Option Investor

Daily Newsletter, Tuesday, 8/23/2016

Table of Contents

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

Market Wrap

Russell 2000 Leads

by Jim Brown

Click here to email Jim Brown

The Russell 2000 surged +9 points to a new 52-week high and provided a sentiment boost for the market.

Market Statistics

The small cap Russell 2000 continued its steady climb and posted a new 52-week high at 1,248 and well over the prior high at 1,241. The semiconductors, biotechs and the energy sector provided support for the Russell and none of those appear to be weakening.

The surge in the Russell suggests fund managers are already starting to nibble at stocks for their yearend portfolio restructuring push. The fiscal year end for most funds is October 31st and that makes the next 60 days critical for fund performance. Typically, they dump stocks in September and then buy stocks on the October lows. So far this season the market is not showing any weakness and managers appear to be putting some of their cash hoard to work in the small cap stocks where they can get the most bang for their bucks. This suggests there could be a healthy rally at some point in the future if managers are not worried about the most volatile six weeks of the year that started on Monday. Based on the chart below there is plenty of room for backing and filling to 1,238 or even 1,225 and still maintaining the uptrend bias.

The New Home Sales for July were off the charts with a 12.4% surge to 654,000. That was up from 582,000 in June, which was a 1.7% rise. Compared to July 2015, sales have risen 31.3% and still climbing. The months of inventory on the market fell to 4.3 compared to the 5.5 month high in March. There were 233,000 homes for sale at the end of July. There is some seasonality in those numbers since builders try to have a large supply of completed homes in the late spring months so shoppers have an assortment to choose from when the buying season begins. Now that summer is over we should see the pace of sales slow in coming months but the very low interest rates will still be a sales driver.

Sales were strongest in the South and Northeast. Sales in the Northeast rose 40% and +18.1% in the South. The Midwest increased only 1.2% and the West was flat. The median price for a new home was $355,800 and a +4.1% increase from July 2015.

Before investors could become too excited about the home sales, the Richmond Fed surveys knocked all the wind out of the market. The headline number on the manufacturing survey declined from +10 to -11, and the lowest reading since -13 in January 2013 and the second lowest reading since the financial crisis.

The internal components imploded with the gap between inventories and orders falling to -44, order backlogs -21 and new orders falling -35 to -20. This was a very ugly report. With the inv/ord gap at -44, this suggests the next couple months could also be very negative. The 35-point drop in new orders means manufacturers will have nothing to build and employment could decline as layoffs increase.

The headline number on the separate services survey fell from +8 to zero. The internal components were equally negative. Sales of big ticket items fell to -10, shopper traffic went negative at -4 and sales revenues fell deeper into negative territory at -26.

The SEMI Book-to-Bill ratio for North American manufacturers rose slightly from 1.00 to 1.05 for July. That means they received $1.05 in orders for every $1 they billed. Shipments declined from $1.715 billion to $1.705 billion. Bookings rose from $1.714 billion to $1.794 billon.

On Wednesday, we get the existing home sales for July and those numbers should be high as well although several analysts are looking for a decline from the 5.7 million pace from last month.

The big events for the week remain the GDP and Yellen speech on Friday. Both could be market movers but the Yellen speech is the real danger. She could either build a fire under the market with some dovish remarks or smother the smoldering rally with a bucket full of rate hike reality. It is widely believed she will try to maintain a cautious tone but suggest the Fed is ready to hike rates at any time if conditions warrant. A strong employment report in early September could be the trigger point but regional reports like the Richmond surveys could be the anchor that keeps them on the sidelines until 2017.

There were still a few companies reporting earnings and Best Buy knocked the ball out of the park. They reported earnings of 57 cents compared to estimates for 43 cents. That was a 16% increase over the same quarter in 2015. Revenue of $8.53 billion also beat estimates for $8.4 billion. Same store sales rose +0.8% compared to estimates for a -0.6% decline. The CFO said they expect same store sales to rise +1% in Q3.

Best Buy said higher demand for wearable technology, appliances, computers and home theater systems offset declines in mobile phones and video games. The big gains came from a 24% boost in online sales. This was an amazing report from a company that was left for dead back in late 2012 when it was trading for $11 and analysts were saying Amazon should buy them as a way to showroom products in brick and mortar locations. Since they compete head to head with Amazon, the spike in online sales is remarkable.

JM Smucker (SJM) reported earnings of $1.86 compared to estimates for $1.74. Revenue of $1.8 billion missed estimates of $1.9 billion and was well below the $1.95 billion from the year ago quarter. Revenue declined -7% on increased competition on sales of pet food and falling coffee prices. Smuckers is the largest coffee roaster with the Folgers and Dunkin Donuts brands in its portfolio. The company was forced to cut prices on coffee by 6% after bulk coffee prices fell. That was the second decline in 2016. Overall, the drop in coffee sales accounted for 4% of the 7% decline in revenue. Coffee revenue alone was down -9%.

The company guided for the full year to earnings of $7.60-$7.75 and below estimates for $7.70. They also guided for sales to be flat to down by -1% or more compared to prior forecasts for a 1% gain. Shares fell -8% on the earnings.

Homebuilder Toll Brothers (TOL) reported earnings of 61 cents that matched estimates. They sold 1,507 homes in Q2 and a nine-year high. The average selling price declined slightly from $834,000 to $831,000. Order backlogs rose 19%. Shares had been locked in a range in 2016 but the earnings were enough to power a 9% gain.

Shares of La-Z-Boy (LZB) crashed -15% in afterhours after reporting earnings of 28 cents that missed estimates for 29 cents. Revenue of $340.1 million also missed estimates for $359 million. The company blamed the flat sales on "weaker demand" and "inconsistent" foot traffic. Same store sales fell -1.9% compared to a rise of +5.5% in the year ago quarter.

Zoes Kitchen (ZOES) shares fell -17% after reporting earnings of 6 cents that matched estimates. Revenue rose +27% to $66.3 million but missed estimates for $67.3 million. Same store sales rose +4% but that was driven by a 3.1% price increase. This compares to a sales rise of 8.1% in the first quarter. This caused a lot of analyst grief because adjusted sales had fallen off a cliff. For the full year, the company guided to $277-$280 million and only $1 million below prior guidance. Analysts were expecting $280 million. They guided to same store sales growth between 4-5%. Based on the guidance and the minor miss on revenue I did not think it was that bad of a report to cause a 17% drop in the stock. Buy the dip?

Lannett (LCI) reported earnings of 73 cents that easily beat estimates for 60 cents. Revenue of $168.9 million also beat estimates for $161.8 million. That was a 70% increase in revenue and a sales record. Lannett is a generic drug manufacturer.

The big dog on the calendar for Wednesday is Hewlett Packard. The headliner on Thursday is Sears along with Gamestop and Ulta Salon. It will be hard for these companies to provide any market lift.

Elon Musk tweeted this morning that Tesla would make a new product announcement in the afternoon. Shares of Tesla immediately rallied from $222 to $228 as shorts ran for cover. Musk is a twitterholic and his tweets do move the stock price. When the announcement was finally made it was a larger 100 kWh battery pack for the Model S and the Model X. Musk said it would make the Model S the fastest production car in the world with a 0-60 time of 2.5 seconds in Ludicrous mode. The Model X would not be a slouch at 2.9 seconds. The new battery would provide a 315-mile range for the Model S and 285 miles for the Model X, assuming you are not racing off every stoplight.

The new high performance version will be called the P100D and will cost $134,500 with the SUV starting at $135,500. A normal Model S starts at $75,000 and can go roughly 200 miles on a charge. Musk said there have been faster production cars from Porsche and Ferrari but they are no longer produced and they cost $1 million each. Musk said demand is expected to be strong but they can only make 200 of the P100D battery packs a week due to production constraints. Shares gave back about half of the gains by the close.

Delphi (DLPH) and MobilEye (MBLY) announced a partnership to develop an autonomous driving technology package for automakers. They plan to develop the market's first turnkey Level 4/5 automated driving solution, which carmakers could begin integrating into vehicles by 2019. Level 5 is totally self-driving while Level 4 is close to complete autonomy.

Nearly all the automakers are working to develop the technology. GM is already testing self-driving cars and Ford plans to have a fully autonomous car in five years. Google has already made giant inroads into the process with more than one million miles of actual driving already completed. Google and Fiat are jointly producing a fleet of 100 self-driving minivans to further test the technology. With Delphi and MobilEye partnering to make an off the shelf package it could free up the various automakers to simply produce the cars and not spend billions developing their own technology. MobilEye was instrumental in Tesla's initial self-driving efforts.

Crude prices came back from an opening dip to trade at $48 intraday after Iran signaled a willingness to participate in a potential production freeze discussion at the end of September. Iran is OPEC's third largest producer. While the comments came from the Venezuelan oil minister after his visits to the Middle Eastern OPEC members, Iran did confirm it was going to participate in the late September talks in Algeria. The Venezuelan minister said "Iran is reaching its pre-sanctions production level soon and after that it can cooperate with others." Iran did not participate in the prior talks. Oil prices rallied from an early morning drop on the Iran news to close at $48.

Unfortunately, after the close the weekly API oil inventory report showed a 4.5 million barrel build in oil inventories. Expectations were for a decline of 500,000 barrels. Crude prices fell back to $47.68 on the news.

Goldman Sachs warned this morning the current rally in crude prices would fail. They said the rally was built on talk from nations known for saying anything to boost prices. There was no fundamental basis for the rally and Goldman was seeing increasing bearishness in the actual fundamentals. They retained their yearend price range of $45-$50 but warned there could be volatility ahead.


While the Nasdaq was breaking out to a new high this morning, Bank of America was warning of an impending correction back to 2,000 on the S&P. Dan Suzuki, senior investment strategist, said there were multiple factors that could cause the correction. He said short interest had moved from near record levels to the lowest point in 2016. Stocks were now expensive given the five quarters of earnings recession. He said if you adjust for currency impact and energy, the S&P revenue growth was the lowest in three years.

He warned the market was likely to suffer from stimulus disappointment as central banks pulled back from the brink. The Fed is on the verge of changing policy again and the ECB is no longer expected to cut rates at the next meeting. The European PMI out this morning was an 8-month high. He also warned the leverage in the market was very high and current earnings estimates for 2017 were unsustainable and would have to be revised lower soon. Goldman Sachs has a 2,100 year end target, JP Morgan 2,000 and HSBC 1,960.

Suzuki said we were experiencing the calm before the storm with the calm in the markets at 20-year lows. He was referring to the very tight ranges and extremely low volatility.

The S&P spiked to 2,193 at the open and came to a dead stop. That was also the high from the big short squeeze on August 15th. Note the nearly identical candles from those two days. We had a big gap open followed by an immediate decline. The S&P closed at the low for the day.

In theory, this is a bearish pattern and suggests strong resistance and the potential for a drop back to 2,175 ahead of the Yellen speech on Friday. Theory has not worked well lately so anything is possible. The problem is the lack of a catalyst to break through that resistance. There is nothing on the horizon that could produce a move strong enough until the Yellen speech. If she is strongly dovish, that could be the catalyst. If she is turning hawkish that could be a downside catalyst.

The Dow chart has a similar pattern with an opening gap higher to the resistance from the July 20th and August 11th tops. The August 15th short squeeze did trade higher but the index immediately fell back into the consolidation channel. The opening spike today was immediately sold and the Dow closed nearly -100 points off its high and at the low for the day. There are no leaders in the Dow components. There is a new set of winners/losers every day and none are consistently higher but some are consistently lower like MCD, WMT, TRV, etc. The path of least resistance for the Dow is bearish.

The Nasdaq did not close at a new high despite trading at one intraday. The close at 5,260 was -2 points below the August 15th high. The Nasdaq is benefitting from the semiconductors, biotechs and energy stocks. Any of those could retreat at any time. With the furor over high priced drugs seeming to grow stronger each week, we could see a crack in the biotech armor at any time.

Current support is 5,225 and resistance 5,270.

The Russell 2000 has the most bullish chart but it is not without challenges. The top of the short-term resistance of 1,250 and the longer-term channel is about 1,255. The Russell is trading at the top of the channel and could easily see some backing and filling and decline to the bottom of the channel without harming the overall trend. That would be around 1,225.

The market has survived for several years with a steady morphine like drip of global economic stimulus. The punchbowl of stimulus has been continuously refilled. Eventually that will stop. As I mentioned earlier the Fed, the ECB and even the BoJ are starting to make noises that could be interpreted as a prelude to turning off the stimulus spigot. It is not going to happen all at once. The ECB is committed to QE through March. The Fed will continue buying replacement securities for those that mature so interest rates are not going up in the near future. While they will probably hike by 25 basis points over the next five months, there is always the danger they could become more hawkish. Yellen's speech on Friday could be a turning point in Fed policy, or not. She may retain her dovish bias and the uncertainty will continue for another two months.

The market is not declining. That means it is not letting buyers into new positions. If this continues past Labor Day, the portfolio managers will be forced to chase prices higher. If we could choose market direction over the next 8 sessions, I would like to see a 3-5% decline. That would open the door to a major rally as the fund managers all tried to squeeze through the door at once in September. A decline of that magnitude would be painful because everyone is long. However, it would be a vaccination against a bigger decline later.

Wednesday is the anniversary of the mini Flash Crash from last August. The Chinese markets suddenly began to implode and that carried over into the U.S. markets with the Dow losing more than 2,000 points in only five days. Could Yellen cause another August implosion? Absolutely, but I seriously doubt it. The wealth effect from the market is a major plank in the Fed's economic support although they will not admit it.

The key point here is that a catalyst can come from anywhere. Nobody expected that Chinese implosion and its impact on the U.S. markets. We need to remain long but keep our stop losses in place as we enter the six most volatile weeks of the year, which started on Monday. The market never needs a reason to correct but it tends to move faster when an unexpected event appears in a normally volatile period.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Market Anchor

by Jim Brown

Click here to email Jim Brown

Editors Note:

IBM is a Dow component and they have posted declining sales for the last 17 consecutive quarters. While its business is improving the outlook is still negative.


No New Bullish Plays


IBM - IBM Corporation - Company Profile

International Business Machines Corporation provides information technology (IT) products and services worldwide. The company's Global Technology Services segment provides IT infrastructure services, such as IT outsourcing, integrated technology, cloud, and technology support services. Its Global Business Services segment offers consulting and systems integration services for strategy and transformation, application innovation services, enterprise applications, and analytics; application management, maintenance, and support services; and processing platforms and business process outsourcing services. The company's Software segment provides middleware and operating systems software, including WebSphere software to integrate and manage business processes; information management software that enables clients to integrate, manage, and analyze data from various sources. The business was started in 1924.

This is not a bearish recommendation on IBM's business. This is a trading recommendation based on its chart pattern and the impact on the Dow. IBM has posted revenue declines for 17 consecutive quarters. The business format is changing and IBM is adapting. However, turning IBM around is like turning a VLCC tanker around. They carry 2 million barrels of oil and it takes miles to slow and turn because of their momentum.

IBM is making the turn and their cloud business is growing rapidly but it could take years before the restructuring is complete.

The problem for the market is that IBM is an expensive Dow component. At $160 per share it carries a lot of weight. After they reported earnings showing a big jump in cloud revenue and a major investment from Warren Buffett, the stock rallied to $163 where it stalled for the last two months. At Tuesday's close it was resting on support at $160 and as the Dow dropped to close at the low for the day.

The problem as I see it is this. There is no reason to buy IBM shares. They will post another revenue decline this quarter. That makes it a sell candidate for portfolio managers trying to raise cash for their end of year buys. It is also a high dollar stock so they get a lot of cash back when they sell it compared to selling a GE or a Pfizer. When you need to raise cash you sell the biggest stock with the least promising outlook.

The Dow is the weakest of the major indexes. If the market ever decides to correct over the next six weeks, you can bet the Dow will be the leader to the downside. That means IBM will likely be the leader inside the Dow because there is no real reason to own it when there are so many better stocks in rally mode.

I am recommending we buy the Oct $155 put with an IBM trade at $159. That will be below the support at $160 and potentially the start of a decline that could dip to $150 depending on the market.

With an IBM trade at $159

Buy Oct $155 put, currently $2.55, initial stop loss $162.50.

In Play Updates and Reviews

Sell the Rip

by Jim Brown

Click here to email Jim Brown

Editors Note:

Traders changed strategy from buying the dips to selling the rips today. The Dow spiked to resistance at 18,625 and immediately began to decline. The opening gap was very quickly sold and the Dow closed at the low of the day and nearly -100 points off the highs.

The S&P also gapped open to 2,193 and exactly the high from Monday the 15th. The failure at that level was immediate and the S&P closed at the lows with only a 4 point gain.

Today could be a turning point in the market. Rarely do these chart patterns reverse higher without a material decline.

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

ETN - Eaton Corp

The long call position was opened at $68.05.

SIX - Six Flags

The long put position was stopped out at $50.95.

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

AKAM - Akamai Technologies - Company Profile


No specific news.

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.

ETN - Eaton Corporation - Company Profile


No specific news. Position was entered at the open at $68.05.

Original Trade Description: August 22nd.

Eaton Corporation operates as a power management company worldwide. The Electrical Sector is a global leader in power distribution, power quality, industrial automation and power control products and services. Products include circuit breakers, switchgear, UPS systems, power distribution units, panelboards, loadcenters, motor controls, meters, sensors, relays and inverters. The principal markets for the Electrical Americas and Electrical Rest of World segments are industrial, institutional, government, utility, commercial, residential, information technology and original equipment manufacturer customers. In California's aerospace industry, the Eaton Corporation manufactures and markets a line of systems and components for hydraulic, fuel, motion control, pneumatic systems and engine solutions. Eaton is a manufacturer of systems and components for use in mobile and industrial applications. Markets include agriculture, construction, mining, forestry, utility, material handling, machine tools, molding, power generation, primary metals, and oil and gas. The Hydraulics group also includes Eaton's Filtration, Golf Grip and Airflex industrial clutch and brake businesses. The Vehicle Group comprises the company's truck and automotive segments. The truck segment is involved in the design, manufacture and marketing of powertrain systems and other components for commercial vehicle markets. Key products include manual and automated transmissions, clutches and hybrid power. Eaton’s automotive segment produces products such as superchargers, engine valves, valve train components, cylinder heads, locking and limited-slip differentials, fuel, emissions, and safety controls, transmission and engine controls, spoilers, exterior moldings, plastic components, and fluid connectors. The company was founded in 1916.

For Q2 the company reported earnings of $1.07 that beat estimates for $1.05. Revenues of $4.08 billion beat estimates for $4.05 billion. Revenues were down -5.4% due to lower sales to the automotive sector and a decline in sales to the oil and gas sector. Currency issues also removed -1% from revenue. The company narrowed its full year guidance from $4.15-$4.45 to $4.20-$4.40 per share. They still expect revenues to decline 2% to 4% for the full year because of the drop in oil and gas sales and the weak global economy and a currency impact of $225 million.

Next earnings Nov 1st.

Argus said the company was doing well in a tough environment and they expect the oil and gas sector to rebound in 2017. They said Eaton was selling at a discount to its peers and raised their rating from hold to buy. Eaton has been restructuring since 2013 and Argus expects that to bear fruit in the year ahead with earnings rising appropriately.

Eaton shares rallied for two weeks after the August 2nd earnings and then went sideways with the market over the last week. Shares closed on Monday at a 52-week high at $67.72. Resistance is $73.50.

If the market rallies as expected after Labor Day, I would expect Eaton to move higher to test that resistance. This is a quality company with low volatility and they pay a $2.28 dividend for a 3.37% yield.

Position 8/23/16 with a ETN trade at $68.05

Long Oct $70 call @ $.99, no initial stop loss.

GIII - G-III Apparel Group - Company Profile


Company announced its earnings date of Tuesday 8/30 before the market opens. We will plan on exiting before that event. No other news.

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. The stock closed at a new high at $120.08.

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.

Position 8/19/16 with an ITW trade at $119.25

Long Dec $125 call @ $2.05. 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. Holding at support while we wait for the next headline.

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.

MKC - McCormick & Co - Company Profile


No specific news. Shares were weak after JM Smucker posted terrible earnings and crashed -8%.

Original Trade Description: August 20th.

McCormick & Company manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in the Americas; Ducros, Schwartz, Kamis, and Drogheria & Alimentari brands, as well as Vahine brand in Europe, the Middle East, and Africa; McCormick and DaQiao brands in China; McCormick and Aeroplane brands in Australia; and Kohinoor brand in India, as well as through regional and ethnic brands, such as Zatarain's, Thai Kitchen, and Simply Asia. This also supplies its products under the private labels. This segment serves retailers, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers directly and indirectly through distributors or wholesalers. The Industrial segment offers seasoning blends, spices and herbs, condiments, coating systems, and compound and other flavors to multinational food manufacturers and foodservice customers.

They reported Q2 earnings of 75 cents that beat by a penny. Revenue rose 3.8% to $1.06 billion and matched estimates. Consumer sales rose 7% to $641.8 million while industrial sales declined -0.7% to $421.5 million. For the full year they guided for earnings on a constant currency basis of $3.68 to $3.75 and analysts were expecting $3.74. Revenues are expected to be $4.34 to $4.43 billion but that was on the low side of estimates for $4.41 billion. They expect sales growth of 5% and EPS growth of 10%. They said they had more confidence they would come in at the high end of their revenue and sales guidance. However, that only matched expectations on earnings and was still light on revenue.

Earnings Sept 29th.

They have several challenges. The quit selling a low cost economy product in India and that reduced revenue. Indians have a very low standard of living and try to find the lowest cost products. The company also warned on currency issues. Total sales growth in Q2 was 3.8% but adjusted for constant currency that would rise to 6%.

They also had an issue with private label customers lowering prices for their products. That means a $2 box of private label pepper is competing with a $2.50 box of McCormick pepper. The company is actually fine with that and encourages private label distributors to adjust prices to whatever price point generates the most sales. Apparently, McCormick is perfectly happy growing market share at a reduced revenue rate. They are still making money on private label products and those products are capturing market share.

Shares sold off from $107 to $100 in the month following the earnings report. After putting in a double bottom at $100 the stock is moving higher and a break over $102 could see the gains accelerate. This is a good stable company paying a $1.72 annual dividend without a lot of drama along the way. I expect it to return to the highs, market willing.

position 8/22/16 with a MKC trade at $102.15

Long Dec $105 call @ $2.40. See portfolio graphic for stop loss.

PAG - Penske Automotive Group - Company Profile


Roger Penske bought another 300,000 shares at $42.55 for $12.8 million. No other news and the stock spiked 4%. That raises his holdings to roughly 31.5 million shares and there are only 85 million outstanding. His ownership is now over 37%. He has purchased more than 1.5 million shares in the last month.

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.

SWKS - Skyworks Solutions - Company Profile


No specific news and a nice gain in a tech rally market.

Original Trade Description: August 18th.

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.

Position 8/19/16 with a SWKS trade at $72.05

Long Nov $75 call @ $3.70, no initial stop loss.
Short Nov $82.50 call @ $1.66, no initial stop loss.
Net debit $2.30.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


The Dow closed nearly 100 points off its highs and barely in the green. Traders have been buying the dips but today they sold the rally. 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


SIX spiked up to $52 at the open as the market rallied to new highs on the strong home sales. The opening gap higher stopped us out of the position. The gap higher caused the option premium to collapse and we barely got out with a gain. These types of moves happen and a good position deflated significantly.

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:

Closed 8/23/16: Long December $50 put @ $1.94. Exit $2.45, +.51 gain.

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