hit 2.155 million.

The total number of jobless claims rose slightly this week but appears to have crested the July peak predicted by seasonal/historical trends. The total number of claims rose by 3,876 to hit 2.148 million, down -4.7% from this same time last year. Even with the rise claims remain in down trend and constent with labor market health. If historical trends remain intact we can expect to see this number begin to decline in the next 2 to 3 weeks, as much as -20%, and possibly hit a new long term low near 1.72 million.

The Philadelphia Federal Reserve Manufacturing Business Outlook Survey rose to positive territory for the 3rd time this year and more than expected. However positive, the internals are not that great. The diffusion index gained 5 points to hit 2 while internally new orders, unfilled orders, delivery time, inventory and employment all fell. New orders fell -19 points to -7.2, unfilled orders fell to -15, inventories fell nearly 10 points to -4.3 and employment fell -18 to -20. The only current index to rise was shipments which gained 2.1 to hit 8.4. Looking forward things are more positive. The future 6 month outlook rose 12 points to 45.8, the highest level in over 18 months.

The Leading Economic Indicators was released at 10AM and came in as expected. The index shows a 0.4% gain in July following a 0.3% gain in June and indicates moderate growth into the end of the year. Conference Board spokesman said there is also a chance for increased growth later this year if current conditions remains unchanged. The Coincident Indicator rose 0.4%, the Lagging Indicator rose 0.1%.

The economic calendar is light over the next week. Tomorrow we'll get nothing, next week New and Existing Home Sales, Durable Goods and the first revision of 2nd quarter GDP along with the weekly jobless claims. While important, nothing here is likely to be big mover of the markets.

The Dollar Index

The Dollar Index fell to a new 7 week low today, despite the upbeat data. Yesterday's FOMC minutes helped soothe rate hike fears and support evaporated. There are few economic reports and no central bank meetings (although there are likely to be random comments from FOMC members) over the next week to ten days so this sentiment may linger. Today's action took the index down by nearly -0.5% to break my support target at $94.30 and the 7.6% retracement level. This level may hold but the indicators are in support of additional testing so I don't the move is quite done. A break below support would be bearish and could take it down below the $93.00 level to test support at or near the May lows.

The Oil Index

Oil prices continued to surge as talk of a possible production freeze ripples through the market. The talk, eerily akin to what we heard last winter, is that OPEC and other large global producers will be considering a possible output freeze next month. If this plays out like last time, and it likely will, the talk will support oil prices up to and until the deal falls apart, and the fundamentals will take over. Even if the deal doesn't fall apart the supply/demand picture will remain unchanged as there is no talk of production cuts, merely halting any additional increases, so upside is limited. Basically, this sounds like a classic buy the news and sell the reality situation. WTI gained more than 3% today to trade above $48 and looks set to test resistance at $50 and possibly the recent high near $52.50.

While traders in the underlying commodity are buying into the rumors, investors in the oil/energy sectors are a little hesitant. The Oil Index made some gains today, a little more than 1%, and has made gains over the past 2 weeks, but nothing like what WTI has made in that time. Today's action in the index was light, created a small candle and leaves it range bound. The indicators support a move to the upper boundary, near 1,175, as indicated by rising oil prices but are not strong and do not suggest prices will break above resistance at this time.

The Gold Index

Gold prices are holding firm near $1350. Today spot prices move up by more than a half percent to trade above $1355. The FOMC minutes, their dovish stance and weakened dollar are supporting prices and are likely to rise in the near term. Upside target is about $30 above today's settlement, near $1,385, with a possible move up to $1,400 in the absence of rate hike or dollar supporting news.

The gold miners tread water today, moving higher on stable gold prices but without much strength. The Gold Miners ETF GDX gained only about 0.5% in a move that created a very small spinning top doji. This candle is representative of an indecisive market, not surprising given the uncertainty of just exactly what the FOMC is going to do over the next few months. The indicators are bearish and consistent with a test of support, near term support is at the short term moving average. A break below support is potentially bearish and could the ETF down to $27.50. Resistance is just above today's close, near the $31. A break above this level would face next resistance at the current 3 year high.

In The News, Story Stocks and Earnings

Wal-Mart was the big name in early news, reporting earnings before the opening bell. The seller of just about everything reported yoy growth in earnings and revenue that came in above consensus estimates and led to improved forward guidance. Sales were strong in both US and international markets. Comps rose 1.6% in the US and are up for the 8th consecutive quarter, net sales internationally up 2.2%. EPS was impacted about $0.03 by currency conversion, or 2.8%. Shares of the stock rose more than 3.5% in pre-opening trading, gapped up at the open and then sold off throughout the day. Despite selling off from the high the stock was able to close with a gain near 1.7% and at a 15 month closing high.

Earnings in the retail have been decent in terms of year over year growth. Just about every one that has reported so far has reported both earnings and revenue growth. The problem in many cases is that forward outlook isn't that great and there have been a few cases of lowered guidance. Of course, there are also stars like Wal-Mart who've been able to exceed expectations and raise guidance. The mix of earnings has resulted in a bit of churn in the sector, Lowe's for one has seen share prices fall more than 6% post earnings release. The XRT Retail SPDR, looking eager on Monday, has since pulled back to a near term support. Today's action continues a bounce from that support but did not reclaim the Monday high. That high marks potential resistance that is confirmed by the indicators. The ETF may move up to test resistance but without further positive catalyst a break through to new highs does not look likely.

Gap Inc reported after the bell and bear EPS estimates by a penny. Despite what was a good 2nd quarter showing for the jeans and apparel retailer full year guidance was lowered on sluggish recovery efforts. Comp sales fell for both the Gap and Banana Republic brands, Old Navy was flat. Shares of the stock fell -3% in after hours trading.

The Indices

Market action was rather light today, not too surprising in light of the season but still, less than I might have expected. I say surprising because the market did not seem to care that oil prices are approaching $50 again, or that nothing seems to have change at the FOMC. I think what it boils down to is a market that has heard this tune before. Today's action was bullish, but it was cautious on the expectation oil prices won't run too high and that the FOMC's "transparency" remains a wild card.

The Dow Jones Transportation Average led today's market with a gain near 0.4%. The index created a small white bodied candle that closed near the high of the day and appears to be drifting higher. The indicators are firing a bullish crossover so this move may have legs, the caveat is that it does not look very strong and potential resistance is about 1% above today's closing price. Resistance is in the range of 8,000 to 8,100, consistent with the top of a 6 month trading range, and has been tested several times before.

The NASDAQ Composite made the 2nd largest move in today's session, about 0.20%. The tech heavy index created a very small white candle moving up from yesterdays close and confirming near term support at the 5,225 level. This may be the precursor to further upside but the indicators suggest otherwise. Both are divergent from the latest high, a new all time high, and both are now confirming with bearish crossovers. A drop below support, 5,225, is like to lead to correction that could take the index to the short term moving average, near 5,115, or lower. If support is confirmed the index is likely to move higher in the short term with upside target near 5,500.

The S&P 500 is third in today's line up with a gain near 0.15%. The broad market created a very small white candle that closed near the high of the day but did not set a new high. Price action has tamed down quite a bit since the index hit new all time highs but appears as if those new highs will be tested. Momentum has been bearish for over a week and now stochastic is rolling over with a bearish crossover confirming weakness in the index so caution is due, reversal is possible. Resistance is just above today's close, at the current all time high. Near term support is near 5,165 and just below that at the short term moving average. A break below these levels would be bearish and could result in a move down to 2,130.

The Dow Jones Industrial Average brings up the rear with a gain of 0.12%. The blue chips made a small white candle that closed at the high of the day, just below the current all time high. Price action was weak today, mostly side-winding if biased to the upside and in continuation of yesterday's support bounce. The index may continue to rise tomorrow but will need to break the all time in order to get bullish. The indicators are divergent from the high, momentum has been bearish for more than a week, and stochastic is rolling over now so additional highs will probably need a new catalyst.

The indices are bouncing from near term support and approaching recently set highs, all time highs in most cases. The move is weak and lethargic, driven by a slightly schizophrenic FOMC, spotty economic data and weak earnings with little in the way of really positive information to support it. Despite my misgivings it does look as if the market will continue to drift higher too, and likely set new all time highs.

The question is, how long can it last? At current levels the S&P 500 is 2.5% above the previous all time high, 5% above the 150 day EMA, 9.5% above the June Swoon low, 11% above a long term up trend line and 20% above the February/Dimon Bottom; attractive levels for profit taking that not I think coincidentally the market has reached as we near the end of the summer season. So, I'm cautiously bullish in the near term, more bullish for the long, but still wary of possibly market correction in the short.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Covering the Earth

by Jim Brown

Click here to email Jim Brown

Editors Note:

Skyworks Solutions has been beaten down by the decline in expected iPhone sales. However, they also produce chips for nearly every other fully featured smartphone from many other manufacturers.


SWKS - Skyworks Solutions - Company Profile

Skyworks Solutions, Inc., designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, VCOS/synthesizers, and voltage regulators. The company provides its products for automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable applications.

In other words, Skyworks chips are in quite a few devices in the Internet of Things (IoT). The stock has been punished by investors because of the decline in expectations for Apple iPhone sales. That is a big business for Skyworks but fare from their only business. They also produce chips for phones like the Samsun Galaxy that is taking market share away from Apple. They are losing share for one customer and gaining share at another plus they sell chips for hundreds of other products not related to smartphones.

They reported earnings of $1.24 compared to estimates for $1.21. Revenue of $751.7 million also beat estimates for $750.1 million. They guided for revenue in the range of $831 million for the current quarter and earnings of $1.43.

Earnings Nov 3rd.

CLSA upgraded the stock from underperform to outperform saying the bad news on worried about Apple's sales is already priced in and the CEO gave conservative guidance that should be easy to beat. The company said its flagship smartphone chipset sales were expected to grow 20% in 2016. The analyst raised the target price to $77.

Shares were up strongly on Thursday despite the weak market. They are poised to break over resistance at $72 and retest the $79 level. Because of the gain the option premiums are inflated so I am recommending a call spread. The October strikes will not be available until next week so we have to go with November.

With a SWKS trade at $72.05

Buy Nov $75 call, currently $3.60, no initial stop loss.
Sell Nov $82.50 call, currently $1.30, no initial stop loss.
Net debit $2.30.


No New Bearish Plays

In Play Updates and Reviews

Dip Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

The new trend appears to be opening dips that are bought on volume to lift the Dow back into positive territory. The Dow has more lives than a cartoon cat and today's opening dip to 18,533 was reversed to close with a 23-point gain at 18,595. Thursday's dip was not as pronounced as the Wednesday dip but the buyers showed up immediately once the selling pressure eased. The S&P and Nasdaq showed similar patterns.

The Russell 2000 small caps shook off two days of weakness to be the biggest gainer at +0.7% and close at a 3-day high. If that sentiment continues the broader market will go higher.

At this point in the cycle if the indexes set another new high it would suggest we are going a lot higher. The bears have been unable to produce any material weakness and the buyers are waiting on every dip.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

ITW - Illinois Tool Works

The long call position remains unopened until $119.25. High today was $118.89

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AAPL - Apple Inc - Company Profile


Apple leaks now claim the iPhone 7 will not be available until a week later than originally planned. The announcement will still be on Sept 9th but the first deliveries have been pushed back from Sept 16th to Sept 23rd. No reason was given and this was just a leak. It could be wrong.

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.

AKAM - Akamai Technologies - Company Profile


No specific news. Shares were up a penny. Waiting on market direction.

Original Trade Description: August 13th.

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers performance and security solutions designed to help Websites and business applications operate while offering protection against security threats. It also provides media content delivery solutions that are designed to deliver movies, television shows, live events, games, social media, software downloads, and other content on the Internet in fixed line and mobile networks; adaptive delivery solutions for streaming video content; and download delivery solution that offers accelerated distribution for large file downloads, including games, progressive media files, documents, and other file-based content.

If you have a large amount of content on the web that is routinely downloaded by thousands or even millions of people around the world, Akamai has the solution. Assume you are a streaming media company with 20,000 downloadable movies. If all those downloads were streamed out of one location to thousands of customers around the world, the bandwidth and server horsepower required at the host location would be enormous. Delays would result when everyone started downloading movies after dinner in the evening.

Akamai solves this problem by cloning your download library and spreading copies around in multiple locations around the world. When a customer clicks on a movie to download, that movie is sent from the location closest to him. In the Internet world distance is time. The farther you are from the website location the longer the downloads will take because they have to pass through dozens of "pipes" and "routers" as they make their way to your. By putting heavily used content in major geographic locations, Akamai shortens the distance for those in that area. Akamai also provides security and redundancy for the companies providing the source data.

In the Q2 report Akamai reported earnings of 64 cents on a 6% rise in revenue of $572 million. Analysts were expecting 64 cents and $575 million. The cloud security solutions unit saw revenue rise +42% to an annualized rate of $360 million. International revenue rose 25% to $177 million.

The problem came from the USA where revenue declined -1%. Two of the company's largest customers, Facebook and Amazon, began remotely hosting more of their own content and that reduced revenue. Those two companies were previously 12% of Akami revenue and they declined to 5%. The company guided for Q3 earnings of 59-62 cents on revenue of $566-$578 million. Analysts were expecting 66 cents on revenue of $590 million.

The key point here is that overall revenues rose 6% despite the sharp decline in revenue from Facebook and Amazon. The second point is that now they are only 5% of total revenue and they cannot decline much farther. Akamai said those two customers were building their own "content distribution network" or CDN, which is a very expensive undertaking and the vast majority of Akamai customers could not afford to do that. Obviously Amazon has AWS with massive datacenters all around the world so it only makes sense for them to clone their own content into multiple locations. That is the same with Facebook. They have hundreds of thousands of servers in secure locations all around the world and no longer need Akamai to handle the bulk of their data delivery.

With Akamai continuing to grow even when 7% of their prior revenue base went away, it shows how strong the business really is today. The rapidly growing cloud security solutions business and the international growth will continue to accelerate.

Akamai shares fell from $58 to $48 on the lowered guidance. After trading sideways for two weeks with no further declines, Wells Fargo upgraded them from neutral to buy on Thursday. I believe they will recover their pre earnings level of $58, which just happened to be an eight month high.

Earnings are October 25th.

Position 8/15/16:

Long Nov $55 Call @ $2.46, see portfolio graphic for stop loss.

GIII - G-III Apparel Group - Company Profile


No specific news. GIII gained 2% in a weak market.

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.

ITW - Illinois Tool Works - Company Profile


No specific news. Just waiting on the market.

The position remains unopened until a trade at $119.25. High today was $118.99.

Original Trade Description: August 17th.

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Illinois Tool Works Inc. was founded in 1912.

In late July, ITW reported earnings of $1.46 that rose 12.3% and beat estimates for $1.40. Revenue of $3.43 billion beat estimates for $3.40 billion. ITW guided for Q3 earnings of $1.42-$1.52 compared to analyst estimates for $1.46. The company raised full year guidance for earnings by 10 cents to the $5.50-$5.70 range. Analysts were expecting $5.51 per share.

The stock jumped from $111 to $115 on the news and then traded sideways for two weeks on post earnings consolidation. In early August the shares started a slow climb to hit $119 and a new high. Every day I thought about recommending ITW but I kept waiting for a pullback. We saw a minor decline on Tuesday to $118 and a positive gain on Wednesday. This may be our chance to buy a dip, even as small as it was.

Earnings Oct 19th.

With an ITW trade at $119.25

Buy Dec $125 call, currently $2.00. No initial stop loss.

If you want to buy the $120 strike you could turn it into a spread by buying the Dec $120 and selling the Dec $130. The net debit today would be $3.40. I still think that is expensive and why I recommended the $125 call.

LL - Lumber Liquidators - Company Description


No specific news. Shares are fighting new resistance at $17.

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.

NOW- ServiceNow Inc - Company Profile


No specific news and no drop. The $72.85-$73.00 level is support and that is where it stopped again today.

Original Trade Description: August 15th.

ServiceNow, Inc. provides enterprise cloud-based solutions that define, structure, manage, and automate services in North America, Europe, the Middle East, Africa, the Asia Pacific, and internationally. It offers service management solutions, including incident management, problem management, change management, and request management, as well as service catalog and knowledge base; and information technology (IT), HR, customer service, security operations, facilities, and field service management solutions. The company also provides business management solutions, such as financial management solutions; project portfolio suite that provides capabilities to plan, organize, and manage projects; governance, risk, and compliance solution that provides clarity into compliance and audit initiatives; and performance analytics solutions. It serves enterprises in various industries, including financial services, consumer products, IT services, health care, and technology.

In late July the company posted earnings of 15 cents that beat analyst estimates for 10 cents. Revenue rose 38% to $341.3 million and beating estimates for $334 million. Billings rose 33% to $375 million. Emerging product revenue rose 40%, up from 24% in the year ago quarter. Two-thirds of their customers now license more than one product and 15 of the top 20 new deals included three of more products. They now have more than 272 customers paying more than $1 million each in annual license revenues, an increase of 26 for the quarter.

They guided for revenue in Q3 of $350-$354 million and analysts were expecting $349 million. Full year guidance was for revenue of $1.37-$1.38 billion and above analyst estimates for $1.37 billion. Subscription revenues are expected to rise 40%. Subscription revenue gross margin is expected to be 84%. Total revenues are expected to rise 35%.

Mizuho recently upgraded them from neutral to buy with an $85 price target.

Earnings Oct 26th.

Shares spiked on earnings then declined in the post earnings depression phase. After two weeks of choppy gains they are about to break out to a new 8-month high. Unfortunately, option premiums are high so this will have to be a spread. Shares closed at $76.74 and the $80 strike is $4.70 and the $85 strike at $2.85. I do not really want to just buy the $85 strike because that is $8 OTM. To solve this problem I am recommending we buy the $80 strike and sell the $90 strike, currently $1.35. The stock hit a high of $91 back in December.

Position 8/16/16:

Long Nov $80 call @ $4.70, see portfolio graphic for stop loss.
Short Nov $90 call @ $1.20, no initial stop loss.
Net debit $3.35.

PAG - Penske Automotive Group - Company Profile


No specific news. Shares closed at a 7-month high but it was only a 2 cent gain.

Original Trade Description: August 10th.

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.

Update: On August 10th CEO Roger Penske bought another 151,412 shares for $6 million. Roger Penske acquired another 50,000 shares on August 11th at an average price of $41.40. He is on a buying binge with new positions every 2-3 days. Just in August he has purchased nearly one million shares for roughly $40 million. That brings his total ownership to 31,066,574 shares. There are only 85 million outstanding. It looks like he may be taking the company private, one bite at a time.

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.

Position 8/11/16 with a PAG trade at $41.00

Long Nov $45 call @ $1.35, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


This is turning into a recurring nightmare with the Dow up +20, down -20, repeat daily, trend. The Dow cannot extend its gains but there are enough dip buyers to keep it was declining. The six weeks after August option expiration are the most volatile of the entire year.

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

SIX - Six Flags - Company Profile


No specific news. New six-month intraday low.

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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