Option Investor

Daily Newsletter, Wednesday, 8/31/2016

Table of Contents

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

Market Wrap

Another Week of Consolidation

by Keene Little

Click here to email Keene Little
Today's trading volume was a little heavier than we've seen recently (not good for the bulls when the indexes finish in the red) but price action continues to be choppy as the market consolidates. We're now waiting for Friday's Payrolls numbers for more clues about what the Fed might do. In the meantime traders are twiddling their thumbs.

Today's Market Stats

The stock market started in the hole this morning after futures pulled back during the overnight session and then a slight drop lower following this morning's pre-market ADP Employment report. The selloff continued into midday but then turned around and bounced back, retracing a good portion of the morning's loss. The day was basically a continuation of the choppy consolidation pattern that we've been in for what feels like the past 10 years (OK I exaggerate; it's only been the past 9 years).

This morning's economic numbers included the ADP Employment report, which came in slightly better than expected (177K vs. 170K) but less than July's 194K (revised up from 179K). It was a neutral number, which keeps the market guessing what the Fed might do with rates in September. Friday's NFP could cause a little more volatility than we saw this morning.

The Chicago PMI for August came in weaker than expected, 51.5 vs. 54.5, and a fairly significant drop from 55.8 in July. This is another sign of our economy in a long slide lower, which is making it more and more difficult for bulls to justify a higher stock market (not that they've needed any justification so far). The market was expecting a smaller decline from 55.8 to 54.5 for August so this might have been a factor in this morning's stock market decline.

Pending home sales for July, at +1.3%, was better than the +0.7% expected and a big improvement over the -0.8% for June (revised lower from the originally reported +0.2%). The health of the housing market, which is holding up so far, will be an important bell weather measurement for how well the consumer is doing. This is especially true as debt levels for consumers rise again and now we're seeing an increase in default rates on many loans, especially auto (the next subprime slime problem for the banks). Many areas of the country, especially major cities, have seen their housing markets back into bubble territory so there's a lot of concern about what will happen when those bubbles burst again, which they will (it's not different this time).

August has been a slow month as far as volume goes and the last figure I saw last week was that it was about 30% below what is normally a slow month anyway. That makes it difficult to tell if the market is consolidating in a bullish pattern or if instead there is simply no power to move this market in either direction. There's been very little effort to move the market and it seems more of an effort to simply hold things in place. Preventing a selloff could be the agenda and if the market can rally instead, all the better.

I'll kick off tonight's chart review with the Dow to highlight some upside potential if the market doesn't crater next week. And if it does neither of those then it will go sideways instead. Now that I've covered all the possibilities I guess there's not much more to review (wink).

Dow Industrials, INDU, Weekly chart

There are a few different ways to interpret the price patterns between indexes and time frames but one bullish idea is shown on the Dow's weekly chart. A not-fun possibility is for September to see price continue to consolidate over/down to the uptrend line from February-June, currently near 17900 and which will be near price-level S/R at 18200 by the end of September. Whether from here or after another month of consolidation, the bullish pattern suggests it will be followed by another rally leg into October before completing a rising wedge pattern off the January/February low. Without trying to sound like I'm from the tinfoil-hat crowd, we know the government can and does support the stock market and we also know those in political and financial power do not like Trump. Most people also know the incumbent party typically loses the election if the stock market declines in October. Do I need to spell out the rest? Unless we're seeing a rolling top pattern develop since mid-July, the sideways consolidation is more bullish than bearish. And the longer it consolidates the more bullish it will become.

Before moving to the Dow's daily chart, I want to show how well the stock market can predict the presidential election, based on its performance in the 3 months leading up to the election. When the stock market is down so is the incumbent party but when the stock market is up there's a greater likelihood the people will keep the incumbent party in power. It's another example of how the stock market is an excellent barometer of social mood. Of the past 22 elections, since 1928, the stock market's performance has accurately predicted the election results 19 times (86%). In the game of odds those are damn good and the incumbent party leaders are well aware of this. The chart below is courtesy InvesTech Research.

Dow Industrials, INDU, Daily chart

The Dow's pullback from August 15th is a choppy move with lots of overlapping highs and lows and this is what gives it the appearance of a corrective pullback. There is a way to view it as a series of 1st and 2nd waves to the downside, which calls for a hard fast break to the downside at any time now. The downside risk from the bearish wave pattern is significant and a drop below its 50-dma, at 18311, would be a bearish heads up. Below the August 2nd low at 18247 would be cause for alarm if you're in long positions. The only way a break below those levels would not be bearish is if we continue to see a choppy sideways/down move in the coming month since that would likely set us up for the October rally. If the combination of the May 2015 high at 18351 and the 50-dma at 18311 continues to hold as support we should see another leg up but what kind of upside pattern we could see is not at all clear yet.

Key Levels for DOW:
- bullish above 18,632
- bearish below 18,247

Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart shows how choppy the pullback from August 15th has been. This has been a tough time for both sides since there have been so many whippy reversals. Again there is a way to interpret the price pattern as a very bearish wave count and the steepening downtrend lines, if not broken quickly, typically leads to a waterfall decline. This could lead to the Dow losing several hundred points in a heartbeat. A rally above 18450 from here would be a bullish heads up and above Monday's high at 18523 would negate the bearish wave count and suggest the next rally leg is underway. At this point in the pattern I'd suggest respect for the downside risk while acknowledging the higher-probability move from here is back up, even if only inside a large consolidation pattern that could last another month.

S&P 500, SPX, Daily chart

Another consolidation idea is shown on the SPX daily chart -- an ascending triangle following the July 20th high. A triangle has 5 waves inside (labeled a-b-c-d-e) and therefore this one requires another up-down sequence before heading higher. This would mean a sideways choppy consolidation for another 2 to 3 weeks before rallying into the end of the month. Needless to say, this would frustrate the hell out of the bears and it would also go counter to the typical September. There's been nothing typical about this year, or years for that matter, and I don't think we can go by what's "typical" for the calendar. The bottom line is that the choppy pattern for August could be a rolling top pattern or a bullish consolidation and we can't know yet which it is. The bears need a break below its 50-dma, now at 2150, and the August 2nd low at 2147 to suggest something more bearish has started (maybe).

Key Levels for SPX:
- bullish above 2194
- bearish below 2147

Nasdaq-100, NDX, Daily chart

The pattern for NDX since gapping up on August 5th looks like a bearish rolling top and a break below 4740, which would also close the August 5th gap, would be a bearish heads up. Below the August 2nd low at 4689 would confirm a more significant high is likely in place. But the short-term pattern for the pullback from the August 15th high can be viewed as a bullish descending wedge with bullish divergence and that suggests it's ready to rally from here (or maybe after one more pullback to 4740 support). As noted on the chart, MACD has pulled back to the zero line from overbought in July-August while price chopped mostly sideways. With MACD "resetting" at the zero line, a turn back up from here would be a bullish setup.

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

Semiconductor index, SOX, Weekly chart

The semiconductor index has been on fire this year and it has helped lift the tech indexes. It's a good thing too since the biotechs flamed out this year. Last year the biotechs (BTK) were up about +11% (after gaining about 50% in both 2013 and 2014) while the SOX was down -3.4%. This year BTK is down -15% while the SOX is up +21%. It looks like hot money rotated out of biotechs into the semis this year. But the SOX has reached a level where caution is warranted. The weekly chart shows it has rallied up to the 127% extension of the previous decline (May-August 2015), at 807.83 with Tuesday morning's high at 808.32 (last week's high was 807.11), which is oftentimes a reversal level. At the same time it is up against the top of a parallel up-channel for the rally from February and the weekly oscillators are looking toppy.

Russell-2000, RUT, Daily chart

The RUT has been the stronger index by chopping its way higher while the others chop sideways or down, including the techs. Today's low was a slight break below its 20-dma, near 1235 (with a low at 1233), but you can see how it's riding up its 20-dma since testing it back on August 2nd. As long as it continues to hold above its 20-dma it stays bullish and for now I see upside potential to the 1270 area by the end of next week. What looks bearish here is the fact that the RUT has been chopping its way higher since July but the oscillators are showing slowing momentum (bearish divergence) and that's a warning sign for bulls.

Key Levels for RUT:
- bullish above 1252
- bearish below 1215

KBW Bank index, BKX, Weekly chart

The banks have not had a good year (down -0.6% at the moment) but they've had a good month of August and are in breakout mode. The weekly chart show the bullish break above its downtrend line from July 2015 and appears headed towards a price projection at 75.41, which is where it would achieve two equal legs up from February. With both the SOX and BKX in gear to the upside it's been good support for the broader market, even if the broader market hasn't exactly been rallying for the past two months. BKX has been in a steep rally and it looks unsustainably steep but keep its upside projection in mind and watch how it behaves if reached.

U.S. Dollar contract, DX, Weekly chart

Last week I had mentioned the US$ had dropped back down to support at the tops of two parallel up-channels (from 2008 and 2011) and that was followed by a bounce back up. It's now just under its 50-week MA, at 96.48 (this morning's high was 96.25) so that's potential resistance (as well as its 200-dma at 96.40). Above that is its downtrend line from December 2015 - January 2016, which is where the July rally stopped. Dollar bulls want to see a break of its downtrend line, currently near 97 and then confirmed with a break above the July high at 97.62.

Gold continuous contract, GC, Weekly chart

Gold's pullback from its July 6th high has brought it close to its uptrend line from December 2015 - May 2016, currently near 1307 and only a point below price-level S/R at 1308 (today's low was 1312). Its pullback is so far a sideways consolidation and two equal legs down points to 1307.4. This makes it important for gold bulls to hold price above 1307 since a drop below that level could usher in stronger selling. It's possible there might be some support at the 200-week MA, at 1291.70, but gold hasn't typically paid much attention to that MA. I continue to see upside potential at least to its downtrend line from September 2011 - October 2012, currently near 1404, but the odds of that happening will lessen if the pullback continues below 1307.

Oil continuous contract, CL, Weekly chart

After oil pulled back from its June high it dropped down to support at its 50-week MA, near 41.46 at the time, and then bounced back up to a downtrend line from June 2014 through the June high. This week's decline adds a little emphasis to the word "rejection" as resistance held. The bounce off the August 3rd low barely got MACD off the zero line and with it turning back down it could drive MACD below zero, which would provide a clue that oil is heading lower. A drop below its 50-wma, now at 41.57, would likely trigger stops on long positions and I can see the potential for a drop back down to at least its January 2000 low at 33.20.

Economic reports

The economic reports have been relatively light this week but we'll see more tomorrow and Friday. Following this morning's ADP employment report, which was only marginally better than the market was expecting, there has been a slight increase in expectations for the NFP report Friday morning, which is 175K, but still lower than the 217K in July. The market would be happiest with a number right around there in order to keep the Fed at bay as far as a rate increase but not showing signs of a fast slowdown in our economy. In reality this employment report is bogus since the real problem is the low-wage job growth vs. the higher-paying jobs. The average weekly earnings continue to decline and that's hurting consumer spending, which of course drives the economy. But expecting the market to care about such details seems in line with expecting my 2-year granddaughter to understand this. Tomorrow morning's important numbers will be Construction Spending and ISM Index, which will be reported at 10:00. Other than that we might see the market go on hold until we get through the NFP report.


August had lower trading volume than past months of August and it seems traders have just stepped aside and don't care anymore. We know money has been pulled from mutual funds and it seems investors are much more aware of how out-of-whack this market is seem to be a little savvier than they're usually given credit for. Some big names are shorting the market in a big way and likely trimmed long positions and raised cash levels. Some will look at large cash levels and see all that buying power. Following a long bull market I'd say it means exactly the opposite.

While I feel bearish about this market generally, I recognize there could be a concerted effort to hold the market up into the elections and I see price patterns that support that idea. If money continues to pour in from overseas and corporations continue to buy back stock (this year is going to set a record for buybacks) it will obviously add buying pressure that's not necessarily related to fundamentals. One could say foreigners have a fundamental problem investing money with negative returns and in stocks that have a weaker economic underpinning so we can't say there's no fundamental argument for a higher stock market.

There are some fundamental reasons for why the stock market could continue to rally but not necessarily from our economic perspective, including weakening corporate earnings and expected higher P/E ratios as earnings decline. But it's a Bizarro World out there and with hyper-active central banks and governments buying up stocks (through ETFs, futures and other vehicles) it has made it much more difficult to judge the stock market by "normal" fundamentals (is there such a thing?).

Follow the charts and right now they're saying the higher-odds play is to the upside. But whether that's from here or after another month of consolidation is hard to say. And while the odds point higher, stay aware of the potential for a very bearish pattern that calls for a waterfall decline (think mini-flash crash) that could start any day now. As we enter September we could get an expansion of the tight Bollinger Bands with a strong bout of volatility. Trade safe and think more about protection than capital gains (in and out quickly, otherwise known as tradus interruptus, while we wait for the larger pattern to become clearer).

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

Keene H. Little, CMT

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

New Option Plays

Marijuana Beneficiary

by Jim Brown

Click here to email Jim Brown

Editors Note:

Regardless of your feelings about the legalization of marijuana, this company stands to benefit significantly. Growing marijuana indoors requires specialized lighting, ventilation, fertilizer and in some cases hydroponic facilities. Scotts is racing to be the vendor of choice for all these needs.


SMG - Scotts Miracle-Gro - Company Profile

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide. The company's Global Consumer segment offers lawn fertilizers, grass seed products, spreaders, other durable products, and outdoor cleaners, as well as lawn-related weed, pest, and disease control products; water soluble and continuous-release plant foods, potting mixes, garden soils, mulch and decorative groundcover products, landscape weed prevention products, plant-related pest and disease control products, organic garden products, live goods and seeding solutions, and hydroponic gardening products; and insect and rodent control products, and selective and non-selective weed control products to protect homes and maintain external home areas.

For Q2 they reported earnings of $2.16 compared to estimates for $2.08. Revenue of $994.1 million missed estimates for $1.04 billion. The company said miserable weather in April/May caused a significant decline in sales as gardeners and homeowners put off buying until June. The continuous rain turned everything green and that depressed fertilizer sales. Going into early April sales for the year were up +14% but after May they had declined -2%. There was also a shift of six days in the company's fiscal calendar.

The company raised earnings estimates for the full year to $3.75-$3.95 but reduced full year revenue forecast as a result of the spring slump. Shares soared on the guidance as the company was very bullish on the business.

They acquired a 75% stake in Gavita, a hydroponic products distributor. They also signed a definitive agreement to acquire Botanicare, a producer of fertilizer and hydroponic systems. They entered into a third transaction that has not yet been announced. They also increased their relationship with AeroGrow International, a consumer direct indoor gardening and hydroponic supplies business.

SMG is rapidly beefing up its lighting division, expanding on hydroponics and adding new products that will help indoor growers. They expect sales of hydroponics equipment to reach $250 million for the year. During the year, they also completed the sale of the Scotts LawnService business into a joint venture with Truegreen and received a $196 million cash distribution from the venture.

Along with earnings, they announced a $500 million share buyback in addition to the $400 million remaining on a prior authorization. "Our priorities for uses of cash are beginning to shift and we expect to begin a more aggressive share repurchase plan in the upcoming quarters."

Earnings Nov 3rd.

Shares spiked to $83 after earnings and moved sideways for the last month. After dipping back to $81 last week it looks like shares are preparing to move higher. A breakout over $83.25 would be a new high.

With a SMG trade at $83.25

Buy Dec $85 call, currently $2.80, initial stop loss $80.65.


No New Bearish Plays

In Play Updates and Reviews

Dip Buyers Return

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow rebounded from a -120 point drop to lose only 53 points. The dip buyers were waiting when the Dow fell to 18,350 and the same low it hit on Friday. The market is simply waiting on the Nonfarm Payroll report on Friday to see if the Fed will raise rates at the September meeting. These minor daily declines are how the market is pricing in a potential hike. There are not yet enough believers to push it significantly lower but their numbers are growing daily. The better than expected ADP Employment numbers this morning were not strong enough to suggest the nonfarm numbers were going to be over the 200,000 level that is thought to be the threshold for a rate hike. The lack of confirmation confused the market and we saw the weak indexes.

The Russell 2000 and the S&P-600 small cap indexes actually declined today with a -6 point and -3 point loss respectively. That was not enough to push them out of their current uptrend pattern so fund managers are not expressing any fear about September.

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

JACK - Jack in the Box

The long call position remains unopened until a trade at $100.25. High today was $99.66.

ETN - Eaton Corp

The long call position was stopped out with a trade at $66.65.

ITW - Illinois Tool Works

The long call position was stopped out with a trade at $118.85.

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. Minor gain in a weak market.

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.

CAVM - Cavium Inc - Company Profile


Cavium share gave back Tuesday's gains to move back under resistance. No specific news.

Original Trade Description: August 27th.

Cavium, Inc. designs, develops, and markets semiconductor processors for intelligent and secure networks. It offers integrated semiconductor processors for wired and wireless networking, communications, storage, cloud, wireless, security, video, and connected home and office applications. The company's products also include a suite of embedded security protocols that enable unified threat management, secure connectivity, network perimeter protection, and deep packet inspection. In addition, it provides commercial grade embedded Linux operating systems, development tools, application software stacks, and support and services.

On August 17th, Cavium completes the $1.36 billion acquisition of QLogic. The acquired company has been around a long time and is a leading name in the Ethernet market. As of 2015, QLogic had a double digit market share lead over its peers. Pacific Crest believes Cavium will be able to reduce QLogic's manufacturing costs by 50% and this would help capture further market share gains on cost while expanding into congerged NIC and onboard LAN markets. That could produce another $1 billion in revenue.

Analysts raised estimates for Cavium revenue from $526 million to $957 million and earnings rose from $1.87 to $2.60.

Earnings Oct 26th.

Shares have been moving up since late June when the acquisition was announced. They plateaued at $55 over the last week but could be poised to move higher with resistance at $64.

Position 8/30/16 with a CAVM trade at $56.40

Long Nov $60 call @ $3.70. See portfolio graphic for stop loss.

Short Nov $70 call @ 85 cents. See portfolio graphic for stop loss.

Net debit $2.85

ETN - Eaton Corporation - Company Profile


No specific news. Shares broke below support and stopped us out for a minor 45 cent loss.

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

Closed 8/31/16: Long Oct $70 call @ $.99, exit .54, -.45 loss.

GRUB - GrubHub - Company Profile


No specific news. New high in a weak market.

Original Trade Description: August 29th.

GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 44,000 local restaurants with diners in approximately 1,000 cities. It operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, iPad, Android, iWatch, and Apple TV devices; and Seamless Corporate program that helps businesses address inefficiencies in food ordering and associated billing. In addition, it provides Allmenus.com and MenuPages, which provide an aggregated database of approximately 380,000 menus from restaurants in 50 states.

GrubHub is a concept that is catching fire and the bigger they get the more restaurants want to sign on to the service. They now serve 44,000 restaurants. They do not markup prices. Whatever the restaurant charges is what you pay. Diners can customize any order to their own taste specifications and dietary needs.

Restaurants benefit because the service drives more orders. Many people cannot take 2 hours out of their day to go to the restaurant to eat. GrubHub brings the restaurant to them. Restaurants typically see about 30% more takeout orders during their first year when they sign up for the Grubhub service. Delivery fees range from free to $3.99.

In Q2 net revenue rose +37% to $120.2 million topping estimates for $114 million. Earnings rose 35% to 23 cents and also beating estimates for 19 cents. They guided for the current quarter for revenue in the range of $116-$119 million and analysts expected $113 million. At the midpoint that would be another 37% rise.

GrubHub active diners rose 24% to more than 7.35 million. They added 382,000 in Q2. Ordering through the GrubHub online menu is 50% faster than ordering from the restaurant on the phone.

The company recently announced participation with national chain restaurants including Boston Market, Johnny Rocket's, California Pizza Kitchen, Veggie Grill, On the Border and Panda Express. This is a natural for fast food chains. They prepare the food fast and it gets to the diner fast.

An analyst at Moness Crespi Hardt upgraded them to buy from neutral saying the fundamentals are rapidly improving with the addition of the chain restaurants. Secondly, they completely overhauled their tech platform in 2015 and the benefits are rising quickly. They are also integrating POS features including Apple Pay. He also believes they are a potential acquisition target by companies like Amazon, Uber and Postmates. His biggest point is the addition of the chain restaurants. Adding companies with hundreds or even thousands of restaurants will catapult them to the next level.

Earnings Oct 27th.

Shares spiked to $39 on the earnings and then spent a month in post earnings depression, dropping back below $36 in mid August. The rebound has begun and Monday's close was a new 14-month high. Initial resistance is $41 and our best-case target is $47.

I am using the December option so there will be some expectation value when we close the position ahead of earnings.

Position 8/30/16:

Long Dec $42.50 call @ $2.71, see portfolio graphic for stop loss.

ITW - Illinois Tool Works - Company Profile


No specific news. The recent uptrend broke and we were stopped out for a minor 25 cent loss. I am going to add ITW back in as a new play this weekend with a trade over $120.50 because I still think it is going higher. I was too aggressive on the stop loss because the momentum slowed and I wanted to limit our losses on a decline.

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

Closed 8/31/16: Long Dec $125 call @ $2.05. Exit $1.80, -.25 loss.

JACK - Jack in the Box - Company Profile


No specific news. Shares closed at a new 52-week high but have not yet broken over resistance at $99.65 but closed right on that level.

This position remains unopened until a trade at $100.25.

Original Trade Description: August 30th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of August 10, 2016, it operated and franchised approximately 2,250 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951.

Jack shares are up 29% year to date after the company reported Q2 earnings of $1.07 that beat estimates by 20 cents. Revenue rose +2.6% to $368.9 million. Same store sales rose 1.1% and the average check rose 3.5%.

They will end 2016 with an additional 20 Jack in the Box stores and 50-60 new Qdoba locations. The company is refranchising many of its stores and believes it can raise earnings by 65-78 cents through cost reductions achieved by shifting company owned stored to new franchisees. Management expects same store sales o rise 2.5% to 3.5% for Jack stores and 4% to 5% for Qdoba stores.

Earnings Nov 21st.

Shares rallied to $99 and the 2015 high on the Q2 earnings. They have held at that level and closed at a historic high on Monday. Today's decline was minimal given the weak market. The next time the market strings together several days of gains I expect JACK shares to break over $100 and start a new leg higher.

Because the market appears "toppy" and we are due for a dip, I am putting an entry trigger on the position. I am using the December options so there is some expectation premium when we exit before earnings.

With a JACK trade at $100.25

Buy DEC $105 Call, currently $4.00, initial stop loss $95.85
Optional: Sell short DEC $115 call, currently $1.10, initial stop loss $95.85
Net debit $2.90

MKC - McCormick & Co - Company Profile


No specific news. Still stuck in a range along with the market.

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.

OC - Owens Corning - Company Profile


No specific news. Shares moved back to resistance in a weak market.

Original Trade Description: August 24th.

Owens Corning produces and sells glass fiber reinforcements and other materials for composites; and residential and commercial building materials worldwide. It operates in three segments: Composites, Insulation, and Roofing. The Composites segment manufactures, fabricates, and sells glass reinforcements in the form of fiber; and manufactures and sells glass fiber products in the form of fabric and other specialized products. Its products are used in pipe, roofing shingles, sporting goods, consumer electronics, telecommunications cables, boats, aviation, defense, automotive, industrial containers, and wind-energy applications in the building and construction, transportation, consumer, industrial, and power and energy markets. The Insulation segment manufactures and sells fiberglass insulation into residential, commercial, industrial, and other markets for thermal and acoustical applications; and manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral fiber insulation, and foam insulation used in above- and below-grade construction applications. The Roofing segment manufactures and sells residential roofing shingles, oxidized asphalt materials, and roofing accessories used in residential and commercial construction, and specialty applications.

For Q2 they reported earnings of $1.29 that beat estimates for 85 cents. Revenue of $1.55 billion also beat estimates for $1.47 billion. They repurchased one million shares in the quarter with 2.8 million left on the current authorization. They projected second half shipments of roofing to be flat after a 20% surge in the first six months of 2016. This is a seasonal business. Hail storms that cause roof replacements are heaviest in April-July.

Earnings Oct 26th.

Shares were very volatile after the earnings with a range of $50.88 to $58.69. After the volatility passed the stock found support at $53 and moved sideways for four weeks. This week shares have started to climb out of the consolidation and the stock closed at $54.81 on Wednesday and actually posted a gain in a weak market. That was a four-week high.

This is a low volatility stock and could be a safe location to wait out any market volatility over the next six weeks.

Position 8/25/16

Long Nov $55 call @ $2.35, see portfolio graphic for stop loss.

PAG - Penske Automotive Group - Company Profile


Minor decline on no specific news.

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.

Update: On August 22nd, 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.

Update: On August 29th, Roger Penske bought another 478,000 shares for $21,132,400. That lifts his ownership to roughly 32 million shares.

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. Waiting on Broadcom to report earnings on Thursday. That could lift the entire sector.

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 dip buyers struck again after the Dow dipped -100 points in late morning. They cut the loss in half but it was still a loss. If we can get a close under 18,300 the entire tone of the market would change.

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

IBM - IBM Corporation - Company Profile


Resistance at $160 held again. No specific news.

IBM is moving in lock step with the Dow and both are stock in a trading range with a minor bias to the downside.

Original Trade Description: Aug 23rd.

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.

Position 8/24/16 with an IBM trade at $159

Long Oct $155 put @ $3.25, see portfolio graphic for stop loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now