Option Investor

Daily Newsletter, Saturday, 10/8/2016

Table of Contents

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

Market Wrap

One Down, One to Go

by Jim Brown

Click here to email Jim Brown

The first two weeks of October are typically negative and the first one is over with one more to go.

Weekly Statistics

Friday Statistics

The nonfarm payroll numbers did not produce the market movement most expected. The early Dow decline saw buyers appear when the -119 low held for over an hour and traders gave up on a bearish move. The index rebounded to positive territory in the afternoon but the 18,250 price magnet was too strong and it closed just below that level.

The Dow has not been reactive to moving averages in a long time but the 100-day has returned to act as support.

The economy added 156,000 nonfarm payrolls in September. That was less than the expectations for 170,000 and less than the revised gain in August of 167,000. The August number was revised up from 151,000. The July job gains were revised lower from 275,000 to 252,000.

After the ADP report on Wednesday declined from 177,000 to 154,000 and also missed consensus estimates of 170,000 the first look at the nonfarm headline number suggested the economy was slowing. However, the average hourly earnings rose +0.2% to +2.6% over the same period in 2015 and the average workweek rose slightly to 34.4 from 34.3 hours. Those are minor gains but spread across 149 million workers it makes a difference.

The unemployment rate rose one tenth to 5.0% as more people entered the workforce. More than 444,000 people entered the workforce in September. The labor force participation rate also edged up slightly from 62.8 to 62.9% after a low of 62.6% in May.

Construction payrolls rose by 23,000 to put the goods producing segment back into positive territory at 10,000 after losing -25,000 jobs in August. The firming of energy prices have started to reverse the job losses in the exploration and production sector.

The separate Household Survey showed a gain of 354,000 jobs. The number of workers employed part-time involuntarily declined by 159,000. The median term of unemployment fell to 10.3 weeks. However, the larger U6 unemployment rate was unchanged at 9.7%.

The average monthly job gains in 2016 is +178,000 and slightly less than the 200,000 per month average for 2014 and 2015. We are in the seventh year of an expansion cycle so a slowing of job growth is to be expected. The number of discouraged workers has declined as a tight job market has produced more job advertisements and higher wages.

As an example of the problems people are having finding qualified workers, Axon, a Seattle based producer of body cameras and associated software is offering a Tesla Model 3 car to new hires including engineers and web developers. The company had 31 open positions as of Wednesday.

Amazon has been known to pay significant sums to developers to induce them to sell their homes and move to Seattle. Tableau Software (DATA) is paying employees a $10,000 finder's fee for referring new prospects that are hired. Microsoft posted openings for 500 new jobs just a week ago.

Despite the third consecutive decline in new jobs, this was still a decent report and Fed heads immediately talked about the need to start raising rates.

The odds of a rate hike for the November meeting have declined to only 8.3% but the odds for December have risen to 65.1%. Unless the economic reports show an implosion in the economy over the next two months there will be a rate hike in December. Several Fed heads are trying to talk up a November hike but the futures are ignoring those efforts. The equity market is not ignoring those comments and that is one of the reasons for the volatility over the last week.

Unfortunately for the Fed the economic forecast is not proceeding according to plan. Back at the beginning of August the Atlanta Fed real time GDPNow forecast for Q3 GDP was predicting 3.8% growth. Over the last two months that has declined to 2.1% growth and could easily slip under 2% in the next revision. This compares to the final Q2 reading of 1.41%. That is hardly the kind of growth the Fed wants to see when they are raising rates.

While the Fed claims it is data dependent, it is not. However, the equity market is the most efficient discounting mechanism of future events and the current volatility on Fed headlines suggests investors are afraid the Fed is going to hike regardless of the country's economic strength.

The other economic report on Friday was the Wholesale Inventories for August, which declined -0.2% after a -0.1% decline in July. The report was ignored.

Next week is a light calendar for economic events but there are still plenty of Fed speeches and the start of the Q3 earnings cycle. Monday is Columbus Day and the banks and the bond market will be closed.

Tuesday is the official kickoff for earnings with Alcoa, Fastenal and Barracuda Networks. Friday is the biggest earnings day with Citigroup, Wells Fargo, PNC Financial and JP Morgan Chase reporting.

The FOMC minutes on Wednesday will be the most important event with analysts trying to decipher the minutes to see if there really is a chance for a rate hike in November. Rounding out the week Janet Yellen has a speech on Friday and whenever she speaks there is always the danger of a lightning strike.

One of the problems hitting the market on Friday was the flash crash in the British pound. The pound crashed from 1.26 to the dollar to 1.14 overnight before a rebound appeared. Banks blamed it on very thin liquidity and a sudden abundance of sell orders. Bloomberg reported that eight market makers went offline for more than 30 seconds because of an absence of bids. Traders said a large number of sell stops were hit and there was nobody to buy. That sent the computer programs into a panic and they cancelled orders until normal trading resumed.

Citigroup blamed the crash on "blunt aggression" in a thin market coupled with retail stop losses being hit.

We are never more than one unfortunate series of seemingly unrelated events away from a flash crash in anything. With more than $5 trillion in currencies traded daily, that is normally assumed to be a very liquid market but there has been at least four flash crashes in the currency market this year.

This chart from the CME does not show the low at 1.14 because of program constraints but the magnitude of the drop is apparent. Normal bid/ask is 1-2 pips. That rose to more than 50 pips and at one point was 600 pips. In currencies, that is a nightmare scenario.

Honeywell (HON) rocked the market with an earnings warning ahead of the Q3 report. The company cut guidance from $1.67-$1.72 to $1.60 and the street was expecting $1.67. They blamed the warning on foreign defense order weakness along with a decline in business jet engine orders. They said weakness in the energy sector reduced demand for private jets and maintenance for those jets. They also guided for Q4 for earnings of $1.74-$1.78 and full year for $6.60-$6.64. That was down slightly from $6.60-$6.70. Shares fell -7.5% on the news.

PPG Industries (PPG) warned it expected to post a loss for Q3 of 74 to 77 cents. That will be the first loss in 30 consecutive quarters. The adjusted earnings will be $1.54-$1.57 compared to analyst estimates for $1.71. They posted a $1.52 profit in the comparison quarter. They blamed the loss on a charge related to their pension settlement. Revenue is expected to be $3.8 billion and also below estimates for $3.84 billion. Shares fell -$8.50 on the news.

Tyson Foods (TSN) shares fell -9% after Pivotal Research cut the stock from buy to sell as a result of a price fixing class action suit filed in September. The analyst said the suit has merit and he cut the price target from $100 to $40. Tyson, Pilgrim's Pride (PPC) and Sanderson Farms (SAFM) reportedly colluded starting in 2008 to reduce production in order to keep prices high. The analyst said this suit could cause stronger industry regulation and reduce profits.

Yahoo (YHOO) is said to be resisting efforts by Verizon to reduce the purchase price from $4.8 billion to $3.8 billion as a result of the hacking scandal. Data from more than 500 million accounts was stolen in 2014 and Yahoo management did not disclose the extent of the breach in the negotiations with Verizon. It would appear to me to be a material adverse change or a MAC event that could allow Verizon to walk if it so desired. Yahoo said there had been some breaches in the past but did not disclose that 500 million accounts were stolen.

The Twitter (TWTR) sale is dead. The rumor making the rounds late Friday said the Twitter sale process had failed and all the bidders had walked away. Google, Disney and SalesForce.com had all withdrawn according to an article on Bloomberg. Twitter had hired Goldman Sachs to find a buyer against the wishes of CEO Tom Dorsey. According to the Bloomberg article, the sale process was all but dead because all the interested parties had passed after a quick look at the offering materials. Apparently, the prospective buyers were also getting a lot of pushback from their boards and investors about acquiring a declining business. The SalesForce CEO was especially bombarded at a company conference with a steady stream of people making their feelings known.

Twitter was supposed to have a board meeting late Friday to discuss potential offers with Goldman but the meeting was cancelled. With the news breaking late on Friday we could see Twitter shares decline again on Monday.

Deutsche Bank (DB) was rumored to be working on an investment from Qatar for $5 billion. There is no confirmation on that but DB slipped into the bond market late Friday and sold $3 billion in dollar denominated five-year bonds at 4.25%. Apparently, there are a lot of investors that do not believe DB is going to fail. The stock has rebounded more than 25% from the $11 low on the 29th.

The "Profit's" Marcus Lemonis, went public with his Camping World (CWH) business on Friday and it was far from exciting. The shares priced at $22 and right in the middle of the expected $21-$23 range. After a full day of trading, they closed at $22.43. While the IPO may have been perfectly priced from the Camping World perspective, it had to be a letdown for Lemonis not to see a big post IPO gain.

Shares of The Gap (GPS) rose +15% despite posting lower than expected same store sales. Comparable store sales fell -3% compared to a -1% decline in the year ago quarter. Comps at Gap Global fell -10% and Banana Republic Global fell -9%. Old Navy was positive with a +4% rise.

Shares were rising because management blamed the decline on the fire that destroyed the massive Fishkill warehouse. The company said Gap Global sales were reduced by 5% because of the fire, with another 3% impact to Banana Republic. According to my math, that does not overcome the declines in comps but apparently, investors were satisfied.

Silicon Motion (SIMO) raised revenue guidance from $140.7-$147.7 million to $156.2-$159.0 million. Analyst consensus estimates were $144.2 million. Shares rose 3.5%.

Crude prices continued their headline honeymoon with nearly two months to go before the OPEC countries actually have to agree to something. They played the game perfectly this time and there has been a lack of loose lips to sink the effort.

Normally somebody cannot stand the suspense and says something stupid the next time a microphone appears. So far, that has not happened. With prices at $50, we are at the level where rig activations could accelerate over the next several weeks, if the price holds.

There has been five consecutive weeks of inventory declines in a period where inventories should be rising rapidly. Imports are down about 500,000 bpd and I attribute that to the hurricane blocking the entrance to the Gulf. U.S. production has been flat at 8.47 million bpd and demand has actually slowed from 16.9 mbpd to 16.0 mbpd. If you are good at math that means we have been using about 900,000 bpd less oil for the last several weeks and yet we still have a decline in inventories. Something is not making sense unless we get a deluge of oil over the next three weeks from the tankers parked in the Atlantic waiting for the storm to blow itself out.

Active rigs rose +2 last week to 524 and I was expecting more activity. With oil at $50, it is profitable to drill in several of the shale areas, especially the Permian. Pioneer Resources said the Permian Basin could use another 100 active rigs.

If I could bet on the rig count, I would bet on 575 by year-end if oil prices remain at $50.




The major indexes have fallen into a sideways pattern and we cannot seem to find a catalyst to break us out of the current rut. We do need to remember the first two weeks of October are normally negative. We have one week to go. What happens next week could be the result of Sunday's debate more than any economic event on the calendar. The markets do not do well where there is not a clear leader.

Trump's comments from 11 years ago have ignited a firestorm that may not be survivable. Clinton has an opportunity to end the race on Sunday if she can get passed the recent document dumps from Wikileaks and Guccifer 2.0. Both candidates are flawed but in this case, the rational speaking candidate has the best chance. The news on both came out after the market closed on Friday. If Clinton wins the debate by remaining rational in the face of a Trump meltdown, the markets should rally on Monday. The status quo will be continued and investors will know what to expect.

The S&P spent the first week of October stuck in a range between 2144-2164 and closed the week right in the middle at 2,154. The 100-day and 75-day averages have suddenly come back into play on the S&P. The index has not been reactive to averages in a long time until just recently.

Horizontal support has formed at 2,145 but there is still a pattern of lower highs that was broken only briefly on Friday morning. The S&P is not giving any indication of direction but the lack of a material decline in this normally volatile period is positive.

The Dow is using the same averages differently with the 75-day average as resistance and the 100-day as support. The 18,250 price magnet is still active as is the pattern of lower highs. However, there is a miniscule upward bias in the Dow chart with the 100-day average rising and the index respecting that support.

The hurdle for the Dow next week will be on Friday when the major banks report earnings. The banks were up +3% last week on expectations for a rate hike. With that possibility not until December, the banks are probably going to weaken before they move higher. The FOMC minutes on Wednesday could either depress the financials or lift them depending on what the Fed discussed.

Once the Dow components begin reporting earnings on Friday, there is a steady stream of additional companies reporting over the next two weeks. That is our best chance to see an end of October rally. We need the guidance to be positive and the earnings to be decent.

The Nasdaq has been struggling to move higher and repeat the new high from September 22nd but has run into solid resistance at 5,320. Support is 5,250 giving it a range of 70 that has been tested repeatedly. However, the intraday dips are always bought.

There is no conviction on either side but there is a very slight bias to the upside. If we can hold that until some of the tech stocks begin reporting earnings then we have a decent chance of making a new high. That will happen in option expiration week.

The Russell 2000 pattern is troubling. This is the clearest example of lower highs and Friday's intraday dip below support could be suggesting a bearish move ahead. If that support at 1,235 fails, the Russell could sink the entire market with a drop to 1,205. The Russell 2000 is the market sentiment index and it is looking very weak.

On Friday, Bank of America analyst Steven Suttmeier warned of a potential 5% decline in equities over the next two weeks. He believes there is complacency in the market with the VIX holding in the 12-13 range. He said the complacency in the VIX and VXV/VIX ratio, along with a lack of fear in the put/call ratios, limits upside and suggests there is a further decline ahead. A VXV/VIX ratio under 1.0 normally signals a market bottom. The closing ratio on Friday was 1.306 suggesting further selling. He suggested buying a S&P dip back to the 2050-2100 range with expectations the index would eventually rise to 2,300. He said we are nearing the "buy October" point on the calendar in expectations of a 5% rally before April.

This is just one more opinion by a technical analyst based purely on the charts. He may be right or wrong with the daily headlines driving market direction. While I am not convinced we will see a 5% decline, I do believe we will see a decent rally if one candidate pulls well ahead of the other in the polls. Equity fund managers need to put money to work before the end of October and they are holding their breath going into Sunday's debate.

We are approaching the point where the market "should" rally into November. Pick a few stocks on your shopping list and decide where you would like to buy them on a dip. If one appears, it may be brief.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts

I am shocked by the sudden change in sentiment. Bearish sentiment took a -9 point plunge and bullish sentiment jumped nearly 5%. The survey ends on Wednesday and the markets were positive on Wednesday. I believe this is calendar oriented with experienced investors shifting their mindset towards the normal end of October rebound.

Did you know that hurricanes, typhoons and cyclones spin in different directions depending on where they form. Above the equator, those storms will spin counterclockwise. Below the equator, they will spin clockwise. The reason for the different direction of the spin is called the Coriolis effect, named after the French mathematician Gaspard-Gustave de Coriolis, who discovered the cause and published his findings in the 19th century. The earth is spinning faster at the equator than at the poles. The faster spin imparts a greater force on the side of the storm closest to the equator and pulls the storm on one side to create the spin.

A state run TV channel in Russia warned that a nuclear war with the U.S. could be imminent. Zvezda, a nationwide TV service run by the Ministry of Defence, said "Schizophrenics from America are sharpening nuclear weapons for Moscow." At the same time, the Russian government initiated a civil defense drill and is evacuating 40 million people. "The three day, four stage drill, involves more than 40 million people, more than 200,000 specialists of rescue units, organizations and enterprises as well as some 50,000 units of equipment."

Whenever there is unrest at home, the Russian government gives citizens another enemy to worry about.

The U.S. formerly blamed Russia for the recent political hacking attacks saying they were "intended to interfere with the U.S. election process." U.S. officials said they were "confident" the Russian government directed those attacks on American political organizations. Last month Putin called the hacking of the DNC a "public service" but denied any involvement. "The important thing is the content given to the public."

Kremlin spokesman Dmitry Peskov said the U.S. accusations behind these cyberattacks are "nonsense." The spokesman said "tens of thousands of hackers" attack Russian President Vladimir Putin's site "every day." "Many attacks are traced to U.S. territory but we are not blaming the White House every time."

Personally, I seriously doubt an attempt at public shaming of the Russian government by the U.S. government, will ever accomplish anything. To the Russians it is probably a badge of honor.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Sometimes people don't want to hear the truth because they don't want their illusions destroyed."

Freidrich Nietzsche


Index Wrap

Uncertainty Threshold

by Jim Brown

Click here to email Jim Brown
We are reaching that point on the calendar where a significant amount of uncertainty should be resolved. Deutsche Bank has raised $3 billion in capital and is reportedly working on a deal for $5 billion more from Qatar. The bank is not in danger of failing. A settlement with the Dept of Justice would be market positive.

The election could be decided early next week after Trump's lewd comments about women became public. If his debate performance on Sunday night is similar to the last debate, Clinton should surge in the polls again with only four weeks left in the race. That would be market positive.

The FOMC minutes should give us a good idea about whether the November Fed meeting could see a potential rate hike. If it appears the Fed is planning on waiting until December, it would be market positive.

The Q3 earnings cycle kicks off next week with three of the major banks reporting on Friday. If their earnings and guidance are decent that would be market positive.

That would bring us to the end of the second week in October and the last two weeks are normally bullish.

While we cannot count on the market reacting in a logical fashion, these events should remove some of the uncertainty and allow portfolio managers to start adding to positions for the end of their fiscal year on October 31st. We normally see quarter end window dressing but once a year we see fiscal year end window dressing and that happens at the end of October.

The S&P-500 is moving slowly sideways between 2144-2164 and the momentum indicators are turning negative. This normally happens when there is no directional movement. The weight of the internals (volume, A/D, etc) begins to drag on the indicators.

If I just looked at this chart and did not know the symbol or the date on the calendar, I would say it was bearish. As the smart investors we are, we tend to let our intelligence get in the way of our common sense. I just explained in the paragraphs above why the market should move higher in the last two weeks of the month. None of those factors was related to a chart.

In theory, charts show us the discounted present value of all those events because they are all already known. In practice, the charts are headline driven. They may rally or sell into a particular headline but once that news breaks, all bets are off. It is called a sell the news event.

I am concerned we could see a sell the news event at any point this week. There may be one more material decline to support at 2,120 before an end of October rebound. That is my conventional wisdom speaking rather than my technical view of the chart.

The Dow pattern is similar only the 100-day average has suddenly appeared as support. The resistance at 18,350 is also rock solid so we are back in the narrow trading range like we saw in September only the intraday swings are more pronounced.

The Dollar caused some problems last week with a spike to a two-month high. That caused a drop in gold and silver and weighed on equities but oil prices were undeterred. They are riding a wave of speculation that OPEC will actually do something to limit production in November.

If the dollar continues higher in anticipation of a rate hike, it will cause numerous problems long term.

Gold has declined from $1,350 in mid September to $1,250 on Friday because of dollar strength and a rebound in Deutsche Bank.

The Semiconductor Index closed just below a new high on Friday and that helped to support the Nasdaq. The biotech sector was negative during the week but closed positive on Friday. That held the Nasdaq to a minor 19 point loss for the week.

Another measure of market strength is the percentage of S&P stocks over their 50-day average. That has fallen to 43.2% and still declining. As I scanned stocks for potential plays this week I noticed a lot be charts turning bearish. I believe this is due to the normal negativity that occurs in the first two weeks of October. This 50-day chart confirms my observation that a lot of stocks are fading.

The percentage of stocks over their 200-day average is 68.4% and a two-month low. That is still a high percentage because 200 days is roughly 9 months of trading. Those averages are still well behind the stock price.

The S&P Bullish Percent Index has declined to 66.6%, down from 77% just a couple weeks ago. This is the percentage of S&P stocks with a buy signal on a point and figure chart. This is nearing a three-month low.

The correlation between the high yield bond market and the S&P has risen to 92%. That is very high and with interest rates expected to rise, it should continue to be high unless the equity market fades. The HYG tends to lead equities and it is doing so today.

All of the various charts seem to concur that market strength is fading. That means it is even more critical that the clouds of uncertainty be cleared this week so that fund managers feel confident in window dressing for their fiscal year end. If the market continues to fade, they will want to show more cash. If the market begins to rebound and the Nasdaq breaks out to a new high, they will be throwing money at the market before month end.

There are a lot of "ifs" in the forecast and this coming week could be rocky. If we are lucky enough to get a dip on the S&P back to 2,120 I would be a strong buyer on any rebound from that level.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Guccifer 2.0 Prevention

by Jim Brown

Click here to email Jim Brown

Editors Note:

Major corporations and government agencies fear the Guccifer name and are spending millions of dollars to block it. The last thing a corporate executive wants to hear it that their data center is under attack by Guccifer 2.0 or the "Fancy Bear" group. Both are state sponsored hackers from Russia.


PANW - Palo Alto Networks - Company Profile

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. Company description from FinViz.com.

The headlines are full of news about cyber attacks and hacking of personal computers. Just last week there were more than a dozen high profile hacks and Guccifer 2.0, a name taken by a Russian state sponsored team, published data claimed to be from the DNC, Clinton foundation and the Olympic doping committee. Not only are they hacking these agencies but the data they are releasing now contains fake data mixed in with the real data. Wikileaks just published thousands of additional emails stolen from democratic campaign officials.

These kinds of attacks and data dumps are very damaging and now that they have started modifying the actual data it could be even worse. Companies will have to admit to some things so they can disprove other claims. This goes beyond just stealing credit card info.

Every time there is a successful attack it emboldens others to increase their efforts. Years ago a company could successfully stop these attacks on their own because the technology was more primitive. Now, even successful enterprise size companies can no longer devote the time, effort, personnel and resources to protecting their data because the attack methods change almost daily. It requires a dedicated company like Palo Alto Networks and others to stop the attacks.

Palo Alto's dictionary of attack profiles is updated constantly in real time and a new attack on a server in New York can be cataloged and immediately used to stop a similar attack in Los Angeles.

State sponsored attacks from Russia, China, Iran and North Korea are just the tip of the iceberg. I am sure there are other attack teams from other countries already probing companies for their technology secrets and agencies for their political secrets. The information gained is very valuable and can be sold to other countries that were not successful in their attacks.

In their recent earnings, Palo Alto posted a 41% increase in revenue and earnings for the current quarter are expected to rise 35%. Of the 27 analysts that follow Palo Alto, 21 of them have a strong buy rating, 3 have a buy and 3 have a hold rating.

Earnings Nov 23rd.

Because the options are so expensive I have to recommend a spread. Resistance is $163 but since I doubt cyber attacks are going to suddenly stop, I expect that resistance to be broken.

Buy Dec $165 call, currently $7.40, initial stop loss $151.85
Sell short Dec $180 call, currently $2.35, initial stop loss $151.85
Net debit $5.05.


No New Bearish Plays

In Play Updates and Reviews

Not What We Expected

by Jim Brown

Click here to email Jim Brown

Editors Note:

After trading in a very narrow range on Thursday, the expectation was for a big directional move on Friday. The Dow dropped -119 points at the lows but quickly rebounded in the afternoon to positive again but it was brief. The index dipped again at the close to just under the 18,250 price magnet.

The Dow is becoming more volatile but it is not going anywhere. The swings are pronounced but there is no market direction. Eventually we are going to break out of this range and it is likely to be violent when it happens.

We were stopped out of three more positions but the biggest loss was only 77 cents. Clovis released from bad data on a cancer drug and fell -30%. First Solar was downgraded by Goldman and Lannet continued the decline with the biotech sector.

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

CLVS - Clovis Oncology

The long call position was stopped out at $33.25.

FSLR - First Solar

The long call position was stopped out at $37.50.

LCI - Lannet

The long call position was stopped out at $25.85.

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

CLVS - Clovis Oncology - Company Profile


That was depressing. Clovis shares gapped down over 30% on fears a leading ovarian cancer drug candidate was weaker than a similar competing drug from AstraZeneca (AZN). The data was presented on Friday at the ESO conference and the drug rucaparib appeared to be inferior to Lynparza, a drug that has already been approved for AstraZeneca. We were stopped on the drop.

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

Closed 10/7/16: Long JAN $30 call @ $6.00, exit $4.20, -1.80 loss
Closed 10/7/16: Short JAN $40 call @ $3.31, exit $1.70, +1.61 gain.
Net loss 19 cents.

COST - Costco - Company Profile


No specific news. Decent gain in a weak market.

Original Trade Description: October 4th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business. In addition, it provides gold star (individual) and business membership services. As of October 29, 2015, it operated 690 warehouses. Company description from FinViz.com.

Costco reported earnings last week of $1.77 compared to estimates for $1.73. Revenue of $36.56 billion barely missed estimates for $36.81 billion. Same store sales, excluding gasoline, rose 2% in the USA, +5% in Canada and +1% internationally. Overall sales rose +3%.

For the full year same store sales were up +4%. Membership fees rose from $785 million to $832 million. The company said some of its increased profitability came from the lower fees it was paying to Visa compared to the prior payments to American Express. There were initial problems in the conversion and some customers were angered leading to weaker sales in the prior two quarters. That is now over and customers are coming back.

The earnings were Friday and shares spiked to $154 on the news. Post earnings depression appeared along with a weak market over the last two days. I believe Costco will rebound into Black Friday because this is the strongest quarter. They typically sink into the September earnings and then rally into December.

The plan is to buy calls now and exit around Black Friday. The December calls are cheap and any rally should lift the stock back to $160-$165. I am not putting a stop loss on this position because of the potential for market volatility over the next two weeks.

Position 10/5/16:

Long Dec $155 call @ $2.76, no stop loss.

DISH - Dish networks - Company Profile


No specific news. Minor decline. Still fighting resistance at $56.50.

Original Trade Description: October 3rd.

DISH Network Corporation provides pay-TV services in the United States. The company operates through two segments, DISH and Wireless. The company provides video services under the DISH brand. It also offers programming packages that include programming through national broadcast networks, local broadcast networks, and national and regional cable networks, as well as regional and specialty sports channels, premium movie channels, and Latino and international programming. In addition, the company provides access to movies and TV shows via TV or Internet-connected tablets, smartphones, and computers; and dishanywhere.com and mobile applications for smartphones and tablets to view authorized content, search program listings, and remotely control certain features. Further, it offers Sling TV services that require an Internet connection and are available on streaming-capable devices, including TVs, tablets, computers, game consoles, and smart phones primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Additionally, the company operates Sling International that offers over 200 channels in 18 languages; and Sling domestic package that consists over 20 channels and tiers of programming, including sports, kids, movies, world news, lifestyle and Spanish language, and premium content, such as HBO. Further, it offers Sling Latino service; and satellite broadband services, wireline voice, and broadband services under the dishNET brand. Additionally, the company has wireless spectrum licenses and related assets. As of December 31, 2015, it had 13.897 million Pay-TV subscribers. Company description from FinViz.com.

Dish is gaining a significant number of views in the millennial generation that either have never had a cable subscription or cannot stand paying the monthly cable bills for what they believe should be free TV. They are also developing a large audience of Latino viewers with their various Spanish language channels. They also offer 18 other languages and more than 200 channels.

In early September, they gained the rights to about 800 sporting events offered by the six PAC 12 networks. Millennial's love to watch sports, especially when it is free or nearly free.

The online Sling TV offering is gaining market share with its skinny bundles including channel packages like HBO and Starz.

Over the last month the consensus earnings estimates for the current quarter have risen from 63 cents to 68 cents. Full year estimates have risen from $2.92 to $3.05.

Earnings Nov 7th.

Since they signed the sports deal on September 12th the stock has been in rally mode. Shares are closing in on resistance from June at $56.50 and should easily break through. The next resistance is in the $65 range.

Position 10/4/16

Long Nov $57.50 call @ $2.43, see portfolio graphic for stop loss.

FSLR - First Solar - Company Profile


The company was downgraded from buy to neutral at Goldman Sachs and shares fell -6% to stop us out. They also downgraded Solar Edge (SEDG) to sell. They upgraded Sunrun (RUN) from neutral to buy and Vivint Solar (VSLR) from sell to neutral.

Original Trade Description: September 28th.

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.

First Solar was the number one pick for a Clinton presidency. In the first debate, she advocated for installing "half a billion" solar panels to head off an impending energy crisis and reduce climate change.

After the debate Clinton was the assumed victor because of her calm, fact filled answers. Analysts have picked several stocks that would rise with a Clinton presidency and they were all up on Tuesday. Note that FSLR was in all four lists.

Deutsche Bank said buy FSLR, C, NFLX, UNH and FB.
Zacks said buy FSLR, LMT and PFPT.
Estimize said buy FSLR, UNH, FB, NFLX and CYBR.
InsiderMonkey said buy FSLR, CREE, TSLA, UNH and HUM.

I could not recommend FSLR on Tuesday because it was up 5%. The morning dip on Wednesday deflated the options and gives us an entry point. However, there is strong resistance at $39.50. I would like to see it move over that level before we jump in. A move over that level could generate significant short covering because FSLR was in a downtrend before the political lift.

Earnings are Oct 27th so we will be out relatively quickly. That is a week before the election and if Clinton is ahead in the polls the stock should still be rising. This could be a volatile position because of the political sound bites.

Position 9/29/30 with a FSLR trade at $40.00

Closed 10/4/16: Long Nov $42.50 call @ $1.95, exit $1.18, -.77 loss.

IDCC - Interdigital - Company Profile


No specific news. New support has formed at $78 and shares posted a minor gain in a weak 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.

Update 9/28/16: In a study done by the EU Commission and IDCC they found the cost of rolling out 5G in all 28 EU member states could reach 56 bullion euros by 2020 and 141.8 billion annually by 2025. That is a huge amount of money that will be flowing into a hand full of companies including IDCC. The 5G standard is seen as 50 Mbps everywhere compared to the current 5-20 Mbps.

Earnings Oct 27th.

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

Position 9/27/16 with an IDCC trade at $78.65

Long Nov $80 call @ $2.90, see portfolio graphic for stop loss.

LCI - Lannet - Company Profile


No specific news. Shares dropped -5% to stop us out as some other biotechs crumbled.

Original Trade Description: October 5th.

Lannett Company, Inc. develops, manufactures, packages, markets, and distributes generic versions of brand pharmaceutical products in the United States. It offers solid oral, extended release, topical, nasal, and oral solution finished dosage forms of drugs that address a range of therapeutic areas, as well as ophthalmic, patch, foam, buccal, sublingual, soft gel, and injectable dosages. The company provides its products for various medical indications comprising glaucoma, muscle relaxant, migraine, anesthetic, congestive heart failure, gastrointestinal, cardiovascular, thyroid deficiency, central nervous system, urinary, dryness of the mouth, gout, hypertension, and gallstone. It also manufactures active pharmaceutical ingredients. Lannett Company, Inc. markets its products under the Diamox, Fioricet, Fiorinal, Lanoxin, MiraLAX, Imdur, Levoxyl/Synthroid, Metadate CD, Concerta, Procardia, Prilosec, Ditropan, Protonix, Salagen, Dyazide, and Actigall brands. Company description from FinViz.com

For Q2, LCI reported earnings of 73 cents that beat estimates for 60 cents. Revenue of $169 million beat estimates for $162 million. Lannet guided for full year revenue in the range of $690-$700 million. Analysts were expecting $666 million.

Revenue increased 70% thanks to new drugs in inventory. They refinanced $250 million in 12% notes to take advantage of the current low interest rates. The forecast an earnings growth rate in the mid teens percentage for the second half of the year.

Shares immediately spiked from $32 to $40 on the earnings news and then faded on post earnings depression. A rebound began on Sept 12th culminating with a spike to $33.50 on the 20th when they announced the FDA approval of two new drugs. That appeared to trigger a sell the news event and shares rolled over and fell to $26 over the next week. The next day after the drug announcement, they also said their Chief of Scientific Affairs resigned. That could have accelerated the decline.

Fast forward to September 29th and shares found support at $26 for three days and prices are now beginning to rise. There is no reason for LCI to be declining. It has fallen to value stock status and fund managers should be drooling over it for their October portfolio restructuring. If this is the bottom, we can enter a cheap position as they rally into earnings on Nov 3rd. Remember they blew away estimates in Q2.

Earnings Nov 3rd.

Position 10/6/16:

Closed 10/7/16: Long Nov $30 call @ $1.50, exit .85, -.65 loss.

LITE - Lumentum Holdings - Company Profile


No specific news. New intraday high but faded at the close.

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.

Update 10/3/16: Jefferies raised earnings estimates to $2.61 for the 2018 fiscal year, which is 14% above consensus. Revenue estimates rose to $1.29 billion and 11% over consensus.

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.

WDC - Western Digitial - Company Profile


RBC Capital said WDC, BRCM and INTC would all benefit from the robust expansion of cloud services underway by Google, Amazon and Apple. Shares of WDC gained 62 cents.

Original Trade Description: September 26th.

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs). The company also offers HDDs embedded into WD, HGST, and G-Technology branded external storage appliances with capacities ranging from 500 GB to 24 TB, as well as using various interfaces, such as USB 2.0, USB 3.0, FireWire, Thunderbolt, and Ethernet network connections. In addition, it provides consumer electronics solutions, including DVRs, gaming consoles, security surveillance, systems, set top boxes, camcorders, multi-function printers, and entertainment and automobile navigation systems. Company description from FinViz.com.

Western Digital recently acquired flash memory company SanDisk and they are stronger together. The company recently raised guidance for the second time as the integration of the two companies is turning out to be a winning duo.

WDC raised revenue guidance for the current quarter to $4.45-$4.55 billion up from $4.4-$4.5 billion. Analysts were expecting $3.41 billion. Gross margin guidance rose from 32% to 33%. Q3 earnings guidance rose from 85-90 cents to $1.00-$1.05. Analysts were expecting 68 cents. The company said the product mix was improving with the addition of the SanDisk lines. They also said PC sales were improving, as did Intel, and that means more disk drives sold.

Update 9/27/16: Research company Cleveland Research said channel checks for WDC showed continued strong demand for the most common hard drives and a potential ramp in demand for the new 10TB Helium drive. There was also strong execution and pricing for NAND chips. Cleveland projected earnings of $6.60 in fiscal 2018 and a mid $70s stock price. Shares closed at $58 after a $1.85 gain.

The Helium 10TB drive is filled with helium instead of air. Helium is one-seventh the density of air and that allows the read/write heads to fly smoother and closer to the actual magnetic recording surface, contain more recording platters, consume less power and operate at a lower temperature. More than one million Helium drives have already been sold with a mean time between failure of 2.5 million hours. Quality is expensive with a $750 price tag.

Earnings Oct 27th.

Shares spiked to $54 on the stronger guidance and then languished for a week before starting to move higher to start a new trend.

Position 9/27/16:

Long Nov $60 call @ $2.14, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

MBLY - Mobileye - Company Profile


No specific news. Shares closed at a new 3-month low.

Original Trade Description: September 27th.

Mobileye N.V., together with its subsidiaries, develops computer vision and machine learning, data analysis, and localization and mapping for advanced driver assistance systems and autonomous driving technologies primarily in Israel. It operates through two segments, Original Equipment Manufacturing and After Market. The company offers Roadbook, a localized drivable paths and visual landmarks using its proprietary REM technology through crowd sourcing; and proprietary software algorithms and EyeQ chips that perform detailed interpretations of the visual field to anticipate possible collisions with other vehicles, pedestrians, cyclists, animals, debris, and other obstacles. Its products also detect roadway markings, such as lanes and road boundaries, as well as barriers and related items; and identify and read traffic signs, directional signs, and traffic lights. In addition, the company provides enhanced cruise control, pre-lighting of brake lights, and Bluetooth connectivity, as well as related smartphone application. It serves original equipment manufacturers, tier 1 system integrators, fleets and fleet management systems providers, insurance companies, leasing companies, and others through distributors and resellers. Mobileye N.V. was founded in 1999. Company description from FinViz.com.

Mobileye was kicked to the curb by Tesla because their camera technology was not precise enough and was subject to errors from things like lightning flash, rain storms, fog and oncoming headlights. Analysts claim the location accuracy needs to be within 1.5 centimeters or about 0.6 inches. While I do not understand the need to be precise to within half an inch I would expect that to be on near objects with the size miss widening if the objects are farther away. For instance, a rifle bullet that misses the target by half an inch at 10 feet would be 15 inches off target at 100 yards. When your car is traveling at 60 mph any miss of that size could be an immediate challenge as in a car coming towards you in two-way traffic.

Tesla also said they were hard to work with because the company demanded all the sensor data received from their cameras could only be used by Mobileye. That would be like Intel claiming all the data on your PC belonged to them because the PC had an Intel processor.

Multiple car manufacturers including Tesla, Ford and Volvo have now moved away from Mobileye technology. The company replacing them is Nvidia with their Drive PX2 technology. Uber is now using an off the shelf camera that costs only $1 and image processing is done in the onboard computer.

Trip Chowdhry of Global Equities Research said the stock is worth $10 today but remains hyper inflated because it was an early leader in the mobile technology. He expects the stock to collapse within 6-8 months as more investors realize the company is being left behind.

Earnings Nov 3rd.

Shares have been falling from their high of $50 as the heated words between Tesla and Mobileye increase. When Mobileye learned it was being replaced they tried to stop Tesla from developing their own system and immediately halted any support for previously installed systems.

Position 9/28/16:

Long Nov $40 put @ $2.08, see portfolio graphic for stop loss.

VXX - VIX Futures ETF - Company Profile


This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.

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

subscribe now