The lack of a material rebound after Tuesday's big loss and the afternoon fade suggests the market is setting up for another decline. The Dow dipped slightly at the open followed by a lackluster rebound ahead of the FOMC minutes. After the minutes there was a slight bump higher than a decline into the close where it barely managed to remain positive.
The other indexes had similar charts only the Nasdaq and the Russell 2000 failed to remain positive. Given the magnitude of Tuesday's decline, the recent trend for alternating triple digit gains and losses on the Dow and no rebound today, we could be going to test lower levels.
The VIX bottomed at 2:PM as the FOMC minutes were released and then rose steadily into the close. This means investors were buying puts on the S&P and contrary to recent days where the VIX actually declined with the market. This time investors appear to be concerned about the potential for a larger dip.
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.
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
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BULLISH Play Updates
COST - Costco - Company Profile
Costco announced a quarterly dividend of 45 cents payable Nov 18th to holders on Nov 4th. Shares were up all day until the last hour when the market faded.
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.
Long Dec $155 call @ $2.76, no stop loss.
DISH - Dish networks - Company Profile
No specific news. Major spike at the open to test resistance at $56.75 but faded with the market at the close.
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.
Long Nov $57.50 call @ $2.43, see portfolio graphic for stop loss.
IDCC - Interdigital - Company Profile
No specific news. Nice gain in a mixed market and fought off the market drop at the close.
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.
PANW - Palo Alto Networks - Company Profile
Removing the stop loss was the right move. Shares fell -$8 at the open but rebounded back to end the day with a loss of only -$1.26. We would have been stopped out at the low for the day for a major loss. No specific news on PANW today.
Original Trade Description: October 8th.
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.
Long Dec $165 call @ $7.30, see portfolio graphic for stop loss.
Short Dec $180 call @ $2.40, see portfolio graphic for stop loss.
Net debit $4.90.
BEARISH Play Updates (Alpha by Symbol)
MBLY - Mobileye - Company Profile
No specific news. 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.
Long Nov $40 put @ $2.08, see portfolio graphic for stop loss.
NKE - Nike Inc - Company Profile
No specific news. I considered adding a stop loss at $53.25 but we only paid $1.05 for the option and we have more than two months to go. I favor letting it ride despite the decent gain today.
Original Trade Description: October 10th.
NIKE, Inc., designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.
Nike is fading fast as revenue growth slows. Previously growth had been over constantly over 10% but that has not happened in the last few quarters. Revenue growth in Q1 was 5%, Q2 4%, Q3 8%, Q4 6% and Q1 is estimated to be 8%. Another challenge is currency issues. Only 42.5% of revenue comes from the U.S. meaning 57.5% comes from overseas where currency fluctuations are costing Nike 6-8% per quarter.
Nike had been targeting $50 billion in annual revenue but quarterly numbers are not growing that fast. In the last quarter Nike had revenue of $8.4 billion. With five quarters of revenue well under $10 billion each they are going to have to push their $50 billion target well out into the future to somewhere in the 2020 range.
Under Armour, Skechers and Adidas are stealing market share with Adidas on a fast track with recent market share gains.
When Sports Authority went out of business, it was a big problem for Nike. They lost money on receivables and had to take back a lot of inventory. In addition they lost 450 retail locations that were heavily subsidized by Nike.
I expect Nike shares to continue declining until sales begin to grow again.
Earnings December 27th.
Long Dec $50 put @ $1.05, no initial stop loss.
VXX - VIX Futures ETF - Company Profile
Minor gain in a positive market. This means investors are worried about future market dips.
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.
Long Dec $33 Put @ $4.20. No stop loss.
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