Option Investor

Daily Newsletter, Saturday, 10/15/2016

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

We are halfway through October and the next two weeks have a historically bullish bias.

Weekly Statistics

Friday Statistics

While there is no guarantee a historical trend will repeat, the next two weeks are normally bullish. The trend did repeat for the first two weeks of October with the markets coming very close to new lows for the second half of the year.

For the S&P the 2,114.74 intraday low on Thursday was the lowest point since July 8th and a three-month low. While technically that is not the low for the second half it only missed it by five trading days. As historical trends go that one certainly qualifies.

Friday saw a large opening bounce with the Dow spiking +163 points in the morning on some positive economics but fading to close at the lows with only a 39-point gain. The S&P and Nasdaq both ended with fractional gains of less than one point and all the rest of the indexes closed in negative territory. This is hardly the way to improve bullish sentiment for the second half of October.

The markets spiked early Friday afternoon after Janet Yellen seemed to say there was no rush to hike rates. She said it is useful to consider the benefits of a "high-pressure economy." She said the U.S. central bank normally stands vigilant over price pressures. However, the post-financial crisis period has pushed policymakers into "reconsidering the dynamics of inflation."

She pointed out that the economy has seen an unusual tendency of weak demand against strong supply, making it reasonable "to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a 'high-pressure economy,' with robust aggregate demand and a tight labor market." She said the financial crisis has forced central bankers to re-think their approach to monetary policy.

The spike was only temporary and the indexes faded into the close.

The morning opened with retail sales for September rising +0.6% compared to a -0.2% decline in August and expectations for a +0.6% rise. This lifted the year over year comparison to +2.7%. Sales excluding autos rose +0.5% and excluding autos and gasoline only +0.3%. Motor vehicles and parts rose +1.1%, furniture +1.0%, building materials +1.4%, gasoline stations +2.4% thanks to rising gasoline prices, sporting goods +1.4% and +0.8% for food service and bars. The only two categories to post declines were electronics and appliances at -0.9% and a -0.4% decline for general merchandisers like Walmart.

Spending slowed in Q3 from the Q2 pace but core sales were up +3.4% year over year. Department stores and malls are closing in near record numbers as online shopping becomes more commonplace. Job gains are slowing and energy prices could rise if OPEC actually cuts production. That will remove excess cash from consumer wallets as fuel prices rise.

At the same time the Producer Price Index for September rose +0.3% and the biggest gain since June. Expectations were for a +0.2% gain after zero gain in August and a -0.4% decline in July. However, 30% of the rise in prices came from higher gasoline prices. The headline number is now up +0.7% over year ago levels. That is hardly a disaster and gives the Fed plenty of leeway in being patient on rate hikes.

Consumer sentiment for October fell -3.3 points to 87.9 and the lowest level in over a year. The present conditions component rose slightly from 104.2 to 105.5. However, the expectations component declined sharply from 82.7 to 76.6 and the lowest since September 2014. Rising gasoline prices were said to be a contributing factor. Worries over the presidential election outcome were also blamed for the sharp decline. Consumers in both parties are very worried over what would happen to the nation if the other party's candidate were to win. With the political campaigns going lower than ever before, we can expect sentiment to decline even more in the weeks ahead.

Business inventories rose +0.2% in August and matched expectations. Manufacturing inventories rose +0.16%, retail inventories +0.63% and wholesale inventories declined -0.18%. The inventory to sales ratio remained flat at 1.39 for the third month.

There is a flurry of economic reports next week with the Philly Fed Manufacturing Survey on Thursday and the Fed Beige Book on Wednesday the two key reports. The Philly Fed report surged from 2.0 to 12.8 last month and is expected to give back a lot of that gain to show a 7.0 reading and mildly expansionary. The Philly Fed report is a proxy for the national ISM Manufacturing report due out in two weeks.

The Beige Book is a report on activity in each Fed region and it has been neutral recently with "moderate" the most overused adjective. Webster defines moderate as "average in amount, intensity, quality or degree." I have another word for our economic growth and that is "lackluster" and definitely not worthy of a rate hike.

On Thursday morning, Mario Draghi will hold the post ECB monetary policy meeting press conference. This could be a trouble spot for the U.S. markets depending on the outcome of that policy meeting.

Twitter (TWTR) was left standing at the altar by the last potential acquirer. Salesforce.com walked away from the deal on Friday saying it was not the "right fit" at this time. That means all the deep pocket bidders have all taken a hike and left Twitter to go it alone. The rumored asking price was $29 with no flexibility and that would have been a good deal for Twitter. However, most analysts believe the real price is more in the $14-$15 range because of the uncertainty over how to monetize Twitter users in the future. If the platform was growing the user base by a couple million a quarter, they could have gotten a better price. However, barely breaking even and always on the verge of losing users, is a problem nobody wanted to assume. Shares fell -5% to a two-month low at $16.88.

Bernie Sanders tweeted about a drug company on Friday and the stock fell -15%. Ariad Pharmaceuticals (ARIA) was under attack by Sanders in a tweet that said, "Drug corporation greed is unbelievable. Arian has raised the price of a leukemia drug to almost $199,000 a year." The drug is lclusig and it is used to treat chronic myeloid leukemia (CML) and Philadelphia chromosome positive acute lymphoblastic leukemia. Both are rare blood and bone marrow diseases. The company has raised prices on the drug four times in 2016. This is Ariad's only drug on the market and they only had revenue of $32.6 million over the last 12 months. Any material discount to the new price will dramatically reduce that revenue and limit future research.

The bigger problem is the damage to the biotech sector as a whole. With Sanders tweeting his outrage, Clinton is sure to pick up the pace of her drug price rhetoric on the campaign trail in order to appeal to Sander's voters. The biotech sector has been in freefall since the $50 gap lower on Illumina on Tuesday. Support at 3,250 failed and it appears to be headed to 2,800. This is a problem for both the Nasdaq and the Russell 2000 because of the high number of biotech stocks in each index.

Samsung continued to take blow after blow on the now discontinued Galaxy Note 7. The company said it will take a $5 billion loss on the phone and it still does not know why it is blowing up. The U.S. Dept of Transportation banned the phones on any commercial airliner starting at noon on Saturday. They cannot be taken on board or included in any luggage. I seriously doubt any owner would want to do that and risk crashing the plane with them on it. Several airlines have now acquired burn bags that will hold a burning phone or laptop and are rated up to 3,200 degrees. I just do not understand how they are going to pick up an explosively burning phone to put it in the bag.

Shares have taken a hit since the peak on Oct 7th but are not down as much as you would expect. Samsung has $69 billion in cash so the hit is painful but not life threatening.

Friday was bank earnings day with several of the big banks on the schedule. JP Morgan (JPM) reported a whopping $6.3 billion profit on an 8.4% rise in revenue. Earnings of $1.58 per share were actually down from $1.68 in the year ago quarter when they got a boost from $2.2 billion in tax benefits. Revenue was $25.5 billion and beat estimates for $24.2 billion. Fixed income trading revenue rose 48% to $4.33 billion. Equities trading revenue only rose 1% to $1.41 billion. They credited the Brexit vote for the monster spike in bond and currency trading revenues. Core business loans rose 14%. Provisions for bad loans rose 86.4% to $1.27 billion because of delinquencies and charge offs in the oil and gas sector. Shares rallied at the open but faded with the market.

Citigroup (C) saw earnings decline -11% to $1.24 but they still beat estimates for $1.15. Revenue fell -5% to $17.8 billion but beat estimates for $17.3 billion. Fixed income trading revenue rose 35% to $3.47 billion while revenue from equity trading fell -23% to $663 million. Total trading revenue rose 16% to $4.13 billion and beating guidance for a mid single-digit increase.

Wells Fargo (WFC) reported earnings of $1.03 that beat estimates for $1.01 per share. Revenue of $22.33 billion rose only 2% and barely beat estimates for $22.24 billion. The bank announced late Thursday that CEO John Stumpf had retired, effective immediately, and COO Tim Sloan had replaced him. Wells beat earnings estimates by reducing the amount of money being held for bad loans to $805 million from the $1.31 billion estimate. Total loans rose 6.4% to $961.33 billion.

PNC Financial (PNC) reported earnings of $1.84 compared to estimates for $1.78. Revenue of $3.83 billion rose only 1% and barely beat estimates for $3.82 billion. Commercial loans rose 5% to $138.2 billion.

Infosys (INFY) shares sank -6% after cutting fiscal year revenue forecasts to growth of 7.7-8.5% compared to 10-11.5% in prior guidance. In Q3 the company saw a 3.4% rise in revenue. This was the second time the company reduced guidance in the last three months. I am skipping the earnings and revenue numbers quoted in rupees.

Yahoo (YHOO) is teetering on the brink of a crash as it waits to see if Verizon is going to pull the plug on their $4.8 billion offer for the core company. Verizon and none of the other bidders were told about the cyberhack of more than 500 million accounts during the bidding process. Therefore, the later disclosure constitutes a material adverse change or MAC that allows a company to back out of a deal with no penalty. The bidders were told there had been attacks but only casually as if it was no big deal.

Now Verizon lawyers are said to be discussing a price closer to $3 billion or pulling out of the deal completely. Yahoo cannot give Verizon a dollar value on the potential liability because they do not know and may not know for a couple years. There are multiple class action suits being formed and there could be a giant penalty if the consumers can prove security was nearly nonexistent and the resulting attack was gross negligence. If the penalty were $20 per person in a class action suit representing the 500 million accounts that would be $10 billion dollars and more than twice the reported sales price.

Yahoo announced on Friday they would not have a conference call or webcast after earnings because of the intense negotiations with Verizon. I guess if you do not want to answer hard questions from analysts, you just cancel the call.

Amazon Web Services and competitor VMware announced a strategic alliance to build and deliver a seamlessly integrated hybrid offering that will give customers the full cloud experience from the leader in the private cloud, running on the world's most popular, trusted and robust public cloud. At least that is what the press release said. The VMware Cloud running on AWS will enable customers to run cloud instances anywhere and in any scale. It will be delivered, sold and supported by VMware as an "on demand, elastically scalable service." Giving customers the ability to run VMware instances on AWS is a win for both companies. AWS has 35 "availability zones" across 13 international geographic regions with more than one million active customers already running in the Amazon cloud. In the case of VMware, if you cannot beat Amazon, join them.

Gartner (IT) says Amazon has 50,000 to 80,000 servers in each of the 35 zones with more than two million active servers in total. By comparison, RackSpace has 100,000 servers across six datacenters. Google has three regions with eight datacenters. Microsoft has 17 regions. Steve Ballmer said Microsoft had more than one million cloud servers and Google had more than Microsoft.

In a Cycle Computing presentation, the company said Amazon regularly allows companies to rent and run monster programs on 10,000, 20,000 or even 100,000 computer cores at one time. Western Digital (WDC) used a program that ran on 70,000 cores to model the relationship between fluid dynamics and magnetism within its disk drives. The amount of computing power available on demand is beyond normal human comprehension.

Amazon is Skynet.

With 7% of the S&P already reported, 76% have beaten on earnings and 62% have beaten on revenue. The blended earnings projection by Factset is a -1.8% decline. If earnings for Q3 do end up with negative growth it will be the first time there has been six consecutive quarters of declines since Factset began collecting the data.

Factset warned that Q4 earnings could come in lower than expected because of the decline attributed to Hurricane Matthew. Businesses and restaurants were closed for several days and some are still closed. Banks and insurance companies are expected to report hits to earnings. After hurricane Sandy earnings declined significantly because of business closures and insured losses.

The Q3 earnings cycle gets underway with a bang next week. IBM and NFLX kickoff the tech cycle on Monday. They are followed by INTC, EBAY, YHOO and MSFT. There are 11 Dow components reporting and they are shaded in pink. This week has a little bit of everything from tech, biotech, energy, financial, industrial, transportation, etc.

The -4.9 million barrel decline in crude inventories managed to keep prices in the $50 range despite numerous articles questioning the potential for an actual production cut by OPEC. The Putin comments that Russia was ready to cooperate with OPEC in stabilizing prices also helped to keep prices level. Almost nobody expects a cut to actually occur and everybody expects OPEC countries to cheat even if they do formalize a production cut. For now, everyone is content to continue talking about the plans for a cut and talk is all it will ever be.

There was a large 15-rig addition to the active rigs last week but only 4 were oil rigs. Eleven of them were gas rigs. Analysts believe it will take a sustained rate of adding at least ten oil rigs a week to lift oil production significantly. In the most recent inventory numbers U.S. production fell by 20,000 bpd to 8.45 million bpd and the lowest level in the last eight weeks. Imports at 7.86 million bpd are also running about 1.0 million below levels we were seeing two months ago. Some of that decline is related to tankers that were delayed by two weeks because of Matthew blocking the entrances to the Gulf of Mexico. We should see imports increase in the coming weeks.




The second week of October is over. It was a holiday-shortened week in the bond markets and volume remained low despite the triple digit moves. Friday's volume was only 6.0 billion shares. The first two weeks of October normally have a negative bias and we saw that with losses for both weeks. The next two weeks typically have a bullish bias and start the best six weeks of Q4. Let's hope that trend continues.

However, the election is getting in the way. The market was hoping for a Clinton win and the republicans holding the house and senate. That would have meant continued gridlock for four more years. The Trump implosion has some analysts projecting a potential democratic sweep of the house, senate and the presidency. The market will panic if that becomes an eventuality.

For Clinton to have control of both houses, analysts believe it would mean higher taxes, more regulation, more deficit spending, drug price controls and the potential for major recession and a bear market.

Fear of this event could increase next week unless Trump was to pull a miracle out of his coat pocket during the last debate on Wednesday. If it were anybody else but Trump running against Clinton, it would be a landslide given all the negative material dumped on the Clinton campaign over the last month. Just the last week has seen enough revelations that any normal candidate would be 20 points down. Fortunately, for Clinton she is running against Trump and he is self-destructing.

That will more than likely be bad for the market. We already saw the sharp drop in consumer sentiment over the last three weeks and it will only get worse. In the equity markets, the small cap indexes are normally considered the sentiment indexes for the markets.

The Russell 2000 declined -2% for the week and the most of the major indexes. Support at 1,232 failed and support at 1,210 is in danger. If we get another big downdraft, the support at 1,200 could be in danger and a failure there would remove support from the rest of the market. There is a lot of white space on the chart under 1,200.

The S&P briefly penetrated critical support at 2,120 on Thursday and then closed at the low for the day on Friday. A failure at 2,120 could easily retest 2,040 or even 1,990. When markets decide to move directionally they can move quickly as we saw in that -123 point crash in late June from 2,113 to 1,990. That only took two days.

The S&P has been moving sideways since mid July and that is a lot of pent up stress. The three-month low on Thursday is a warning sign that we may not be going to follow the normal late October trend higher. I really hope I am wrong about the risk. The first two weeks of October normally scare investors and makes them nervous. The aggressive ones get short. When the end of October window dressing arrives, everyone races to cover and those in cash begin to throw money at the market.

Investors bought the dip on Thursday and were rewarded with a +161 point spike at Friday's open. When that spike evaporated it probably put a little fear back into those traders and anything is possible next week.

The Dow has 11 components reporting earnings next week. With the majority of the component charts already showing bearish patterns, we need some strong earnings and strong guidance to reverse the negativity or we will be retesting some lows once the post earnings depression kicks into gear.

The Dow has critical support at 18,100 and again at 18,000 and both levels were penetrated temporarily on Thursday. If it were not for the dip buyers, we would be having an entirely different conversation this weekend.

The preliminary earnings from a scattered selection of big cap stocks have not been pretty. The banks did ok but the earlier reporters including HON, DOV, PPG and others have not been encouraging. Revenue is declining, earnings were weak and guidance was negative. That is especially true for tech guidance with networking and cybersecurity stocks guiding lower.

The big caps are going to be guiding based on the recent highs in the dollar and lows in the British pound. That is going to be a stiff headwind. Rising oil prices are also going to be an increase in costs.

The Dow has strong resistance at 18300-18400 and weakening support at 18100-18000. That is not a recipe for a rally unless the earnings provide a significant upside surprise.

The Nasdaq remains the strongest index but the weakness in the biotechs is an anchor that has not yet found a bottom. The Nasdaq has strong support at 5,200 but that was broken intraday on Thursday. If the tech earnings next week are not strong, we could be looking at a drop that could be significant. Ironically, the Nasdaq 100 made a new historic high on Monday and I would hate to see it turn into the start of a material decline, a sort of sell on the news event.

IBM is not a Nasdaq stock but they report earnings on Monday and their comments will be critical for the tech sector. Netflix is also a major tech event on Monday and their recent earnings events have been disasters because of slowing subscriber growth.

Historically, the next two weeks are supposed to be positive as fund managers window dress their portfolios for their October 31st fiscal year end. With the election in a state of flux, they may not have a clear idea how they want to accomplish that this year. That means they could simply throw some money at large cap techs and industrials and avoid biotechs. Once into November, they can quickly reverse those trades and return to cash if the market is reacting negatively to the election outcome.

I really hope the next six weeks, which are normally the best six weeks in Q4, hold to that seasonal trend. Unfortunately, hope is not a valid trading strategy. We need to trade what we see and not what we want to see.

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

The sudden decline in bearish sentiment we saw last week was quickly reversed. Bullish sentiment at 25.5% is well under the historical average of 38.5%. Even some of the gains in neutral sentiment were reversed with investors fleeing back into a bearish posture.

Everyone knows that the market will normally do whatever investors least expect. That would be a strong rally given the nearly 75% neutral/bearish sentiment. However, sometimes the herd is right.

Short interest in Amazon has reached a record high at $5.3 billion in stock value. Since Amazon has risen +170% since early 2015 it is not surprising that technical traders are betting there is a dip in our future.

The average short interest value has been $2-$3 billion between 2012 and 2015. In 2015 that rose to $4 billion on three occasions. Now in late 2016 it has reached $5.3 billion. Anyone that has bet against Amazon since February has lost a lot of money.

Amazon hit a high of $696 in late December and crashed back to $475 in February. That is a monster drop and the stock does have a habit of selling off as the holiday shopping ends. In January 2014, shares dropped from $408 to $338 in a two-week period. On Black Friday in 2014, shares hit $341 and then declined to $285 in January.

With shares at $825 after a $325 point run since February, it only makes sense to expect a seasonal bout of profit taking. Expectations are very high with multiple price targets in the $1000 range. Amazon is currently hitting on all cylinders and while I can see the lure in the short scenario, I would be very cautious about putting it into practice.

The number of stock buybacks in September were the lowest since 2011. Microsoft and American Express accounted for the majority of September's volume. Dividend growth over the last two quarters was the lowest level since late 2009 and early 2010. The data came from TrimTabs.com research.

Buybacks and dividend have been a major factor in powering the last seven years of the bull market. Now those factors are evaporating. Buybacks rise when corporations are feeling good about the business and cash flow is strong enough to support them. When cash flow shrinks and/or the outlook turns sour, the buybacks dry up.

In Q3, announced buybacks fell to $115 billion and more than a two-year low. Only 29 buybacks were announced in September and the lowest number since January 2011. This follows an eight-quarter low for buybacks in Q2. Two-thirds of September's announced volume came from a $40 billion announcement from Microsoft.

With buybacks and dividend hikes providing a significant portion of market movement over the last several years, the decline in both is a warning sign for the year ahead. Source

Two trillion is a huge number but it is just a fraction of a much larger number. Scientists reported last week that using the most up to date methods for counting galaxies that there are more than two trillion galaxies in the observable universe. That sounds like a lot but here is the catch.

A galaxy is a collection of stars and planets. The Milky Way is a galaxy. According to Wikipedia, the Milky Way contains between 200 and 400 billion stars and at least 100 billion planets. Link

You can easily see that trying to calculate the number of stars and planets in the entire universe assuming two trillion galaxies and even using a low number like 50 billion items in each galaxy would be a number the human mind cannot comprehend. That would be 1 followed by 23 zeros and that is on the low end of the estimates for heavenly bodies.
That is 100,000,000,000,000,000,000,000 or 100 sextillion.

One very small cross section of the Milky Way


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


Politicians creed, "It's easier to fool people than to convince them that they have been fooled."

Mark Twain


Index Wrap

Sentiment Fading

by Jim Brown

Click here to email Jim Brown
In theory, Monday starts the best six weeks of Q4 for the markets.

In practice, we may get something entirely different. Market sentiment is fading and we are reaching critical levels. That could mean we are about to see the market accelerate to the downside OR it simply represents the normal early October buying opportunity that fund managers expect.

Don't you love it when an analyst says the market could go up or it could go down? That is like the weatherman saying we have a 50% chance of either sunshine or rain.

The problem is that the current market setup is exactly that, a chance of a further decline or a setup for a strong rebound. However, in this case the technicals are suggesting further weakness.

The percentage of S&P-500 stocks that are currently over their 50-day average has declined to only 29% and a four-month low. That means the majority of stocks are in a declining pattern ahead of earnings. The percentage over their longer 200-day average has fallen to 64.2% and a four-month low.

If we use these charts as oscillators we can see that the market rebounded when the 50-day percentage was at 22% in July and 53% on the 200-day chart. That would suggest we were getting close to a potential rebound point.

However, the prior three declines were significantly lower at 10% and 20% respectively. So which is it this time? Are we going to bounce at the higher level or should we expect the market to turn sharply lower before we see a rebound?

If we compare the charts above to a similar chart of the S&P the outlook should become clearer. The last time the sentiment numbers were headed lower the S&P was testing 2,000. While I do not want to see a retest of 2,000 it is much more preferable than the prior two declines where the percentage charts were in the 10% and 20% range. That was back in January/February and the S&P was at 1,810. There is no currently discussed scenario where the S&P falls back to 1,810. Is it possible? Yes. Is it probable? No. The current earnings may be in decline but they support a much higher valuation than 1,810.

What this chart suggests is that a break below 2,120 would immediately target a return to 2,000. That would not be pleasant but it would be preferable to the other downside target.

If we expand the scale slightly, it shows the potential break at 2,120 and how critical that support is today. All the indicators are negative and the S&P has closed under the 100-day average for four consecutive days. Every day that happens, it enforces the average as stronger resistance.

The biggest drag on the market remains the biotech sector. The $BTK is in free fall after breaking support at 3,250. The next material support is 2,860. The indicators are buried at the low end of the scale and normally we would be looking for an oversold bounce. However, the political attacks on the drug companies and pricing are not likely to let up in the next three weeks. Bernie Sanders and Clinton saw how effective the tweet was on Friday in crashing the stocks of those evil drug companies and they are likely to keep up the comments. I thought we were going to get that bounce on Friday but the tweet reinforced the negative direction.

The cumulative advance/decline line on the S&P is about to fall to three month lows. This is similar to the sentiment charts above but it is actually showing slightly more strength. It is right on the edge of turning negative and should be watched.

While Monday starts the best six weeks of the quarter in normal years, this is far from a normal year. Fund managers would normally be buying this dip as they window dress their portfolios for the October 31st fiscal year end. With the election so crazy and the tide shifting rapidly towards Clinton, they may be rethinking their investments. If it appears Clinton is going to win and possible carry the senate and the house as well, then biotech and energy stocks would be kicked to the curb and that comprises a large portion of the market.

With just over three weeks left until the election, the majority of fund managers are probably scratching their heads on what to buy and what to sell. There may be a contingent of managers that elect to raise cash levels until the election is over and the carnage in the equity markets has faded. This is a very uncertain time for equities.

Because of the fiscal year end, managers could throw caution to the wind and load up on large cap techs over the next two weeks and then restructure their portfolios in mid November after the election results. That is the wild card in the potential for a market decline. The indexes are at three-month lows and that is either a buying opportunity over the next two months or a warning of a pending breakdown on election fears. There is no easy answer for market direction today.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

One Up, One Down

by Jim Brown

Click here to email Jim Brown

Editors Note:

The two plays today are both plays on a lack of communication. Honeywell did not explain the earnings decline correctly and Yahoo cannot do anything right. Their entire culture is denial of the facts.


HON - Honeywell - Company Profile

Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.

On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.

The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.

After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.

The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.

He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.

Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.

Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.

I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.

Buy Dec $110 call, currently $2.74, no initial stop loss.


YHOO - Yahoo - Company Profile

Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.

After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.

When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.

On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.

I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.

If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.

This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.

Buy Jan $40 put, currently $1.83. No stop loss.

In Play Updates and Reviews

Closed on the Lows

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's market action did not inspire any bullish confidence with the indexes closing on their lows. The Dow closed with a decent gain at +39 points but the other indexes barely escaped closing negative. The S&P gained less than half a point and the Nasdaq Composite gained less than one point. The Dow Transports, Biotechs and the small cap indexes all closed with losses.

The Dow was up +131 at the highs and then fell to close at the lows. Had the market been open another 15 minutes it would probably have closed negative.

This is not a good sign for market sentiment but there may have been some weekend headline fear weighing on investors. The indexes are trading just above three-month lows and that is causing some investor angst.

Next week is the start of the earnings flood and it is the start of the best six weeks of the year for the market.

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

XBI - Biotech ETF

The long call position remains unopened until a trade at $62.50.

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

COST - Costco - Company Profile


No specific news. Shares still chopping around with the uncertain 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 gain to hold above resistance.

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.

IDCC - Interdigital - Company Profile


No specific news. Shares down slightly after a big bounce at the open. Shares faded with the 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.

PANW - Palo Alto Networks - Company Profile


No specific news on PANW. UBS said PANW, SYMC and CYBR were still well positioned to gain from shifts in tech spending towards cybersecurity.

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.

Position 10/10/16:

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.

WOR - Worthington Industries - Company Profile


No specific news. Minor gain in a mixed market.

Original Trade Description: October 12th.

Worthington Industries is a leading global diversified metals manufacturing company with 2016 fiscal year sales of $2.8 billion. Headquartered in Columbus, Ohio, Worthington is North America's premier value-added steel processor providing customers with wide ranging capabilities, products and services for a variety of markets including automotive, construction and agriculture; a global leader in manufacturing pressure cylinders for industrial gas and cryogenic applications, CNG and LNG storage, Cryogenic transportation and storage and alternative fuel tanks, oil and gas equipment, and consumer products for camping, grilling, hand torch solutions and helium balloon kits; and a manufacturer of operator cabs for heavy mobile industrial equipment; laser welded blanks for light weighting applications; automotive racking solutions; and through joint ventures, complete ceiling grid solutions; automotive tooling and stampings; and steel framing for commercial construction. Worthington employs approximately 10,000 people and operates 80 facilities in 11 countries.

Worthington is a "value added" steel processing company. To put that into english it means they take steel and form it into products they can sell. They do not make the steel, they just turn it into something useful. Between 2009 and 2015 they acquired 18 companies, each with a special niche in the market, in order to broaden their product offerings and increase the size of their customer base.

As steel prices strengthen, the products Worthington makes will become more valuable and their product margins will increase. In a commodity market where the raw material is cheap, every product made from that material is also under price pressures. The growth in global auto sales is good for Worthington as is the growth in the aircraft industry, ship building, energy, construction and manufacturing of all types that requires steel parts.

In their recent quarterly earnings they reported $1.03 per share and easily beating estimates for 77 cents. Revenue declined -3% to $737.5 million and missed estimates for $742.8 million. They blamed the weaker revenue on the weak oil and gas sector. Shares spiked 8% on the news despite the revenue miss.

Earnings Dec 28th.

Shares have moved sideways with a minor uptrend bias since the Sept 28th earnings spike. After two weeks of consolidation, they should be ready to start a new leg higher, market permitting.

Position 10/13/16:

Long Dec $50 call @ $2.05, see portfolio graphic for stop loss.

XBI - Biotech ETF - ETF Profile


Biotechs dipped a little lower after Bernie Sanders tweeted about again about high drug prices. He took aim at ARIA, which just raised the price of their leukemia drug to $199,000 a year. This caused the sector to drop again and the XBI came ot rest on support at $60. I considered lowering the potential entry point or even just buying the dip at $60 but with the Sanders attack on drug prices, it will probably encourage Clinton to ratchet up her attack over the weekend in order to attract or maintain her hold on the Sanders voters. A bottom will eventually appear and we should not be too eager to jump into the trade unless we see a decline to $50, which is major support.

This position remains unopened until a trade at $62.50.

Original Trade Description: October 13th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

The XBI traded up to $69 in late September and has since crashed back to support at $60 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls. The Theranos disaster and the closing of their labs weighed on the sector even though Theranos was not a public company.

Comments from Clinton about drug pricing concerns also caused investors to flee some drug company stocks.

With the XBI now -13% off its September high and all of those factors baked somewhat into the market, it may be time to place a bet on a biotech rebound. New drugs are announced every week and old diseases are cured or at least made tolerable.

I know it is hard to buy a stock in free fall but this may be the right point. The $60 level is support from June and August. The 100-day average is currently $60.37. This appears to be a good spot to place a bet.

Other traders may have felt the same way today. The XBI posted a minor gain in a bad market and the opening dip to $60.50 was only a drop of 75 cents and it was quickly erased before 10:15.

Not posting a material decline when the Dow was down -185 and the Nasdaq was down -70 is a sign of good relative strength.

If we are wrong about the support at the $60 level, we will stop out quickly and look for a retest of the next support level at $50. I am going to put an entry trigger on it just in case the market gaps down again on Friday.

With an XBI trade at $62.50

Buy Nov $64 call, currently $1.83, initial stop loss $58.85

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.

Update 10/13/16: Deutsche Bank questioned the technology used by Mobileye and others after recent announcements on falling costs. DB suggested the sharp drop in cost for technology offered by other vendors could weigh on future Mobileye sales.

Position 9/28/16:

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

NKE - Nike Inc - Company Profile


Piper Jaffray said a recent survey showed that Adidas was the leading brand in the back to school and coming holiday season. Adidas has raised its outlook four times in 2016 and could do it again before the year is over. Also, Under Armour is taking shelf space from Nike in the UK markets and brand awareness is continuing to rise. UA rose from 11th to 7th in the survey of preferred footwear brands. Adidas rose from 7th to 4th.

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.

Position 10/11/16:

Long Dec $50 put @ $1.05, no initial 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