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Newsletter

Daily Newsletter, Saturday, 1/9/2016

Table of Contents

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

Market Wrap

Welcome to 2016

by Jim Brown

Click here to email Jim Brown

The year began with the worst start in decades and the declines may not be over. I saw a wanted poster for Santa offering a huge reward but I doubt it will help.

Market Statistics

Friday Statistics

The Dow peaked before New Years at 17,750 at 3:PM on Dec 29th. We have been on a slippery slow ever since with Dow closing at 16,346 on Friday and losing -1,394 points since that post Christmas peak. You can pick from a variety of excuses but it was probably a combination rather than one event in particular.

The 7% drop in China that halted trading on Monday was definitely a trigger that sent us lower but we were already in crash mode after the -328 point drop from that peak on the 29th. The U.S. markets were already fading fast and the China news just accelerated that decline.

Moving farther into the week the second Chinese trading halt and the crash in oil prices greased the skids to allow the U.S. markets to move to three-month lows. It appeared for a while on Thursday night that a positive close in China was going to spare the U.S. markets from more pain but the early morning rebound was quickly sold and the Dow ended down -167 points for the day. There was $1.3 billion in market on close orders to sell on the NYSE. There was NO dip buying or short covering at the close. Apparently, traders were convinced we are still going lower. Rarely do markets this oversold fail to see at least a minimal short covering bounce going into the close ahead of the weekend.

This suggests traders are expecting more downside risk and probably the potential for the Chinese markets to continue their downward move. The Chinese markets were rescued when regulators said they were extending a ban on insider trading that was due to expire on Friday. Anyone with more than 5% of a company's stock is prohibited from selling that stock until the government releases that ban. This was instituted back in July when the Chinese market was in meltdown mode.

U.S. traders are facing not only the economic and geopolitical events of China, Saudi Arabia, Iran, Syria and weak economics in the U.S. but also an increasing number of earnings warnings ahead of the Q4 reporting cycle. Add in the constant chatter from the Fed about future rate hikes and suddenly there is no support under the market.

Not even a blowout number on the Nonfarm Payrolls could hold the market up for more than a few minutes. In December, the country added a whopping 292,000 jobs compared to 211,000 in November and consensus estimates for 200,000. November was revised higher by +41,000 to 252,000 and October was revised higher by +9,000 to 307,000. This produced a three-month average of 284,000 new jobs and well over the Fed desire for 200,000 or better. The third quarter average was 174,000.

Total new jobs declined from 3,116,000 million in 2014 to 2,650,000 in 2015 but the employment rate declined from 5.6% to 5.0% because more people left the labor force. Those not in the labor force have risen to 94,103,000 million.

On the surface, this was a stunning report suggesting the job market was exploding higher. However, average hourly earnings were unchanged, suggesting there are still plenty of workers applying for available positions. The average workweek was also unchanged at 34.5 hours where it has been for the last year. Again, no rise in the workweek means plenty of workers and no need to work longer hours.

Most analysts believe the jump in December employment was seasonal. Art Cashin pointed out that in the separate Household Survey there was a gain of 485,000 jobs but 35% went to workers under the age of 19 and another large chunk to workers over 55. Only 16,000 out of 485,000 went to workers between the ages of 24-55. That sounds an awfully lot like seasonal workers.

There was another catch as well. Workers with multiple jobs have increased by +752,000 since May. If you have to work 2 or 3 jobs to pay the bills because you can't find a full time job then each of your jobs counts as a new job. Multiple jobholders have accounted for 64% of all job gains since May. The BLS said they would like to sort all the jobs by social security numbers and eliminate the duplicates but they cannot have access to the data for privacy reasons. Also, if you worked as little as 1 hour, say parking cars at an event, then you are considered "employed." Looking for jobs online on Monster.com does not make you part of the labor force. You actually have to interview in person with a prospective employer to avoid being logged as "not in the workforce." In other words, the monthly payroll numbers are not even a decent guesstimate of actual employment or new jobs. Artificial Employment

The managed unemployment rate remained at 5.0% for the third month. The broader U6 measure of underemployment remained at 9.9% or roughly 15.6 million workers. More than 5.7 million workers are working part time because they cannot find full time jobs.

The December number is going to be very hard to follow for January. Typically, jobs decline in January and if a lot of those Q4 jobs were seasonal, we could see a much smaller number next month. I have not seen any analyst expecting over 200,000 and it is possible it could be a lot lower.


The GDP forecast for Q4 took another hit when the Wholesale Trade numbers for November were released. Inventories declined -0.3% compared to the prior month at -0.1% and consensus estimates for -0.1%. However, the October headline number was revised downward to -0.3% as well. Were it not for a rise of +2.3% in petroleum inventories the headline number would have been a lot worse.

Declining inventories are actually positive to some extent. The rise in inventories boosted the Q2 GDP numbers to nearly 4% growth but that was an abnormal increase in inventory levels. Now that they are declining, we are seeing the GDP forecast decline as well.

Wholesale trade declined with sales falling -1.0%. That was led by nondurables falling -2.4% and durables rising +0.4%. The inventory to sales ratio increased slightly from 1.31 to 1.32.

Moody's Chart

The Atlanta Fed GDPNow forecast for Q4 fell back to +0.8% growth after rebounding from 0.7% to 1.0% on Wednesday after the International Trade report. The next update will be on January 15th when the Retail Sales report for December is released. Morgan Stanley slashed their forecast to only +0.1% because of the stream of weak data we have seen in recent weeks.


The calendar for next week is relatively light. None of the reports should move the market with the possible exception of the Retail Sales on Friday. The Beige Book on Wednesday is not expected to show any major change from the last update.


There were no forward splits announced last week. Seanergy Maritime (SHIP) announced a 1:5 reverse split to keep from being delisted.

For the full split calendar click here.


Friday was a tough day for retailers. The Container Store (TCS) started the bad news with a -41% decline after reporting a loss for last quarter. The company said is lost 4 cents and consensus estimates were for a gain of 5 cents. Revenue of $197.2 million was slightly under forecasts for $199.1 million. The company guided for the current quarter for revenue of $222-$232 million with earnings of 19-22 cents. Analysts were expecting 29 cents. Same store sales may decline as much as -5% in the quarter. The CEO said they suffered a "challenging quarter." They operate 77 stores and opened 10 last year.


American Eagle Outfitters (AEO) reported that Q4 same store sales came in at 4% compared to estimates at 4.87%. Management had originally guided for a range of 3.4% to 6.6%. The company affirmed guidance of 40-42 cents and analysts were expecting 42 cents. The company reports earnings on March 2nd. Shares fell -16%.


Gap (GPS) shares fell -14% after the company said same store sales for December fell -5%. Store brand Banana Republic fell -9% and Old Navy sales declined -7%. The headline Gap brand saw sales fall -2% and the least of the group. This was the second consecutive decline in same store sales. Total revenue fell -4% to $2.01 billion for the five-week period.


Macy's (M) announced they had decided to close 40 stores because of slowing mall traffic. They will be terminating 3,000+ employees. Since Macy's is an anchor tenant, it means other stores in the malls are going to suffer. JC Penny's (JCP) has 19 stores in malls where Macy's is leaving. That suggests traffic in those malls is going to decline even further and hurt JC Pennys. Sears (SHLD) has 16 stores, Claire's 8 stores, Bon-Ton four stores and Nordstrom 3 stores. Macy's reported a -4.7% decline in same store sales. The company guided to earnings of $2.18-$2.23 for Q4 and analysts were expecting $2.55. Shares rallied on Thursday on the store closings but declined Friday with the rest of the sector.

The malls are dying thanks to the availability of online shopping. Both Macy's and JC Penny's said they had strong online sales. Retail shoppers are deciding not to take their life into their hands and congregate in busy malls where some crazy terrorist may show up. Since you have a four times greater chance of a shark bite and eight times better chance of being struck by lightning this is a misplaced fear. However, it is a fear and it will grow once a U.S. mall is attacked.


Best Buy (BBY) shares fell -4.2% after Cleveland Research warned investors about sales trends ahead of the stores report next week. Cleveland expects disappointing results. Hedge funds long the stock decreased from 28 to 24 in Q4. Amazon is still ruling the retail sector and Best Buy has put up a valiant fight but it remains to be seen if they are winning market share or just delaying the inevitable. Multiple analysts have suggested that Amazon buy Best Buy because they could use the floor space for "show rooming" and the warehouse space could be added to their distribution system.


Software company Microstrategy (MSTR) has had a struggle over the years with executives and accounting. The company filed with the SEC on Friday saying the president, Paul Zolfaghari and Jonathan Klein, the chief legal officerwho also held the title of president, had "left" the company. Just six months ago, the CFO was replaced. Founder Michael Saylor, currently the chairman and CEO will now assume the role of president as well. W.Ming Shao, EVP, will now assume the chief legal officer role. Microstrategy has a revolving door for officers and going to work there should be considered temporary employment.

Shareholders have tried in the past to get Saylor to relinquish control but it never seems to last long. About 15 years ago, I was short 10 contracts of the $220 puts on MSTR. I turned on my computer one morning and MSTR was trading at $110. I remember thinking "I don't remember MSTR having a 2:1 split scheduled." Unfortunately, it was not a split but some accounting problems had been disclosed by the company. I eventually traded my way out of the problem thanks to a decent $30 rebound that allowed me to profit on a truckload of calls I bought at the bottom but it was a very unsettling couple of weeks. Since then I have never traded MSTR and strongly suggest it be avoided. Sudden high profile events tend to occur to this stock as you can tell from the many gaps on the chart.



Chip maker Ambarella (AMBA) crashed another 10% on Friday after Cirus Logic (CRUS) and Qorvo (QRVO) warned after the bell on Thursday. Ambarella has been following GoPro lower and shares of GPRO were down -5% on Friday on hangover from CES and new competitors popping up everywhere. Ambarella has declined from $129 to $45 since July. That exactly mirrors the plunge in GoPro.



December was a weak month for auto sales despite it being a record year. The car dealers, like Lithia Motors (LAD) began falling mid month and have not stopped. Investors are fickle. Once they see a trend turn, it is a race to get out of that sector.


Next week is the start of the Q4 earnings cycle. Because of the flurry of guidance warnings S&P Capital IQ is now predicting S&P-500 companies will post an earnings decline of -5.5% and the second consecutive quarter of declining earnings. The last time that happened was in 2009. Revenues are expected to decline -1.7% but other analysts have predicted as much as a -3.2% decline. The strong dollar is still getting the blame.

The declining earnings estimates may also be weighing on the market. Two consecutive quarters of declines, means PEs are expanding unless stock prices contract. With the PE on the S&P between 18-20 depending on how you calculate it the market is somewhat overvalued.

I looked at a lot of charts this weekend and the vast majority are very ugly. Only 45 stocks in the S&P-500 are up for the year. Most are in bear market territory after last week's decline.

Intel is the first big tech to report for this cycle and earnings are Thursday after the close. JP Morgan will get a one-day jump on banking Friday by reporting on Thursday. The rest of the major banks report on Friday with the exception of Bank America.


The energy sector continues to drag the market lower as oil prices set new lows. The Energy Sector SPDR (XLE) set a six-year low at $56 on Friday because the low oil prices guarantee that exploration and production is going to shut down until prices recover.


The commodity markets are crashing just as hard as the equity markets. The CRB index closed at a new 42-year low. This is due to lack of demand leading to excess supply. This severe of a correction has never happened outside of a global recession.


The Baltic Dry Index of shipping rates is at another historic low because nobody is shipping commodities. Until the Baltic Index begins to rebound, the global economic conditions are going to continue to worsen. When shipping begins to increase that will be a leading indicator the economy is recovering.


WTI closed at $32.88 on Friday and a -10% decline for the week. Analysts believe the dispute between Iran and Saudi Arabia could force both to produce even more oil. Saudi will produce it to force prices lower to hurt Iran and Iran will produce more in order to make up for the lower prices. Also, there were rumblings out of Washington last week that the sanctions on Iran could be lifted by the end of January. That means an almost immediate 500,000 bpd of additional oil on the market plus the 30 million barrels Iran has stored on tankers in the Persian Gulf. This will immediately push prices lower.

Most people see the price of WTI at $32.88 and think, wow that is low. Unfortunately, for some producers they only wish they could get that price. In the Bakken shale, the ultra light oil is discounted even further because there is limited pipeline capacity and transportation out of the Bakken is expensive. Last week there was an $8 discount to WTI for Bakken crude. As of Friday that would mean roughly $25 is what Bakken producers could get.

This is even worse for Canadian producers. Western Canadian Select traded under $20 last week. This crude is now being priced at a $14 discount to WTI because there is nowhere to store it. All the storage tanks in the Midwest are nearing capacity and there is limited pipeline capacity to take it south to the Gulf of Mexico. This is what the Keystone XL pipeline was supposed to solve. The Keystone would take oil from the Bakken and Canada and send it south to Cushing and the Gulf refineries.

If you really want to see how badly the low oil prices are impacting E&P companies you only need to look at the rig counts. For the week ended on Friday the rig count declined by -34 rigs to 664. Twenty of those rigs were oil rigs and 14 were natural gas. Active rigs have now declined -1,267 from the peak last year or almost two-thirds.

Despite the drop in active rigs, U.S. production rose again to a three month high at 9.219 million barrels per day. Producers are squeezing out every last drop because they know prices are about to collapse even further. This is going to eventually decrease production significantly, probably by July, as the number of new wells shrinks significantly.

Analysts keep talking about a 2 handle on WTI, meaning anything under $30. Over the last week, people started talking about oil in the teens because of the lack of storage. Cushing Oklahoma, the delivery point for crude futures saw inventories rise to 63.9 million barrels and a record high. Cushing has a capacity of about 70 million but they need to keep 10% available for mixing and blending the various crude grades they get to the required density for sending through the pipelines to the Gulf refiners. If you are good at math you see the problem. They are already over their 90% operational capacity and nobody can deliver crude to Cushing unless an equal amount is shipped out.

I cannot visualize oil in the teens, although it was in single digits in 1998 because of an internal OPEC war similar to this one that created a glut. I can see it in the high $20s over the next few weeks. Inventories normally peak at the end of April so the next three months are going to be tense for oil producers.



Markets

I could summarize my market commentary in one word. Ugly! The Dow dropped nearly -1,400 points in seven days. There is little in the way of support for the Dow until 16,000.

The S&P declined -139 points over the last seven days and is in free fall territory with 1,867 the next material support.

The Nasdaq Composite is closing in on support at 4,600 and could easily test 4,500.

The scariest thing about all the charts is that there has been no material pauses. It has been straight down every day. Friday saw a minor blip higher at the open but it was quickly erased.

When funds and investors decided to take profits it was immediate and there has been no dip buyers.

Volume has also been spiking. Friday saw 8.8 billion shares with 3:1 decliners to advancers. Thursday saw a whopping 9.8 billion shares with decliners 6:1 over advancers. Tuesday was the lightest day of the week at 6.9 billion shares and that is the only day of the week that closed with a gain. This is not a good sign.

The severity of the decline has thrown all the technicals into extremely bearish mode. The percentage of S&P stocks still over their 200-day long-term average has fallen to 25.4%. Even worse, the percentage of stocks still over their short-term 50-day average has declined to only 12.8%. We are rapidly nearing the lows we saw back in September.



Another indicator I found somewhat surprising is the Bullish Percent Index. Thirty-six percent of S&P 500 companies still have a buy signal on the Point & Figure charts. Given the number of ugly charts I looked at on Friday, I would have thought it was much lower. Of course, that includes the utility companies and dividend payers like Altria (MO) and Reynolds American (RAI). They benefit from the flight to quality trade when the market collapses.


Late December and early January is the strongest period of the year for small caps, except for this year. The advance decline line for the small caps has declined to very near the September low and there is zero buying interest for small caps. On a sentiment basis, this is very bearish for the broader markets.


The same A/D line on the Nasdaq is at three year lows. It does not get much more bearish than this.


Another indicator of economic health is the Dow Delivery Service Index. If companies are thriving, they will be shipping a lot of product. The index fell to a two-year low last week. The Dow Railroad Index is also at a two-year low. The Dow Transports ($TRAN) closed at a new two-year low on Friday. With oil at $33 the shippers, airlines and railroads should be at their highs. The confirmation of these three charts shows that the economy is sick regardless of what the Fed believes.




Lastly, the Wilshire 5000 Index, the broadest market index available, is about to break two-year lows. This index shows graphically the normal 5-6 year economic cycle with significant market declines during the recessionary periods. The current expansion is 81 months old and is due for a rest. A garden-variety recession could knock it back to 12,000. I am not claiming that will happen but simply showing the length of time between business cycles.


There is little left to say about the S&P. Support at 2,000 broke and 1,867 is the next logical target. HOWEVER, we are VERY oversold and we could see a short squeeze at any time. Whether that would reverse the trend is unknown but doubtful. We saw the Dow futures up +200 points before the open on Friday. The Dow spiked about +150 at the open and then gave it all back to close down -167. That does not give me much confidence that a short squeeze is going to solve our problems.

Resistance on the S&P is now 1,960 and 2,020 with support at 1,867.



Where could the S&P go if the selling continues? Here is a very long-term chart of the S&P going back to 2000. The horizontal support is 1,600 and the Fib retracement of the 2009-2015 rebound is at 1,581. If I had to bet on a bear market bottom I would draw the line at 1,600. I am not saying that is where we are going but that could be a worst-case scenario.


After a nearly 1,400-point drop in seven days, there is not much to say about the Dow. That was the worst start for the Dow dating back to 1897. Support broke and we have another lower low and the prior pattern was confirmed. Apple was up on Friday simply because it had been down so much in the prior weeks. When markets collapse, investors try to find safety in stocks that were beaten down before the current decline. They figure there is less risk in a stock that is already -25% off its highs.

Dow component Intel reports earnings on Thursday.

Support is 16,000 and I sure hope traders are ready to buy the dip. A continued decline from there puts us into an entirely different market posture.



The Nasdaq decline accelerated and nearly every day was a gap lower. However, Friday the index declined less than its peers. Whether that was just a coincidence or somebody nibbling at the dip is unknown. With Facebook and Apple higher it could be just somebody buying losers.

Note the winners list below. Most of the symbols are stocks you never see in that list. A lot of them I did not even recognize at first while all the big name favorites are on the losers list. Until the big names start showing up on the winning side we are going lower.

Near term support is 4,600 followed by the more likely support at 4,500. The flash crash low was 4,292 and hopefully we are not going that low but 4,130 cold also be in play for a protracted decline.



The Russell 2000 has collapsed back to the October 2014 low at 1,046 and is showing no signs of a rebound soon. In fact, the Russell is the most dangerous index this weekend. If the support at 1,046 fails, it could be a long drop. The Russell is now -19.2% off its highs and only about 10 points away from a bear market. If the Russell does collapse below this support, it should be a signal the broader markets are going much lower.


Last week we put on our 5th grader hats and determined the major averages were headed lower. I recommended not making any trades last week and hopefully everyone took my advice or were short. The first 10 days of January can be volatile and we still have five days to go. Once the earnings cycle begins the market should pick a direction. I could see some short covering before that happens. The first big companies are Intel and JP Morgan on Thursday and then most of the banks on Friday.

I would continue to be a watcher not a trader. Be patient. There is always time to trade as long as you have capital to invest. If you miss an entry on the stock you want, be patient. There are 4,500 stocks. Another opportunity will appear.

Don't Miss Out in 2016!

Recent reader comment on 1/4/16:

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Random Thoughts


Are we already in a bear market.

A bear market is normally a market that has declined -20%. Bespoke did the math for all the stocks in the S&P 500 and found that we are already in a bear market. The average stock is down -24% from its recent highs. Small caps are down an average of -27.6%, mid caps -23.6% and large caps -19.9%. The reason the indexes are not down -20% or more is that they are being held up by the performance of a very few large cap stocks. The top ten gainers have supplied nearly all of the gains in the S&P-500. Bespoke Article

Bespoke Chart

While the energy sector is the biggest drag on the index, only three of the S&Ps 10 sectors have declined less than 20%.

Bespoke Chart


Just because China's markets calmed on Friday does not mean the problem is over. China has a long way to go on its path to currency normalization. China's yuan has been pegged to the dollar for a very long time. Currently the yuan is roughly 6.5 to the dollar. That means one dollar buys 6.5 yuan.

Because it is pegged to the dollar, it goes up when the dollar goes up and down when the dollar declines. The dollar rose +26% from May of 2014 to March 2015. That means the yuan appreciated roughly the same amount. That made Chinese goods more expensive around the world. If you are paying in euros, Iranian rials, Swiss franc's, Japanese yen, etc, those goods cost you more because the dollar went up. In order to depreciate its currency back to 2014 levels and make their products more affordable to the world they need to further devalue the yuan by 10-15%. In currency terms, that is a very big move and it will upset the global markets. China has to do it to reboot their manufacturing economy. China is moving to peg their yuan to a basket of currencies rather than just the dollar but that is a long process.

We can expect further competitive devaluations from China ahead of its formal inclusion in the IMF SDR club in October. To devalue significantly before that event is going to require some pain in the currency markets. Be prepared. Effective January 15th margin requirements on yuan currency trades will be doubled. Margin update

China wants quick sharp currency decline


On Friday, Kyle Bass explained the real problem in China. He said it is not the equity markets or the currency market. It is the financial system. The Chinese banking system has $35 trillion in assets. China's GDP is about $10 trillion. The government's remaining reserves are about $3.5 trillion. The banking system grew by more than 400% over the last 8 years. There are zero "nonperforming loans." China uses the "extend and pretend" method of dealing with bad debt. If a company defaults, they extend the loans for another year and pretend it did not happen.

Bass said the Chinese banking system is a monster bubble that will pop. The emerging market miracle that was China's growth over the last decade was built on credit. Anybody could get a loan for anything as long as it created jobs. With the economic cycle declining those debtors cannot pay back the loans.

When the system eventually fails those loans will have to be written off. If only 10% of the assets are written off that is $3.5 trillion and equal to the government's reserves. The odds are significantly higher that much more than 10% are nonperforming and will be written off. Analysts believe it could be 25-35% of the total. This is going to be a monster shock to the Chinese economy similar to Lehman Brothers and Bear Stearns going under only worse. Bass said the bill for lack of regulation and supervision is coming due.

We saw over the last couple of years that inventories of commodities like copper were being used as collateral for multiple loans from multiple banks. In other words, the owners or even purported owners of a pile of copper had borrowed multiple times from different banks using the same pile of copper as security. That is like getting a dozen mortgages on your home without anyone finding out. Eventually there will be only one winner and the rest of those loans will be worthless.


Bank America warned last week that investors should be in cash and long volatility. They joined Citigroup, UBS and RBC Capital in warning of a rough market ahead. They are expecting a sharp drop in the S&P to 1850-1900.

The bank said to remain in cash until one of three things happened.

China PMI is back over 50.

Buyers return for high yield and emerging market debt.

A spike in volatility or an equity market reset causes the Fed to pause.

The bank also said the drop in the U.S. manufacturing ISM to 48.2 was the weakest since June 2009. Readings lower than 50 indicate contraction. A reading under 45 has coincided with a recession in 11 of the last 13 times since WWII. Full article


UBS distributed a 30-page report last week to outline their claim that the world has entered a bear market.

"The S&P-500 is currently in 4th longest bull market since 1900. Bear markets are defined by a market decline of 20% and more. It's a fact that since its March 2009 low, with 82 months and a performance of 220%, the S&P-500 now trades in its 4th longest and 5th strongest bull market since 1900. So from this angle alone we suggest the 2009 bull cycle has reached a mature stage."

"Together with the 200-day moving averages rolling over in more and more markets globally, the break of the 2011 bull trend in the Russell-2000 and the equally weighted Valueline-100 index in the US, as well as intact sell signals in our monthly trend work, we can clearly say that globally, a bear market is already underway in more and more markets."

Bear Market Has Begun



Global equity markets lost -$2.3 trillion in market cap last week. U.S. equity funds saw $12 billion in outflows, the most in 17 weeks. The S&P-500 saw $1 trillion in market cap erased. Can you say "extremely oversold."


Here is a really good article on why the world is headed for recession or even deflation. It is long but worth the read. Recession or Deflation?


Bill Gross posted his market outlook on Friday and it is worth a read. Here is the first paragraph.

The Romans gave their Plebian citizens a day at the Coliseum, and the French royalty gave the Bourgeoisie a piece of figurative "cake", so it may be true to form that in the still prosperous developed economies of 2016, we provide Fantasy Sports, cellphone game apps, sexting, and fast food to appease the masses. Keep them occupied and distracted at all costs before they recognize that half of the U.S. population doesn't go to work in the morning and that their real wages after conservatively calculated inflation have barely budged since the mid 1980's. Confuse them with demagogic and religious oriented political candidates to believe that tomorrow will be a better day and hope that Ferguson, Missouri and its lookalikes will fade to the second page or whatever it's called these days in new-age media. Meanwhile, manipulate prices of interest rates and stocks to benefit corporations and the wealthy while they feast on exorbitantly priced gluten-free pasta and range-free chicken at Whole Foods, or if even more fortunate, pursue high-rise New York condos and private jets at Teterboro. It's a wonderful life for the 1% and a Xanax existence for the 99.

Bill Gross Investment Outlook


When the Santa Claus Rally fails to appear as it has only 14 times since 1950 the rest of January and much of February tends to be bearish. However, for the full year the markets have been up in nine years and down in five. The up years significantly outperform the negative years. The average gain in an up year is 14.1%. If you remove 2008 from the list because of the external factors, the average down year loses only 0.8%. In 2008 the market declined -38.5% for the full year and that skews the average significantly if you include it. The average loss including 2008 is -12.4%. I think it is safe to say we are not expecting another 2008 in 2016. When Santa Fails to Appear

This analysis suggests a real washout in Jan/Feb is a positive for the year and we should be looking at this as a buying opportunity.

However, as I reported last week, according to the Stock Trader's Almanac the 8th year of a presidential term has been down 5 of the last 6 times it has happened with an average loss of -13.9%. Sorry to burst your bubble.

We have two vastly different historical trends with exactly opposite outcomes. I know which one I am rooting for.


The December Low Indicator. In the 1970s, Lucien Hooper, a Forbes columnist, coined that term. He found that in years when the Dow declined below the December low during the first quarter of the year, a more bearish market move was likely to follow. The Stock Trader's Almanac said that in the 30 times this has happened since 1952 the market continued lower in 28 years. The average decline is more than 10%.

This may have been the reason for the flush last week when the Dow declined below the December closing low of 17,128.55 at the open on Wednesday.

The First Five Days indicator registered its worst reading on record going back to 1930. Fortunately, that indicator by itself is not that reliable. Since 1930, that has been negative 28 times and 15 years finished up and 13 down. However, in the last 16 presidential election years, the indicator has been right 14 times. Only in 1956 and 1988 did the market turn positive for the year after being down the first 5 days.


Investor sentiment is shifting into bearish with a 14.6% rise to 38.3%. However, the survey closes on Wednesday so the end of week declines are not yet in the picture.



Your chances of winning the Powerball this weekend are 1 in 292 million. The last stated prize has risen to $900 million. If you take the cash value option you would receive $558 million. Taxes at that level are 39.6% but the government only withholds 25%. The rest of the taxes are due with your regular tax bill. Since you are probably going to give a large amount to charity that will reduce the actual amount you owe at year-end. If you live in New York there is an additional 8.82% tax plus a lottery tax of 3.9%.

If you live in New York City and win, you will receive about $348 million out of the $558 million lump sum payment. Advisors always recommend the lump sum payment. Even if you invest it in something safe like tax-free municipal bonds, your total payout over the next 30 years could be even more than $900 million. If nobody wins on Saturday, the jackpot could climb to $1.3 billion.

Lottery officials said only about 65% of the available number combinations had been played as of Friday night. Good luck and please send some money my way if you win!


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"It is not enough to be busy. So are the ants. The question is: What are we busy about?"

Henry D Thoreau


 


Index Wrap

Worst start to a new year

by Keene Little

Click here to email Keene Little
Week's Indexes

Review of Major Stock Indexes

The first week of January 2016 has been the worst start to a new year for bulls in the history of the stock market. At least that's what's in the headlines and that alone is going to freak out more than a few investors, many of whom have already been complaining about a year in which they didn't make anything and yet still had to pay management fees. There is also the January barometer making news (as goes January, so goes the year) and with the fact that the first week of January is a good tell for how the rest of the month will go, there are understandably some very nervous investors this weekend. The last thing the market needs is investors pulling out of the market out of fear we could be facing another financial crisis.

The Stock Trader's Almanac provides some statistics for the January barometer and it's actually quite impressive. Since 1950 (65 years) January has predicted how the year would finish with 87.7% accuracy. Furthermore, the first week of January predicted how January would close with 85.4% accuracy. Those are pretty good odds that now tell us 2016 is likely to be one for the bears. I wouldn't mortgage the house (maybe sell it though, wink) and short the market on that information but it does provide a piece to the puzzle about what the probabilities are for the coming year. And the STA further states that every time the month of January finished negative, without exception since 1950, it has been followed by a new or extended bear market, a flat market, or at least a 10% correction.

The table above provides a good summary for what happened to the various indexes last week. I circled two of interest -- the Nasdaq lost in one week what it took all of 2015 to gain and then lost an additional -1.6% on top of that. The biotechs, which have been on fire for the past 3 years, got hosed last week (that's a technical term by the way, which refers to a mauling by the bears). The +10.9% gain in 2015 was nearly given back with last week's loss of -9.9%. On a closing basis last week's loss for SPX (122 points) was the same as the week of August 17-21 (121 points) and that week in August was followed by another 104 points down the next two days (Monday and Tuesday) into the August 25th low before a strong v-bottom reversal. It remains to be seen whether or not the same kind of pattern will play out in the coming week but that's the kind of risk we still face. However, there are reasons to be cautious about the downside, as I'll review on the charts.

From the December high at 2114 SPX is now down -9.1%, which is a little shy of a -10% "correction" and this follows the -10% correction in August, which in hindsight could look like the shot across the bow of the USS Bullship that bulls that should have paid more attention to. While SPX is working on a -10% correction most S&P 500 stocks are already down more than -20%, putting them officially into a bear market. I haven't seen numbers after Friday's close but as of Thursday's close there were 444 of the 500 stocks hitting new 52-week lows. We've been in a stealth bear market but most traders have been unaware of it. This past week's drubbing has opened the eyes of more than a few traders and if you don't like playing the short side you should be thinking strongly about how to protect your long positions. Cash is a good position when you're not sure what the market is going to do and there's a real risk of a larger correction.

At the moment we have a price pattern that is similar to what happened in January 2008, which of course was the "year of recognition" that not all was as rosy as the Fed and economic analysts would have liked us to believe. The first week was down hard and then there was a 4-day pause in the selling that was then followed by another 5 days of strong selling before finding a tradeable bottom (January 22nd). We rarely see the market repeat exactly the same pattern but there is a rhythm to it (it's mimicking trader sentiment which tends to react the same way) and that gives us similar patterns to watch for. We have opex week coming up and it's typically bullish so we'll see if that can at least provide some relief to the selling pressure we've seen in the past week.

I have a few more charts than I'll typically show for a review of the indexes but I think it's an important weekend to take a little more time to review what we have and what it could mean for the weeks/months to come. I'll drill down from a weekly chart of SPX to intraday charts to show why we should be looking for a bounce in the coming days, and why it will be more bearish if we don't get the bounce (stating the obvious here).

A Look At the Charts

S&P 500, SPX, Weekly chart

I'll show different expectations for the coming days on the various indexes below but I want to first show some downside potential if we don't get a bounce in the coming week. There is an uptrend line from October 2014 - August 2015 that's currently near price-level S/R near 1885 and I think that makes a good downside target and support for at least a bounce before continuing lower. The bearish wave count suggests we'll see the decline stair-step lower into February/March before a larger bounce/consolidation into June. As projected on the chart, we could see the October 2014 low tested by early-mid-February. Bears are not potentially in trouble until SPX gets back above price-level S/R near 1985 and while we could see some sharp relief rallies we have to remember that those will likely reverse right back down if we're in the beginning of a new bear market leg down.

S&P 500, SPX, Daily chart

The daily chart shows how a stair-step pattern lower might look. I think we'll see at least a small bounce in the coming days but then a turn back down to the 1885 area. That bounce might come after a flush on Monday/Tuesday. Assuming we'll get at least a small bounce and then lower, as depicted (bold red line), the pattern calls for a larger bounce/consolidation into early February and then down to the October 2014 low at 1820 before the end of February. If we get a stronger bounce in the coming week, while it could be bullish, especially if it gets above 2021, I think it would actually set up an even more bearish wave pattern. That will have to be evaluated if and when it happens. For now stay bearish below 1971, neutral-to-bullish above that level and then more bullish above 2021. It would turn much more bearish below 1885 (think flash crash).

Key Levels for SPX:
-- bullish above 1971
-- bearish below 1885

S&P 500, SPX, 60-min chart

Now we start drilling down into the intraday charts for clues for the next few days. The current decline could drop to a price projection near 1902 (where the leg down from December 29th would be 162% of the December 2-14 decline) before starting a bounce correction but the point I want to make here is that the decline from December 29th would look best with at least a small correction (4th wave) before dropping lower, with a downside target at either the 1885 level shown above or the August low at 1867. Just keep in mind that the market is oversold (it can always get more oversold) and showing some bullish divergence on the oscillators (waning selling momentum), which suggests shorts need to be very careful chasing this market lower.

S&P 500, SPX, 15-min chart

For these weekend reviews I will rarely get into the intraday charts, especially one as short-term as the 15-min chart below. But because of the big move I think it's important to review what to look for on Monday, which could set the tone for the week. Notice the descending wedge pattern for this past week's decline, with the bullish divergence often seen for this bullish reversal pattern. Friday finished with a small poke below the bottom of the wedge, which is a common way for these patterns to finish (throw-under or a throw-over in a rising wedge) with a small capitulation to finish the move. This one chart suggests Monday will be an up day and we could see a high bounce (think short covering spike) that quickly retraces the decline from last Tuesday (the start of the descending wedge. That would be a 100-point rally in the coming days, which obviously is not something you want to be fighting if you're looking to be short. If anything, this chart told me on Friday to fade the selling and get long. The flip side is that if Monday breaks down it will likely break down hard (failed patterns tend to fail hard). Hence I did not get long late Friday and actually preferred the comfort of being flat over the weekend. :-)

S&P 100, OEX, Daily chart

OEX shows a double breakdown -- on Thursday it dropped below the bottom of a parallel down-channel from November and it broke its uptrend line from August-September. The bulls need OEX back above 885 to at least have a chance at getting a new rally going. We might see support here or slightly lower near 852 where the 3rd wave in the move down from December 2nd would be 162% of the 1st wave. I show a bounce/consolidation into the end of the month before heading lower into mid-February to complete the larger-degree 3rd wave in the move down from November.

Key Levels for OEX:
-- bullish above 885
-- bearish below 850

Dow Industrials, INDU, Daily chart

The DOW's pattern is the same as OEX above. We have a good setup for a bounce/consolidation into the end of the month and then lower into mid-February and then a larger bounce/consolidation before heading lower again in March. Bulls need to get the DOW back above price-level S/R near 16900 to at least give them a fighting chance at something more bullish and it would turn much more bullish above last Tuesday's high at 17195. If we don't get a bounce on Monday I'd look for the next support level near 16K.

Key Levels for INDU:
-- bullish above 17,195
-- bearish below 16,515

Nasdaq Composite, COMPQ, Daily chart

The Nasdaq has a price projection at 4623 for the 2nd leg of its decline from December 2nd, where it would be 162% of the 1st leg down. Friday's low near 4638 might have been close enough and when this leg down from December 29th completes we'll then have either a bullish a-b-c pullback that will lead to the start of a new rally (I have my doubts about that but it remains possible) or a bearish 1-2-3 that will lead to only a bounce/consolidation for the 4th wave before heading lower to complete a 5-wave move down from December. The form of the coming bounce/rally will tell us which way to lean in the coming weeks. If the market drops lower on Monday watch to see if the Naz finds support at its uptrend line from April-October 2014, near 4535.

Key Levels for COMPQ:
-- bullish above 4811
-- bearish below 4570

Nasdaq-100, NDX, Daily chart

NDX is a little weaker than the Nasdaq in that it has dropped below the 162% projection, at 4279, for the 3rd wave down. But it's close enough and we could see an immediate bounce off support on Monday. The same April-October uptrend line referred to for the Naz above is not shown on the NDX chart since it's already been broken (with last Monday's gap down). If the bulls can drive NDX back above 4475, which was the bottom of its trading range in November-December, they could at least turn the chart neutral. But at the moment the chart is more bearish than bullish and playing the long side should be considered counter-trend with the usual precautions (short-term trading, tighter stops, careful risk management, don't spit into the wind, don't eat yellow snow, etc.).

Key Levels for NDX:
-- bullish above 4475
-- bearish below 4279

Russell-2000, RUT, Daily chart

The RUT has been warning us for a long time (along with other important indexes like the TRAN and commodities) that not all was well with the market, regardless of how well the big indexes were being held up (by just a few large stocks, such as the FANG group). On Thursday the RUT held support near 1065 (two equal legs down from December 2nd and at the bottom of its down-channel) but then it broke support on Friday. I show an expectation for support at 1040 (the October 2014 low) to hold but only a small bounce/consolidation in the coming days before heading lower to the projection at 1005 where the 3rd wave of the move down from December would equal 162% of the 1st wave. A recovery back above 1065 would at least neutralize Friday's bearish move and then above 1080 would be a little more bullish. But a high bounce could actually set up an even more bearish price pattern so it will require caution about getting long. No complacency allowed for either side. The pattern for price action this coming week should provide the clues we'll need to help determine what it will look like into the end of the month and into February.

Key Levels for RUT:
-- bullish above 1080
-- more bearish below 1040

SPDR S&P 500 Trust, SPY, Daily chart

Looking at the ETFs for volume information, the SPY chart shows a setup that has resulted in good tradeable bottoms in the past. One caveat here -- in a bear market the usual buy setups run the risk of being false setups. Many traders today have not traded a bear market and it's important to realize that all the buy setups we've had since 2009 will not work in a bear market, which I believe we've entered. So be careful here. But we do have a buy setup with the volume spike on Thursday and Friday, price below the lower BB and the MFI down near 30. As shown with the vertical blue lines, these conditions have led to at least a nice rally that made money for those brave enough to fade the selling. But as you can see what happened in August, oversold can get more oversold and another 10 points lower on SPY would be a lot of pain for someone buying here and not stopping out.

Powershares QQQ Trust, QQQ, Daily chart

Similar to SPY, we have a reversal setup if it works out the same as in the past. Williams %R is buried below -90 while volume has spiked above the 50M mark and price is pressing below the lower BB, all of which suggests shorts should be playing defense and longs could work very nicely for at least a large bounce back up. But again, in a bear market oversold can get a lot more oversold and in a market that is susceptible to flash crashes I would be very cautious about trying to catch falling knives.

ISEE Index, January 2015 - January 2016

Another reason for caution is trader sentiment. The ISEE chart below is updated every day (including intraday readings) that you can find at ISEE Index and it's a bit different from the standard put/call ratio in that it looks at long-only puts and calls. This tends to be a better reflection of sentiment since it discards the short options that are often part of income strategies. It also discards trades from large firms and market makers because, again, those trades are usually hedges and/or simply taking the other side of a customer's trade. You can read more about the indicator at the link provided above and receive daily updates if you'd like.

Naturally I watch for extremes in sentiment to show me when the boat is about ready to tip over from too many running over to one side. Our job is to high side this when it happens.

The ISEE has hit 50 (twice as many puts as calls) and as you can see on the chart below, that's a warning sign that the boat is about to tip. This in combination with the reversal setup shown on the SPY and QQQ charts was enough reason for me to dump my short positions and wait for Monday to see whether or not the market is going to crash or reverse. If we follow the August pattern we could see another 100 points lower for SPX before the reversal so I did not want to be long over the weekend. But with the number of things lining up for a reversal I felt it was too risky to stay short. Flat was the perfect position (for me) and now we'll see if opex week can hold to its bullish reputation for at least a choppy bounce/consolidation before heading lower.

Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville


New Option Plays

Ignoring The Market's Sell-off

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Digital Realty Trust Inc. - DLR - close: 77.04 change: +0.26

Stop Loss: 74.80
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.5 million
Entry on January -- at $---.--
Listed on January 09, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: Yes, see below

Company Description

Trade Description:
The last several days have been tough on investors. Stocks experienced a global market sell-off. This volatility and uncertainty could push investors into safer, high-dividend paying stocks. Currently the 10-year U.S. bond only yields 2.1%. That makes a stock like DLR, with a dividend yield above 4%, a lot more attractive. The company has a history of consistently raising its dividend over the last nine years in a row. The stock's relative strength doesn't hurt either.

DLR is in the financial sector. According to the company, "Digital Realty Trust, Inc. supports the data center and colocation strategies of more than 1,000 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia. Digital Realty's clients include domestic and international companies of all sizes, ranging from financial services, cloud and information technology services, to manufacturing, energy, gaming, life sciences and consumer products."

DLR has consistently beat Wall Street earnings expectations the last four quarters in a row. The last two quarters the company has also beat analysts' revenue estimates.

Earlier this week DLR provided their 2016 outlook and the company's forecast was slightly above expectations, which helped shares resist the market's sell-off.

Here is an excerpt from DLR's press release on their 2016 outlook:

Digital Realty expects 2016 core FFO (Funds from Operations) per share to be within a range of $5.45-$5.60, which represents a 7% increase at the midpoint from the midpoint of 2015 core FFO per share guidance. Foreign currency translation is expected to represent a headwind to core FFO per share of 1%-2% in 2016.

"We are seeing solid demand for Digital Realty's comprehensive set of data center solutions, which gives us confidence in our ability to achieve accelerating core FFO per share growth in 2016," commented Andrew P. Power, Digital Realty's Chief Financial Officer. "We also expect to generate double-digit AFFO per share growth (Adjusted Funds from Operations), driven by greater cash flow contribution from our core business, accretion from the Telx acquisition and the continued burn-off of straight-line rent. In short, the quality of earnings is improving, the growth in cash flow is accelerating, and we are optimistic about the prospects for our business in 2016 and beyond."

The recent relative strength in shares of DLR over the last few weeks has lifted shares above key resistance near the $75.00 level. It has also produced a buy signal on the point & figure chart, which is now forecasting a longer-term target of $102.00.

Friday saw DLR shares tag new all-time highs (@ 77.67). Tonight we are suggesting a trigger to buy calls at $77.75. Plan on exiting prior to February option expiration.

Trigger @ $77.75

- Suggested Positions -

Buy the FEB $80 CALL (DLR160219C80) current ask $1.00
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Market Sell-off Sets A Record

by James Brown

Click here to email James Brown

Editor's Note:

The stock market sell-off continued on Friday to mark the worst start for any year on record for both the S&P 500 and the Dow Jones Industrial Average. The market has been in a near non-stop decline from its December 29th peak.

We are removing IONS as a candidate.
The QQQ trade has two new entry points.


Current Portfolio:


CALL Play Updates

Dollar Tree, Inc. - DLTR - close: 77.79 change: -0.66

Stop Loss: 76.90
Target(s): To Be Determined
Current Option Gain/Loss: -48.6%
Average Daily Volume = 3.6 million
Entry on January 07 at $80.85
Listed on January 06, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

Comments:
01/09/16: The only major news for DLTR on Friday was a headline that the CEO of Family Dollar, Howard Levine, plans to leave now that the two companies have merged.

Shares of DLTR have weathered the market's storm relatively well. The stock did lose -0.8% on Friday but is only down two days in a row. The S&P 500 is down six out of the last seven days.

If DLTR dips again on Monday I would look for potential support at the simple 30-dma (near $77.35). If shares fall much further we could get stopped out.

No new positions at this time.

Trade Description: January 6, 2016:
Last year DLTR shares delivered a very bumpy ride for investors but the stock did manage to outperform. 2015 saw the S&P 500 index flat with a -0.7% loss. The NASDAQ gained +5.7%. Yet DLTR added +9.7%. More importantly DLTR has been showing relative strength THIS year and appears to be breaking out past resistance.

DLTR is part of the services sector. According to the company, "headquartered in Chesapeake, VA, Dollar Tree is the largest and most successful single-price-point retailer in North America, operating thousands of stores across 48 contiguous U.S. states and five Canadian provinces, supported by a solid and scalable logistics network. At Dollar Tree, we are committed to serving the best interests of our shareholders. We seek to enhance shareholder value not only through exceptional business performance and practices, but also through responsible and effective communication. To help put Dollar Tree, Inc.'s financial performance into perspective, our Investor Relations site provides the latest company information relevant to the individual."

One of the big stories for DLTR last year was its $9.5 billion acquisition of rival Family Dollar (FDO). This more than doubled DLTR's stores and more than doubled its annual sales.

DLTR's earnings results have been mixed and the stock has seen some big moves on its recent reports. On September 1st DLTR reported their Q2 results that missed estimates and guided lower. Shares plunged. Fortunately for investors DLTR bottomed in the $60-62 area in the October-November time frame.

On November 24th DLTR reported its Q3 results, which looks like their first full quarter as a combined company (with Family Dollar). Earnings were $0.38 a share. That missed analysts' estimates. Revenues were up +136% from a year ago thanks to the merger and above expectations at $4.95 billion. Management lowered their Q4 guidance but raised their full year 2016 revenue guidance above Wall Street estimates. Investors bought this news and shares of DLTR have been outperforming the broader market for the last several weeks.

DLTR's CEO Bob Sasser commented on his company's Q3 performance, "I am pleased with our Company's third quarter performance. Dollar Tree delivered same-store sales of 2.1%, which represented our 31st consecutive quarter of positive same-store sales. This was against a 5.9% comp from the prior year, our strongest quarter of 2014. While not included in our comp calculation, Family Dollar delivered positive same-store sales of low to mid-single-digits, as a percent, each month during the quarter." Sasser added, "Our integration project is on schedule and we are on track to achieve our stated synergy goals. Today, I am even more enthusiastic about the long-term opportunity this merger provides for our customers, our suppliers, our associates, and our shareholders."

In early December analyst firm RBC upgraded DLTR to one of their "top picks" and raised their price target on the stock to $90. RBC believes DLTR can achieved +20% to +25% growth in 2016-2017. Analyst firm Cantor Fitzgerald is also bullish on DLTR. A couple of weeks ago they issued an note on the company saying, "We expect a re-acceleration of SSS growth and believe there is opportunity for the company to realize cost synergies from the Family Dollar acquisition that doubles the $300 million guidance by year three." Cantor upped their DLTR price target from $85 to $105.

Currently the point & figure chart is bullish and forecasting at $90.00 target.

DLTR spent a good chunk of December consolidating sideways in the $75-80 zone. Now the stock is breaking out, which is impressive considering the stock market's weakness. The S&P 500 is already down -2.6% in 2016 and the NASDAQ is down -3.4%. DLTR is up +4.2% year to date and broke through resistance near $78.50 and now the $80.00 level. Tonight we are suggesting a trigger to buy calls at $80.85.

- Suggested Positions -

Long FEB $80 CALL (DLTR160219C80) entry $3.60

01/07/16 triggered @ $80.85
Option Format: symbol-year-month-day-call-strike

chart:


Harris Corp. - HRS - close: 85.84 change: -0.40

Stop Loss: 84.90
Target(s): To Be Determined
Current Option Gain/Loss: -52.8%
Average Daily Volume = 927 thousand
Entry on January 05 at $88.15
Listed on January 04, 2016
Time Frame: Exit PRIOR to earnings in early February
New Positions: see below

Comments:
01/09/16: HRS tried to rally a gain on Friday but failed near its 10-dma (that is two days in a row). Shares only lost -0.4% on Friday versus the S&P 500's -1.0% drop but HRS does look headed for round-number support at $85.00. Nimble traders could use a bounce from $85.00 as a new bullish entry point. Keep in mind that our stop loss is at $84.90.

You will notice on the daily chart below that HRS has not yet tested its three-month trend line of support. The stock should bounce. I want to caution you that our stop is very close to this support. More aggressive traders may want to widen their stop and given HRS more room.

Trade Description: January 4, 2016:
Out of the thousands of publically traded companies out there only a few have been around for over 100 years. A couple of weeks ago HRS celebrated its 120th anniversary.

HRS issued a press release to mark the achievement. Here's an excerpt: "Founded in the back room of an Ohio jewelry store in December 1895, Harris grew from a tiny printing press company into a top 10 defense contractor with $8 billion in annualized sales, 22,000 employees, customers in 125 countries, and a diverse portfolio of technologies that connect, inform and protect the world. Harris is the longest-thriving major defense contractor and one of 398 publicly held companies still in existence for 120 years or longer - including GE, CVS, Coca-Cola, Pfizer, P&G, and J.P. Morgan."

Today HRS is in the technology sector. They are considered part of the communication equipment industry. According to the company, "Harris Corporation is a leading technology innovator, solving our customers' toughest mission-critical challenges by providing solutions that connect, inform and protect. Harris supports customers in more than 125 countries, has approximately $8 billion in annual revenue and 22,000 employees worldwide. The company is organized into four business segments: Communication Systems, Space and Intelligence Systems, Electronic Systems, and Critical Networks."

Last year HRS ended 2015 on a strong note. The month of December saw HRS win several government contracts worth more than $1 billion. Meanwhile analysts are bullish on the stock. Goldman Sachs has a buy rating on HRS. Cowen recently upped their price target to $102 and said it was one of their best trading ideas for 2016.

Technically the stock has been showing relative strength. Last year HRS outperformed the broader market with a +20% gain. The positive news about the company's new contract wins produced a bullish breakout past major resistance at $85.00 in mid December. Today investors bought the dip near short-term support at its 10-dma. HRS displayed relative strength today too with a +0.8% gain. If this bounce continues we want to hop on board. Tonight we are suggesting a trigger to buy calls at $88.15.

- Suggested Positions -

Long FEB $90 CALL (HRS160219C90) entry $2.65

01/05/16 triggered @ $88.15
Option Format: symbol-year-month-day-call-strike

chart:


PowerShares QQQ ETF - QQQ - close: 104.01 change: -0.86

Stop Loss: 103.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 35 million
Entry on January -- at $---.--
Listed on January 07, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: Yes, see below

Comments:
01/09/16: The first week of 2016 has been brutal for stocks. The NASDAQ composite is down -7.3% in the last five trading days. The QQQ is off -7% this year and down -9% from its Dec. 29th high (just seven trading days).

As you know we think stocks have fallen too far too fast and should see a sharp bounce. Tonight we are adjusting our entry strategy on the QQQ. We are listing two separate entry triggers. Tonight we are adding a new buy-the-dip trigger should the QQQ continue to plunge. The $100.00 level should be round-number support. Add a buy-the-dip trigger at $100.50. If this trigger is hit we will use a stop loss at $97.45 and the February $105 calls (see below).

Should the QQQs bounce from current levels then we will use an intraday trigger to buy calls at $106.50. If this entry is hit we will use a stop loss at $103.45 (and use the Feb. 110 calls).

Trade Description: January 7, 2016:
The stock market moves on emotion. Most of the time it is a tug-of-war between fear and greed. Occasionally one emotion takes control of the market and stocks move too fast one direction. That is where we are at today.

Fears of a global slowdown thanks to disappointing economic data out of China have increased. China has devalued their currency again, which does not generate confidence. Yesterday we had the nuclear weapon testing headlines from North Korea, which generates fear. We have plunging oil prices, which is fueling worries about deflation.

Odds of a snap back rally are growing and we want to be ready to catch it. One way to play it is the NASDAQ-100 ETF or the QQQ. These are very liquid, big cap names that fund managers can move in and out of more easily.

Thus far 2016 has been ruled by fear. We are only four trading days into the year and the NASDAQ composite is already down -6.4% completely erasing its +5.7% gain from 2015. The QQQ is down -6.2% in the last four days and it's down -8.25% from its December 29th peak just six trading days ago. That's too far too fast.

Tonight we are suggesting a short-term bullish trade when stocks bounce. They will bounce (eventually). Today's intraday high on the QQQ was $107.29. We are suggesting a trigger to buy calls at $107.35. We'll use an initial stop loss at $103.85. More conservative traders may want to use a stop loss closer to today's intraday low instead ($104.81).

Trigger @ $106.50, use an initial stop loss at $103.45

- Suggested Positions -

Buy the FEB $110 CALL (QQQ160219C110)

Buy-the-Dip Trigger @ $100.50, use an initial stop loss at $97.45

- Suggested Positions -

Buy the FEB $105 CALL (QQQ160219C105)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point(s).

01/09/16 Entry Strategy Update - Use TWO different entry triggers
One is a buy-the-dip trigger at $100.50 with a stop at $97.45 and the Feb $105 calls
The other is a trigger at $106.50 with a stop at $103.45 and the Feb $110 calls
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates

Red Robin Gourmet Burgers - RRGB - close: 58.29 change: +1.67

Stop Loss: 60.25
Target(s): To Be Determined
Current Option Gain/Loss: -12.0%
Average Daily Volume = 244 thousand
Entry on January 06 at $58.40
Listed on January 05, 2016
Time Frame: Exit PRIOR to earnings in mid February
New Positions: see below

Comments:
01/09/16: Warning! RRGB displayed significant relative strength on Friday. The rest of the U.S. market continued to sink but RRGB bounced. Shares gained +2.9% although it is worth noting that Friday's move is an "inside day". The entire bounce took place inside Thursday's range. Days like that normally suggest investor indecision. We still want to be defensive here so we are lowering the stop loss down to $60.25.

No new positions at this time.

Trade Description: January 5, 2016:
The second half of 2015 had to be frustrating if you were bullish on RRGB. The company has been outperforming many of its peers in the restaurant industry but shares still got crushed. RRGB delivered a -19.7% decline for all of 2015 but fell -33.5% from its 2015 peak near $92.00 a share.

RRGB is in the services sector. According to the company, "Red Robin Gourmet Burgers, Inc. (www.redrobin.com), a casual dining restaurant chain founded in 1969 that operates through its wholly-owned subsidiary, Red Robin International, Inc., is the Gourmet Burger Authority®, famous for serving more than two dozen craveable, high-quality burgers with Bottomless Steak Fries® in a fun environment welcoming to guests of all ages. In addition to its many burger offerings, Red Robin serves a wide variety of salads, soups, appetizers, entrees, desserts and signature Mad Mixology® Beverages. Red Robin offers a variety of options behind the bar, including its extensive selection of local and regional beers, and innovative adult beer shakes and cocktails, earning the restaurant the 2014 VIBE Vista Award for Best Beer Program in a Multi-Unit Chain Restaurant. There are more than 500 Red Robin restaurants across the United States and Canada, including Red Robin Burger Works® locations and those operating under franchise agreements."

One of the biggest stories last year was the decline in crude oil. Lower crude oil means lower gasoline prices at the pump. Many were expecting lower gas prices to fuel a jump in consumer spending. Unfortunately that increase in spending never really showed up.

The data has shown a slowdown in restaurant sales. Black Box Intelligence, a research firm, publishes monthly statistics on the restaurant industry. Black Box said industry-wide sales growth fell from +1.8% in Q2 2015 to +1.5% in Q3 (no word yet on Q4). Traffic stalled as well. In early November Black Box Intelligence reported that same-store sales growth for the restaurant industry went negative for the first time since July 2014 with a -0.2% drop in October 2015. Traffic plunged -2.8%. There was a bounce in November with comp sales up +0.5% but traffic fell another -1.7%.

That is the environment RRGB has been operating in. They have been beating a lot of their peers with stronger comparable-store sales but RRGB has not been immune to the slow down. Looking at RRGB's last four quarterly reports they have beaten Wall Street's earnings estimate the last three quarters in a row. However, they have missed analysts' revenue estimates three out of the last four quarters. Revenue growth has slowed from +16.6% to +16% to +14.4% and down to +6% in their most recent announcement. Comps started last year at +3.6% and dipped to +2.9% before bouncing back to +3.5%.

Investors don't seem to care that RRGB's comparable store sales are beating the industry. Traders have sold the stock hard following the last two earnings reports and shares have continued to sink under a bearish trend of lower highs. The last three weeks of December saw RRGB consolidating sideways in the $60.00-65.00 range. The recent breakdown below support at $60.00 has produced a new quadruple bottom breakdown sell signal on the point & figure chart, which is currently forecasting a target near $54.00 (and could go lower).

Shares of RRGB displayed relative weakness today. The intraday bounce attempt failed and shares lost -1.7% on the session to close at new 52-week lows. The stock is poised for a drop toward the $50-55 zone. Tonight we are suggesting a trigger to buy puts at $58.40.

- Suggested Positions -

Long FEB $55 PUT (RRGB160219P55) entry $2.50

01/09/16 new stop @ 60.25
01/06/16 triggered @ $58.40
Option Format: symbol-year-month-day-call-strike

chart:



CLOSED BULLISH PLAYS

Ionis Pharmaceuticals - IONS - close: 56.88 change: +1.45

Stop Loss: 56.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.6 million
Entry on January -- at $---.--
Listed on January 02, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

Comments:
01/09/16: IONS did bounce on Friday. Upon further review it appears that IONS might be too volatile to trade at the moment. We have decided to remove IONS as a candidate. Our trade did not open.

Trade did not open.

01/09/16 removed from the newsletter, suggested entry was $60.35
01/06/16 Entry point update - Adjust the entry point to buy calls from $63.20 down to $60.35. Move the stop loss down to $56.75
Option Format: symbol-year-month-day-call-strike

chart: