Option Investor

Daily Newsletter, Tuesday, 9/13/2016

Table of Contents

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

Market Wrap

The Trend Has Changed

by Jim Brown

Click here to email Jim Brown

The sudden appearance of volatility and the Dow falling 4 out of 5 days is a not so subtle warning.

Market Statistics

I write often that one day does not make a trend. However, five days is a good indication that the prior trend has changed. It does not mean we are about to experience a 5-10% correction but the implications of the recent market action suggest we should consider that potential.

The Dow has posted alternating 200+ point moves over the last three days. Three alternating 1% or move moves are very rare. One analyst said it has happened only a handful of times in the last 20 years. Typically when a trend breaks and a decline begins there will be rebounds but not of this magnitude. Normally there will be several days of declines and then a big short squeeze before the decline resumes.

Having three alternating 200-point moves back to back suggests there is significant uncertainty that has escalated rapidly. There are multiple reasons being tossed around for this increased volatility. They blame the uncertainty over a September rate hike as well as the potential for an accelerated rate hike bias because the chatter from half the board has become increasingly hawkish. North Korea's nuclear test, submarine launched ballistic missiles, Iran threatening to shoot down U.S. planes and China warning countries not to approach their newly built islands in the South China Sea are also causing uncertainty. Investors worry we are close to a flash point where one or more of those events could erupt into a shooting confrontation.

There is also the election. With the polls tightening and the lead changing in some of the critical swing states, Clinton is no longer being projected as the likely winner. A Clinton win was already factored into the market and with republicans in control of the House and Senate, analysts were projecting four years of relative calm because of the divided government. If Trump wins, there is significant potential for an upset to the status quo. In theory, there would be republican control of all three branches although Trump is only barely considered a republican. Also, the House and Senate would definitely not be rubber-stamping any of his requests. There could be a deadlock of a different sort but as we have seen in the primary, it is foolish to count him out. He is a force to be reckoned with similar to a runaway bulldozer.

The potential for a Trump win, upset the historical trend in the market. I have written before that a lopsided contest in August tended to pull the Q4 rally forward because the uncertainty had been removed. We saw that in August when the polls were showing a double digit lead for Clinton. Now that it is a dead heat, that uncertainty has returned and the volatility spiked.

Lastly, over the last week the feeling over the path of the global central banks has changed. With $13 trillion in bonds with negative yields and $15 trillion on the balance sheets of the major central banks, the outlook has turned to uncertainty. The current global stimulus policy is not working. Economies are not growing and monetary policy is at record levels of stimulus. Central banks are suddenly reconsidering their plans and that suggests the global economy as we know it is about to change.

Today, the yield on the ten-year treasury spiked +3.7% to 1.73% and a three-month high but the outlook for the Fed did not change.

On Friday, the chance of a September hike spiked to 24%. On Monday after the three Fed heads spoke, the odds fell back to 15%. Those odds held that same level today. The spike in yields was not directly related to the Fed but an overall worry that global stimulus was about to tighten.

On Tuesday, equities, bonds, oil and gold all sold off. This is a classic sign of worries over the global economy. If stimulus is about to tighten then economic growth, which is already minimal, could slow as well. One analyst said "We need a good recession to reset expectations." That recession may not be that far off and that is why the Fed is panicked about adding a couple more rate hikes so they have some breathing room when it finally arrives. Some analysts believe 2-3 rate hikes over the next 9 months could actually cause a recession so what is the point in hiking rates just so you can lower them again?

The only material economic report on Tuesday was the NFIB Small Business Survey. The headline optimism index fell from 94.6 to 94.4 in August. The report proved the points I made above. The survey found that 39% of respondents cited political uncertainty as a reason not to expand their businesses or hire additional employees. During August 2015 only 20% cited political uncertainty.

The calendar for Wednesday is lackluster with nothing that should move the market. Cracker Barrel earnings will probably produce more headlines than the Import & Export prices.

Thursday is the big day with the Philly Fed Manufacturing Survey, Producer Prices and Retail Sales. Thursday will be a busy day but the quadruple witching on Friday will be the main factor in any market move.

With the Fed meeting starting on Tuesday, we could see some selling into the close on Friday. It will be interesting if the normal pre-Fed rally appears on Tuesday. Typically, the day before a Fed announcement is positive.

There was not much news to move the market on Tuesday. With very few earnings and the headlines mainly about the Fed there was little in the way of single stock news.

Freeport McMoran (FCX) shares gave back their gains from Monday after they said they were selling their deepwater Gulf of Mexico assets to Anadarko Petroleum for $2 billion plus the assumption of $500 million in abandonment expenses. Anadarko is selling $2 billion in a secondary offering to pay for the acquisition. This was a bargain for Anadarko and analysts said the price was way too cheap and that weighed on FCX shares. Freeport will use $582 million of the proceeds to pay off preferred shareholders and the rest will go to debt repayment.

Anadarko will add about 80,000 Boepd of production consisting of 80% oil. It will increase their ownership in the Lucius development to 49% from 35%. The Lucius spar is in 7,100 feet of water and can produce up to 80,000 Bopd and 450 million cubic feet of gas. Capital One Securities said Anadarko paid only 2 times EBITDA, which was exceptionally cheap considering the cash flow will pay out the deal in only two years without any additional development. Seaport Global Securities said the acquisition would add $2-$3 billion in free cash flow over the next five years. Anadarko is only paying for reserves that have been proven and acquired everything else is free. Anadarko's Gulf projects will produce 155,000 Boepd by year-end of which 85% is oil.

The company is raising its capex budget to $2.8-$3.0 billion. Onshore they are adding 2 rigs to the Delaware and DJ Basin later this year and will increase activity in 2017 as well. They plan on doubling production to 600,000 Boepd over the next five years. I have always liked Anadarko and I would not hesitate to enter a new position on any future dip.

While on the topic, oil prices fell -3% on Tuesday to $44.97 and could continue to fall. Prices gained 30 cents in afterhours trading after the API inventory report showed a minor 1.4 million barrel build. The more closely watched EIA report on Wednesday is expected to show a significantly higher build this week and next to offset the -14.5 million barrel decline last week as a result of the hurricane on shipping and the closure of oil production platforms. Tankers avoided the Gulf while the hurricane was active. They should have arrived at their destinations in Louisiana and Texas last week and this week and that will boost inventory levels.

Compounding the problem the International Energy Agency (IEA) warned that rebalancing demand and supply would take longer than originally thought. They warned that 2016 demand would rise 1.3 million barrels per day and -100,000 bpd less than originally projected. For 2017, they are predicting a further slowing of demand growth to 1.2 mbpd and a reduction of -200,000 bpd from their prior forecast. The IEA said the slowing global economy made "underlying macroeconomic conditions more uncertain."

The IEA said non-OPEC supplies in August declined -300,000 bpd but OPEC production rose to offset that decline. Global oil production was 96.9 mbpd and 300,000 bpd lower than August 2015. Near record OPEC supplies offset any declines in other countries. The IEA said the stimulus effect from cheaper oil prices is fading and economic worries in developing countries are weighing on forecasts. Demand growth has declined from 1.4 mbpd in Q1 to only 800,000 bpd in Q3. "Refiners are clearly losing their appetite for more oil." "Supply will continue to outpace demand at least through the first half of 2017." Current global stockpiles are at record levels over 3.1 billion barrels.

Tesla (TSLA) and SolarCity (SCTY) received a lot of headlines after short seller Jim Chanos said Tesla could go bankrupt. He said the proposed merger between SolarCity and Tesla would bankrupt Tesla because of the major cash drain to support the solar effort. The combined companies are burning cash at the rate of $1 billion a quarter. They will constantly need to return to the capital markets to generate more cash. Some believe Tesla may need to raise up to $5 billion over the next two years just to fund its manufacturing process. If you add in another $1 billion cash drain from SolarCity, soon investors are going to stop giving Tesla any additional money.

Currently SolarCity is selling solar installations for $3.01 a watt after allowances for debt costs. Those installations are costing the company $3.05 a watt. While that may not sound like a big loss, a typical installation can be 5,000 to 10,000 watts. When they do several thousand installations a quarter, those pennies add up to a loss of $55 million last quarter. That was up from a loss of $33 million in the comparison quarter.

Chanos does not think the merger will happen. According to the merger documents being passed around, the Tesla board refused to give SolarCity a $100 million bridge loan until the merger could be consummated. If the board actually thought the deal were going through it would have been a natural loan. Instead, SolarCity had to go outside the company to acquire $305 million in additional debt at 7.4% interest.

SolarCity was trading at $27 when they agreed to the merger. The stock is now at $17.06 because of the decline in TSLA shares and the expectations for the deal to collapse. SolarCity shareholders are to get 0.11 TSLA share for every SCTY share. That is $21.50 today with the actual share price significantly lower.

If the deal collapses, Tesla shares should rebound but SCTY shares could collapse further with their cash burn rate increasing and no sugar daddy to cover their overdrawn checking account.

Apple (AAPL) shares exploded higher to gain +$2.51 after carriers began to release order information on the iPhone 7. Apple said it was no longer going to release order numbers for the first few weeks of sales because those numbers were normally artificially low because of production limitations. However, carriers began spreading the good news this week.

T-Mobile said preorders for the last four days were up nearly 400% over the orders for the iPhone 6. "The first four days of the iPhone 7 launch are by far the biggest ever for T-Mobile" according to CEO John Legere. T-Mobile said existing customers can get a 32GB version for free or an iPhone 7 Plus 32gb model for $120 when they trade in their existing iPhone 6.

Sprint immediately fired back saying orders were up +375% and they would give the basic iPhone 7 for free with any trade in of a smartphone including the Samsung Galaxy S7. Sprint is also discounting the 256gb phones by $100.

The headlines on the surge in orders lifted Apple shares in a bad market. Shares hit a low of $102.43 on Monday and closed at $108 today.

After the bell, Carl Icahn said he had asked the SEC for the option to increase his stake in Herbalife (HLF) from 35% to 50%. He currently owns just over 20% of the outstanding shares and the company has given him permission to own up to 35%. He said Herbalife would be better off as a private company and be rid of Bill Ackman. Herbalife shares rose 2.5% in afterhours.

I believe most of Icahn's comments are just publicity designed to support the stock price. Icahn is enjoying the pain he is inflicting on Ackman's $1 billion short. They snipe at each other weekly but in this particular street fight, Icahn has the hammer. Ackman's carrying costs rise every month as the stock continues to trade above $55. The time is running out on Ackman's put options that he owns in addition to the stock he is short. If Icahn can keep the price over $55 through January, it could cost Ackman a lot of money.


This is shaping up to be a September to remember. After a return to the lows on Tuesday, the S&P futures are up more than 6 points and steadily rising in the afterhour's session. While that could be reversed before morning, another short squeeze bounce is always possible.

The key for me is not the major indexes but the prior leaders in the S&P-400 and S&P-600. The S&P-600 closed at a two month low with a nearly -2% decline. There was a minor rebound but it closed very near to a potential support break.

So far, the S&P-600 has not broken out of the consolidation pattern since mid July. The uptrend is still intact. If the 730.50 support is broken it could spoil market sentiment. The small cap indexes have been the strongest performers and breaking that support would be kryptonite for the broader market.

The S&P-400 Midcap Index was the other performance leader and the decline there has already broken below similar support. The market is collapsing one index at a time.

On the S&P-500 the prior support at 2,150 returned as resistance on Tuesday with the high for the day at 2,150.47 and the opening print. The S&P has flirted with the light support at 2,130 for the last three days but it has not been convincing. The 2100-2105 level could be tested on any further decline and that should be decent support.

However, with the return of volatility we could see major moves in either direction that disregard established support and resistance levels. For instance, the rebound on Monday blew through the 2,150 level to the upside but as soon as that short squeeze cooled that level returned as strong resistance.

The Dow was crushed by declines in financials and energy stocks. Apple was the only component in positive territory and that gain helped lift the Dow from the -297 point intraday low. There is nothing on the horizon to lift the Dow from a single stock perspective but it will be very reactive to further Fed rumors.

Thank you Apple for not letting the damage be worse. Yesterday the winners list and losers list were an almost exact opposite of today's lists. Amazon, Google, Biogen, PriceLine, Tree were all in the top ten on the winners list. Today they are the biggest losers. This is a crazy representation of portfolio managers trying to throw money at the market on the way up and then quickly removing that same money from the market on the way down. They want to be exposed if a real rally appears but they do not want to take on any extra risk this close to October.

The 5,100 level is now support and that is the critical level to watch.

If we have another 200+ day on the Dow on Wednesday, I may pull my hair out, what little I have left. We need the market to pick a direction and stick with it for more than 6.5 hours. Every reversal shakes out a few more trader/investors and that adds uncertainty to the market. Investors really do not care which way the market goes in the short term because they can make plans as long as it moves in one direction. If the market goes down for 3-4 consecutive days, they can watch for the support levels to be hit and jump in with some counter trend trades. If the market is moving higher, they can look for resistance levels to jump out. These alternating 200+ point days do not work for anybody but the futures traders.

I would continue to refrain from being overly long or short just in case the market continues to alternate directions. There is always another trade waiting as long as you have capital to invest when the volatility ends.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Bear Killer

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the futures down -6.00 in afterhours the market direction is a coin toss again. I am going to try and sneak in a play on Clovis in hopes the market does not crash again on Wednesday.


CLVS - Clovis Oncology - Company Profile

Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.

Clovis has been rising on the prospects for the drug Rucaparib. They reported last week the FDA was not planning on holding an advisory committee meeting to discuss the new NDA application. The FDA has accepted the company's NDA for accelerated approval and granted it a priority review. The FDA response is expected to be positive and is expected by Feb 23rd.

Clovis has several anti cancer drugs in final stages and the outlook is very positive. Just seeing that CLVS shares have not declined in the recent market drops is a very strong indication that portfolio managers are buying and holding.

Earnings Nov 3rd.

We have to use a January call spread because October is the only other series available and with Friday the expiration for September, the October premiums will collapse next week. The net cost is the same but with the January options, we have more flexibility in the weeks ahead.

Buy JAN $30 call, currently $6.30, no initial stop loss.
Sell JAN $40 call, currently $2.65, no initial stop loss.
Net debit $3.65


No New Bearish Plays

In Play Updates and Reviews

Outlook Worsening

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow closed down for the 4th time in five days and just above critical support. This was the third day with a triple digit move of more than 200 points in alternating directions. Typically this pattern of alternating major moves resolves to the downside. Today's decline suggests a worsening of the outlook and the potential for a support break below 18,000.

On the positive side the ITW play was entered on the drop at only 5 cents above the low for the day. Now we need that support to hold. The Lumentum play was triggered at the open on a spike higher but shares fell back to lose only 16 cents. That is good relative strength in a bad market. The IDCC play actually saw the stock post a gain for the day.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

ITW - Illinois Tool Works

The long call position was opened with a trade at $115.50.

AMP - Ameriprise Financial

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

LITE - Lumentum

The long call position was opened with a trade at $37.75.

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

AMP - Ameriprise Financial - Company Profile


No specific news. Down with the market again despite Monday's big rebound.

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.

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 up today in a bad market.

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.

ITW - Illinois Tool Works - Company Profile


No specific news. The new long play was triggered 5 cents above the low for the day. That should be a good entry point assuming the support at $115 holds.

Original Trade Description: September 12th.

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.

Position 9/13/16 with an ITW trade at $115.50

Long Dec $120 call @ $2.50. No initial stop loss.

LITE - Lumentum Holdings - Company Profile


No specific news. The position was triggered with a spike at the open so we did not get the best fill. Shares only lost 16 cents in a bad market.

Original Trade Description: September 12th.

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.

Position 9/13/16 with a LITE trade at $37.75

Long DEC $40 call @ $2.65, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


The Dow erased its rebound gains from Monday but has not quite returned to the sub 18,000 intraday low. The close at 18,066 suggests there is more weakness ahead.

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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