Option Investor

Daily Newsletter, Saturday, 10/29/2016

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

The disclosure by the FBI that they had discovered a laptop owned by Huma Abedin containing tens of thousands of State Dept emails was Kryptonite for the market and the indexes declined sharply.

Weekly Statistics

Friday Statistics

At 1:PM on Friday FBI Director Comey took the unusual step of notifying Congress that he was "supplementing" his testimony regarding Hillary Clinton's classified emails. Later reports said in an unrelated investigation they had discovered a device that contained emails from Clinton and the FBI would be investigating their potentially classified status. He did NOT say there were any classified emails on the device. However, given the timing of the letter to Congress, the impact on the political campaigns and the attention any further testimony would attract, it is probably safe to say these emails are not discussing yoga routines or Chelsea's wedding. Comey would not drop this bomb this late in the political campaign unless they already knew the details would be damaging. There is speculation that this laptop contained a backup of the 33,000 emails Clinton deleted.

The market was trading sideways on very thin volume when the headline appeared. There was an immediate decline that pushed all the indexes into negative territory.

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On the economic side the first reading on the Q3 GDP came in at +2.9% growth and much stronger than expected. The Atlanta Fed was predicting 2.1% and the analyst consensus was 2.5%. While the reporters are talking up the stronger than expected GDP, the facts tend to get in the way.

Inventories added 0.61% and exports 1.17% or more than half the headline number. Personal consumption, which normally accounts for more than 70% of the GDP fell to only half of the Q2 level. Consumers quit spending in Q3. Fixed investments otherwise known as capital spending, subtracted from growth for the fourth consecutive quarter. That has never been seen before outside a recession.

The real kicker is the export number which rose from $7 billion in Q2 to $49 billion in Q3. This was the highest level in more than two years. The number one export was soybeans, which normally are exported in Q4 but a poor harvest in South America pulled those exports into Q3. The Q4 export is such a regular event that the government adjusts Q4 numbers with a seasonal adjustment to "smooth" the Q4 GDP. Since the exports were pulled forward into Q3 by the weak harvest there will be a hole in Q4. The current seasonal adjustments for Q3 meant that food and beverage exports increased by +121% in Q3 and obviously not a repeatable number.

Using the Bureau of Economic Analysis numbers the $38 billion in one-time soybean exports was one third of the total $119 billion increase in Q3 GDP. That represents 0.9% of the 2.9% headline number. Capital Economics said if you remove the one time soybean exports, the inventory build, which will be negative in future quarters and the impact of Obamacare, which added 10% to Q3 GDP, the U.S. actually grew by only +0.9% in Q3.

We can expect to hear the politicians and the news sources bragging about 2.9% growth and the highest in more than two years BUT it is a bogus number that will be corrected over the next two quarters with abnormally low GDP reports. You cannot take one third of the GDP increase from one quarter and pull it forward without leaving a hole in the quarter to follow.

The Atlanta Fed GDP forecast remains the gold standard for predictions. Removing the 0.9% for the soybean exports gives a headline number of +2.0% and the GDPNow forecast was 2.1%. The average over the last four quarters is now +1.5% growth and far too low for the Fed to get excited about a series of rate hikes.

Consumer Sentiment for October fell to 87.2 and tied the lowest level since the 86.9 in October 2014. September 2015 saw the same 87.2 reading. That is a -4 point decline since last month and the largest one-month decline in more than a year. The present conditions component declined from 104.2 to 103.2 and the expectations component fell -5.9 points from 82.7 to 76.8. That should tell you something about how excited consumers are about the two presidential candidates. Respondents said the country's direction and outlook for business were the two main factors weighing on their sentiment. More than 30% of respondents said their financial conditions had worsened. More than 71% of those surveyed said business conditions would stagnate or worsen over the next year.

We have a big week ahead economically. The ISM Manufacturing Index on Tuesday is not expected to improve and there are whisper numbers for a decline. The ADP Employment report on Wednesday is expecting only a minor increase from the 154,000 new jobs in September.

The FOMC announcement on Wednesday is not going to feature a rate hike but the Fed is expected to begin warning about a hike in December. The election will be over and the Fed can hike another quarter point and then go to sleep for another six months. The December hike would be to save face since they have threatened a rate hike all year. For November, there is only a 9.3% chance according to the Fed Funds Futures. There is now a 74.2% chance for a hike in December and that is likely to rise after Wednesday.

However, Yellen has been making noises about letting the economy run hotter for longer before raising rates so the Fed guidance is going to be interesting. The economy is far from hot so longer could be a long time if she meant what she said. This is the same person that recently said the Fed could buy equities if their current QE actions were not enough to juice the economy. I would bet that comment did not go over well in the boardroom.

The last nugget next week will be the Nonfarm Payrolls on Friday. They are expected to increase from 156,000 to 170,000 but there are worries that we could see a decline instead. The regional economic numbers over the last six weeks have seen some employment declines. Whether that will carry over into the bigger market is unknown. The Fed should have these numbers before their Wednesday announcement and it could impact their decision.

Earnings remained the biggest news story of the morning and McKesson (MCK) was the disaster of the day. The drug distribution company reported earnings of $2.94 and missed estimates for $3.05. However, the big hit came from lowered guidance. The company lowered guidance for 2017 from $13.43-$13.93 to $12.35-$12.85. The CEO said we are starting to see competitive activity that is broader and more aggressive than previously thought.

There are more companies marketing competing biosimilar drugs and there is growing price pressures from the pharmacy companies. This will only get worse regardless of who wins the election. Clinton has vowed to lower drug prices and allow importation of similar drugs at a cheaper price. Trump has said he would change the laws to allow Medicare/Medicaid to negotiate prices. As the biggest purchasers of drugs that could lower prices significantly.

A lot of companies have drugs going off patent. An example is Amgen's Enbrel, a drug that accounted for 80% of the company's income growth. Unless companies have new blockbuster drugs in the pipeline, the loss of exclusivity on their top drugs is a serious problem.

McKesson shares were down over 25% at one point to $115 but rebounded slightly to close at $124 with a $36 loss. Competitors Cardinal Health (CAH) fell -10% and AmerisourceBergen (ABC) fell -13%. Amgen (AMGN) fell -10%. Cardinal Health reports earnings on Monday.

Novo Nordisk (NVO) reported earnings of 58 cents compared to estimates for 56 cents. Revenue was $4.13 billion. So far so good. Unfortunately, the company said the U.S. market has become "significantly more challenging" and it "no longer deems it achievable" to reach the operating profit growth target of 10% and they lowered it to 5%. They recently announced plans to lay off 1,000 workers to reduce costs in the U.S. market. Shares collapsed 13% on the lowered guidance.

The Healthcare sector is in crash and burn mode with a -2.2% decline on Friday alone to a 7-month low. I looked at buying the dip but we may be a week too early. I am recommending a play this weekend on the biotech sector.

Hershey (HSY) redeemed itself from the post buyout decline when they reported earnings of $1.29 that beat estimates for $1.18. Revenue of $2.0 billion barely beat estimates for $1.99 billion. They raised guidance for full year earnings from $4.24-$4.28 to $4.28-$4.32. Shares rallied 7% on the news.

Anheuser-Busch InBev (BUD) reported earnings that missed estimates for the sixth consecutive quarter. The company said beer sales in Brazil had fallen by 6.8% and there were cracks appearing in the U.S. craft beer boom. BUD is trying to buy up all the competition and spent $103 billion buying SABMiller Plc. The company slashed guidance saying it no longer expects to see volume growth outpace inflation. Q3 earnings rose 2% and analysts were expecting 4.5%.

Amazon (AMZN) reported earnings Thursday after the bell and missed estimates. The company reported 52 cents and well below the 78 cents analysts expected. Sales increased 29% to $32.7 billion and beat estimates slightly. To put this report in perspective they reported 17 cents and $25.36 billion in the year ago quarter. Amazon guided for Q4 for revenue in the $42.0-$45.5 billion range and earnings in the $0 to $1.25 billion range. That is the widest range I have ever seen for earnings guidance. Analysts are expecting earnings of $2.14 and revenue of $44.58 billion. Amazon will hire 120,000 temporary employees for the holiday season. The company ended the quarter with $12.52 billion in cash.

Amazon said Alexa, the voice of the Echo device, has received more than 250,000 marriage proposals to date. The company said they have some surprises in store for this year that will be a major improvement.

Amazon ended the quarter with 65 million Prime accounts based on analyst estimates. A Prime customer spends an average of $1,200 a year and more than twice the spending by a non-Prime customer. Having a lot of Prime customers is a double-edged sword. Amazon said shipping expenses rose 43% in Q3 to $3.9 billion and was responsible for part of the earnings miss.

Virtus Investment Partners (VRTS) reported earnings of $1.64 on revenue of $82.3 million. That beat estimates for $1.50. Shares spiked $20% on the news.

Chevron (CVX) reported earnings of 68 cents that beat estimates for 39 cents. However, Chevron does not adjust earnings for onetime events like asset sales so that is not really and apple to apples comparison. Revenue of $30.14 billion did beat estimates for $30.06 billion. Production averaged 2.51 million bpd, down from 2.54 million. They guided for Q4 production of 2.65-2.70 million boepd. Chevron raised its quarterly dividend by a penny to $1.08 per share. This is the 29th consecutive year they have raised the dividend. They reduced capex spending by $10 billion due to deliberate cut costs. Expectations were low for Chevron so shares rallied 4%.

Exxon (XOM) reported earnings of 63 cents of $2.65 billion, down from $1.01 and $4.24 billion in the year ago quarter. Revenue was $58.7 billion. Analysts were expecting 58 cents and $60.4 billion. Exxon cut capex spending by 45% to $4.2 billion. Production fell -3% to 3.8 million boepd.

Next week is the busiest week of the Q3 earnings cycle but the number of companies that can move the market is limited. Facebook, Alibaba and Starbucks are probably the top three investors will be watching. Now that we are past the blue chip reporting phase, the quality of earnings will decline along with the lack of big name companies.

GE and Baker Hughes (BHI) are talking merger. No, GE is not likely to buy BHI but there is a good chance they will do a joint venture or GE will sell its oil servicing assets to BHI. The energy division was a big drag on GE earnings last quarter and GE is interested to doing something about that. Reportedly, GE approached BHI and a spokesman said we are talking about several options but "none of these options include an outright purchase" of BHI.

If GE sold its energy servicing business to BHI it would lift the company to the number two in the sector behind Schlumberger's $28 billion in revenue. It would catapult BHI from $11 billion in revenue to $22 billion. GE has decided the energy business is too cyclical and they would rather focus on manufacturing equipment rather than maintaining it. Since GE has recently added to its energy services division, ($3.4 billion purchase of Lufkin in 2013) they are probably not going to get a cash bid from BHI that would make them whole. If BHI gave them stock, GE would have a longer-term potential to make a profit once energy prices recovered.

The Volatility Index ($VIX) rose all week but still spiked 3.5 points intraday after the FBI news broke. Apparently, that encouraged a lot of traders to start buying protection.

There are currently 7 times more call options on the VIX than put options. That is the highest since August 2015 just before China devalued the yuan. Clearly, there are a lot of investors either betting on a crash or hedging against a crash.

Seven fund managers reported a total of $50 billion in net outflows in Q3. The biggest losers were Franklin Resources at $22.1 billion, AllianceBernstein with $15.3 billion and Waddell & Reed Financial at $4.9 billion. Others with outflows included T Rowe Price, Ameriprise Financial, Janus Capital and Legg Mason. In Q2, the same 7 funds saw outflows of $34 billion. The reason for the constant stream of outflows from actively managed funds is the shift to passive funds and ETFs. Actively managed funds have had a poor track record over the last couple of years and investors are leaving in droves. Waddell & Reed marked the 9th quarter of outflows. Fewer than 15% of actively managed funds have beaten the S&P-500 over the last 10 years according to S&P Global.

In the 12 months ended September 30th, actively managed funds had outflows of $295 billion. Passive funds had inflows of $454 billion. BlackRock saw inflows of $55 billion in Q3 with 90% going into ETFs. Vanguard Group saw inflows of $78 billion into index funds and ETFs. There were 8,044 ETFs at the end of 2015 with $2.5 trillion invested.

Oil prices are sliding lower as the outlook fades for an OPEC production cut. The delegates to a two-day meeting in Vienna said on Friday they had not reached a consensus on quotas after the first day. Iran, Iraq, Libya and Nigera have claimed they should be exempt from any output cuts. None of the countries attending specified how much they would be willing to cut to stabilize prices. Non OPEC producers Russia and Brazil joined the talks on Saturday. Russia's energy minister was quoted as saying, why do it, "any output freeze could be offset by a quick recovery in US shale output."

After the informal agreement in Algeria, OPEC said it was going to shoot for a reduction in production from 33.4 mbpd in September to 32.5 to 33.0 mbpd when they met at the end of November. The tricky part was deciding how much each country would have to cut production to meet that goal. One delegate said, "It is getting complicated...every day there is a new issue coming up."

The joke making the rounds is that OPEC now means "Organization of Producers Exempt from Cuts." Even if they do claim to have an agreement when they meet in late November, the odds are close to 100% that nobody will honor it. OPEC countries have never honored any prior agreements so why start now. It is all a show for the rest of the world as they try to talk up prices.

Crude prices declined more than 2% on Friday as the news trickled out of Vienna. While very few professional market watchers ever believed OPEC could pull off a production cut, now it appears they may not even be able to enforce a production freeze. Getting everyone to agree is nearly impossible. Getting them to comply is impossible.

The U.S. added 4 active rigs last week but that is not the real story. There were 6 new gas rigs while oil rigs declined by two. The recent spike in gas prices has motivated gas producers and they have added 20 rigs since early September. At the same time, 36 oil rigs have been reactivated. We still have only 25% of the rigs that were active at the peak in 2015.

The dollar index gave back 50 cents on Friday with the majority of that on the dip caused by the FBI headlines. The strength in the dollar has made it very hard for commodities to rise and kept the pressure on crude prices. Meanwhile gold prices rallied after the headline to close at $1,276 and a four-week high.




The normal historical trend for a rebound in the last two weeks of October has failed. The election uncertainty has smothered any positive sentiment that actually existed. The Dow is trapped in a tight range but the S&P, Russell 2000 and S&P-600 are all weak.

The FBI announcement at 1:PM on Friday killed what little bullish sentiment still existed. The major indexes fell to the lows of the day and the Dow is the only one that tried to recover.

The S&P has support at 2,120 and the intraday dip knocked it down to 2,119.36 before a minor rebound. The 2,120 support level is critical. We had been fighting the 2,145 resistance for most of the week with minimally lower highs every day. The close on Friday under 2,130 was seen by some as a bearish event because it was the second close under that level since September 14th. The 2,126.14 close was exactly the same close as October 17th and that is a six-week closing low. If the S&P weakens to close under 2,120 we could be in a world of trouble.

The Dow suffered under the earnings curse last week with some companies beating estimates and spiking and others missing and falling. After all the smoke cleared, the Dow actually gained 15 points for the week. However, it remains locked in the 18,100 to 18,250 range and this week there are no Dow stocks reporting earnings. The index will be left to find its own direction and with 26 Dow stocks already reported, all of them will be experiencing post earnings depression.

The Dow will be driven by the external headline from the political campaign, Fed meeting and the payroll reports. None of those events are expected to give a material boost to sentiment. The biggest risk is a decline under that 18,100 support to trigger sell stops and fall into that empty void on the chart with 17,135 at the bottom.

On the positive side, the Dow has not sold off. It has had multiple chances over the last couple of weeks and has always honored that support at 18,100 by the close.

The Nasdaq Composite closed 10 points under critical support at 5,200 but still close enough for it to be in play. Any further decline targets 5,100 and the lows from September.

The Nasdaq 100 ($NDX) made a new high on Monday and fell all the way back to support at 4,800 on Friday. I said multiple times I thought fund managers would buy big cap tech stocks to window dress for the end of October but it did not happen. They were off to a good start on Monday but the negativity and the election uncertainty apparently kept them in cash. A break below 4,800 targets 4700-4650.

The bad news for the week came from the small cap indexes. The Russell 2000 closed at nearly a 4-month low on Friday and well under the last material support at 1,200. There is nothing under Friday's close until the 1,100 range.

The S&P-600 small cap index is almost identical to the Russell with a nearly 4-month low and totally unsupported at this level.

The breakdown in the small caps suggests the broader market is likely to decline. The small caps normally lead in both directions and with the big cap buying fading as we enter November, the outlook on a technical basis is negative.

We could wake up Monday to a completely new spin on the election and the FBI headlines. I have read dozens of articles this weekend with a couple claiming the FBI is not even in possession of the emails because they did not have a warrant to seize that data since their warrant only covered the sexting case. Whether that is true or not remains to be seen. It is entirely possible those emails could disappear by Monday and all the momentum shift back to Clinton. I think that would cause a significant amount of frustration for at least half the population but this is a crazy year.

Given the polarization between the political parties and the short time left in the race, we could still see several other bombshells between now and Election Day. The outcome is far from decided and that uncertainty could cause significant market volatility. Once we are in November, the fund managers no longer have to be fully invested and they can dump positions in volume ahead of the election with plans to reinvest once they see who wins and which sectors will benefit. That could increase any volatility in a thin market.

I would continue to caution against being overly long and I would suggest you update your shopping list of stocks you would like to buy on a dip. Your prior selections may have changed.

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Random Thoughts

There is still a tug of war in progress between the bulls and bears and several ended up in the neutral camp this week. This survey ends on Wednesday so the events of Thr/Fri are not yet included.

When Alphabet (GOOGL) reported earnings, they also announced a $7,019,340,976.83 stock buyback. Alphabet is famous for announcing deals with some hidden meaning in the number and they do not tell us the meaning. You may remember their first buyback program was for $5,099,019,513.59 in 2015. After a few hours, some enterprising math researchers came up with the answer. There are 26 letters in the alphabet and that is the square root of 26.

The puzzle this year was quickly deciphered by a retired math teacher named John Owens. 7019.34097683 = 26^e. "e" is a constant in math and physics. That is far above my pay grade.

Professor Jeremy Siegel has been one of the biggest bulls on Wall Street with a 2,300 price target on the S&P. On Friday, he backed off on that prediction but only by a little bit. Now he believes the S&P will close between 2,250 and 2,300. He is blaming the election uncertainty, the possibility of a Fed rate hike and weak earnings guidance for the minimal reduction in his target.

He said we would need "bang up earnings and super guidance" to get over the hump of a rising 10-year treasury yield. He said even though everyone now expects the Fed to hike in December, the real worry is how often the Fed will hike in 2017. The 10-year treasury yield was up over 5% for the week.

Walmart is upgrading the customer experience this holiday season. They are doubling the number of product demonstrations to 150,000. They are hiring a dedicated pickup manager for each store for people that order online and want to pick up at the store. The manager will have a very high profile counter painted bright orange to make it easier to find and to advertise the pickup option. The store has increased the number of items available online from 8 million to 20 million.

Santa Claus will live in each store with "selfie booths" where customers can take their own pictures with Santa. Walmart will offer 400 toys that are not available anywhere else. One example is the $398 Disney Princess Carriage that is already sold out online, but they have ordered more.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Those who would give up essential liberty, to purchase a little temporary safety, deserve neither liberty nor safety."

Benjamin Franklin


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Index Wrap

Storm Clouds Gathering

by Jim Brown

Click here to email Jim Brown
The normal end of October window dressing never appeared and the negativity is increasing.

The uncertainty over the election escalated significantly on Friday with the FBI announcement and that could easily push portfolio managers to lighten up once the calendar turns to November and their fiscal year end is behind them.

There was some big cap tech buying on Monday when the Nasdaq 100 made a new high but the last four days have been consistent declines. With 26 of the Dow components already reported there will be a distinct lack of bullish sentiment for that index. Those stocks that have already reported will be suffering from post earnings depression now that the earnings excitement has faded. There are no Dow stocks with earnings this week.

The biggest blow to market sentiment came from the small cap indexes. The Russell 2000 broke below critical support at 1,200 and is now unsupported until 1,095. There is a lot of air on that chart from 1,200 to 1,095. The indicators are in full decline and I would not expect an imminent rebound. The S&P-600 small cap index has an identical pattern to the Russell.

The broader Russell 3000 Index ($RUA) is showing the same pattern as the S&P-500 with a close on Friday just above critical support at 1,250. This is the 3,000 largest stocks in the market so this index IS the market. The potential for a breakdown this week is very strong and support is a long way off.

The normal market interrelationships are still intact. The rising dollar has pressured oil prices along with the headlines out of OPEC.

The Semiconductor sector has weakened after failing to make a new high on some positive earnings and M&A in the chip sector. This is negative for the Nasdaq.

The Biotech sector was weak once again with the $BTK closing just above 2,950 on Friday. The weakness in this sector also weighed on the Nasdaq. However, the BTK was not as weak as expected given some major declines in drug/healthcare stocks. The BTK may be trying to form a bottom although there is no clear support in the 2,950 area.

The Dow Transports actually held up well for the week despite some earnings problems with the airlines. The transports are not suggesting the Dow will decline but they could always follow the Dow lower if that support at 8,000 breaks.

The high yield market is also holding at the highs and this will provide support for the broader market. The S&P normally follows the HYG but there was a sharp downtick after the FBI headlines on Friday.

The percentage of S&P-500 stocks over their 50-day average declined slightly to 33% but are still holding above the January and July lows. This is a thin straw to grasp but it is still a mildly positive point.

I wrote last weekend that the markets were weakening ahead of the election and I am afraid we could see this trend increase this week. Once we are into November, portfolio managers will be free to sell those positions they held over the October 31st year-end and they could be raising cash to use once the election is over.

We should continue to avoid being overly long and keep a list of stocks we would like to buy at a lower level. We may get that chance.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Very Oversold

by Jim Brown

Click here to email Jim Brown

Editors Note:

Political fears have crushed this sector and it is now very oversold. With Clinton, Warren and Sanders all attacking the biotech stocks on a weekly basis the sector is now very oversold and the election is only ten days away. If Clinton does not win, there could be a monster rebound.


XBI - Biotech ETF ETF Profile

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 $56 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.

Comments from Clinton, Warren and Sanders about drug pricing concerns also caused investors to flee the biotech sector.

The biotechs may have ended their decline in fear of Hillary Clinton. After the news on Friday about the FBI reopening the criminal investigation on her emails, that should make it really tough to win the election. That means the biotech sector could begin to rebound even before the vote if the polls tighten even further or move into Trump's favor.

On Friday 10/28, the healthcare sector imploded on earnings and warnings from several companies including McKesson, AmerisourceBergen, Cardinal Health and others. The XBI failed to decline after hitting support at $56.

With the XBI now -18% off its September high, all of those factors above are baked into the market. This may be time to place a bet on a biotech rebound.

The ETF has support at $56 and the 200-day at $56.55. The dip on Friday penetrated to $55.80 but then rebounded $1 in a weak market.

I am recommending we buy a cheap December call ahead of the polls that will be out next week. If Clinton does win, we will exit on any weakness.

With a XBI trade at $58

Buy Dec $60 call, currently $2.07, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The continued decline in the Russell 2000, S&P-600 and S&P-400 to lower lows is confirmation next week could be negative. With the small and mid cap stocks in full retreat and the S&P futures closing under the 100-day EMA, the market is poised for a deeper decline.

The immediate drop on the damaging FBI headline shows the market was expecting a Clinton win. That is now in doubt given the radioactive announcement. The news will be full of negative headlines and all types of speculation all weekend and that will be negative for the Clinton campaign and the market.

With Trump surging in the polls anyway and now this blow to Clinton, the odds are increasing that we could see a market volatility event before the election. Add in the FOMC announcement on Wednesday and next week could be rough.

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

No Changes

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BULLISH Play Updates

COST - Costco - Company Profile


No specific news. Was flat on the day until the market dropped on the Clinton emails.

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. Up until 1:PM when the FBI headline caused the market to drop.

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.

HON - Honeywell - Company Profile


Honeywell raised its annual dividend from $2.38 to $2.66 with the quarterly payment now $0.665. It is payable on Dec 9th to holders on Nov 18th. Company is presenting at a Goldman Sachs conference on Nov 3rd.

Original Trade Description: October 15th.

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.

Update 10/21/16: Honeywell reported earnings of $1.67 that beat estimates for $1.60. Revenue of $9.8 billion also beat estimates for $9.77 billion. They guided for the current quarter to earnings in the range of $1.74-$1.78 and analysts were expecting $1.75.

Position 10/17/16:

Long Dec $110 call @ $2.51, see portfolio graphic for stop loss.

LB - L Brands - Company Profile


No specific news. Shares up $1 in a weak market. The company will host an investor day on November 1st and everyone can listen/watch on the LB.com website.

Original Trade Description: October 24th.

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

In early October LB said same store sales for the five weeks ended on Oct 1st, rose 3% and beat expectations. Total net sales for September rose $971.4 million. Same store sales were flat at Victoria Secret but rose 9% at Bath& Body Works.

The company said they are emphasizing pink active bras and the sports collection for October. They guided for comps to increase in the low-single digits for October.

With analysts expecting a decent earnings report on November 16th and shares rising, we could see a decent gain over the next three weeks. Resistance is $73.50 and again at $75.

This is a short-term play and we will try to get in and out quickly. I am using the December strike so there will be some earnings expectation premium left when we exit.

Somebody recently bought 2,300 November $75 calls for as much as $1.80. That is a pretty expensive bet that shares will rise.

Position 10/25/16:

Long Dec $75 call @ $1.65, see portfolio graphic for stop loss.

NVDA - Nvidia - Company Profile


No specific news. Minor 12-cent decline. I raised the stop loss to take us out on any further weakness. Earnings are Nov 10th.

Original Trade Description: October 19th.

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

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

Earnings Nov 10th.

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

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

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

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

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

On September 28th, Nvidia announced a new AI supercomputer chip called Xavier, which is designed for self-driving cars. The system-on-a-chip (SoC) integrates a new Graphics Processing Unit or GPU called Volta and a custom 8 core CPU along with a new computer vision accelerator. The processor will deliver 20 trillion operations per second while consuming only 20 watts of power. Nvidia already provides chips to Audi, BMW, Honda, Mercedes, Tesla and Volvo. On August 31st Nvidia and Baidu (BIDU) announced a partnership to make an autonomous car platform. Also today, the company announced a partnership with TomTom to develop artificial intelligence to create a cloud to car mapping system for self-driving cars.

Update 9/30/16: Bloomberg had a blurb earlier in the week saying Nvidia was hiring Apple engineers to work on new graphics for the Apple product line. Apple has always relied on imbedded Intel graphics chips but with the new demand of video editing and VR, that is no longer an option. They are going to have to upgrade to a more powerful video interface. That would be a big win for Nvidia and they would not be hiring Apple engineers unless there was some announcement coming.

On October 3rd, Amazon announced a new P2 instance for the Amazon Elastic Compute Cloud (Amazon EC2). The VM machines are powered by 16 Nvidia Tesla K80 GPUs. They also include up to 64 vCPUs with up to 732 Gb of host memory. These instances offer up to 60 times the processing power of prior P2 instances.

Update 10/20/16: Tesla announced the decision to equip all new cars with complete self driving hardware and technological components. Nvidia is the chosen partner to provide the Drive PX chipsets, which retail for $250-$300 each. If Tesla goes with the super high performance Titan GPU at $1,200 each that would equate to $1 billion a year in revenue for Tesla.

Update 10/27/16: Nvidia said they would be providing the complete Drive PX 2 chipsets so revenue per car could be in the $800-$1000 range.

  Microsoft announced a new Windows 10 Surface Studio that includes a desktop PC and 28 inch ultra-high resolution monitor powered by Nvidia graphics chips.

Nvidia is the Intel of the future.

Nvidia shares have been stair-stepping higher since January. They peaked at $69.70 on October 4th. When the stock rolled over on the 6th we were stopped out of a prior position. Nvidia has a habit of surging $5-$7 then resting for a couple weeks. The decline from the October 4th peak touched $63.70 on the 13th and shares have been moving sideways with a slight upward bias. I think they could be getting ready for another move higher as we head into earnings.

I am a firm believer that Nvidia will beat on earnings. I am going to recommend that we hold over the event but I will give everyone fair warning a couple days before so you can make your own decision.

Position 10/20/16:

Long Dec $70 call @ $2.90, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

BIG - Big Lots - Company Profile


No specific news. Morning rebound on no news but faded in the afternoon.

Original Trade Description: October 26th.

Big Lots, Inc., operates as a non-traditional, discount retailer in the United States. The company offers products under various merchandising categories, such as food category that includes beverage and grocery, candy and snacks, and specialty foods departments; consumables category, which comprises health and beauty, plastics, paper, chemical, and pet departments; soft home category that consists of home decor, frames, fashion bedding, utility bedding, bath, window, decorative textile, and area rugs departments; hard home category, including small appliances, table top, food preparation, stationery, greeting cards, and home maintenance departments; and furniture category consisting of upholstery, mattress, ready-to-assemble, and case goods departments. It also provides merchandise under the seasonal category that includes lawn and garden, summer, Christmas, toys, and other holiday departments; and electronics and accessories category, including electronics, jewelry, hosiery, and infant accessories departments. The company operates 1,449 stores in 47 states. Company description from FinViz.com.

For Q2, the company reported earnings of 52 cents compared to estimates for 45 cents. Revenue of $1.2 billion missed estimates for $1.22 billion. For the current quarter they guided for a profit of 1 cent to a loss of 4 cents. That is not exactly a stellar performance.

Revenue growth in Q2 slowed from the 3% in Q1 quarter to a -0.5% decline in Q2. Same store sales only rose +0.3%. Big Lots warned Q4 comps would be "flattish" and leaving the door open for a decline. They revised down full year revenue guidance to only 1-2% growth. The admitted online sales were only about 4% of the total and there was limited inventory online. That is not what investors wanted to hear.

Earnings Dec 2nd.

Shares collapsed to plateau about $47 in September. In October that plateau declined to $44.50 and this week that level has now broken. With the market weakening there is less tolerance for companies that are not performing. Shares are near a 9-month low.

Position 10/27/16:

Long December $42.50 put @ $2.10, 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.

YHOO - Yahoo - Company Profile


The EU sent a letter to Yahoo telling the company to communicate all aspects of the data beach to EU authorities and to notify affected users of the "adverse effects" and to cooperate with all "upcoming national data protection authorities enquiries and investigations." It sounds like the EU is about to drop the hammer on Yahoo and could also drop fines and penalties on the company for allowing the breach.

Original Trade Description: October 15th.

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.

Update 10/18/16: Yahoo reported revenue that fell -14% to $857 million. This is the fourth consecutive quarter that revenue has fallen more than 10%. They beat on earnings with 17 cents compared to estimates for 11 cents but did it on major cost cutting with the termination of 2,200 employees or one-fifth of its workforce. Verizon signaled last week it was reconsidering the acquisition because of the damage from the cyber attack. The decision to complete the deal or back out should be made over the next 2-3 weeks. Yahoo did not hold a conference call in order to avoid having to answer questions that might stir up more objections by Verizon.

Update 10/26/126: Verizon executive, Marni Walden, said Verizon was taking an in-depth look at how the Yahoo cyber attack occurred and what risk Verizon would have from continuing the acquisition. They would have an answer within 60 days. She said the deal still makes sense strategically BUT we have to be careful about what we do not know. The deal was tentatively still on track but the impact of the breach was "material" and still a big unknown. Use of the word material refers to a possible "material adverse change" or MAC clause in the contract that would allow Verizon to walk from the deal. With 500 million accounts hacked, a $20 fine on each account would be $10 billion and more than twice the $4.8 billion sales price.

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.

Position 10/17/16:

Long Jan $40 put @ $1.90. See portfolio graphic for stop loss.

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