On Monday, the Dow lost -78. Tuesday the Dow gained +168 and Wednesday it lost -158.
The market is bipolar this week with alternating periods of bullish and bearishness.
What happened to the seasonally bullish December? While that may be our question today, it is too early to make any assumptions. Two days do not make a trend.
The real decline today began at 1:30 as Janet Yellen was speaking. While she did not specifically claim the Fed would hike rates in December she did phrase her speech to give all the reasons why the Fed was likely to move sooner rather than later. She glossed over all the negative economic reports of late as temporary blips in a modestly growing economy.
The ADP Employment report this morning showed a gain of +217,000 jobs and well above consensus estimates at +190,000. That seemed to bolster her view that the job market was growing stronger and the weakness we saw in August and September was just a hiccup.
It is hard to say why the market sold off today given the good employment report but it appeared the Yellen speech gave investors indigestion. The potential for a real rate hike and the start of a series of hikes may have finally hit home.
Oil prices also upset the market. Crude dipped to $39.84 intraday and the energy sector declined sharply. Exxon and Chevron were in the top 3 losers among the Dow components with Goldman Sachs taking the top position with a -$2.81 loss after a $3.05 gain on Tuesday. It is that bipolar thing at work again in the banking sector.
In theory, the next three days are seasonally bullish. That means 74% of the time the market is up on these three days and then we have a week of declines as tax loss selling pushes stocks lower. Starting about December 15th, the market normally rebounds through the end of December. Let's hope the seasonal trends return soon.
I changed the format of the newsletter to include the prior play descriptions for all the active plays. They will not be updated on a weekly basis. The updates are in the portfolio graphic unless something changes in the play.
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Items shaded in blue were previously closed.
Current Position Changes
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
No Changes to Current Positions
CME - Chicago Mercantile Exchange (Put Spread)
Chicago Mercantile is the U.S. futures exchange and they are doing a thriving business with the directional moves in the commodity sector. With today's close at $98.25 they are within $2 of a new closing high.
Earnings Feb 4th.
Sell Jan $92.50 put, currently $1.45, stop loss $95.25
Buy long Jan $85 put, currently .55, no stop loss
Net credit 90 cents.
SWKS - Skyworks Solutions (Put Spread)
Skyworks is in rally mode after another Apple supplier Avago (AVGO) reported full year earnings that spiked 83% last week. Investors were afraid that Apple was cutting orders for iPhone components and apparently Avago had not seen those cuts. Q3 revenue rose +16% and earnings +26%. This boosted all the Apple component suppliers including Skyworks.
Earnings are Jan 21st.
Sell short Jan $75 put, currently $1.35, stop loss $79.25
Buy long Jan $65 put, currently .40, no stop.
Net credit 95 cents.
Original Play Recommendations (Alpha by Symbol)
BLUE - Bluebird Bio (Put Spread)
Bluebird is in the business of solving blood diseases. A new drug called BB305 in the testing stages cures a rare disease called beta-thalassemia in the majority of patients. Prior to this drug these patients had to receive routine blood transfusions, which are not only expensive but dangerous.
At the ASH conference in early November, they released results that showed most patients were successful but three patients had a doubly rare form of the same disease and the drug did not work for them. The stock crashed even though these patients with the extremely rare form of this disease are a very minor subset of the patient population. The vast majority of people with this disease will benefit significantly from the treatment. The FDA has labeled it a "breakthrough therapy." It also has an application in sickle cell disease.
Shares are recovering from the crash and should continue higher in a decent market.
Earnings are Feb 24th.
Sell short Dec $70 put, currently $2.55, stop loss $78.65
Buy long Dec $60 put, $1.10, no stop
Net credit $1.45
LRCX - Lam Research (Put Spread)
Lam has been a steady stock and the only position in the November cycle that did exactly as it was supposed to do. It went sideways with an upside bias. The stock broke out to a four month high on Wednesday and could be poised to move over $80. Let us hope it stays steady with an upside bias for another month.
Earnings Jan 27th.
Sell short Dec $72.50 put, currently $1.10, stop loss $74.85
Buy long Dec $62.50 put, currently .25, no stop.
Net credit 85 cents.
NFLX - Netflix (Put Spread)
Netflix is on fire. After dropping to $101 last Friday it has rebounded more than $17 in three days and closed at a three-month high. I seriously doubt it is going to return to $100 in the next four weeks.
Earnings Jan 13th.
Sell short Dec $102.86 put, currently $1.23, stop loss $109.65
Buy long Dec $93.57 put, currently .53, no stop loss
Net credit 70 cents
SWKS - Skyworks Solutions (Call Spread)
Skyworks is an Apple supplier and analysts are cutting estimates on component demand almost daily. On Tuesday Credit Suisse said Apple cut production of iPhone component last week by 10% because of weak Asian demand for iPhones.
Skyworks is also in a bidding war with Microsemi over PMCS-Sierra (PMCS). We learned on Tuesday that PMCS was favoring the bid by Microsemi and analysts expect Skyworks to up the bid again.
Earnings Jan 21st.
Sell short Dec $85 call, currently $1.60, stop loss $82.65
Buy long Dec $95 call, currently .35, no stop loss.
Net credit $1.25.
WDC - Western Digital (Put Spread)
Western Digital shares fell hard after it announced it was buying/merging with Sandisk (SNDK). As a tech guy I understand the reasoning behind the acquisition. Having Sandisk memory in Western Digital drives will make them run faster. However, analysts thought WD paid too much and the stock tanked.
It appears to have found a bottom at $60 and there are some rumors that the deal may not happen. If that was the case WDC shares would rocket higher. At this point the deal is priced in and shares are risng anyway so it looks like the worst is over.
Earnings Jan 26th.
Sell short Dec $60 put, currently $1.01, stop loss $61.25
Buy long Dec $55 put, currently .36, no stop loss
Net credit 65 cents.
WTW - Weight Watchers (Put Spread)
WTW soared a couple weeks ago when the company announced Oprah Winfrey had taken a 10% stake in the company and would put her weight behind the product. Everyone knows the Oprah effect is legendary. Whatever she backs always explodes as millions of fans follow her lead. Shares are not showing any post headline decline and it appears the rally may stick.
Earnings Feb 4th.
Sell short Dec $22 put, currently .80, stop loss $23.05
Buy long Dec $19 put, currently .40, no stop
Net credit 40 cents.
XBI - S&P Biotech ETF (Put Spread)
Biotechs were killed this week when Hillary Clinton said she was going to propose sweeping changes to drug pricing in the USA. This has been tried before and although it is needed, it will be very tough to get through Congress. Every prior effort failed BUT drugs are growing more expensive by the day.
The key here is that we are easily 3-4 years away from any material change. Clinton would first have to be elected and then get legislation passed. I believe the sharp decline in the biotech/pharma space is overdone.
The XBI recently had a 3:1 split and prices are back in range for common investors. There is decent support at $70.
Sell short Oct $67 put, currently $1.15, stop loss $69.35
Buy long Oct $60 put, currently .55, no stop.
Net credit 60 cents.
YUM - YUM Brands (Call Spread)
YUM reported another quarter of disappointing earnings with comps in China coming in well below expectations. In an effort to pacify investors they announced the spinoff of YUM China into a separate company. That is the growth sector for the company. The parent will remain YUM Brands US and will be a stable slow growth stock. Investors are expressing their lack of interest in a slow growth operation by selling their shares.
Earnings Jan 5th.
Sell short Dec $72.50 call, currently $1.10, stop loss $70.25
Buy long Dec $77.50 call, currently .43, no stop loss
Net credit 67 cents.
Prices Quoted in Newsletter
At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.