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Newsletter

Daily Newsletter, Wednesday, 11/16/2016

Table of Contents

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

Market Wrap

A Slowing Rally and A Mixed Day

by Keene Little

Click here to email Keene Little
Tuesday and Wednesday saw a bit of a shift in which indexes were doing well and which were not and that has created some confusion about the market's direction. Opex week continues the tradition of being more bullish than bearish but the rally from November's lows is looking vulnerable to at least a larger correction.

Today's Market Stats

Depending on which index you look at you'll get a different picture about what's happening in the stock market. While the RUT was on fire last week and through Monday it has slowed down and struggled to hold onto its highs. The weaker indexes, such as NDX, have been stronger since Monday's lows but it's not clear if they're seeing a dead cat bounce or the start of something more bullish. The sloshing back and forth of money between sectors and indexes has been strong and this week we're seeing some of that money reverse course. This can be seen with the bonds as well.

Investors have been attempting to get in front of the stampede into stocks that are expected to do better under a Trump administration than the Obama administration. Just one example is in the coal sector, which Obama tried to snuff out. Arch Coal (ARCH) shot up almost $20 (+30%) after the election but has given back about a third of that since Monday's high. Some short covering in the stock and some real buying interest created the spike and now this week we're seeing some profit taking in those that rallied hard since it's recognized that the move might have been a little too much, too fast. From a bearish perspective, some of the indexes, such as the RUT, might be seeing its last hurrah before a much deeper market correction takes hold.

Last week the big-cap tech stocks (think FANG) were crushed as sellers in those high-flyer stocks took their profits and rolled the money over into previously struggling stocks. The small caps (RUT) benefited greatly by the rotation but as mentioned above, it too has slowed as investors decide not to chase those stocks higher right now. From a bigger-picture perspective, it's hard to discern whether the past week's moves have been simply realignment of investment positions prior to another leg up for the broader market or if instead it's part of the scrambling that's done just prior to a major peak for the market.

At previous major market tops, such as in 2000 and 2007, we saw the riskier stocks (techs and small caps) make new highs without the blue chips. It's as if the final buyers, typically retail investors, become convinced that they need to get into these stocks and typically do so at the top (the last of the buyers and then no more to follow). But this time the techs did not participate with the small caps and the Dow Industrials were right there with the RUT. Much of this had to do with specific sectors doing much better, such as the big banks, but the end result leaves a lot of confusion for those who study "normal" market patterns.

Just as this past election was anything but normal, we are finding the same thing in the stock market. Be sure to analyze specific stock/sector/index charts before making a trade since a general market direction is currently providing a mixed message. We have to look at individual charts to try to discern the answer to the question about direction and wait for more price action to see if we get a common answer out of the multiple charts to help us better guess the direction of the broader market (which has a significant impact over time for most stocks).

This morning's economic reports were largely ignored since there weren't any major surprises. The PPI came in less than expected, 0.0% vs. +0.3%, which was a drop from the +0.3% in September. The core PPI for October dropped -0.2% vs. expectations for it to stay at the same +0.2% that was reported for September. No inflation at the producer level helps the Fed in their desire to raise rates, which they've been communicating they want to do next month (and may be forced to do regardless of what happens since their credibility is increasingly on the line). At least for now it would appear they don't have to be worried about inflation.

The bigger worry, in my opinion, is deflation, which is something very few express concern about. But with debt at sky-high levels across the board (governments, corporations and personal) it will be the destruction of debt through bankruptcies and paying down the loans that will create a huge deflationary wave in the coming years. The Fed has to worry about crushing any hopes of an economic recovery with a rate hike but I don't think they have to worry about inflation. Not yet anyway.

With the large move between sectors and indexes in the past week I noticed the S&P 500 index tended to remain somewhat in the middle of it all and remains one of the better market proxies. I'll start off tonight's chart review with its weekly chart.


S&P 500, SPX, Weekly chart

There's a large parallel up-channel that SPX has been trading in since the October 2011 pullback low. The last time it got near the top of the channel was back in late 2014 and all this year it's been trading in the lower portion of the up-channel, which shows general weakness as compared to the early part of the rally from October 2011. This matches the idea that the rally from February is the 5th wave of the rally from 2009 (the October 2011 low would be the 2nd wave pullback correction).

I show the potential for SPX to rally up to the parallel line near the middle of the up-channel (where the April and August highs stopped), which could see SPX hit 2250-2300 by the end of the year. Another possible upside target is 2223, which is the 127% extension of its previous decline (2015-2016) since that's a common target/reversal level. But there is still the possibility that the August high near 2194 was the final high and a back-test of the broken uptrend line from February, near 2189 by the end of the week, will be followed by a bearish kiss goodbye and a strong selloff. I consider the upside from here as very risky while we wait to see if we get a reversal signal.


S&P 500, SPX, Daily chart

The daily chart is a little messy but two things I'd like to point out is last Thursday's back-test of the broken uptrend line from February-June and achievement of a price projection at 2182.28 (with the high at 2182.30). That price projection is where it's possible the rally off the November 4th low completed the c-wave of a large a-b-c bounce pattern off the September 12th low. This is an expanded flat correction in EW terminology since the b-wave (September 22 - November 4 decline) made a lower below the a-wave (August 15 - September 12). The c-wave in this pattern typically achieves 162% of the a-wave, which is the projection to 2182.28. The combination of that achievement and the back-test of the broken uptrend line is what has had me thinking the short side should work. But I'm watching to see if we get another back-test, including a possible test of the August high, before aggressively turning bearish. As shown on the 60-min chart further below, I'd back off on the short side if it rallies above 2190, and especially 2194, and wait to see how it does near 2223 (if reached). Will we more likely see 2175 or 2200 for Friday's settlement number? Who knows, maybe back down to 2150 for a settlement number.

Key Levels for SPX:
- bullish above 2183
- bearish below 2151


S&P 500, SPX, 60-min chart

If SPX pushes higher this week I'll be watching for the possibility it won't get above 2189, which is where it would back-test its broken uptrend line from February and its downtrend line from August 15-23 (not shown on the daily chart above since it's practically coincident with the horizontal line off the August 15th high near 2194). It's also looking like we're completing a 5-wave move up from November 4th (with bearish divergence on MACD helping confirm the wave count). The vulnerability for bulls, from an EW interpretation, is that the leg up from November 4th will complete the 5-wave move up from February, which in turn will complete the 5-wave move up from 2009 (to complete the 2009-2016 cyclical bull market). This is the reason why I'm looking for a MAJOR top for the stock market and it could be within hours/days. At least that's the bearish potential and why I don't like the upside potential vs. downside risk.


Dow Industrials, INDU, Daily chart

The Dow had a strong rally off its November 4th low, which resulted from a big move into stocks that are thought to do well with expected policy changes out of the Trump administration. Stocks like CAT did well since they'll sell more equipment with infrastructure spending. As the US dollar rallied it strengthens international companies like CAT, GE and IBM. The big banks, like GS and JPM, did well as people expect these banks to do better with an assumed rate increase by the Fed next month and since they'll participate in the new loans expected to fund construction projects and international business. Whatever the reasons, the Dow rallied +5.9% into Monday's high while SPX rallied +4.7%. Both are respectable rallies for sure but the Dow's outperformance like that is a little unusual. Too much, too fast? That should be a concern, especially since the VIX collapsed at the same time.

While the Dow currently sits 200 points above its August high at 18668, the same cannot be said about the NYSE advance-decline line. The a-d line is lagging badly, which shows the rally has not been broad-based and that should be very worrisome to bulls. It's the first time in a long time that new highs are not being supported by a new high for the a-d line and that's a strong warning about the possibility a top is being made around here. The higher prices go without a new high in the a-d line the more vulnerable it becomes. The last time a divergence of the same magnitude was seen was at the May 2015 high, which led to a -16% crash into the August 2015 low. The current divergence is also greater than what was seen at the 2007 top. Buyers beware here.

As for the Dow's chart, it has rallied up to a trend line along the highs from November 2015 - August 2016, near today's high at 18910. I see the potential for a rally up to at least the trend line along the highs from April-August 2016, near 19100, but it's not something I'd bet on (too risky). The pattern for the rally from November 4th suggests a drop below last Friday's low near 18737, would signal a top is likely in place. Back below the August high at 18668 would leave a failed breakout attempt and confirmation that either a large pullback is in progress or potentially something much more bearish.

Key Levels for DOW:
- bullish above 18,935
- bearish below 18,668


Nasdaq-100, NDX, Daily chart

As mentioned above, NDX was pummeled last week but has been relatively strong since Monday's low. The bounce into today's high made it up to its broken 20-dma, near 4789, and closed marginally above it. The broken 50-dma is a little higher, near 4811, and then price-level S/R near 4816. It would obviously turn more bullish above its November 10th high near 4856, but the bearish pattern calls the bounce just a correction and will be followed by strong selling.

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


Russell-2000, RUT, Daily chart

The RUT's rally has it approaching the trend line along its highs from April-June-November, currently near 1319, and that's the upside potential I see for this week. It would be bullish above the line (watch for a head-fake break and then failure). But the RUT has stalled and the risk is for a small rolling top (intraday pattern) this week could lead to a strong reversal back down next week.

Key Levels for RUT:
- bullish above 1320
- bearish below 1257


Volatility index, VIX, Daily chart

With the stock market rally we've seen a collapse in the VIX and once again, it looks like a move that's gone too far, too fast. The setup on November 4th, with the tag of its downtrend line from January-June, was for a reversal back down, which had forecasted a stock market rally following the election. Now it's getting close to the uptrend line from August-September, currently near 12.80, and while there's no guarantee it will get there or turn there, the pattern for its decline suggests looking for a reversal back up soon, which makes the uptrend line a great spot to watch closely, especially if it's hit by the end of this opex week.


10-year Yield, TNX, Weekly chart

The other big mover in the past week has been bonds and in fact a much bigger move than has been seen in a long time. Bonds sold off hard, which has driven yields higher and many are claiming this is the kickoff to a longer-term selloff in bonds with the completion of the 30-year bond bull market. I remain unconvinced of that, with my belief that we're in a period of "disinflation" and which will become much more of a deflationary period. But it's hard to argue with the recent move and it's either the middle of what will become a stronger move or it's an overreaction to what many think will drive interest rates higher in the coming year (government spending, inflation, etc.).

The 10-year yield gapped up on Monday, following the strong rally last Wednesday and Thursday (the bond market was closed last Friday) and the week's candle, so far, is a spinning top doji just above the 200-week MA at 2.207%. Watch for the possibility that this week's candle is followed by a red candle next week, which would create a candlestick reversal pattern. That would be especially true if it gaps down next Monday and leaves behind an evening star doji. That's just speculation for now and if bonds continue to sell off this week and next we could see TNX head up to its downtrend line from June 2007 - December 2013 (log price scale).

The one caution we have with the bond market's strong move is that it's another too much, too fast kind of move. Gradually rising rates might not disturb the stock market's rally (one reason why the Fed has been so careful to introduce the idea of slowly raising rates) but a very fast rise in rates, as we've seen, leaves stocks very vulnerable to a more significant correction. The weekly RSI is now more overbought than it's been since its 2013 high, which doesn't mean it will reverse here and now but it's certainly vulnerable to that happening.


KBW Bank index, BKX, Weekly chart

With the big rally week for the banks BKX made it near the top of a broken uptrend line from February, which is a line that's parallel to the uptrend line from June. This shows the similarity between the rallies and with this week's test of the broken uptrend line, near 85.50, there's a good possibility it's topping out here. This week's candle, so far, is a shooting star after tagging resistance as well as achieving a price projection at 84.97 for two equal legs up from February. There's slightly higher potential to the trend line along the highs from April 2010 - July 2015, near 86.50. Monday's high was 85.92.


Transportation Index, TRAN, Weekly chart

The transportation stocks have rallied strong the past two weeks since investors must believe the economy is going to improve under a Trump administration and that that will then help the transportation industry. I have my doubts about that but the market is a little bigger than I am. However, the TRAN has reached a potentially important level for the bounce off its January low. Two equal legs up for a 3-wave bounce correction to the decline off its November 2014 points to 8775, which was achieved yesterday and again today (this morning) but it couldn't hold that level into today's close. The longer-term pattern suggests the TRAN is now ready to resume its decline that started off the November 2014 high. But if the buyers can keep up the pressure and the TRAN can stay above 8775 into next week we could see it head for a new all-time high. That makes it an important inflection point here and we should know over the next few days whether or not the current rally will get reversed.


U.S. Dollar contract, DX, Weekly chart

The US$ has rallied the past two weeks and finally made it up to the top of its sideways consolidation off the March 2015 high. The top of a shallow down-channel is near 100.30 and the dollar climbed above that level yesterday and again today but it's struggling to hold above that level. At this point it's not clear if the dollar is going to turn back down but that's my expectation. The pattern of the rally from May suggests it will remain inside the consolidation range and one more leg down into early next year would do a nice job setting it up for the next rally leg (above 105).


Gold continuous contract, GC, Daily chart

The dollar's rally has put some downward pressure on the commodities sector but more so for the metals. The metals have been in decline since topping back in July and gold's bounce off the October 7th low resulted in a back-test of failed support at 1308 in the beginning of the month. That was quickly followed by a bearish kiss goodbye and strong selloff into Monday's low and below its October 7th low. The back-test of support-turned resistance at 1308 was a classic setup for the bears. The bounce off Monday's low looks like a bear flag consolidation pattern and I expect gold to head lower to potentially stronger support at either its May 31st low at 1199 or price-level support near 1180, which goes back to lows in 2013 that acted as support until the breakdown and back-test in 2015. Gold then rallied back above 1180 in February so a drop back below that level would be more bearish for gold.


Oil continuous contract, CL, Daily chart

In last week's update on oil I had mentioned the leg down from October 19th looked close to completion and should set up a bounce correction before heading lower. The bounce off Monday's low looks to be that correction and while I'm showing a higher bounce into next week on my chart it's not required. At the moment it's struggling with its downtrend line from June-August, which it broke above at the end of September and then dropped back below on November 2nd. The back-test of that trend line could be followed by a bearish kiss goodbye from here. But a little higher it would back-test its broken 20- and 50-dma's, both near 47, which would also be a 50% retracement of its October-November decline. It could make it up to its broken uptrend line from August-September, near 47.80 by mid-week next week, or maybe even up to the 62% retracement of its decline at 48.21. But it has retraced 38%, at 45.92, and therefore the minimum expected bounce correction has now been met.


Economic reports

Thursday's economic numbers include the CPI numbers, which are expected to have ticked up from the September reading. Another zero or negative number might get some analysts mumbling something about "disinflation." Some housing numbers are not expected to change much but I noticed the home builders are struggling so the numbers could come in weaker than expected, which might cause the Fed to pause and at least think about whether or not it would be wise to raise rates. But then again I've never been accused of calling them the sharpest knives in the drawer.


Conclusion

For the past week, since the election results, we've seen a strong rotation out of some previously strong sectors into previously weak ones. But the quick rotation can actually be considered a sign of instability in the stock market and in the past week we had a few signs of trouble. I mentioned the deteriorating advance-decline line and in addition to that we had a cluster of Hindenburg Omen and Titanic Syndrome signals. As indexes test resistance we saw new highs and new lows last Friday each at 60-day peaks and the last time that happened was back in June 2008. The rest of that year was not kind to bulls who stubbornly held onto their long positions.

None of this says the rally will reverse here and now but they are additional warning signals and with some indicators pointing to the same conditions as we saw at previous important highs (2007, 2015) I think it's important to understand the risk here. Upside potential is once again dwarfed by downside risk and holding long positions overnight could be very risky. It goes without saying that holding short is risky, especially without any kind of confirmation that the market has topped. But the setups on several indexes have me nibbling on the short side (put options, risk it all, no stops) and I think we'll know by this time next week whether or not the market will turn down or possibly hold up into at least Thanksgiving next week (holiday-shortened weeks tend to be bullish). Trade carefully over the next several days.

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 to Take a Bite

by Jim Brown

Click here to email Jim Brown

Editors Note:

It may be time to take a bite out of Apple in expectations for a rebound in big cap techs.


NEW DIRECTIONAL CALL PLAYS

AAPL - Apple Inc - Company Profile

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. Company description from FinViz.com.

Apple shares have been under pressure since topping at $118.25 before their Q3 earnings. Q4 estimates are rising thanks to the problems with the Samsung Note 7 that forced its removal from the market. Sales are said to be booming despite tight supply. Apple cannot make enough phones to fill the demand going into the holiday season and that suggests it should be a good quarter.

The company is also expected to announce some new products soon including "digital glasses." The rumors breaking about the next iPhone model to be announced next September already have Apple fanatics excited. Those include full frontal screens without any edges. This will allow full use of the phone's screen and allow for smaller phones overall sizes while keeping the screen sizes the same. There is rumored to be a 4.7 inch, 5.0 inch and 5.5 inch model. The 5.5 inch model is said to be an OLED screen with curved edges.

Regardless of the future new product rumors, several high profile funds have increased positions in the stock. Steve Cohen and Ray Dalio have reportedly increased their stakes.

Apple shares dipped to $104 on Monday and touched the 200-day average. That has been support/resistance dating back to September 2013. Since Monday's dip, which was seen as the last bout of climax selling for the big cap tech stocks, Apple shares have risen for two days.

Today, with Apple at $108, somebody bought 160,000 contracts of the December $115 calls. Even at the average price of 75 cents that was a $12 million dollar bet that Apple is going higher over the next 30 days. That takes some serious conviction. I am recommending we follow them only use the January option just in case they are wrong about the timing.

Earnings January 24th.

Buy Jan $115 call, currently $1.87, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Consolidation in Place

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow finally gave up ground as weakness in financials and industrials broke the string of record closes. We were due for some profit taking and Goldman's 20% gain over the prior week was begging for some selling. The bank gave back 5% today and was the biggest loser on the Dow.

Even with Goldman knocking about 30 points off the Dow the index only gave up 55 points. The Dow has been moving sideways with a positive bias for the last four days and today's loss is still in the trend. There was no damage.

The Russell 2000 squeezed out another fractional gain to close at a new high despite the financial sector weakness.



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


FB - Facebook

The long call position was entered at the open.

YHOO - Yahoo Inc

The long put position was stopped at $40.65.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates


FB - Facebook - Company Profile

Comments:

We caught a break today. Facebook shares dipped at the open on news their advertising tracking numbers were wrong. The stock dropped to $114.48 at the open and the call option opened at 60 cents lower than Tuesday's close. Facebook rebounded almost immediately because the errors did not have anything to do with the number of ads served or the prices paid. Now we need somebody else to buy the dip.

Original Trade Description: November 12th.

Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.

The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.

Facebook still makes a lot of money and they still have a lot of assets to monetize. Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.

Earnings February 1st.

Position 11/16/16:

Long Feb $125 call @ $3.05, see portfolio graphic for stop loss.


IWM - Russell 2000 ETF - ETF Profile

Comments:

Excellent relative strength with a decline of only a penny. Maybe there is some life left in the small cap rally.

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, see portfolio graphic for stop loss.


SMG - Scotts Miracle Grow - Company Profile

Comments:

No specific news. Shares continue their rebound from the dip last week.

Original Trade Description: November 12th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide.

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.

Position 11/14/16:

Long March $90 call @ $3.90, see portfolio graphic for stop loss.


WDC - Western Digital - Company Profile

Comments:

No specific news. Still testing resistance at $60.

Original Trade Description: November 12th

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

Last week WDC announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy with a price target of $69.64. Shares closed at $58.89 on Friday.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Position 11/14/16:

Long Jan $62.50 call @ $2.20, see portfolio graphic for stop loss.


XBI - Biotech ETF ETF Profile

Comments:

Finally got a decent dip on profit taking. Shares closed above support at $65 and I lowered the stop loss slightly to just below that level. It has been a good run and if we are stopped it will be for a nice gain.

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)

CERN - Cerner - Company Profile

Comments:

No specific news. Minor loss on low volume. Now we need a new closing low and we will be in good shape.

Original Trade Description: November 14th.

Cerner Corporation designs, develops, markets, installs, hosts, and supports health care information technology, health care devices, hardware, and content solutions for health care organizations and consumers in the United States and internationally. The company offers Cerner Millennium architecture, which includes clinical, financial, and management information systems that allow providers to access an individual's electronic health record at the point of care, and organizes and delivers information for physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals, and consumers. It also provides HealtheIntent platform, a cloud-based platform that enables organizations to aggregate, transform, and reconcile data across the continuum of care, as well as assists to enhance outcomes and lower costs. Company description from FinViz.com.

When the company reported earnings on November 1st they missed on all three metrics. Earnings of 59 cents missed estimates by a penny. Revenue of $1.18 billion missed estimates for $1.24 billion. They guided for Q4 earnings of 60-62 cents and analysts were expecting 65 cents. They guided for revenue of $1.23-$1.30 billion and analysts expected $1.32 billion. Bookings fell -10% to $1.43 billion and below Cerner's own guidance for $1.45-$1.60 billion.

Shares fell after the report then fell again after the election on uncertainty over what the health care changes will do to existing programs and services. With potentially sweeping changes to the sector and Cerner already under pressure the stock began to decline again.

Earnings Jan 31st.

With shares declining in a bullish market and setting a new 3-year low on Friday, I expect them to continue lower as the bullishness wears off.

Position 11/15/16

Long Jan $47.50 put @ $1.65, see portfolio graphic for stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

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:

No specific news. Shares gained 2% to stop us out at $40.65 for a 45 cent 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.

Update 11/10/16: 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.

The new SEC 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."

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 11/11/16:

Closed 11/16/16: Long Jan $40 put @ $1.90. Exit $1.45, -.45 loss.

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


YUM - YUM Brands - Company Profile

Comments:

No specific news. YUM finally closed under $60.70 after closing exactly at that number for the prior three consecutive days. Zacks reported there were five estimate reductions over the last month. They reiterated their strong sell recommendation.

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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