Option Investor

Daily Newsletter, Monday, 9/12/2016

Table of Contents

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

Market Wrap

The Brainard Bounce

by Thomas Hughes

Click here to email Thomas Hughes


Fedspeak helped to drive the indices up down and sideways and we still don't really know what they are going to do. Volatility was the name of the game today. At first indicated to open with losses greater than -1% they later gained more than +1% in an up, down and sideways kind of a day. The driver behind the moves was FOMC uncertainty and a new round of conflicting statements; two Fed officials made a case for a September rate hike before the opening bell while a third made a case later in the day for not raising rates. The funny thing is, with all this Fed transparency we have about as much of clue as we ever did.

International markets were down heavily in the early hours of the morning. Asian indices closed with large losses, led by the Nikkei's -2.5%. The move was largely driven by Friday's US market sell-off. European indices were equally affected but were able to recover much of their earlier losses before the end of trading. The rebound in US stocks and oil both helped to lift prices, leaving the DAX leading with a loss of about -1.4%.

Market Statistics

Early futures trading saw the indices down by more than -1% only to have FedSpeak send them back to near break-even before the opening bell. The broad market opened with a slight loss, about -0.5% for the SPX, and the proceeded to work its way higher from there. The bounce lasted throughout the morning carrying the index to an intraday high about 0.6% above Friday's close. This level held for over an hour and then gains were extended to near 1% on comments from Brainard. She says the case for a rate hike is less compelling than it once was. The Brainard Bounce, as it has been labeled, cut it's gains by roughly 50% by 1:30PM before reestablishing the rally and moving higher once again. By 2:30PM the SPX was up a little more than 1.5% and looking like it would keep moving higher, only it didn't. From that point on the indices held their ground in sideways trading to close near the highs of the day.

Economic Calendar

The Economy

There was no economic data today and there is very little this week until Thursday. Tomorrow is Treasury Budget and Wednesday is the mortgage index, both non-movers. Thursday there are 10 individual reports ranging from weekly jobless data to retail sales, Philly Fed, Empire Manufacturing, Business Inventories and PPI. The next day, Friday, there are another three reports including Michigan Sentiment and the Fed's favorite gauge of inflation, CPI. Both the PPI and CPI could move the needle in terms of the FOMC and the September rate hike.

Moody's Survey of Business Confidence fell -0.1% to 26.1. According to Mr. Zandi the index shows stability in global business sentiment despite the summer's round of geopolitical events. Sentiment is strongest in the US, it is weakest in South American with positive forward outlook. Looking at the table it is possible that sentiment has bottomed, if so the next thing I'd like to see is some improvement.

Second quarter earnings is over, the final growth rate for the S&P 500 is -3.1%. Looking forward, 3rd quarter earnings are still expected to be poor but there are signs we could be emerging, finally, from the earnings recession. Third quarter expectations for growth remain negative but ticked higher to -2.0% from -2.1% and remain positioned to produce a final growth rate of roughly 2.0% if earnings trends persist (trends predict a roughly +4% increase in the projected rate by the end of the reporting season). There are 3 S&P 500 companies reporting earnings this week but the season does not really get underway for about 3 more weeks.

There are additional signs that earnings declines have bottomed. First, the third quarter is expected to see a return to revenue growth, if so this will be the first quarter since Q4 2104 to post positive growth. Second, 4th quarter earning growth is now expected to be 5.8%, up 0.3% from last report. While still well below expectations at the first of the year a return to expanding expectations is positive in my book. Third, full year 2016 expectations have also risen, they are still negative but not as negative as before. If third and fourth quarter expectations come in better than expected, as is what typically happens, full year 2016 could easily turn positive. Fourth, full year 2017 expectations have also risen in the latest report, gaining 0.2% to hit a two month high. So, what we have on tap is the real possibility of snapping the earnings recession with expanding and robust growth to follow.

The Dollar Index

The Dollar Index fell by -0.25% today but the move was negligible. The index is positioned almost exactly in the middle of a recent trading range and wind-up driven by the upcoming FOMC meeting. Today's action was impacted by Fed-Speak and Fed-Speak alone, holding pat waiting to see what REALLY happens. To recap briefly, in the early hours we got some comments from Lockhart and Kashkari. Lockhart asks the question, are current rates still appropriate? And answers by saying that conditions warrant a "serious" discussion of rate hikes at the September meeting because the economy is showing sufficient momentum. Kashkari says fiscal policy can only help so much with growth, it will take legislative action to really get things going. Along with that immigration reform could help as well. Brainard delivered her address shortly after 1PM and made what was describe as a whole-hearted defense of not raising rates.

The Dollar Index direction will come down to what the FOMC does next week. A hike would be bullish and could take it up to $97.50, the top of the range. No hike would be dovish and could take it down to the bottom of the range, near $93. The wild card will be the BOJ which also meets and delivers their policy statement next Wednesday. Early in the day the Fedwatch tool was showing a 24% probability of September rate hike, after the Brainard comments that fell to 14%.

The Oil Index

Oil prices were volatility today. First down by more than -1.5%, then up 1% and then flat on the day. Today's action was driven by a variety of factors starting off with high supply and high production which are what eventually dominated today's trade. WTI finished the day with a small gain, near the $46 level. Volatility may persist, especially if new rumors/headlines come out concerning possible production caps.

The Oil Index opened the day with a loss of about -1.5% but regained it and another 1% early in the day. The rebound in oil prices helped to lift the index up off the 1,120 support line which is the midpoint of the nearly 6 month trading range. This level may be gaining strength as support, this is the third bounce from it since it was crossed in early August, but the indicators do not yet show it. Both MACD and stochastic remain consistent with range bound trading. The 1,120 is the critical one for near term traders, a break below this would likely take the index down to the bottom of the range near 1,080. If support holds a retest of the upper range, near 1,175, is likely. Looking out to the short term, earnings season is just around the corner and this sector is once again expected to lead year over year earnings decline. Longer term though is much brighter, full year 2017 earnings growth is expected to be over 300%.

The Gold Index

Gold prices fell for the fourth day in a row, extending the fall from the $1,250 resistance level, but remain above critical support levels. The move lower has been driven by renewed, increased, FOMC rate hike outlook and will possibly go lower if the rate hike and/or hawkish stance is taken by the Fed. A break below critical support, in the range of $1300 to $1320, would be bearish. Until then the metal remains range bound and driven by headlines.

The gold miners had a bit of a mixed day, the Gold Miners ETF GDX opening with a loss and then regaining it and more. By end of day the miners had moved higher by about 3% and moved above resistance at the $26.50 level. The ETF appears set to move higher, confirming support at a higher level than the previous bounce, at least in the near term. If the bounce is able to move higher first target for resistance is the short term moving average near $28. A break above this could take it up to retest recent highs.

In The News, Story Stocks and Earnings

The VIX saw another major move today, falling nearly -6%. Despite the fall and apparent reversal the indicators remains consistent with higher volatitility, momentum is on the rise and stochastic is ticking higher. At best I think we can expect to see volatility trend sideways and show some volatility of its own, at least until the FOMC meeting. At worst it will continue to rise with a possible upside targets near $22.50 and $25.

On a sector by sector basis the utilities sector is expected to show the best year over year earnings growth for the third quarter, 5.7%. Fourth quarter outlook is better, bringing the full year 2016 estimate up to 6.2%, third best for the year which is a plus. Next year is not so good though, full year estimate is only 2.2% coming in last place of the ten major sectors. Looking at the Utilities ETF XLU the gained more than 1.75% in today's action but remains in downtrend. The caution is that the ETF also created a long white candle and bullish attack pattern so the downtrend may have found a bottom. The indicators suggest that it will continue higher in the near term, short term is less certain due to resistance just above the current levels. Resistance is near $50 and the short term moving average, a break above this level would be bullish with upside target near $52.50.

The Indices

The indices bounced today after support formed in the early pre-market hours. Even so, volatility has entered the market so it wise to be prepared for some large moves either direction over the next week to ten days. Today's leader was the NASDAQ Composite with a gain of 1.68%. The tech heavy index created an significantly large white candle which moved up to and broke above the short term moving average. Despite this move the index remains below potential resistance at the previous all time high. A break above this level is needed to get bullish right now and the indicators don't support it. MACD is bearish, not strong but bearish, and stochastic is rolling over and pointing lower following a bearish crossover. A break above would find next resistance at the current all time high, a move lower may go as deep as 5,050 before finding support.

The S&P 500 made the second largest move today, about 1.5%. The broad market created a significantly long white candle, larger than Friday's (not counting the gap), confirming support at 2,120. The indicators are mixed and consistent with range bound trading so no clear indication is given. Despite today's move the index remains below potential resistance at the short term moving average which has itself begun to peak. A break above the moving average would have to be strong enough to break additional resistance at the current all time high. Until further evidence is presented I think it best to assume that volatility may persist.

The Dow Jones Transportation average made the third largest move today, about 1.32%, and confirmed support along the bottom of a potential trading range. Support is at 7,750, upside target for resistance is near 8,150. The indicators are a bit mixed but more bullish than not, stochastic is weak in the nearer term but moving higher in the longer, basically consistent with range bound trading. A break below support would be bearish, a break above resistance bullish.

The Dow Jones Industrial Average made the same move as the transports, 1.32%. The blue chips also made a large white candle and have also confirmed support levels, this time at the 18,000 level. The index broke through potential resistance at the previous all time high as well and looks set to test next resistance at the short term moving average. The indicators are mixed so the strength of any move is questionable at this time. A move above the short term moving average would find next resistance at the current all time high, failing to break resistance could take it down to retest support at 18,000.

Volatility has returned to the market, a relief to option traders worldwide I'm sure. Today's move recovered much of the losses experienced Friday but it may offer false promise. The indices, despite large gains, remain beneath resistance levels with little reason for bullishness. The most immediate concern is the FOMC with economic data a close second. We'll get quite a bit of data including important reads on inflation between now and the meeting next week so interest rate outlook will likely roller coaster over the next 4 trading days.

If the Fed raises rates it brings us back to the duality of higher rates in that they aren't great for the market but signify health in the economy. In the near term it may spark the correction I have feared coming while in the long term economic health will bring improved corporate earnings and higher index prices. If they don't it's just more of the same. In either event, so long as earnings outlook remains positive and we actually see positive earnings growth come back to the market we should get a rally into the end of the year. I expect to see more volatility in the indices over the next few days and in that movement perhaps a clear signal will emerge. I remain cautious in the near term, waiting for the next great bull market entry.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Coin Toss Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the futures down -7.50 in afterhours the market direction is a coin toss again. The rebound short squeeze was strong but not as strong as the Friday crash. Fortunately, the drop-rebound exercise pointed out a stock that dipped only slightly and had a nice rebound for good relative strength. I am also adding ITW back in the mix tonight.

Sorry for the delay tonight. Our internet went out for 5 hours after the market closed.


LITE - Lumentum Holdings - Company Profile

Lumentum Holdings Inc. manufactures and sells optical and photonic products for optical networking and commercial laser customers worldwide. It operates in two segments, Optical Communications and Commercial Lasers. The Optical Communications segment offers components, modules, and subsystems that enable the transmission and transport of video, audio, and text data over high-capacity fiber optic cables. It offers optical communication products, including optical transceivers, optical transponders, and supporting components, such as modulators and source lasers; modules or sub-systems containing optical amplifiers, reconfigurable optical add/drop multiplexers or wavelength selective switches, optical channel monitors, and supporting components; and products for 3-D sensing applications, including a light source product. This segment serves customers in telecom and datacom markets. The Commercial Lasers segment offers diode, direct-diode, diode-pumped solid-state, fiber, and gas lasers; and photonic power products, such as fiber optic-based systems for delivering and measuring electrical power. This segment serves customers in markets and applications, such as manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, and solar cell scribing. Company description from FinViz.com.

In Q2 LITE reported adjusted earnings of 41 cents compared to estimates for 35 cents. Revenue of $241.7 million beat estimates for $238.4 million. The company guided to earnings of 40-46 in Q3 and revenue in the range of $245-$255 million. Both were slightly ahead of analyst estimates.

Raymond James upgraded the stock saying strong demand from new datacenter build outs and from China was pushing sales higher. The company only has two competitors, Finsar and Nistica, and they only compete in certain products. Raymond James believes LITE can increase sales in that category by 50% by year-end. Verizon's network upgrades are expected to supply $900 million to LITE over the next several years. Zacks also joined the upgrade club with a strong buy.

The stock is also getting a boost from the strong performance of Acacia (ACIA), which sells some similar products. The winning is rubbing off on LITE.

Shares made a new high at $37.82 on Friday morning and then dipped to $35.37 this morning before rebounding to close just under the prior high.

With a LITE trade at $37.75

Buy DEC $40 call, currently $2.45, no initial stop loss.

ITW - Illinois Tool Works - Company Profile

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. Company description from FinViz.com.

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.

Earnings Oct 19th.

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.

On Sept 2nd shares spiked to $123.50 on no news. That spike was erased and shares drifted back down to the prior consolidation range of $119 and held there for two days. The 9/9 crash knocked us out of our prior position and shares dipped to $114.91 on Monday the 12th. Real support is $114.50. I am going to recommend this position for a reentry on a dip to $115.50 on any further market weakness.

With an ITW trade at $115.50

Buy Dec $120 call, currently $3.20. No initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Fed Blinked

by Jim Brown

Click here to email Jim Brown

Editors Note:

Fed heads speaking today pushed down the expectations for a September hike and the market celebrated. At least that is what the talking heads were saying. While the Fed heads did reduce the chances for a hike, the market rebound was pure short squeeze. This was not a bunch of investors suddenly rushing to buy the dip in hopes of a new high later this week. I am sure there was some dip buying but that only added urgency to the squeeze. Professional traders were short heading into Friday and probably got even shorter on the way down. They were forced to exit some of those on the way back up.

The market is only expecting a 15% chance of a September hike and it was 24% at the close on Friday. However, the rebound stalled at prior support, now resistance at 18,300 on the Dow and the S&P futures are down -6 tonight. That could change before morning but the odds of us making a new high this week are less than those for a rate hike. We could still see further weakness simply because this is the fourth of the six most volatile weeks of the year due to portfolio restructuring and the October 31st fiscal year end for funds.

Down volume was 10:1 over advancing volume on Friday. Advancing volume was only 5:1 today. Advancing stocks were 5:2 today compared to decliners at 10:1 on Friday. It was a big rebound but the internals are flashing caution.

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

PAG - Penske Automotive

The long call position was stopped with a trade at $46.85.

AMP - Ameriprise Financial

The long call position remains unopened until a trade at $102.75.

FTNT - Fortinet

The long call recommendation has been cancelled.

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BULLISH Play Updates

AMP - Ameriprise Financial - Company Profile


No specific news. Big rebound from the $98.30 drop at the open to close at $101.50. I still like the relative strength. We just need it to move over resistance to the entry point.

The position remains unopened until a trade at $102.75.

Original Trade Description: September 3rd.

Ameriprise Financial, Inc., provides various financial products and services to individual and institutional clients in the United States and internationally. The company's Advice & Wealth Management segment provides financial planning and advice, as well as full-service brokerage services primarily to retail clients through its advisors. Its Asset Management segment offers investment management and advice, and investment products to retail, high net worth, and institutional clients through unaffiliated third party financial institutions and institutional sales force. They offer U.S. mutual funds and their non-U.S. equivalents, exchange-traded funds, variable product funds underlying insurance, and annuity separate accounts; and institutional asset management products, such as traditional asset classes, separately managed accounts, individually managed accounts, collateralized loan obligations, hedge funds, collective funds, and property funds. They also offer annuities and various insurance products including disability, property, casualty and life insurance. The company was originally known as American Express Financial Corporation. They were founded in 1894 and employ more than 10,000 financial advisors.

In late July, the company reported earnings of $2.23 and analysts were expecting $2.27. Revenue was $2.87 billion which missed estimates for $2.91 billion. The company has assets under management of $776.6 billion. The revenue and earnings miss was caused by exchange rate problems enhanced by Brexit and outflows of investor funds. The entire industry is struggling because investors are afraid of the market after a 7-year run and they are pulling funds out of investments in advance of the next recession. The current expansion is the third longest in history so investors are expecting it to end. It may be two quarters from now or two years from now but they expect it to end. Because this is an industry problem rather than a company problem, I believe the minor miss on earnings and revenue was actually positive. They also declared a quarterly dividend of 75 cents.

The company repurchased $444 million in stock in the quarter. They also closed an acquisition of Emerging Global Advisors in an effort to accelerate their Smart Beta efforts. This expands the Ameriprise foothold in the ETF marketplace. They recently filed for multiple new ETFs under the Smart Beta name. They first began offering ETFs of their own in 2011.

Earnings Oct 26th.

Shares fell sharply on the earnings miss from $101 to $85. Over the last month, they have recovered that loss and are back at the $101 level with resistance at $102.50. A break over that level targets $110 and then $115. Because of the potential for market volatility I am going to recommend an entry trigger.

With an AMP trade at $102.75

Buy Dec $105 Call, currently $3.10, initial stop loss $97.65.

FTNT - Fortinet Inc - Company Profile


No specific news. Only a minor rebound for a 16-cent gain. I am cancelling the recommendation.

Original Trade Description: September 3rd.

Fortinet, Inc. provides cyber security solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and virtual appliances products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which provides a single point of network log data collection. It also offers FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; and FortiDDos and FortiDB database security appliances. The company also offers security subscription, technical support, training, and professional services. Company description from FinViz.com.

They reported earnings of 3 cents that beat estimates for 2 cents. Revenues rose 29.9% to $311.4 million and beat estimates for $304 million. Product revenues jumped 19% and services revenues surged 40%. During the quarter they added 9,000 customers to bring their total to more than 280,000. The number of transactions over $100,000 increased by 36% and deals over $250,000 rose 35% with deals over $500,000 rising 19%. Total billings rose 26% to $373.8 million. Gross profits rose 33.2%. They ended the quarter with $985 million in cash.

They guided for Q3 to earnings of 17-18 cents and revenue of $319-$324 million. Consensus estimates were expecting 7 cents and $318.9 million. They also raised full year revenue guidance to $1.28 billion which was also above prior estimates.

Earnings Oct 20th.

The company is growing rapidly and the future is bright. There is resistance at $37.25 from a gap down last October and it has failed at that level twice. I expect it to break through on the next attempt. That breakout will target $43-$45 and then the prior highs at $50.

Recommendation cancelled.

IDCC - Interdigital - Company Profile


No specific news. IDCC will present at the Credit Suisse Small and Mid Cap conference at 10:AM on the 15th. Shares crashed to $69 at the open before rebounding to close at $72.30. Excellent rebound.

Original Trade Description: September 7th.

InterDigital, Inc. designs and develops technologies that enable and enhance wireless communications in the United States and internationally. It offers technology solutions for use in digital cellular and wireless products and networks, such as 2G, 3G, 4G, and IEEE 802-related products and networks. The company develops cellular technologies comprising technologies related to CDMA, TDMA, OFDM/OFDMA, and MIMO for use in 2G, 3G, and 4G wireless networks and mobile terminal devices; and other wireless technologies related to Wi-Fi, WLAN, WMAN, and WRAN. Its patented technologies are used in various products, including mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants; wireless infrastructure equipment comprising base stations; and components, dongles, and modules for wireless devices. As of December 31, 2015, it had a portfolio of approximately 20,400 patents and patent applications related to the fundamental technologies that enable wireless communications. Company description from FinViz.com.

IDCC does not make the equipment that uses its designs and patents. They lease those patents to other companies for annual royalty payments based on the volume of devices sold. This is a very lucrative business because they do not have the cost of production or the risk any specific product will not sell in the marketplace.

For Q2 they reported earnings of 48 cents that beat estimates for 26 cents. Revenue of $75.9 million was $300,000 short of estimates. They received an arbitration award of roughly $150 million from Huawei in the quarter that will be reported as income in Q3. They also announced a new multi-year patent agreement with Huawei for 3G and 4G units. They ended Q2 with $814 million in cash.

Update 9/8/16: The company issued revenue guidance for Q3 of $220-$225 million. This compares to Q2 revenue of $75.9 million. Quarterly revenues are volatile because they receive royalties on new products when shipped. For instance, a royalty on the iPhone 7 would show a monster jump in Q4 compared to minimal revenue in Q3.

Earnings Oct 27th.

IDCC is a member of the S&P-400 MidCap index.

IDCC shares are moving slowly higher with very little volatility. They closed at a new high on Wednesday. I know the daily chart looks scary but the 90-min chart below shows the three weeks of consolidation after their Q2 earnings jump. That consolidation is breaking to the upside and given their guidance, I believe it has room to run. I am using an inexpensive option in case disaster strikes.

Position 9/8/16 with a IDCC trade at $73.25

Long Oct $75 call @ $1.60. See portfolio graphic for stop loss.

PAG - Penske Automotive Group - Company Profile


Roger bought another $15.7 million in shares (327,602) on Friday and reported it today. Unfortunately, the stock dropped sharply with the market at the open and we were stopped out at $46.85.

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.

Update: On September 1st, Roger Penske bought another 187,764 shares worth $8.5 million.

Update 9/8/16: Roger bought another 225,000 shares for $10.6 million.

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

Closed 9/12/16: Long Nov $45 call @ $1.35, exit $3.20, +$1.85 gain.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


I The Dow dipped below 18,000 at the open but rebounded +330 points to close back in the consolidation range. This is very frustrating but the S&P futures are down -6 tonight. It could still go either way.

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

HSY - Hershey Co - Company Profile


No specific news. Shares only rebounded slightly suggesting there is more weakness ahead.

Original Trade Description: September 3rd.

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hershey's, Reese's, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands. It markets and sells its products to wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, and department stores. The Hershey Company was founded in 1894 and is headquartered in Hershey, Pennsylvania. Company description from FinViz.com.

Mondelez offered $107 per share for Hershey in June. Shares spiked to $110-$115 in anticipation of an upgraded offer. After two months of discussions they finally got around to price. The Hershey board said it would need a lot higher price to get the deal approved. Mondelez thought about it and came back saying "maybe they could go to $115" if some conditions were met. Hershey replied that was not high enough and it would take at least $125 to continue the discussion. Mondelez immediately broke off negotiations saying there was no "actionable path" to a conclusion.

Hershey is struggling. Sales have been slowing as new competition slowly erodes market share. The Hershey Trust owns 80% of the voting stock so even if the Hershey board decided to consider an offer the trust would have to approve it along with the Pennsylvania Attorney General, which has power over the trust. There will not be another deal and the trust board is being reconstituted in 2017 as demanded by the AG so no major actions will be approved.

Hershey is going to have to deal with its own market share losses and slowing sales. This means the outlook for Hershey shares is negative. Last week Bank America reiterated an underperform rating with a price target of $100 and shares closed the week at $99. The outlook is underwhelming and the stock should decline back to the $90 range where it was stuck before the Mondelez offer.

Earnings Nov 1st.

Position 9/8/16 with a HSY trade at $98.75

Long Nov $95 put @ $1.60. See portfolio graphic for stop loss.

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