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Testy Tuesday – Dropping Below the Lines

Wheeeee – that was fun! 

It only took a day to wipe out the rest of October's gains but we recovered a bit off the weak bounce line (of the 15% line) but that was sure to lend support so now we calculate the bounce lines off the bounce line and we fall from 3,562.50 (the 25% line) to 3,360 (the weak bounce line) and let's call that an even 200 points which makes the bounces 20% of that so 3,400 on the dot is the short-term weak bounce and 3,440 is the strong bounce but 3,410 is the 400-Hour (2 month) Moving Average on this short-term chart and that's about a month – so we'll have to respect that line followed by our 20% line at 3,420 – that's going to make it a tough slog to get back through that zone of resistance.  

Keep in mind TA is totally BS, our 5% Rule™ is not TA – it's just math.  Math that is derived from the same formulas that drive the electronic trading that is 90% of all trading these days – so it works very well.  If you want to apply TA you shouldn't look at a chart's past but consider it's future.  We're significantly below the 100-hour (2-week) moving average and, since it's a fast-moving average, it's going to get pulled down quickly and that's going to turn that blue support line into a downtrending line of resistance and, since we are as much below it as we were above it at the moment – then we can imagine the downslope will match the upslope but, for that to happen, we'd have to be having days below the 15% line again so – if we can't pop back over that red 400-hour moving average this week, which also "happens" to be our 20% line heading into the election, then DOOM!!!! is a ahead for the market.  

Of course DOOM!!!! is a relative term as we're miles up from the bottom but not far off the 3,200 we started the year at.  Earnings season has not been kind so far, as we've fallen almost 10% from our too highs since companies began reporting in earest and it hasn't been the data – as we haven't had too much of it – it's the earnings – and the virus.  See, I'm already bored warning you about the virus and I've moved on…

One stock that reported yesterday that caught my eye was Pet Med Express (PETS) the on-line pharmacy for dogs and cats.  With people sitting home all day with their animal friends, they tend to pay more attention to them when they are sick and spend more money on them and earnings were a huge beat but, because the market sucked – they got sold off anyway.  

While not terribly sexy at 19x earnings, PETS is significantly cheap compared to the 30x average in the On-Line Retail space and has been growing a lovely 8% a year for the last 5 years and that's doubled in the past year AND they pay a nice $1.12 (3.83%) dividend.  That makes them a great candidate for our Dividend Portfolio and here's what we'll do:

  • Buy 1,000 shares of PETS at $29.23 ($29,230)
  • Sell 10 2023 PETS $22.50 puts for $6.60 ($6,600) 
  • Sell 10 2023 PETS $30 calls for $9 ($9,000) 

By selling the puts, we're promising to double down at net $15.90 and that's a price we'd LOVE to own PETS at so it's a very good use of $1,516 in ordinary margin.  We're only laying out $13,630, which is $13.63/share and, if we are assigned 1,000 more at $22.50 ($22,500), then we'd be in 2,000 shares for $36,130 or $18.065/share, which is 38% below the current price.  That's our WORST case!

On the upside, if PETS can struggle back over $30 in the next two years, we'll get $30,000 back for a net profit of $16,370 (120%) PLUS we get $2,240 in dividends for another 16.4% of our cash outlay while we wait.   Aren't options fun?

In our Earnings Portfolio, we can take advantage of the high VIX and the volatile stock to do the following:

  • Sell 10 PETS 2023 $25 puts for $9 ($9,000) 
  • Buy 20 PETS 2023 $25 calls at $10.62 ($21,240)
  • Sell 20 PETS 2023 $35 calls for $7.50 ($15,000) 

We get PAID to take this spread as our net is a credit of $2,760 which means, even if we are assigned at $25, our net cost would be just $22.40 per share, which is a better entry than our dividend portfolio in their first round.  That's our WORST case – owning 1,000 shares of PETS at $22.40 ($22,400), which is 23.3% below the current price.  If all goes well, however, we'll make $20,000 on the spread plus the $2,760 in our pocket so $22,760 (824%) upside potential on this one.  

Most people consider optons a less conservative way to play but our upside at $30 is $12,760, not much less than our Dividend play – yet we're using no cash (a credit, in fact) and about the same margin yet our assignment risk is 50% lower.  So this is 1/2 of that position (potentially) making $12,760 at the same strike ($30) the dividend play makes $18,620 so about 66% of the profit at the same $30 but with the upside potential of $22,760, which is over 20% more and still 1/2 the risk and 1/2 the allocation – that leves us open to more diversification.  

As I mentioned, I'm bored warning people about the virus, the Global Economy and such so here's the headlines of the moment:

 


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  1. I am starting to really worry that the fix is in for the election now – looking at the SCOTUS ruling about the Wisconsin mail in ballots, it seems that they are on a path to disanfranchise lots of people because the post office won't be able to deliver ballots on time. After they spent months slowing down mail… The nightmare scenario is Trump declares he won next Tuesday night and ask the courts to halt vote counting and SCOTUS agrees with him. We are not done with him yet!


  2. Good Morning.


  3. PETS Nice on paper but I think we need to have the PUT recalculated. From 9 down to 6.50. I put the PUT on GTC.


  4. stjeanluc yes thats the scariest thing currently. cnn just said cavanagh was quoted as saying the danger of allowing mail in ballots to be counted after election day is that they could flip the result. Sounds like republicans have no intention of allowing real voting results to occur.


  5. Nobody seems to think that republican voters can be affected by these rulings as well….


  6. PETS / YODI – I'm with you….  the price target seems a bit stretched…. given where the market is and how much this has already gained this year…. I'm waiting for a pull back… 30 target is a bit too high for me


  7. batman, PETS I find the call play OK but as I say always You cannot expect to receive a good premium for the put sale when the stock is up and by servers, if the stock is down you buy the call and here you sell the put.


  8. Not very impressive action so far.

    Trump/StJ – Very often people think they will vote a dictator out of power early in their rule or that the courts will reign them in – doesn't always work that way.  Putin became Prime Minister in 1999 with 51.8% of the vote but in 2008 he got 87.1% of the vote and in 2012 he got 100% of the vote – very popular!  

    2012 election. Blue indicates a win by Putin.

    Here's the 2020 projection from Borepatch, who also remind us: "Remember that the people that hid Anne Frank were breaking the law and the people that took her to the camps were enforcing it."

    Borepatch: Election 2020 prediction: Trump 522, Whoever 16

    PETS/Yodi – I was guessing based on pre-market.  

    Now that we're running, $6.60 was still the last sale on the $22.50 puts, but that was yesterday and the $25 puts went for $6.82 this morning.  PETS went up, unfortunately.  So the Dividend Portfolio Trade is on but the Earning Portfolio Trade should be just the bull call spread for now as that's $3 and we can always add a put later but $3 to make $10 with no margin is a nice trade on it's own.

    Cavanaugh/Tommy – Yet if the "result" is Biden on Election day I bet the GOP will be counting ballots for the next couple of years.  

    • Susquehanna analyst Christopher Rolland says AMD's (AMD -2.2%) $35B purchase of specialty semiconductor company Xilinx (XLNX +10.5%) "makes sense" since the deal complements AMD's existing CPU platform and expands its reach into data centers.
    • Rolland says AMD could "gain more equal footing with Intel (INTC -2.1%) and Nvidia (NVDA +1.8%) " as XLNX's field programmable gate array capabilities could accelerate the growth of EPYC processors, which are already "on the precipice of a breakout."
    • The analyst notes that the deal isn't expected to close until the end of CY21 but expects the standard amount of regulatory hurdles for a deal of this size.
    • Rolland downgrades Xilinx from Positive to Neutral and lowers the price target from $140 to the takeover price of $130.
    • Related: In 2015, AMD rival Intel purchased Xilinx's largest FPGA competitor, Altera, for $16.7B.
    • AMD shares are currently down 2.2%, a natural drop for a purchaser, while Xilinx is up 10.6%.
    • Previously: AMD reports record Q3 revenue, raises full-year view on PC, gaming strength (Oct. 27 2020)
    • Previously: Advanced Micro Devices to acquire Xilinx in $35B all-stock deal (Oct. 27 2020)
    • Expect big bank capital requirements to tighten if Joe Biden wins the presidency, but don't expect a radical departure from the existing regime, writes Jaret Selberg of Cowen Washington Research Group.
    • Specifically, he expects the adoption of a countercyclical capital buffer that would require an extra 100 to 200 basis points of capital, which would be "turned on when the economy is growing and turned off during downturns," Selberg writes in a note. "It would differ from the current CCyB as it would not be tied to whether systemic risk is rising."
    • Also sees tougher CCAR stress tests and changes that would boost required capital, such as requiring the prefunding of eight quarters of expected dividends.
    • Changes, though, wouldn't be immediate as the terms of Fed Vice Chairman Randal Quarles (October 2021) and Chairman Jerome Powell (February 2022) would have to expire before such proposals could advance.
    • If President Trump wins re-election, "we do not expect any increases in big bank capital levels. Instead, we expect the Federal Reserve to complete the transition to the Stress Capital Buffer as the way to determine what level of distributions are permitted."
    • The Fed could still adopt the countercyclical capital buffer under a second Trump term, but that would likely be offset by capital reductions elsewhere, Selberg said
    • "Let's all have a little patience," says Pfizer (NYSE:PFE) CEO Albert Bourla, speaking on the earnings conference call. It's an interesting choice of words considering Bourla made the press rounds one month ago kind of setting expectations for some news on the company's Covid-19 vaccine trial by the end of October.
    • "I wish an analyst would bring this up," tweets Brad Loncar. "Clinical trial guidance slippage is almost always meaningful."
    • Bourla further notes the data monitoring committee has not yet been unblinded to data, and that any announcement would come about a week after that group looks at it – that likely means we're into November before getting any news. He remains "cautiously optimistic" that the vaccine will work.
    • See page seven of the earnings call presentation. More than 42K participants have been enrolled in the trial, with nearly 36K having received a 2nd dose as of October 26.
    • Shares are down 1.35%.
    • Previously: Pfizer Vyndaqel sales +41%; 2020 guidance ranges tightened (Oct. 27)
    • Baxter International (BAX +1.8%) announces observational data from the OxirisNet Registry that support the rationale for using its Oxiris filter set for extracorporeal (outside of the body) blood purification (EBP) in severely ill COVID-19 patients.
    • The results, recently published in the journal Critical Care, showed significant reductions in levels of interleukin-6 (IL-6), a pro-inflammatory protein, improvements in indicators of organ dysfunction and reductions in expected intensive care unit (ICU) mortality rate compared to historical control.
    • The company says the 37-subject study was not designed to demonstrate a causal relationship between EBP treatment with Oxiris and these outcomes, but it does support the feasibility of its use with these patients.

    • Greenlight Capital's David Einhorn warns about a bubble in technology and also the "perilous" political climate in the U.S. in his Q3 letter.
    • "As for the question of sanity, we are now in the midst of an enormous tech bubble," Einhorn writes. "We prematurely identified what we thought was a bubble in early 2016. Part of our thinking at the time was that the height of the 1999-2000 bubble was a once-in-a-career experience and that investors would not repeat that level of insanity. Clearly, we were mistaken. Four years later, there is a consensus that we are in a bubble."
    • "All the signs of a bubble are there," he says, including an "IPO mania", a huge market concentration in a few stocks, a second tier of obscure stocks with S&P 500-type market caps, outsize reaction to stock splits and "a parabolic ascent toward a top".
    • On the political front Einhorn warns that the center is collapsing and these times "may rank among the most perilous times, absent war, in modern American history."
    • Einhorn is scheduled to speak at the Robin Hood Investors Conference after the bell today.
    • IMAX (IMAX -0.5%) and TOHO (OTC:TKCOFannounced a slate agreement to release five current and forthcoming TOHO films in IMAX theatres, expanding their longstanding partnership across distribution and exhibition.
    • The new agreement marks IMAX's biggest slate deal to date with a film studio outside Hollywood. The term of the agreement spans at least through 2021 and includes three forthcoming films to be announced.
    • In 2019, IMAX and TOHO partnered on the animated blockbuster "Weathering With You," which went on to become the highest grossing Japanese language film in IMAX, earning $7.7M. Additionally, IMAX and TOHO partnered on the 2016 release of "Shin-Godzilla" (2016), which saw $5.7M.

    • October Consumer Confidence100.9 vs. 102.0 consensus, 101.3 prior (revised).
    • Present Situation confidence up to 104.6 from 98.9.
    • Expectations down to 98.4 from 102.9.
    • "Consumers, however, are now less optimistic about the short-term outlook than a month ago. The percentage of consumers expecting business conditions will improve over the next six months decreased slightly from 36.7 percent to 36.3 percent, while those expecting business conditions will worsen increased from 15.8 percent to 17.0 percent," said Lynn Franco, Senior Director of Economic Indicators.
    • Tiffany (NYSE:TIF) is up 1.66% after CNBC's David Faber reports the company and LVMH (OTCPK:LVMHF) are in indirect talks over a reaching a deal.
    • Faber speculates that Tiffany and LVMH could be considering a slightly lower price for the deal or moving toward a tender offer. Legal squabbling between the two companies is still going on.
    • Earlier today, the European Union cleared the Tiffany-LVMH deal to move forward, which was the final regulatory clearance that was needed.
    • Tiffany pre-announced August and September results a few weeks ago.
    • SunPower (SPWR -4.4%), SolarEdge Technologies (SEDG -0.7%), JinkoSolar (JKS -0.6%) and Sunrun (RUN -0.6%) open lower after are all downgraded to Sell from Neutral at UBS following strong recent runs higher ahead of the U.S. presidential election.
    • "Even a Blue Wave election would result in less-than-priced-in policy support over the next year," UBS analyst Jon Windham writes. "We see asymmetric downside risk as we think the pace and scale of policy implementation is likely to disappoint."
    • But Windham raises his price targets on the companies, anticipating long-lasting upward demand for ESG stocks: SunPower's target is increased to $11 from $10, SolarEdge to $210 from $160, JinkoSolar to $55 from $30, and Sunrun to $43 from $25.
    • The firm also reiterates Buy ratings on First Solar (FSLR -0.2%) with a $95 price target, raised from $90, and TPI Composites (TPIC +0.8%) with a $43 target, up from $36.
    • Cantor Fitzgerald says it now recommends Aphria (APHA -0.1%) over Aurora Cannabis (ACB -4.1%) for cannabis investors seeking exposure to Canada.
    • "Yes, the stock has derated to a 4-5x EV to current sales multiple vs. 7-8x before, but we do not see medium term catalysts to turn that around. Also, the BS constraints will likely prevent the company from benefiting from potential reg changes in the US. We take 15x on our forward EBIDTA estimates (which are still above consensus) to derive our 12mo PT of C$7.00," updates analyst Pablo Zuanic.
    • Cantor drops its rating on Aurora Cannabis to Neutral from Overweight, while keeping Aphria rated at OW.
    • The U.S. has reported an average daily high of 69,967 coronavirus cases on Monday, topping the record set the day before and up 20% on the week.
    • Five U.S. states (Montana, North Carolina, South Dakota, Tennessee, and Wyoming) hit record highs in average daily new deaths yesterday.
    • Bad news for public health is a potential tailwind for Zoom Video (NASDAQ:ZM), which has soared since the pandemic started to spread.
    • Yesterday, Zoom shares were up 5.8% in early trading, partly driven by the global rollout of the previously announced end-to-end encryption for free and paid users.
    • Zoom is currently up 0.9% pre-market to $522.25, potentially setting the stage for another day of gains.
    • Here's a look at Zoom's meteoric rise over the past six months compared to the tech sector (NYSEARCA:XLKand S&P 500.
    • Citi pokes its head out of the slightly dwindling bear camp on Tesla (NASDAQ:TSLA) with a post-earnings update.
    • "Our price target goes to $137 from $117 on higher LT margin assumptions reflecting greater confidence in gross margin execution. That said, we believe the stock still reflects a significantly more robust growth/margin outcome than what we view as most likely, leaving us at Sell. We expect the NT focus to shift to Q4/’21 demand metrics and full self-driving progression."
    • The new PT is far below the $420.48 closing price of Tesla yesterday.
    • In general, there have been more Wall Street firms on the sidelines with Tesla this year than planting a flag in either the bull or bear camps

  9. Ugly turn for XLF so early in earnings season – does not bode well:


  10. Oil made a run at $40 but failed.

    Honey badger, as usual, does not care:


  11. Uglifying into the close after being rejected at 3,410.

    It only took a day to wipe out the rest of October's gains but we recovered a bit off the weak bounce line (of the 15% line) but that was sure to lend support so now we calculate the bounce lines off the bounce line and we fall from 3,562.50 (the 25% line) to 3,360 (the weak bounce line) and let's call that an even 200 points which makes the bounces 20% of that so 3,400 on the dot is the short-term weak bounce and 3,440 is the strong bounce but 3,410 is the 400-Hour (2 month) Moving Average on this short-term chart and that's about a month – so we'll have to respect that line followed by our 20% line at 3,420 – that's going to make it a tough slog to get back through that zone of resistance.  

    Keep in mind TA is totally BS, our 5% Rule™ is not TA – it's just math.

    And, please remember:

    if we can't pop back over that red 400-hour moving average this week, which also "happens" to be our 20% line heading into the election, then DOOM!!!! is a ahead for the market.  


  12. Tomorrow's lines today! Busy morning planned.


  13. Have fun with that.  

    Indexes down half a point at the moment.


  14. And Europe down 1.5% it seems!



  15. Analysis: The absolutely bonkers threat Donald Trump made this week






  16. Trump Administration being sued for alleged voter intimidation