Option Investor

Daily Newsletter, Saturday, 7/8/2017

Table of Contents

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

Market Wrap

Volatility Over?

by Jim Brown

Click here to email Jim Brown

Has the market volatility run its course or is there more to come?

Weekly Statistics

Friday Statistics

For a holiday week, we saw significant volatility. Other than Monday's 3.8 billion shares, the volume was moderate at 6.0 to 6.7 billion shares for the rest of the week. Alternating triple digit gains and losses and closes under critical support, were just a few of the market events. However, by Friday's close the Dow, Nasdaq and S&P all managed to post minor gains for the week. All are under recent resistance but rebounded to close back over support. The Nasdaq closed at a six-week low on Thursday and below support at 6,100. The S&P closed at 2,409 on Thursday and also under critical support at 2,420.

Both indexes rebounded back above support on Friday's short covering but the charts are still bearish.

The Friday short squeeze was driven by a sharp rebound in the payroll numbers for June. June posted job gains of 222,000 compared to the previously reported 138,000 in May. The May number was revised up to 152,000 and the April number was revised up from 174,000 to 207,000. Including the revisions, that was an addition of 266,000 jobs. Analysts had expected 180,000. The average monthly gain for the quarter was 194,000 jobs.

The initial reaction in the futures market was negative because wage growth rose only 0.153% and May was revised lower from 0.2% to 0.1%but once traders realized that all the other metrics were positive, a positive bias appeared.

The unemployment rate rose from 4.3% to 4.4% because 361,000 people entered the labor force. The labor force participation rate also rose from 62.7% to 62.8%.

The private sector added 187,000 jobs and government added 35,000. Retailers added 8,000 jobs much to everyone's surprise. Healthcare added 37,000 jobs, leisure and hospitality 36,000, construction 16,000, temporary help 13,000, financial services 17,000, mining and energy 8,000, professional and business services 35,000.

The payroll report did not have any material impact on Fed policy. They are on autopilot for a new hike in December. While they have not hit their 2% inflation target, they are now focused on a bubble in bonds, equities and commercial real estate values. This is a Fed that is looking for an excuse to hike rates. The Fed released its Monetary Policy Report (PDF), which forms the basis for Janet Yellen's testimony to the House and Senate next week.

Currently there is an 86.3% chance of the Fed doing nothing in September. The recent economic reports, slowing inflation growth and sharp selloff in Treasuries have moved the expectations out to December for the next hike and even then the chances are barely over 50:50. There are some analysts that believe the Fed will be forced to wait until 2018 and that may be why the Fed sudden interest in asset bubbles as a reason to hike rates.

The Atlanta Fed's real time GDPnow forecast has fallen to 2.7% growth in Q2 but there is still a month of reports to go that cover the June period. I am expecting 2.5% when the initial GDP is released at the end of July.

The calendar for next week is headlined by multiple appearances by Janet Yellen. This is the week for her testimony to the House and Senate and that always provides an opportunity for a foot in mouth event. However, she has been very good in recent interactions and not say anything that will get her in trouble. She has learned her job well and is far more careful now than in her initial months in office.

On Thr/Fri we get the two price indexes, Producer and Consumer, with their update on inflation. Everything else is just filler including the seven Fed speeches. No Fed speaker is going to say anything that will contradict Yellen's testimony this week.

The Q2 earnings cycle kicks into high gear on Friday with Citigroup, JP Morgan Chase, Wells Fargo and PNC Financial. The banks are expected to do well and several are holding near their recent highs. Wells Fargo is the laggard because of their duplicate account scandal that continues to plague them.

Thomson Reuters is predicting 7.9% earnings growth in Q2. So far, 23 S&P companies have reported and 78.3% have beaten earnings expectations compared to the long-term average of 64%. Some 84% of companies have beaten revenue estimates and well above the average of 59%. For Q2 there have been 80 negative preannouncements compared to 43 positive announcements. Only 9 S&P companies will report earnings next week. The only Dow company to report this week is JPM. There will be 9 Dow reporters the following week.

There was very little stock news on Friday but Tesla (TSLA) was at the top. On Wednesday, Goldman Sachs (GS) predicted the stock would be cut in half and reiterated a sell rating. The analyst lowered the price target to $180 but that was only $10 lower than his prior sell target. The analyst said there was potential for downside as the Model 3 launch curve misses the company's production targets. At the same time, he said the demand for the Model S and Model X appeared to be hitting a plateau below an annual run rate of 100,000 units.

On Friday, Tesla saw its national car registrations decline nearly 10% through April, with California, its largest market, falling 24% according to IHS Markit. Since the May/June numbers are not yet available we do not know if April was a fluke or the start of a new trend. Elon Musk blamed a battery shortage for missing the production targets in June with deliveries of 22,000 cars compared to the 25,000 target. Shares have crashed 16% for the week and 19% from their $387 high the prior week.

Production on the Model 3 began on Friday and the first customers will get their cars by the end of the month. Tesla said in its latest earnings release that Model 3 sales could impact demand for the Model S and X. Elon Musk is trying to avoid that by reminding consumers, "Model S will always have more range, more acceleration, more power, more passenger cargo room, more displays (two), and more customization choices."

Long time Apple analyst Gene Munster said the economics of the Model 3 would catapult Tesla's addressable market in the U.S. from 1 million vehicles a year to more than 11 million. However, they will have to double production in 2017, 2018 and again in 2019 to capitalize on that larger market. Musk expects to make 10,000 Model 3s or more per month in 2018.

Tesla also announced on Friday that it won a contract to install the largest grid scale 100-Megawatt battery in South Australia. Tesla must install the battery within 100 days of the contract signing or the batteries are free. Musk said a failure to install on time would cost Tesla $50 million or more. The battery installation is large enough to power 30,000 homes if the main power were to fail. Prior to this installation the largest battery backup in the world was an 80-Megawatt installation in California, also powered by Tesla batteries. South Australia made a commitment to shut down its coal fired generation stations and rely on wind, solar and gas. This makes the grid unstable since the sun only shines half a day and the wind is unreliable. The battery backup system is supposed to fix that problem. In September, 1.7 million residents were without power, some for up to two-weeks because the renewable systems could not keep up with demand and collapsed.

Sears Holdings (SHLD) CEO Eddie Lampert is on his way to being the worst retail CEO ever. He announced on Friday they were closing another 43 stores, 8 Sears stores and 35 Kmarts. That is in addition to the 265 store closings already announced in 2017. Shares recovered some of their intraday losses on the announcement.

Well after the close on Friday, the company announced a new "Line of Credit Facility" for $500 million with a maturity of not more than 179 days. The facility will be secured by a second lien on inventory, receivables and related assets. The announcement of the loan facility said Lampert's ESL Investments was considering participating in the loan but was under no obligation to do so. This is known as a tease to incentivize lenders.

The company also said it sold and closed on more than $200 million in real estate transactions and reduced the balance of the April 2016 $500 million real estate loan to $347 million. The announcements were made at 5:30 after the extended hours session ended so there was no stock movement.

Snack maker Mondelez (MDLZ) said second quarter revenue growth would be reduced by 3% as a result of the recent wave of cyber attacks. The company said locations in different regions were experiencing technical problems as a result of the attacks. In some markets, revenue was permanently lost due to timing of holiday sales but some revenue will be recovered in Q3 when delayed shipments eventually arrive. Mondelez said shipping and invoicing was delayed during the last four days of the month. Those systems are now up and running again. They also expect to incur incremental one-time costs in both Q2 and Q3 as a result of the attacks. Shares declined on the news but recovered by the close.

Canaccord Genuity analyst Mike Walkley reiterated a buy rating on Apple with a target of $180 saying iPhone sales are doing just fine. He said a recent survey showed sales were tracking for 42 million in Q2 and 47 million in Q3.

In addition, a Raymond James survey showed that 14% of iPhone owners plan on buying Apple's Home Pod when it goes on sale in December. Another 12% are planning on buying the Apple Watch and that is the highest of any prior survey. There was also strong buying interest in Apple speakers and Beats headphones.

On Thursday, Qualcomm increased its legal attack against Apple and is trying to block importation of some iPhone models into the US. Analysts believe this is just another round of legal sparring and there is no danger to Apple. This is a negotiating tactic just like Apple's suit against Qualcomm and refusal to pay $1 billion in license fees. If Qualcomm were to get close to an import block sometime in 2018, Apple would pay the fees. Most analysts believe the companies will reach a settlement in mid 2018 and all the legal battles will end.

Apple is suing Qualcomm for unfair licensing practices. Qualcomm supplies one component to the iPhone but demands a percentage of the phone's total selling price rather than a fee on just the one component. Apple says this is taxing Apple's innovation rather than just the one component. Apple says they should not have to pay Qualcomm for technology breakthroughs that do not relate to the Qualcomm component. Qualcomm contends that without their component there would be no iPhone.

McDonald's (MCD) shares rose 2% after Cleveland Research said U.S. same store sales were stronger than expected and earnings are poised to beat estimates over the next 6-12 months with Q2 comps looking "solid." The analyst was bullish on the company's execution, new products, messaging, mobile expansion and product conviction.

Stores in my neighborhood have more activity and longer lines than I remember seeing in a long time. 12-18 months ago, they were empty more than busy and it was a quiet place to take the grandkids for an ice cream and 30 min of play time. Now the place is a zoo with lines and the play land is packed out. My wife said everyone she knows is going there for the $1 drinks when everyone else averages $2.50. That loss leader for McDonalds is scoring them a lot of food orders to go with the cheap drinks. Shares spiked to a new high on the analyst comments.

Blue Apron (APRN) has already fallen 22% from its IPO price and it has only been trading for six days. This is everyone's IPO nightmare. Initially they wanted to price it in the $15-$17 range. They eventually conceded and priced it at $10 and that is exactly where it closed on the first day of trading after an intraday high at $11. Some analysts blame the poor performance on the Amazon/Whole Foods announcement just prior to the IPO. There are worries Amazon's ability to deliver products fast and Whole Foods reputation for fresh produce and meat, could allow the combination to duplicate the Blue Apron business model very quickly.

Another challenge is the lack of customer retention by Blue Apron. With more than 20 prepackaged foods companies in their market, they have only been able to retain 23% of prior customers. About 72% of customers cancel the service within the first six months. I believe this is a fad business. It looks like a good idea in the advertisements but you still have to retrieve it from the porch and cook the food. Consumers today are very active and the type of consumer this appeals to is probably the most active. About the only hope Apron has today is a mass merger with multiple other companies to reduce the competition.

The silver market declined sharply on Friday after a flash crash in the commodity at 7:PM on Thursday evening. Silver is a commodity so the futures are open at all hours. At 7:PM volume is normally somewhere between 25-50 contracts in a five-minute period. On Thursday, somebody dropped a 6,000 contract sell order on the market and prices declined 11% in just a few seconds from $16 to $14.34. Those 6,000 contracts represented about $500 million in silver. The CME reviewed the action and adjusted the sales prices of everything below $15.45 to that price. That saved many traders a lot of money as stop losses were hit during that air pocket.

There was no shortage of conspiracy theorists. Why would anyone drop a 6,000 contract sell on the market at the most illiquid time of the day? Analysts determined it was not a fat finger trade because there was no corresponding buy orders to recover from their error. Several analysts pointed to some volatility in the Japanese bond market at exactly the same time. With the Bank of Japan buying all the bonds available at the exact same time there could have been some complicated relationship of bonds, yen and silver in some account that triggered the massive sale.

Regardless of the reason, the trade killed the sentiment for silver and the commodity lost -2.6% on Friday to close almost exactly on that CME price adjustment.

Oil prices had an eventful week. Prices rallied to just over $47 on Monday and then crashed back to $45 on Wednesday. Both the API and EIA reported large declines in inventories of -5.76 MB and -6.3 MB respectively. Cushing inventories fell to a multi-month low and product demand rose to a record 22.23 million barrels thanks to July 4th holiday driving. Prices should have risen. However, US production rose 88,000 bpd and the biggest weekly increase this year.

OPEC said it was mulling production caps on Libya and Nigeria. Prices rallied. Russia and Kazakhstan said they would reject future production cuts proposed by OPEC. Kazakhstan just started the 370,000 bpd Kashagan field that will add to the glut. Russia is starving for cash so their compliance with the 300,000 bpd cut they initially agreed to is very low at this point and will probably be nonexistent in the near future. Prices declined.

Once the summer demand cycle is over and that is about six-weeks from now, the outlook for oil prices will fade. Once a few countries begin dropping compliance with the OPEC cuts, there could be a rush to market by everyone else.

In the Non-OPEC cuts, Russia and Mexico were the only main players. If Russia drops compliance completely, you can bet the rest will be heading to the exits.

Bloomberg Chart

Now that the holiday is over the activation of rigs resumed with 7 new oil rigs and 5 new gas rigs. The one-week decline was holiday related as I wrote last week.



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Dip buyers have had a tough year because there have not been any material dips. According to JP Morgan, the 3% intra-year decline has been the smallest since 1980 and in a tie with 1995. The long-term average is a 14.1% decline every year. While we have seen some increased volatility in recent weeks, it pales in relation to "normal" volatility. This makes the markets hard to predict because there are no normal peaks and valleys. Every 5-10 day move higher is met with expectations for a decent correction but instead the indexes move sideways with maybe a day or two of declines then additional sideways consolidation. Eventually, there will be a real correction and it will be very painful. In the Random Thoughts below, I have comments from Bank of America on the coming "Humpty-Dumpty" crash. This is just their opinion, not a guarantee of a future event.

The S&P closed well under critical support at 2,420 on Thursday but the minor bout of short covering on Friday lifted it back over that level. The pattern is still bearish with multiple resistance levels that need to be broken before it will turn bullish again.

The Dow continues to chop around just below its recent highs and prior support at 21,414. The intraday dip to 21,200 was brief as was the spike to 21,562. There is tremendous indecision and the Dow has been posting alternating gains and losses for a couple weeks now. The Dow chart has retained its bullish bias but it is looking "toppy" because of all the volatility. That is a symptom of tops and bottoms. Only one Dow component reporting this week and that is JPM on Friday.

Supporting the Dow is the Dow Transports. The index closed at a new high on Friday and the Dow Industrials are not likely to decline as long as the transports are positive. The breakout is being powered by the airlines, railroads and low oil prices

The Nasdaq Composite closed under critical support at 6,100 on Thursday but the Friday short squeeze lifted it back into the recent congestion. There are multiple levels of resistance that would have to be broken for the chart to turn bullish again. Despite Friday's rebound, the chart is still bearish until proven otherwise. At Thursday's lows, the index was down -222 points from the 6,303 lower high on June 26th. The pattern of lower highs and lower lows needs to be broken to repair sentiment.

The small caps are outperforming the big caps for a change with the Russell 2000 only about 12 points from a new high. Resistance at 1,427 is strong as is support at 1,400. The strength in the financials is supporting the Russell.

Last week was full of external events to push the markets around. We had the low holiday volume and strong inflows of end of quarter retirement money hitting the market. Funds were repositioning for the coming earnings cycle and the two weakest months of the year in August/September. The earnings cycle begins this week with the big banks reporting on Friday. Funds should be positioned to capture any earnings gains. The holiday volatility should be over but the Yellen speech/testimony is always a hurdle. As long as the Nasdaq is over 6,100 and the S&P over 2,420 I would be in buy the dip mode. If we have new closes under those levels I would move to flat or short.

Random Thoughts

Very little movement in the sentiment survey last week. Just over 70% of investors still do not believe the market is going higher. On a contrarian basis that is good because those unbelievers will be chasing prices if we do move to new highs.

Bank of America's Michael Hartnett said last week that "central banks have exacerbated inequality via Wall St inflation and Main St deflation" and now they are looking for a way to painlessly undo their error. He said, "There are only two ways to fix inequality. You can make the poor richer or you can make the rich poorer." He believes the "Fed/ECB are now tightening to make Wall St poorer" because it is "no longer politically acceptable to stoke the Wall St bubble."

One year ago, the 30-year Treasury yield hit an all time low o 2.14%. The Swiss government could have issued a 50-year bond at a negative yield. Over the last year, yields have improved slightly but the global equity markets have gained $10 trillion to $76.3 trillion. Global debt has risen $50 trillion to $217 trillion since the financial crisis. Unfortunately, nearly one-third of the global government debt is held by central banks. They need to unwind this massive stimulus but inflation is not cooperating.

They have begun tightening in the case of the Fed and talking about tightening in the case of the ECB but rates are not rising materially. Beware the next taper tantrum. The Fed has already warned they are going to begin tapering their ongoing QE purchases. In the past, the tapering process did not go well. Without rising inflation, it may not go well this time either unless they proceed very slowly.

Hartnett believes the Fed's various operations to hike rates in a zero inflation economy will not go over well in the equity market. He is expecting a "Humpty-Dumpty" fall in the market over the next six months, most likely in September/October. He is expecting a global financial event as a result of the Fed/ECB trying to raise rates using the equity market valuations as an excuse.

Hartnett received a significant amount of criticism for this call but there are other believers in this scenario.

Ray Dalio from Bridgewater, warned the Fed QE party is ending. The days of easy money are over. "Investors should keep on dancing but move closer to the exits."

Here is a reason Sears is having so much trouble maintaining positive retail growth. The malls are dying. There is even a website called DeadMalls.com that has a running commentary on the various dying malls around the country. The malls are turning into ghost towns and you cannot sell any products if there are no customers. This is affecting the real estate value of Sears properties as well.

The Yellowstone super volcano is making noise. Over the last two weeks, there have been over 1,100 earthquakes in and around the Yellowstone caldera. Quakes are spreading out from Yellowstone and there was a 5.8 earthquake in western Montana on Thursday. This was the strongest quake in more than 20 years. Prior to that, the largest was a 7.2 magnitude earthquake in West Yellowstone 58 years ago.

The last time Yellowstone erupted was 640,000 years ago. The caldera is 34 miles long by 45 miles wide and dwarfs any other active volcano on the planet. If Yellowstone actually erupted again, it could kill thousands of people in the USA. Ash depth could be measured in feet hundreds of miles from Yellowstone. Farmland would be buried, transportation halted and civilization as we know it severely disrupted in the 8-10 surrounding states and as far away as Little Rock, Dallas, Chicago and St Louis.

The volcano has erupted at least three times and emitted more than 250 cubic miles of magma. The last time, 640,000 years ago, it was 2,500 times more destructive than the Mt Saint Helens eruption in 1980. Recent technological improvements has allowed researchers to map the current magma pocket. Scientists found that the pocket under the caldera is 2.5 time larger than previously thought and 20 miles by 55 miles wide and 6 miles deep. That is very close to the size of the pocket when the volcano last erupted.

Scientists do not believe the volcano is about to erupt despite the upsurge in earthquakes. They believe they can map the magma flows and predict when an eruption will occur. When the Bardarbunga volcano in Iceland erupted in 2014 they were able to track those flows for weeks in advance and there was plenty of warning before the volcano finally erupted. If they did start to see magma flows rising, there would be widespread alarms and time to prepare. Stay tuned.

Source 1

Source 2

Ash fall projections by USGS


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


Warren Buffet's primary rules on investing:

1. Don't lose money.
2. Refer to rule number 1.

Index Wrap

Potential Topping Pattern

by Jim Brown

Click here to email Jim Brown
Increased volatility and wider ranges can be a symptom of a topping or bottoming process.

The increased volatility over the last three weeks could be a sign the market is topping out. The Dow has traded between 21,200 and 21,560 with alternating gains and losses for most of the last three weeks. The swings have expanded their daily range to triple digits on the Dow.

The index has been troubled by a pause in several previous high flyers. McDonalds helped lift the Dow on Friday with a $3.18 gain that added roughly 24 Dow points. When the ranges broaden at market tops, it represents indecision by market participants. Shorts increase but they get squeezed easily and the index vacillates in both directions.

In the Dow chart below there is no direction other than sideways. The index has only gained 30 points over the last three weeks after the 21,384 close on Friday June 16th. This is not a bullish chart. Consolidation normally does not produce wide ranges over a prolonged period. Consolidation is marked by higher lows or at least tighter ranges as buyers and sellers move towards each other rather than a broader range.

I pointed out last week that the MACD was already negative on the Dow and it has not improved. The indicators have worsened over the last week despite the index trading roughly at the same level. The lack of direction has not turned the chart bearish but that danger is increasing.

The S&P indicators have accelerated to the downside with the MACD expanding its bearish signal. The index closed under 2,420 on Thursday but rebounded back above that level on Friday in the payroll short squeeze. This chart is bearish. That does not mean it cannot reverse to the upside but if we trade what we see rather than what we would like to see then the trade for this week would be bearish.

The Nasdaq Composite closed below support at 6,100 on Thursday but rebounded above that level on Friday's short squeeze. However, the rebound failed to retest the resistance at 6,175. This chart is also bearish and the MACD is in full retreat. The potential is strong for a break below the 6,100 level again and 6,000 would be the next target.

The FAANG stocks have weakened and although they are volatile, the prior momentum gains have disappeared.

Another challenge for the S&P/Nasdaq indexes is the impending average cross. For longer-term signals I like to use the 19 and 39 exponential moving averages. That is roughly 4/8 weeks of trading and once the averages cross it can be several weeks before they can cross again. The cross should occur this week. When the 19 (blue) crosses below the 39 (red) it is a bearish signal.

The Russell has been trading sideways for seven months but it is only 12 points from a new high. The gains in the financial sector are providing support. The indicators are almost useless on the Russell.

The percentage of Nasdaq stocks trading over their 50-day average has fallen to 47% and the lowest level since November. This is a good illustration of how weak the Nasdaq has become even though the top 20 stocks are still relatively close to their highs.

The same chart for the S&P shows an almost identical picture even though the percentage has only declined to 60.4%. The top 20 S&P stocks are holding the S&P near the highs while the troops are falling back.

The semiconductor sector improved slightly and that helped to blunt the decline on the Nasdaq.

I would continue to be cautious next week. In theory, the holiday volatility should be over BUT there are an increasing number of warnings from high profile analysts that suggest a summer correction could be just around the corner. However, the more warnings we get the less likely we are to actually see that correction. August and September are the worst two months of the year for the market and once the first couple weeks of earnings are over, we need to be ready for a potential decline.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Business Plan Not Working

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes restructuring plans do not pan out. Campbell Soup added a fresh foods division but it is falling flat.


No New Bullish Plays


CPB - Campbell Soup - Company Profile

Campbell Soup Company, together with its subsidiaries, manufactures and markets food and beverage products. It operates through three segments: Americas Simple Meals and Beverages; Global Biscuits and Snacks; and Campbell Fresh. The Americas Simple Meals and Beverages segment engages in the retail and food service of Campbell's condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; Pace Mexican sauces; Campbell's gravies, pastas, beans, and dinner sauces; Swanson canned poultry; Plum food and snacks; V8 juices and beverages; and Campbell's tomato juices. The Global Biscuits and Snacks segment provides Pepperidge Farm cookies, crackers, bakery, and frozen products in the United States retail; and Arnott's biscuits in Australia and the Asia Pacific; and Kelsen cookies worldwide, as well as meals and shelf-stable beverages in Australia and the Asia Pacific. The Campbell Fresh segment provides Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages, and refrigerated salad dressings; and Garden Fresh Gourmet salsa, hummus, dips, and tortilla chips, as well as refrigerated soups. The company sells its products through retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores, and dollar stores, as well as other retail, commercial, and non-commercial establishments; and independent contractor distributors. Campbell Soup Company was founded in 1869. Company description from FinViz.com.

Campbell added a fresh foods division but the business is failing. Sales fell -8% in Q2 to $260 million. The company warned that sales would decline for the rest of 2017. The CEO said, "Let's be real, I am not satisfied with our overall sales performance in the quarter. Our performance over the last year in fresh food has been disappointing." Total sales declined to $2.17 billion and missed estimates for $2.22 billion. The company has spent almost $2 billion since 2012 to build the Fresh Division and it is still declining.

The company announced on Friday it was buying Pacific Foods of Oregon, an organic foods distributor, for $700 million. Pacific only produced revenue of $218 million in 2016. This is actually a good move for Campbell but they paid too much for Pacific. Their earlier acquisition for the Fresh Division was Bolthouse, a producer of carrots, juices and salad dressings, for $1.55 billion.

Campbell's is struggling because consumers are buying less packaged foods and more fresh and organic foods. They are buying less packaged food because they are moving to healthier choices. The CEO's admission that sales would decline for the rest of 2017, will likely be followed by another one that sales will decline in 2018. It is a tough retail market and Amazon's acquisition of Whole Foods is going to make it even harder.

Earnings August 18th.

Shares have fallen below support at $52.50 and could continue significantly lower.

Buy Aug $50 put, currently 70 cents. No initial stop loss.

In Play Updates and Reviews

Neutral Close

by Jim Brown

Click here to email Jim Brown

Editors Note:

The holiday week ended with decent gains but it only brought the indexes back to neutral. The major indexes rebounded back over critical support levels but all remain under resistance. The rebound on the payroll numbers was muted and mostly accomplished at the open, which suggests short covering.

The true test will be the direction on Monday. The first week of the quarter is over and the retirement funds have been put to work. Next week will require a conscious decision by investors to either buy or sell stocks ahead of earnings.

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

AAPL - Apple Inc - Company Profile


Canaccord Genuity said it was seeing "steady" iPhone 7 sales ahead of the company's earnings on August 1st. The analyst said the pace of sales is consistent with prior estimates for 42 million in Q2 and 47 million in Q3. They have a $180 price target. A Raymond James analyst said their survey found strong consumer interest in the watch, and Apple speakers including the Beats wireless speakers and the upcoming HomePod smart speaker. The survey found that 14% of iPhone owners plan to buy the HomePod when it goes on sale in December. They also found that 12% of consumers plan to buy the Apple Watch, the highest level since the watch was announced.

Original Trade Description: June 28th.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. Company description from FinViz.com.

This play is not going to take a lot of explanation. Shares rallied to $156 in May and then stalled at that level as various rumors continued to circulate over a potential delay in shipping the iPhone 8. Analysts routinely debated the various pros and cons of the Apple outlook. Shares fell to $144 and they have been trading at $145 for the last three weeks. On Tuesday's decline the stop lost $2, which was immediately recovered on Wednesday.

Apple is expected to report earnings on August 1st. The stocks always ramps up into earnings. Since Apple is expected to announce multiple iPhone models in September, a shipment delay on the big iPhone 8 will not be a disaster. We will be out of the position before the August earnings so that will not impact us either way.

The plan is to capture the ramp into the earnings and then exit. Having Apple dormant at $145 for the last three weeks shows there is plenty of support under that level and a rebound could start at any time. Fortunately, because of the dormancy, the options premiums have shrunk.

Apple is a sleeping giant. When it awakes, there could be plenty of price chasing.

Update 7/5/17: Nomura said iPhone 7 demand was weak but it was ok because of the pent up demand for the iPhone 8, expected out in a couple months. The analyst said the model 8 would provide sufficient upside in both volume and price to more than compensate for the current weak sales in the model 7.

Update 7/6/17: Qualcomm is seeking to ban imports of some iPhones in their long running patent dispute with Apple. The news was announced after the bell and shares of Apple declined about 10 cents. This will not impact any current phones or the iPhone 8 because the case will not even begin to be heard until spring of 2018 or later. The two companies will eventually settle out of court. This is just legal sparring.

Position 6/29/17:

Long August $150 call @ $3.00, see portfolio graphic for stop loss.

BABA - Alibaba - Company Profile


No specific news. After two days of extreme volatility, BABA shares were dormant with only a minor gain.

Original Trade Description: June 10th.

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. Company description from FinViz.com

Alibaba is the poor investor's Amazon. With shares at $135, the options are at least reasonable but not cheap. Alibaba is growing as fast or faster than Amazon and tries to copy everything Amazon does.

When the company reported earnings for the last quarter at 63 cents, they missed estimates for 68 cents. Revenue of $5.6 billion easily beat estimates for $5.2 billion. Other than the earnings miss it was a solid quarter with ecommerce up 47% and cloud computing up 102%. Digital media growth was up 234%. Mobile MAUs rose from 493 to 507 million. That is important because 90% of China's ecommerce occurs on a mobile device.

The company announced plans to buy back $6 billion in stock over a two-year period.

Earnings August 18th.

Shares dipped on the earnings miss then spiked on the guidance to $125.50, which was a new high. After a little more than two weeks of post earnings consolidation, shares returned to that $125.50 level and closed at a new high.

There was an analyst day last week and that kicked the stock up to another level with a $10 gain. The company guided for 45% to 49% revenue growth in this year and analysts were only expecting 37%. MKM partners raised the price target to $177. Pacific Crest raised their price target to $160 from $137. Needham raised their target to $155. The Benchmark Company is targeting $175.

Shares declined on Tuesday on no news. With the stock overbought after the analyst meeting we could be seeing some simple profit taking. I am going to put an entry trigger on the position. If shares continue lower I will revise the entry.

Update 6/20/17: Alibaba is hosting a forum for 3,000 entrepreneurs in Detroit to explain how easy it is for them to begin selling products on Alibaba's websites. CEO Jack Ma said in another interview he expects to employ 1 million workers in the USA.

Update 6/27/17: JP Morgan initiated coverage with an overweight rating and $190 price target. Barclays said it valued Alibaba in a sum of the parts method at $200 but their price target for the parent is $175 with an overweight rating.

Update 6/29/17: Mott Capital said Alibaba could be worth $210 on a fundamental basis. A "source" in China said Alibaba will launch a device similar to Amazon's Echo but Chinese speaking, next week. That should give the stock a decent pop.

Update 7/5/17: Alibaba announced the Alexa clone called Genie X1, which will be available to the first 1,000 people for a one-month trial. The cost will be $73 during this live test and it only speaks mandarin.

Position 6/19/17 with a BABA trade at $139.50

Long Aug $145 call @ $5.95, see portfolio graphic for stop loss.
Short Aug $155 call @ $2.92, see portfolio graphic for stop loss.
Net debit $3.03.

PYPL - PayPal - Company Profile


No specific news. Shares posted a minor gain after a volatile week.

Original Trade Description: June 21st.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

PayPal started out as a payment system for Ebay. Since then they have moved into dozens of areas including credit cards, peer to peer payments. Instead of being locked into one business model, they are rapidly expanding to multiple business models. Recently they partnered with MasterCard and Visa to have their digital payments processed on their systems. The company is expanding the scope of its Venmo payment platform, which handled $6.8 billion in Q1, up 114%. This peer to peer app will now allow you to pay for goods at any merchant that accepts the app, just like Apple pay.

In Q1 PayPal revenue rose 17% to $2.975 million and earnings rose 5%. Total accounts rose 23% to 203 million. As a comparison, Mastercard's revenue was less at $2.7 billion. That is a shocker to most people.

With their Q1 earnings, PayPal committed to buy back $5 billion in stock.

Expected earnings July 26th.

Shares dipped with the Nasdaq tech crash but are recovering. Their recent high was $55 and shares closed at $53.50 today. Options are inexpensive.

Update 7/5/17: Payment processor, Vantiv, offered $10 billion to buy London based Worldpay. That immediately boosted Paypal and Square on thoughts there may be other combinations in the future. Paypal has a market cap of $66 billion and Square $5 billion so Paypal is not likely a potential target but they could benefit from acquiring a smaller player.

Position 6/22/17:

Long August $55 call @ $1.58, see portfolio graphic for stop loss.

RH - RH Inc - Company Profile


No specific news. Profit taking finally caught up with RH with shares down -$5 or -7.5% on Friday. The true test will be watching to see what happens on Monday. After weeks of massive gains, is $5 enough to attract buyers again?

Original Trade Description: June 26th.

RH, together with its subsidiaries, operates as a retailer in the home furnishings market. The company offers products in various categories, including furniture, lighting, textiles, bathware, decor, outdoor and garden, tableware, and child and teen furnishings. It provides its products through its retail galleries and Source Books, as well as online through rh.com, rhmodern.com, restorationhardware.com, rhbabyandchild.com, rhteen.com, and waterworks.com Websites. As of January 28, 2017, the company operated 85 retail galleries, including 50 legacy galleries, 6 larger format design galleries, 8 next generation design galleries, 1 RH modern gallery, and 5 RH baby and child galleries in the United States and Canada; 15 Waterworks showrooms in the United States and the United Kingdom; and 28 outlet stores. The company was formerly known as Restoration Hardware Holdings, Inc. and changed its name to RH in January 2017. Company description from FinViz.com

RH reported earnings of 5 cents that beat estimates for 4 cents. Revenue of $562.1 million beat estimates for $560.4 million. However, they guided for Q2 earnings of 38-43 cents and analysts were expecting 53-75 cents. That is not a misprint.

The company said it was ditching its prior merchandising model and switching to a membership model in order to make the company Amazon proof and enhance the customer experience. They are moving away from the highly promotional retail experience with constant sales and discounts and moving to a membership model where the focus will be on the customer experience. "Members" will pay $100 a year for the ability to shop in a high quality store where they will find only high quality merchandise.

The Costco CEO once told Jeff Bezos at an event that once people buy a membership they no longer price shop. Bezos went on to create Amazon Prime where customers pay $99 a year for a membership and the rest is history. RH is trying to duplicate that experience.

Shares crashed 26% to $42 on the guidance but the rebound has been amazing. Apparently, investors like the concept and the idea of a "Costco" model but in high quality products.

Earnings August 31st.

Shares closed at a 52-week high on Monday as shorts are being forced to cover. There are a lot of shorts! The surge over the May highs should be a trigger for an entirely new round of short covering.

Options are expensive because of the rapid gain since they changed the retail model. I am using September to retain that earnings expectation premium. We can buy time but we do not have to use it.

Position 6/27/17:

Long Sep $65 call @ $5.20, see portfolio graphic for stop loss.
Short Sep $75 call @ $1.26, see portfolio graphic for stop loss.
Net debit $3.94.

BEARISH Play Updates (Alpha by Symbol)

NKE - Nike Inc - Company Profile


No specific news. Minor rebound which was probably short covering ahead of the weekend.

Original Trade Description: July 5th.

NIKE, Inc., together with its subsidiaries, 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 reported earnings last week of 60 cents that beat estimates for 50 cents. Revenue of $8.7 billion narrowly beat estimates for $8.6 billion. The earnings spike was due mostly to a lower tax rate.

The stock spiked $5 on short covering after they announced they were turning to Amazon to help them sell shoes and apparel. Some analysts believe this will lead to further discounting because Amazon is a cutthroat market. We have already seen a weak market for high dollar Nike models with sales at 50% off. Moving to Amazon will cause additional discounting in those high dollar models. They also believe it will lead to lower orders from distributors and cause them even more grief in the U.S. where sales were flat. The U.S. is Nike's biggest market where they face less competition from brands like Adidas, which is rapidly accelerating.

Futures orders were reportedly down -10% indicating weak orders from distributors. As Nike shifts more from wholesale sales to the direct to retail market, they are going to face an entirely different set of problems. They announced they were laying off 1,400 employees as part of their consumer direct offense strategy.

Expected earnings Sept 28th.

The earnings are over and the post earnings depression phase should be starting. With everyone else starting their earnings next week, traders will be leaving Nike to find a stock with positive momentum.

Position 7/6/17:

Long Aug $57.50 put @ $1.51, see portfolio graphic for stop loss.

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