Option Investor

Daily Newsletter, Tuesday, 9/20/2016

Table of Contents

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

Market Wrap

Hike, No Hike, Hike, No Hike

by Jim Brown

Click here to email Jim Brown

Analysts cannot make up their mind what the Fed is going to do.

Market Statistics

On the surface, the consensus estimates suggest a 90% chance the Fed will not hike rates on Wednesday. However, there is a wide range of analysts that believe the odds are much higher that the Fed will hike.

Bill Gross said this morning there was a 50:50 chance of a Fed hike. If that were to happen, the market would react very negatively. The majority of Fed heads have made hawkish comments in recent weeks but Yellen and a couple others still appear to be firmly dovish in their remarks.

There are multiple reasons the Fed could move in either direction and the Bank of Japan monetary policy statement early Wednesday could be a major deterrent. If the BoJ goes wild with a new stimulus statement, the Fed could be forced to wait until December even if they wanted to hike on Wednesday. It is commonly thought that the global central banks communicate their intentions to each other to avoid a conflict of policies. We will see on Wednesday if that is the case.

There is an 88% chance of a rate hike in December according to a survey this week. The Fed funds futures are only showing a 60% chance today but it is very likely to happen.

The Fed will probably issue a statement that is more hawkish than normal in order to set the tone for future commentary and the rate hike in December. This hawkish tone is expected by the market but there may still be a negative reaction.

The Fed cannot hike in November only three working days before the election. They go out of their way to avoid political confrontations. This means a pass in September is almost a guaranteed hike in December.

The chatter about the potential for a September hike lifted the futures slightly from Friday's 15% chance to suggest an 18% chance at today's close.

The only material economic report on Tuesday was the New Residential Construction numbers for August. The headline number declined from 1.211 million to 1.142 million and missed the consensus estimate for 1.191 million. This was the lowest number since the 1.113 million in March, which is typically low because of winter weather.

The -5.8% decline in housing starts was still +0.9% above the August 2015 numbers. Housing permits, a guide to future starts, fell slightly from 1.144 million to 1.139 million for a -0.4% decline.

The decline in housing starts was limited to the South with the other three regions showing slight increases. Starts in the South fell -14.8% and are now -13.1% below year ago levels. The West saw a 1.8% rise, Midwest +5.6% and Northeast +7.6% gain.

Wednesday is the make or break day for the market despite a flurry of economic reports on Thursday. The market direction should be dictated by Wednesday's events. The economics on Wednesday are not normally market-moving reports.

Homebuilder Lennar Corp (LEN) reported earnings of $1.01 that beat estimates for 88 cents. Revenue of $2.83 billion rose 13.7% and beat estimates for $2.66 billion. The company delivered 6,779 homes in the quarter, up 7% from a year ago. The average selling price rose 3% to $362,000. New orders rose +8% to 7,018 homes. The company said low interest rates and strong job growth were helping sales. Unfortunately, nothing helped lift the shares and they declined -3.5%. Shares declined because Lennar cut gross margin expectations from 23.5-24.0% to 23.25%. The average cost for building a home has risen 13.7% since 2007. Land costs, construction and financing costs have risen 2.9%. The labor costs have been the biggest driver in the price.

Homebuilder KB Homes (KBH) reported earnings of 42 cents that beat estimates for 39 cents. Revenue of $913.3 million missed estimates for $954.1 million. Deliveries rose 11% to 2,487 homes and the average selling price rose 2% to $365,900. The gross profit margin rose 20 basis points to 16.4%. The order backlog at the end of the quarter rose +17% to 5,226 home worth $1.85 billion. New orders for the quarter rose 16% to 2,508 homes. Shares declined -2.4% on the drop in the residential construction report.

After the bell, FedEx (FDX) reported earnings of $2.90 compared to estimates for $2.81. Revenue of $14.7 billion beat estimates for $14.6 billion. The company also raised guidance for the full year from $10.85 to $11.35. They said the integration of the TNT Express acquisition was going to be a plus. FedEx is raising rates an average of 3.9% for ground and FedEx Home Delivery and +4.9% on FedEx Freight on Jan 2nd. They also said they would switch to a weekly fuel adjustment charge starting on Feb 6th. Shares rallied $5 to $167 in afterhours trading.

Adobe Systems (ADBE) reported earnings of 75 cents that beat estimates for 72 cents. Revenue of $1.46 billion rose 20% and beat estimates for $1.45 billion. This was the tenth consecutive quarter of revenue gains. Annual subscription revenue was flat at $3.7 billion. They only account for those revenues in the quarter the service is provided. They guided for record Q3 revenue of $1.55 to $1.6 billion and earnings of 83 to 89 cents. Analysts were expecting $1.575 billion and 78 cents. Shares rose $5 in afterhours trading.

Microsoft (MSFT) said it raised its dividend 8% to 39 cents. The dividend will be paid on December 8th to holders on November 17th. They also announced a new $40 billion stock buyback plan that will follow the existing $40 billion program that is scheduled to be completed by December 31st. There was another $40 billion program before that one. Microsoft has $113.2 billion in cash and is spending $26 billion to acquire Linkedin (LNKD). That deal will be largely funded with debt because much of the company's cash is stranded overseas. Shares rose 50 cents in afterhours trading.

Allergan (AGN) reported its third acquisition in September with a $1.7 billion purchase of Tobria Therapeutics (TBRA). Investors went to bed with a $5 stock on Monday and woke up with a $40 stock on Tuesday. Their market cap was only $90 million before the announcement. Analysts speculate the high premium was due to competition from other potential acquirers. With Gilead Sciences on the prowl with $29 billion in cash, they may also have been a bidder.

Allergan is buying Tobria to get their drugs to fight fatty liver disease. The NASH disease affects more than 15 million Americans. Their livers accumulate fat that is not associated with alcohol consumption. Tobria's drug cenicriviroc has the potential for annual sales of $5 billion if later trials perform as expected.

Allergan bought privately held Akarna Therapeutics as well for $50 million. The company is also working on drugs to treat NASH.

NuSkin (NUS) reported a settlement with the SEC regarding a probe into a charitable contribution in China in 2013. The SEC said the accounting procedures were insufficient. The company settled for $765,688 or basically pocket change. The settlement ended the probe. The company also said Q3 revenue would come in at the high end of prior guidance of $560-$580 million. Shares were up 3% in afterhours.

Consumer audio manufacturer DTS Inc (DTSI) said it was being acquired by Tessera Technologies (TSRA) for $42.50 per share in cash or $850 million. This represents a 28% premium. Tessera said the acquisition would be immediately accretive and will generate considerable free cash flow.

Crude prices fell to $42.55 in early trading and rallied to close at $43.85. After the bell the API inventory report showed a monster -7.5 million barrel decline when analysts were expecting a +3.4 million barrel gain. There has not been any news that could account for the big decline. The EIA inventories on Wednesday will either confirm or discredit this number. After the report, crude prices spiked to $44.89. However, the current month contract expired at the close and that $44 number is the new contract that was already slightly higher. If I had to bet, I would expect the EIA numbers to not show that big decline. If they do, we need to start looking for a massive pipeline leak somewhere in the USA.


The markets will be volatile the rest of the week. That is about all I can tell you that I know will be true. The direction should be determined by the Fed and the BoJ on Wednesday. The Dow and S&P have been putting in lower highs and higher lows and compressing into a tight range ahead of the Fed news. They are likely to explode out of this consolidation but the direction is unknown.

The best guess would be a move higher because of the recent dip buying. Every dip is bought on strong initial volume but no conviction. Investors are willing to buy the dips but they are not willing to chase prices higher. Maybe after the Fed decision that problem will be resolved. Both those indexes are well above support and at the high of their recent range and that also suggests the move will be higher.

The S&P has resistance at 2,150 and it has been tested every day since Friday the 9th. Support at 2,120 has not been tested in four days. This should confirm the theory of an upside bias.

The Dow has a similar pattern. The resistance is 18,250 with support at 18,000. However, the last three days the Dow has found new interim support at 18,100 as the trading range compressed. There will be a directional move, only the direction is unknown.

The Nasdaq is holding closer to its historic high and I would expect the tech sector to lead if there is an upside move. Portfolio managers are likely to throw money at the FANG stocks as a way to get invested quickly if the Fed statement is market positive.

The biotech sector is behaving well thanks to the M&A activity. I am surprised it was not up more today but +1.4% when the other indexes were weak, is still a good day.

The Adobe earnings and the Microsoft buyback announcement could be positive for the tech sector in the morning. There may be an overriding gloom until after the Fed announcement.

The small cap S&P-600 continues to hold well above support and only 23 points from the historic high. When the big cap indexes were down on Monday the S&P-600 was up several points. They reversed roles today. I do expect the small caps to lead the market higher once the all clear signal arrives. We just do not know what or when that will be.

Everybody keeps warning about the Fed decision and the BoJ and the impact on the markets. That would appear to suggest that some news out of both events will power the market higher. While I believe there is a good chance of an upward move everyone should realize that it may not happen that way. Even if the Fed does not hike, there may be an immediate bout of volatility, probably in both directions, but there is no guarantee the market will go up.

With the election process in full swing and the lead changing almost daily there is a tremendous amount of uncertainty hovering over the market. It is entirely possible the market continues to chop around within 50 points of where the S&P closed today at 2,139 until after the election. I know that is painful to hear but it is a distinct possibility.

I would continue to caution not to be overly long until the market picks a direction. 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

Oil Prices Impact Everything

by Jim Brown

Click here to email Jim Brown

Editors Note:

Signet Jewelers blamed the decline in oil prices on their poor earnings performance in Q2. Since the oil crash is now more than two years old, why was it only a problem in Q2? I think there are bigger issues at work here.


No New Bullish Plays


SIG - Signet Jewelers - Company Profile

Signet Jewelers Limited engages in the retail sale of diamond jewelry and watches. Its Sterling Jewelers division operates stores in malls and off-mall locations under the Kay Jewelers, Kay Jewelers Outlet, Jared The Galleria Of Jewelry, Jared Vault, Jared Jewelry Boutique, JB Robinson Jewelers, Marks & Morgan Jewelers, Every kiss begins with Kay, He went to Jared, Celebrate Life. Express Love., the Leo Diamond, Hearts Desire, Artistry Diamonds, Charmed Memories, Diamonds in Rhythm, Open Hearts by Jane Seymour, Radiant Reflections, Colors in Rhythm, Chosen by Jared, Now and Forever, and Ever Us names. As of January 30, 2016, this segment operated 1,540 stores.

The company's Zale division operates jewelry stores and mall-based kiosks in shopping malls under the Zales, Zales Jewelers, Zales the Diamond Store, Zales Outlet, Gordon's Jewelers, Peoples Jewellers, Peoples the Diamond Store, Peoples Outlet the Diamond Store, Mappins, Piercing Pagoda, Arctic Brilliance Canadian Diamonds, Candy Colored Jewelry, Celebration Diamond, The Celebration Diamond Collection, Unstoppable Love, and Endless Brilliance names. This segment operated 977 jewelry stores and 605 mall-based kiosks. Company description from FinViz.com.

In Q2, Signet reported earnings of $1.14, down from $1.28 and well below analyst estimates for $1.45. Revenue fell -2.6% to $1.37 billion and also missing estimates. Same store sales declined -2.3% system wide with sales at Jared down -7.6% and Kay Jewelers seeing a -0.5% decline.

The CEO blamed the drop in oil prices for the decline in jewelry sales. The company slashed guidance, cutting the earnings forecast from $8.35-$8.55 to $7.25-$7.55. They cut same store sales guidance from 2.0% - 3.5% growth to a decline of -2.5% to -1%.

Next earnings Nov 22nd.

Shares fell from $95 to $80 on the earnings news. After moving sideways for three weeks, shares began to fade last week and closed at a two year low today at $75.65.

With a SIG trade at $75

Buy Nov $70 put, currently $2.45, initial stop loss $79.25.

In Play Updates and Reviews

Spring Compressing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow closed -97 points off its intraday high and the second day the Dow closed at the lows. The Dow pattern is one of lower highs and higher lows as the market spring compresses ahead of the Fed decision on Wednesday. We are guaranteed a directional move before Friday's close but we do not know in what direction.

The market appears to be setting up for a move higher but there is no guarantee. This is typically the most volatile week of the year so anything is positive.

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

FSLR - First Solar

The long put position was entered at the open at $34.65.

RGR - Sturm Ruger

The long put position was opened with a trade at $54.85.

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

ALXN - Alexion Pharmaceuticals - Company Profile


The approval of the DMD drug for Sarepta may have opened the door for approvals of other orphan drugs in the future and that is positive for ALXN, RARE and BMRN.

Original Trade Description: September 14th.

Alexion Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes life-transforming therapeutic products. The company offers Soliris (eculizumab), a monoclonal antibody for the treatment of paroxysmal nocturnal hemoglobinuria (PNH), a genetic blood disorder; and atypical hemolytic uremic syndrome (aHUS), a genetic disease. It provides Strensiq (asfotase alfa), a targeted enzyme replacement therapy for patients with hypophosphatasia (HPP); and Kanuma (sebelipase alfa) for the treatment of patients with lysosomal acid lipase deficiency. The company also conducts Phase IV clinical trials on Soliris for the treatment of PNH registry; Phase III clinical trials for the treatment of myasthenia gravis, neuromyelitis optica spectrum disorder, and delayed kidney transplant graft function; and Phase II clinical trials for antibody mediated rejection in presensitized renal transplant patients. It develops cPMP (ALXN 1101) that is in Phase II/III trial for treating metabolic disorders; and ALXN 1007, a novel humanized antibody in Phase II clinical trial for the treatment of anti-phospholipid syndrome and graft versus host disease. Company description from FinViz.com.

The Uncommon Strength campaign supports building global communities for patients with rare diseases, which include atypical hemolytic uremic syndrome (aHUS), hypophosphatasia (HPP), lysosomal acid lipase deficiency (LAL-D) and paroxysmal nocturnal hemoglobinuria (PNH). While the platform aims to provide key information about the diseases to educate the patients and their families, it also offers interactive connection through social media components to unite the global community.

Last week Alexion was awarded orphan drug status by the EU on the ALXN1007 drug for the treatment of graft-versus-host disease (GVHD). This is an anti-inflammatory monoclonal antibody targeting complement protein C5a, currently in a phase II study in patients with newly diagnosed acute GVHD of the lower gastrointestinal tract (GI-GVHD). This disease has a 30-40% mortality rate. The orphan drug status provides certain incentives for the company to proceed with marketing including a longer period of market exclusivity. They have several other drugs similar to ALXN1007.

In Q2 they reported adjusted earnings of $1.25 compared to estimates for $1.17. Revenue of $753.1 million also beat estimates for $742.5 million.

Earnings Oct 27th.

Shares dipped in late August and traded sideways for two weeks. They have been trying to rebound despite the volatile market. Options are expensive so I am recommending a November call spread to reduce the expense.

Position 9/15/16 with a ALXN trade at $130.50

Long Nov $135 call @ $6.00, see portfolio graphic for stop loss.
Short Nov $145 call @ $1.90, see portfolio graphic for stop loss.
Net debit $4.10.

CLVS - Clovis Oncology - Company Profile


No specific news. The big gain came on the DMD drug approval for Sarepta. This was a big FDA decision that could ripple down for years as other orphan drugs come up for approval.

Original Trade Description: September 13th.

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.

Position 9/14/16

Long JAN $30 call @ $6.00, see portfolio graphic for stop loss.
Short JAN $40 call @ $3.31, see portfolio graphic for stop loss.
Net debit $2.69

IDCC - Interdigital - Company Profile


No specific news. Zacks called it their bull call of the day. Earnings estimates are rising. Over the past 30 days earnings estimates have risen 40 cents to $3.06. Full year estimates have risen from $3.01 to $5.80, a 93% gain. That is a huge spike in sentiment.

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. Decent gain in a weak market.

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. See portfolio graphic for stop loss.

LITE - Lumentum Holdings - Company Profile


No specific news.

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, see portfolio graphic for stop loss.

NVDA - Nvidia Corp - Company Profile


No specific news. SunTrust and Susquehanna both initiated coverage with a neutral rating and that weighed on the stock today.

Original Trade Description: September 17th.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors. Company description from FinViz.com.

Q2 earnings rose 800% to 40 cents and beat estimates for 37 cents. Revenue of $1.43 billion beat their own guidance of $1.35 billion they gave in Q1. Earnings in the year ago quarter were 5 cents and $1.15 billion. They hiked full year revenue guidance as well as the current quarter. They guided for Q3 revenue of $1.68 billion and analysts were only expecting $1.45 billion. During the first six months of 2016, they bought back $509 million in shares and paid $124 million in dividends. The company had $4.88 billion in cash at the end of Q2.

Earnings Nov 10th.

They recently released several new graphics cards that are twice as fast and 40% cheaper than the cards they are replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

Nvidia shares have been stair-stepping higher since January. That means they post solid gains for a month or so and then pause to consolidate with a minor retracement. They set a new high at $63.38 on August 12th, the day after their Q2 earnings beat. Shares have moved sideways for a month. Last week, when the extreme market volatility hit on the 9th, shares dropped from $63 to $57. Within 4 days the stock was back at $63. I believe it it now poised to breakout now that the weak holders have been eliminated.

Position 9/19/16:

Long Nov $65 call @ $3.45, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


The 18,100 support held again but the Dow did give up more than a 100 point intraday gain for the second consecutive day.

I would like to see the play be successful but a breakdown would damage all the long plays that we currently hold. I look at this as a hedge against a market decline.

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, see portfolio graphic for stop loss.
Short Oct $172 put @ $1.73, see portfolio graphic for stop loss.
Net debit $2.25

FSLR - First Solar - Company Profile


No specific news. The position was entered at the open.

Original Trade Description: September 19th.

First Solar, Inc. provides solar energy solutions in the United States and internationally. It operates through two segments, Components and Systems. The Components segment designs, manufactures, and sells solar modules that convert sunlight into electricity. This segment manufactures cadmium telluride and crystalline silicon modules for system integrators and operators. The Systems segment provides turn-key photovoltaic solar power systems or solar solutions, such as project development; engineering, procurement, and construction; and operating and maintenance services to utilities, independent power producers, and commercial and industrial companies. Company description from FinViz.com.

For Q2, FSLR reported earnings of 87 cents that beat estimates for 58 cents. Revenue of $934 million beat estimates for $904 million. However their GAAP earnings declined 86 cents to 13 cents after the company decided to halt production os solar panels using TetraSun's experimental technology. The company guided to full year earnings from $4.10-$4.50 to $3.65-$3.90 per share.

Goldman Sachs warned the solar sector was facing demand risk as government regulation and new laws made solar systems less desirable. The supply continues to be higher than demand and that is forcing the average selling price lower. Jinko Solar and Trina Solar are increasing production 18% this year. Utility companies are becoming less agreeable about buying back power that systems push into the grid during daylight hours. Goldman expects hardware costs to decline 20-30 cents per watt in early 2017. They are currently averaging 42 cents a watt and First Solar's production cost is 42 cents. As prices continue lower, FSLR will lose more money. They are not the only one. Trina's cost is 45 cents a watt.

Earnings Oct 27th.

JP Morgan said First Solar will struggle to hit earnings estimates in the near term. JMP cut FSLR to an underperform. Deutsche Bank cut them from buy to hold.

Shares have fallen from $39 to $34 but the trend is still lower. Monday's close was a three-year low.

Position 9/20/16:

Long Nov $32.50 put @ $1.79, see portfolio graphic for stop loss.

HSY - Hershey Co - Company Profile


No specific news. Only a minor decline but a new 2-month closing low.

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.

RGR - Sturm Ruger & Company - Company Profile


No specific news. The position was triggered at $54.85 when shares finally broke below interim support and closed at a new 8-month low.

Original Trade Description: September 15th.

Sturm, Ruger & Company, Inc. designs, manufactures, and sells firearms under the Ruger trademark in the United States. It operates in two segments, Firearms and Castings. The company offers single-shot, autoloading, bolt-action, and sporting rifles; rimfire and centerfire autoloading pistols; single-action and double-action revolvers; and firearms accessories and replacement parts, as well as manufactures and sells steel investment castings and metal injection molding (MIM) parts. It sells its firearm products through independent wholesale distributors to commercial sporting market; and castings and MIM parts directly or through manufacturers' representatives. The company also exports its firearm products through a network of commercial distributors and directly to foreign customers comprising primarily of law enforcement agencies and foreign governments. Company description from FinViz.com.

In Q2, RGR reported earnings of $1.22 that beat estimates for $1.19. Revenue rose +19% to $167.9 million. The company said the new AR-15 clone, the AR-556 was responsible for one-third of all sales.

However, the pace of sales growth declined from the 26% rate in Q1. Ruger also surprised investors with a new CEO succession plan. The highly regarded Michael Fifer will retire in May and be replaced by the COO Christopher Killoy. The company had not mentioned a possible succession plan at the last shareholder meeting. Killoy is a good choice because he graduated from West Point and worked at both GE and competitor Smith & Wesson before joining Ruger as head of sales in 2003. He will only be the fourth CEO in Ruger's history.

The slowdown in sales growth was accompanied by a decline in background checks. FBI background checks slowed in August to only a 6% rise compared to 37% growth in July and 39% in June. The actual number of checks fell from 2.19 million in July to 1.85 million in August.

The gun makers have been posting some outstanding earnings thanks to rapidly rising gun sales only those sales are slowing now that Trump has pulled even or slightly ahead of Clinton. Trump is pro gun and Clinton is anti gun. As long as his numbers are improving, gun sales are likely to slow. However, should Clinton surge into the lead again, the numbers will rocket higher. Consumers are not going to spend hundreds of dollars to buy another gun if they think their gun rights will be safe for another 4 years. If Clinton surges into the lead again, they will be out in force buying those "extra" guns. The biggest surge will occur if Clinton wins the election on Nov 8th. At that point we want to be long every gun manufacturer and ammunition maker.

Earnings Nov 1st.

Ruger shares closed at an 8-month low on Wednesday. The rebound on Thursday was lackluster in a market were the Dow was up +200 points. With sales growth slowing and investors thinking the "bun boom" is over we could see Ruger retest the November lows at $48.

Position 9/20/16 with a RGR trade at $54.85

Long Jan $52.50 put @ $3.50, see portfolio graphic for stop loss.
Short Jan $45 put @ $0.80, see portfolio graphic for stop loss.
Net debit $2.70

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