Option Investor
Newsletter

Daily Newsletter, Thursday, 11/10/2016

Table of Contents

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

Market Wrap

Market Rally Defies the Experts

by Keene Little

Click here to email Keene Little
The stock market rally that followed a Trump election victory has defied the opinions of most market analysts. It was another example of how the market will embarrass the majority who are in agreement on something. Now we have to wonder if it's just a knee-jerk response (short covering) or something more bullish.

Today's Market Stats

Heading into the election I saw a poll of market analysts about what they believed would happen if Trump or Clinton won the election. The majority, like 93% of them, believed the stock market would sell off if Trump won. When I saw that number, plus a chart setup that supported the bulls (which admittedly had me wondering if Clinton would win), I thought they're probably going to be proven wrong. Paradoxically that then had me wondering if Trump would win the election so that we would get the rally.

This is the challenge we face when trying to figure out how the market will react to the news, not what the news might be. At any rate, the 93% were proven wrong with a market rally after a Trump win, proving once again that when the majority agree on something about the market it's often best to fade them. It was another important lesson in using contrarian opinion when thinking about market direction.

In today's market we had a large spread between indexes with the INDU and RUT up strong (+1.2% and +1.6%, resp.), NDX down hard (-1.6%) and SPX up marginally (+0.2%). The Dow was helped by a few heavyweights, such as a couple of the big banks, Pfizer (PFE), CAT and IBM. NDX was hurt by the FANG stocks (FB, AAPL and AMZN, NFLX and GOOG), which were seriously defanged today. Much of the rotation between sectors is based on what investors think the Trump administration policies might be and where his promised infrastructure spending will go.

Like yesterday, today's trading volume was very heavy, about twice what we've typically seen lately. But the day saw a lot of rotation between sectors and the result was up volume only nudged out down volume but advancing issues were less than declining issues. As will be shown on the charts, the risk for bulls is that all this churning is happening up against some strong resistance levels and it's incumbent upon the bulls to keep up the buying pressure, or at least not allow any serious selling pressure to take hold. A rally or a day of consolidation on Friday is what the bulls need to see. But any sharp decline back down could leave the charts looking vulnerable to stronger selling.

Equity futures had chopped sideways/up last night and this morning opened with a gap up. That was followed by about 15 minutes of buying before the sellers smacked the market back down with selling that lasted about 45 minutes. Following that was a recovery effort that lasted most of the day. Other than the Dow and RUT, which did make it up to new intraday highs, the other indexes struggled to regain their morning losses. I think the next day or two is going to provide some important clues about what the rest of the month might be like.

SPX was the "neutral" index today so I'll start off with a review of it with a look at the weekly, daily and 60-min charts.


S&P 500, SPX, Weekly chart

This week's rally now has SPX back-testing its broken uptrend line from February-June, near 2180 (today's high was 2182). From just a chart perspective, this is a classic back-test of broken support and is a shorting opportunity. The stop should be kept fairly tight and not much above today's high. A continuation of the rally could see it head much higher over the next few weeks, with an upside target zone of 2250-2300. One potential target, especially if we see SPX nuzzle up underneath its broken uptrend line for a couple more weeks, is near 2223, which is the 127% extension of its previous decline (May 2015 - February 2016). This extension is a common target/reversal level. But if the market rolls back over from here we could see SPX drop down to price-level support at 1992 in the next few weeks.


S&P 500, SPX, Daily chart

Today finished with a long-legged doji as SPX finished in the middle of a large-range day. It broke through its downtrend line from August, currently near 2168, tagged its broken uptrend line from February and closed below both. With the long-legged doji at its broken uptrend line and with the VIX climbing today it has me wondering if the doji is a reversal-in-the-making and signaling a coming strong decline, which would mean this week's rally is setting a bull trap. I like the setup for a short play but it has to be on a short leash considering the upside potential if the rally continues.

Key Levels for SPX:
- bullish above 2183
- bearish below 2125


S&P 500, SPX, 60-min chart

The 60-min chart shows a closer view of the price action around the broken uptrend line from February-June and the broken downtrend line from August-September. The rally off last Friday's low is currently just a 3-wave move and as such it could be just a sharp a-b-c bounce correction that will now be followed by a resumption of the decline. Today's double back-test of the broken uptrend line looks like a stronger sell signal since the intraday break of the downtrend line was not able to hold into the close. Based on the bearish setup here it looks like a good opportunity to short SPX against today's high. If we get just a choppy consolidation on Friday it would be a signal for bears to step aside since a consolidation following a rally should lead to another rally. You don't want to hold short if SPX rallies above 2183 since the upside potential is significant (2250-2300).


Dow Industrials, INDU, Daily chart

The Dow rallied much stronger than SPX this week but it too managed only a back-test of its broken uptrend line from February-June. It broke it intraday but pulled back and closed marginally below the line. Today's high stopped just shy of a trend line along the highs from November 2015 - August 2016, near 18905. RSI quickly made it up into oversold territory and while it could easily remain there with an extended rally it is a warning sign that a reversal back down is possible at any time.

Key Levels for DOW:
- bullish above 18,925
- bearish below 18,250


Nasdaq-100, NDX, Daily chart

The bulldog named FANG had some dentist work done today and the dog was defanged today. Collectively FB, AMZN, AAPL, NFLX and GOOG finished down more than -3% today and that was an improvement from earlier in the day. NDX finished down -1.6% and it had been down -2.9% earlier in the day. This was while the Dow was up more than +2% and the RUT was up more than the +1.6% where it finished. That's a split that you don't often see. The daily candle for NDX is a bearish engulfing candlestick, which is an outside down day and usually a good reversal indication. With the candle following a back-test of the bottom of its broken rising wedge pattern off the September low it has "SELL!" written all over it. It was able to hold price-level support at 4740 for the close so it remains possible we'll see at least a bounce correction but I'd short a bounce against today's high near 4856. This morning's gap up and quick morning high looks like a bull trap.

Key Levels for NDX:
- bullish above 4860
- bearish below 4656


Russell-2000, RUT, Daily chart

As mentioned previously, the RUT was up relatively strong today, as it was yesterday, and since it's been a leader for the stock market (up and down) it's worth watching closely here. Today it broke above its downtrend line from September, near 1235, and made it up to a downtrend line from June 2015 - September 2016, which at 1259 is a little shy of its September high near 1263. Now we wait to see if resistance is broken, which would be confirmed with a rally above 1264 (and holds above), or if today's breakout turns into a failed breakout with a drop back below 1235.

Key Levels for RUT:
- bullish above 1264
- bearish below 1188


10-year Treasury Note emini futures, ZN, Weekly chart

Treasuries have made a big move this week, much larger than normal, and it appears the bond market is more convinced the Fed will raise rates in December. There's been strong selling, as can be seen on the weekly chart of the 10-year Note (emini futures), and that has driven rates higher. But bonds bear watching here since ZN has dropped down to a long-term uptrend line from the low in June 2008 and as can be seen, this uptrend line acted as support twice in 2015. If the line is broken it will be a strong signal that more selling could be coming. But if it holds as support it's possible a reversal back up would be supported by selling in the stock market (rotating from stocks into Treasuries).


High Yield Corporate bond ETF, HYG, Weekly chart

The other bond fund to watch carefully is HYG. I've recently been showing its weekly chart to point out the fact that it recently broke down from its rising wedge pattern off the February low and that was an early-warning sign for the stock market. This week it has sold off while the stock market rallied and it sold off strongly again today. It has made it down to its broken downtrend line from June 2014, at 84.25, so it could get a bounce but any further selling would be that much more of a negative message for the stock market. If traders are taking off risk by getting out of HYG it means buying in the riskier stocks, such as the small caps, could be a bad move.


KBW Bank index, BKX, Weekly chart

The banks have been on fire this week, especially yesterday and today (+3.8%). At last week's high BKX was starting to look a little weak, with bearish divergence, on its daily chart, and much of the rally the past two days could be short covering once it broke above last week's high (yesterday). Or perhaps it's a stronger belief that the Fed will now feel free to raise rates since the election is over (higher rates help the banks make more money). Whatever the reason, this week's rally has BKX up more than +13% from last Friday's low. Too much, too fast? It could be and it has achieved a price projection at 82.19 (with today's high at 82.60) for two equal legs up from February. It has also achieved a 62% retracement of the 2007-2009 decline, at 81.65, which was almost tagged at its July 2015 high. A failure here would leave a big double top against the 2015 high but there is still more upside potential if the bulls can keep up the buying pressure. The trend line along the highs from April 2010 - July 2015 will be near 86.60 by the end of the month.


U.S. Dollar contract, DX, Daily chart

The US$ got a boost this week and after some volatility around the election results it has rallied back up to the October 25th high at 99.09 with today's high at 99.08. It could pull back again within its up-channel from May, the bottom of which was tested with a quick spike down to 95.90 Tuesday night (just above its 200-dma at 95.86), but the upside target for the move up from May continues to be a little over 100 before heading back down for the last leg of its consolidation pattern since March 2015.


Gold continuous contract, GC, Daily chart

Gold's pattern has been choppy (corrective) and therefore short-term projections are very difficult. But based on its back-test of support-turned-resistance at 1308 last week and again on Monday that's been followed by a drop back down it looks like a bearish kiss goodbye that should lead to lower prices. A break below its October 7th low near 1243 should usher in more selling. The next price-level support is down near 1182, or maybe the May 31st low at 1199, before we could see a bigger bounce correction. But another rally above price-level resistance near 1308 would likely see a larger rally and potentially up to the 1400 area.


Oil continuous contract, CL, Daily chart

Last week's decline for oil had it dropping back below its broken downtrend line from June-August, which created a failed breakout attempt. That rally attempt left behind a double top with the June high. With the drop back below the broken downtrend line last week it also broke below its uptrend line from August so it was a double breakdown signal. This week's bounce was back up to its downtrend line and today's selling leaves a small back-test and bearish kiss goodbye. If the sellers drive oil below its 200-dma, currently at 43.50, we should see oil drop down to its August low at 39.19 and potentially much lower.


Economic reports

There were no market-moving economic reports this morning and only one report Friday morning -- Michigan Sentiment will be reported at 10:00. No big change is expected and I doubt the market will pay much attention to it.


Conclusion

The election results fooled the majority of the political "experts" and then the stock market fooled the majority of the financial "experts." It's been a wild week and today's stock market simply added to the confusion with the mixed messages from the different indexes. But even with the large differences between the main indexes I see similar setups where they've rallied up to potentially strong resistance and either sold off from there, such as NDX, or are potentially ready to sell off.

The bulls need to at least hold the market up on Friday to maintain the potential for a higher rally. A choppy pullback/consolidation would keep things looking bullish. But a sharp (impulsive) decline would suggest this week's rally might have set some bull traps and it would be a message to traders to not hold onto long positions since a stronger selloff could occur from here (and then prove the experts correct). We should have a much clearer picture in the next day or two and in the meantime stay nimble in your trades.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Time for a Rest

by Jim Brown

Click here to email Jim Brown

Editors Note:

Trees do not grow to the sky and market streaks always come to an end. The Dow has gained 1,389 points in four days and closed well into new high territory today. Meanwhile the Nasdaq 100 dropped back below 4,700 intraday as it lost 78 points. This was a clear sign of sector rotation as investors move into areas that should do good under a Trump presidency.

The Dow is on fire because it is the large cap industrials, energy and banks. The tech portion of the Dow was under pressure as was the dividend stocks like PG and JNJ. Strangely, IBM was an exception. The gains in the Dow stocks have been off the scale. For instance caterpillar (CAT) is up 17% over the last five days and Goldman Sachs +14%. I am loving it but these gains cannot continue.

We are likely to see some profit taking on Friday. Given the recent gains, it could be severe. Once we do consolidate, I believe we will continue higher. We just need to wait for that consolidation.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Out of Gas?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow has now rallied 1,389 points in four days and the Nasdaq 100 is crashing back to support. This is a crazy market with the Nasdaq 100 losing -78 points while the Dow gained +218. The S&P was nearly flat with only a 4 point gain.

The Russell 2000 added another 10 points but came to a dead stop at 1,255 and strong resistance at the old highs.

It is time for the market to rest. Nobody in their right mind is going to continue buying stocks that are up 7% to 15% in just a week. The Russell 2000 IWM ETF is now up +23% in the last five days. These kinds of market moves to not last regardless of the reason for the rally.

Friday could see some decent profit taking and then the rally could resume next week.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.




Current Position Changes


SMG - Scotts Miracle Gro

The long call position was opened and closed today.

YHOO - Yahoo

The long put position was stopped at the open. RELOAD on Friday



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Long and short equity trades = Premier Investor



BULLISH Play Updates


HON - Honeywell - Company Profile

Comments:

No specific news. New five-week high. Gains are starting to slow.

Original Trade Description: October 15th.

Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.

On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.

The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.

After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.

The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.

He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.

Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.

Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.

I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.

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

Position 10/17/16:

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


IWM - Russell 2000 ETF - ETF Profile

Comments:

Today was another nice gain but a dead stop at resistance.

Original Trade Description: November 5th.

The IWM currently holds 1,975 stocks and attempts to replicate the performance of the Russell 2000 Small Cap Index.

The S&P has now declined for nine consecutive days and the longest streak in 36 years. That is the equivalent to red coming up on the roulette table nine times in a row. The index is short-term oversold after a 4.8% decline. I believe the sell off over election uncertainty is nearly over. Investors and funds have had a week since the end of the October fiscal year end to make changes to their portfolios and raise cash for their post election purchases.

We all know there are several sectors that will not do well under a Clinton presidency and some that will prosper. Under a Trump presidency there are more profitable sectors but there is a greater fear of the unknown. He is a take no prisoners type of person and he has a lot of ideas about how to make American great again. Unfortunately, it may start off with a larger market sell off on that uncertainty.

Clinton is still ahead in the polls with two days to go and she is pulling out all the stops. The electoral map favors Clinton because there are more democrats than republicans. The heavily populated coastal states with a high number of electoral votes are liberal democrat while most of the flyover states are conservative republican.

The key point here is that Clinton is favored to win despite all her problems. If that turns out to be the case the market is expected to rally 3% to 5% very quickly.

There is always the possibility of a Trump upset and a temporary market dip but that would be the "Brexit dip" that should be bought. This is a headline event rather than a sudden change in the government. It would take many months or even years to get his changes passed into laws, and some would never be passed. The key point is that a Trump victory could be a sell the news event followed by a Brexit type rebound.

I am recommending a call position on the Russell 2000 ETF because the Russell is the most oversold. It is also cheaper for a speculative position.

I am going to recommend two entries. One for a positive move higher and one for a dip buy. It is entirely possible we could end up with both positions. If the dip entry is triggered first, cancel the rebound entry.

This is a SPECULATIVE position. Do not invest money you cannot afford to lose.

Rebound entry:

Position 11/7/16: With an IWM trade at $117.25
Long Dec $119 call @ $2.47, no initial stop loss.


TREE - Lending Tree - Company Profile

Comments:

No specific news. Shares pushed through downtrend resistance at $90 but horizontal resistance at $91.50 is waiting.

Original Trade Description: October 31st.

LendingTree, Inc., operates an online loan marketplace for consumers seeking loans and other credit-based offerings in the United States. The company offers tools and resources, including free credit scores that facilitate comparison shopping for these loans and other credit-based offerings. Its mortgage products comprise purchase and refinance products. The company also provides information, tools, and access to various conditional loan offers for non-mortgage products, including auto loans, credit cards, home equity loans, personal loans, reverse mortgages, small business loans, and student loans. In addition, it offers information, tools, and access to other products, including credit repair, through which consumers obtain assistance improving their credit profiles; debt relief services, through which consumers obtain assistance negotiating existing loans; home improvement services, through which consumers have the opportunity to research and find home improvement professional services; personal credit data, through which consumers gain insights into how prospective lenders and other third parties view their credit profiles; real estate brokerage services, through which consumers are matched with local realtors who assist them in their home purchase or sale efforts; and various consumer insurance products, including home and automobile, through which consumers are matched with insurance lead aggregators to obtain insurance offers. Company description from FinViz.com.

Lending Tree reported revenues that rose 35.5% to $94.6 million but missed estimates for $96.9 million. Earnings of 80 cents were in line with analyst estimates. The company lowered its revenue guidance for the full year from $380-$390 million to $370-$375 million. The stock was knocked for a $16 loss to $75.

Yes, they reported a 35.5% increase in revenue but missed estimates by $2 million and the stock was crushed. That is hardly worth a major decline.

That is not the entire story. Mortgage product revenues rose 21%. Total loan requests rose 68%. Small business lending has risen more than 200% from the year ago quarter. The MyLendingTree.com customer portal product now has more than 3.7 million members.

The CEO was not apologetic. He said in a quarter where mortgage rates were near a record low we optimized the business to expand margins and grow profits.

Earnings Jan 26th.

I see nothing wrong with Lending Tree. While they did miss revenue fractionally and guided fractionally lower for the full year, the business is booming. We should see a swift rebound because there are very few companies of any type growing this fast.

Position 11/1/16:

Long Dec $85 call @ $4.00, see portfolio graphic for stop loss.


SMG - Scotts Miracle Grow - Company Profile

Comments:

What the heck happened? After making a new high on Wednesday the stock crashed -7% on absolutely no news. We entered the position on a gap higher at the open and were stopped at lunch time after a $5 drop.

Original Trade Description: November 9th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide. The company's Global Consumer segment offers lawn fertilizers, grass seed products, spreaders, other durable products, and outdoor cleaners, as well as lawn-related weed, pest, and disease control products; water soluble and continuous-release plant foods, potting mixes, garden soils, mulch and decorative groundcover products, landscape weed prevention products, plant-related pest and disease control products, organic garden products, live goods and seeding solutions, and hydroponic gardening products; and insect and rodent control products, and selective and non-selective weed control products to protect homes and maintain external home areas. This segment provides its products primarily under the Scotts, Turf Builder, EZ Seed, Water Smart, PatchMaster, EverGreen, Fertiligene, Substral, Miracle-Gro Patch Magic, Weedol, Pathclear, KB, Celaflor, EdgeGuard, Snap, Handy Green II, OxiClean, Miracle-Gro, Osmocote, Hyponex, Earthgro, SuperSoil, Ortho, Miracle-Gro Organic Choice, Nature's Care, Whitney Farms, EcoScraps, General Hydroponics, AeroGarden, Substral, ASEF, Scotts EcoSense, Naturen, Fafard, Tomcat, Roundup, Groundclear, Nexa Lotte, and Home Defence brand names. Its Scotts LawnService segment offers residential and commercial lawn care, tree and shrub care, and pest control services through the periodic applications of fertilizer and control products. Company description from FinViz.com.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

There are two ways to play this. The stock closed at $90.45 so the $90 strikes are slightly in the money and expensive. The December $95 strike is 95 cents. I like the price but there are only 37 days for the stock to move $5. There is no January strike. The next available is March at $2.85. I have a lot of confidence that SMG will be over $95 before their earnings on Feb 2nd. I am recommending we use the March strike and there will still be a lot of expectation built into the premium when we exit before earnings. I am recommending the March strike. We are buying time but we are not going to use it.

Also, the spread is 50 cents in the March option so the stop loss will be wide until we get closer to the money and that spread will narrow.

Position 11/10/16:

Closed 11/10/16: Long March $95 call @ $3.00, exit $1.47, -1.53 loss.


XBI - Biotech ETF ETF Profile

Comments:

Another nice gain but I do not think we can expect it to go much higher without some profit taking. The XBI is up +23% since last Thursday.

Original Trade Description: October 29th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

The XBI traded up to $69 in late September and has since crashed back to support at $56 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls.

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

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

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

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

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

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

Position 11/8/16 with a XBI trade at $58

long Jan $60 call @ $2.37, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

SRG - Seritage Growth Properties - Company Profile

Comments:

Shares were up in a positive market on news they signed with Cinemark to open a 12 screen reclining theater at the Mall at Rockingham Park in Boston. Shares came within 8 cents of our stop loss.

Original Trade Description: November 7th.

Seritage Growth Properties (Seritage) is a self-administered and self-managed real estate investment trust (REIT). The Company is engaged in the acquisition, ownership, development, redevelopment, and management and leasing of diversified retail real estate across the United States. The Company's assets are held by and its operations are primarily conducted through directly or indirectly, by Seritage Growth Properties, L.P. Its portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Its portfolio includes over 3,000 acres of land, or approximately 10 acres per site for its owned properties. The Company's portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Company description from Reuters.com.

When Seritage was spun off from Sears it held about 230 properties with either a Sears store or a Kmart as the anchor tenant. Almost immediately, Sears began serving notice of intent to terminate leases. In September, Sears notified Seritage it was terminating 17 more properties. These properties are normally older malls with Sears of Kmart as the anchor tenant. Once Sears or Kmart leaves, the malls have a good chance of dying.

Seritage is rapidly remodeling and trying to release these malls and strip centers. However, in their recent earnings they disclosed the average rent before Sears/Kmart terminated was $19.25 per square foot. The average rent they are receiving after those anchor stores leave is now $13.75 per square foot.

There are two big challenges. The first is the death of the mall. Average rents are going to deteriorate until the mall finally closes. Numerous malls have already been shutdown and bulldozed to make way for office buildings of some type. That is not bad for Seritage since each center they own averages about 10 acres. However, they cannot just terminate all the leases just because Sears terminates. They will try to replace the anchor tenant and continue to operate as a mall as long as possible but income will continue to decline.

The second challenge is the current weakness in the Sears/Kmart business. There is a constant stream of rumors that Kmart will file bankruptcy after the holidays. Some distributors are no longer shipping them product for fear of not being paid.

Since the majority of Seritage properties are occupied by Sears/Kmart they are at extreme risk for further declines in those retail businesses.

Earnings Feb 2nd.

Update 11/7/16: Boenning & Scattergood reiterated an underperform rating saying SRG was seriously over valued and would have to raise significantly more capital in order to remodel the 1.7 million square feet of space Sears is terminating in January. They believe SRG is currently valued at 27% over net asset value and that will be worse when they announce a secondary offering.

Monday's market rally lifted Seritage from a 7-month low but shares only managed to gain 26 cents. If the prior decline continues it should return to the lows and test $40 in the weeks ahead. I am recommending an April option to get us past any January closing announcements by Sears.

Position 11//8/16:

Long April $40 put @ $2.37, see portfolio graphic for stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

The VXX rallied today as the Nasdaq 100 crashed with a 78-point loss despite the Dow's +218 point gain. Market is sending mixed messages.

This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.


YHOO - Yahoo - Company Profile

Comments:

Shares spiked at the open to stop us out at $41.45 and then crashed to a new 3-month low on news Verizon is unhappy with Yahoo and could move to void the agreement. In a filing with the SEC the company admitted it waited 18 months after the hack was initially discovered before researching it so see what was really stolen and the actual number of account records hacked. The filing also said the FBI is researching data supplied from a hacker that includes a significant amount of account information that was not initially thought to be taken in the account. The hacker said he obtained the information on the web and turned it over to the FBI.

We were stopped out and I am recommending we reload the position. The new disclosure contains this clause in the risk section.

"risks that Verizon may assert, or threaten to assert, rights or claims with respect to the Stock Purchase Agreement as a result of facts relating to the Security Incident and may seek to terminate the Stock Purchase Agreement or renegotiate the terms of the Sale transaction on that basis."

Buy Jan $40 put, currently $1.72. No stop loss.

Original Trade Description: October 15th.

Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.

After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.

When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.

On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.

I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.

If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.

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

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

This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.

Position 10/17/16:

Closed 11/10/16: Long Jan $40 put @ $1.90. Exit 1.96, +.06 gain

RELOAD THE POSITION AT THE OPEN ON FRIDAY


YUM - YUM Brands - Company Profile

Comments:

No specific news. Still holding just under resistance after a big rebound from the opening dip. It appears the weakness is returning.

Original Trade Description: November 2nd.

YUM! Brands, Inc., operates quick service restaurants. It operates in three segments: the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items. As of April 21, 2016, it operated approximately 36,000 restaurants in approximately 130 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food categories. Company description from FinViz.com.

Yum China had 7,300 stores and adding 1,500 since 2012. Currently they are on a path to add 600 stores a year with a growth target of 20,000 stores. This was the growth engine for Yum Brands.

Now the parent company is going to focus on a dividend model and returning cash to shareholders. Yum is planning on reducing its owned store count in the U.S. from 3,200 to 1,000. In the U.S. the pace of new restaurants has slowed significantly and Yum will concentrate on generating and retaining cash of its existing portfolio.

While Yum may generate a great dividend in the years to come, the excitement has evaporated from the stock. There will be little growth and earnings are going to flat line.

Update 11/4/16: Yum announced a giant expansion plan for Taco Bell. They are going to add 2,600 stores by the end of 2022 to bring their total to 9,000 US locations. That will increase employment by 100,000 from the current 210,000. Shares declined on the news.

Apparently I was wrong about Yum Brands lack of expansion. They are taking their most popular store and spending the money they are getting from yum China to expand it. While this will have no impact on YUM in the near future, it would be beneficial five years from now and raise earnings and dividends.

Earnings Jan 4th.

Shares are at $60 and I think they have risk to $55 or even $45. There is support at $57.50 but the company has changed. I would not be surprised to see shares cut through that support very quickly.

The YUMC shares began trading on Tuesday and YUM shares have declined sharply on Tue/Wed. The option is cheap and we will have little risk.

Position 11/3/16:

Long Dec $57.50 put @ $1.10, see portfolio graphic for stop loss.




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