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Daily Newsletter, Saturday, 11/19/2016

Table of Contents

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

Market Wrap

Calm Before the Storm?

by Jim Brown

Click here to email Jim Brown

The major indexes all posted gains for the week but those gains were muted after the post election bounce.

Weekly Statistics

Friday Statistics

The Dow only managed a 20-point gain for the week as the big cap stocks started to fade. The small cap Russell 2000 continued to surge with its 11th consecutive daily gain and another new high. The small caps are definitely leading the market but the large caps are beginning to weaken.

I believe this is the consolidation period from the monster post election gains. Traders were locking in profits ahead of the weekend event risk. It never hurts to take some gains off the table and reposition into different stocks.

With Thanksgiving week typically bullish it will be interesting to see if the historical trend holds or will the profit taking increase. I believe we will see continued but possibly muted gains.

The Russell is extremely overextended and due for a rest with resistance at 1,325. On Monday, more than 25% of the Russell components made new 52-week highs. That was a record.


On the economic front, the Kansas Fed Manufacturing Survey for November posted a decline from 6 to 1 and right on the verge of going negative again. That is only the 4th positive number over the last 12 months with a low of -12 in February. Nearly all the components weakened with prices paid the big gainer. Weak activity in nondurable goods, specifically food products and plastic items were blamed. Producers were still optimistic despite the weakness.



The state and regional employment reports showed employment increased in only 11 states in October, down from 14 in September. Employment fell in 5 states and was unchanged in 34 states. Washington added 10,600 jobs, Michigan 18,900 and California 31,200 for the biggest gainers. Connecticut lost 7,200, South Carolina -9,900 and Minnesota lost 12,500 to top the losers list. The report was ignored.

The economic calendar for Thanksgiving week is relatively bland with the existing home sales and Richmond Fed surveys on Tuesday the only material reports. The FOMC minutes are already assumed to point to a December rate hike so there is no mystery there.

The CME odds of a rate hike are now over 95% so there the hike is already priced into the market. The only surprise would be a hike of more than a quarter point but I doubt the market would care.



There was very little stock news on Friday as everyone is already going dark for the holidays. Foot Locker (FL) reported earnings of $1.13 compared to estimates for $1.11. Revenue of $1.89 billion matched estimates. Same store sales rose 4.7% and in line with estimates. The company opened 21 new stores in the quarter but closed 28 nonperforming stores. Shares were up fractionally on the news.

However, the earnings had a negative impact on Under Armour (UA). Foot Locker said the Steph Curry 2.0 and 2.5 shoes "performed well" during Q3 but the Curry 3.0 shoe which came out on October 27th, "started off a bit slower than the two previous models" but it was still early. Shares of UA fell -4% on the comment.



Hibbett Sports (HIBB) reported a 21% decline in earnings to 66 cents that badly missed estimates for 74 cents. Revenue of $237 million was only fractionally shy of the $237.8 million estimate. They guided for full year earnings of $2.82-$2.88 per share. They blamed the soft quarter on weak apparel sales because of the unseasonably warm weather. Shares fell 11% on the news.


Abercrombie & Fitch (ANF), a serial disappointer, reported earnings of 2 cents compared to estimates for 21 cents and earnings of 48 cents in the year ago quarter. Revenue of $821.7 million missed estimates for $830.6 million. A year ago, they posted $878.57 million in revenue. This was the 15th consecutive quarter of declining sales. Same store sales fell -6% compared to estimates for a -3.9% decline. The company said it expected "challenging" comps for Q4 but slightly better than Q3. Analysts are expecting earnings of $1.07 on revenue of $1.07 billion. Shares fell -14% on the news.


The Buckle (BKE) reported earnings of 48 cents that missed estimates for 51 cents. Revenue of $239.2 million matched estimates. Same store sales imploded with a -15.3% decline. Online sales fell -8.5%. Year to date sales are down -11.8%. It was a miserable report but shares rose 2% for no apparent reason. This looks like a short candidate along with ANF.


Wells Fargo (WFC) was cut to a sell at BMO Capital Markets. They believe the rally after the scandal has been too extreme and they issued a $47 price target with the stock at $53. After the bell, Wells Fargo declared cash dividends on their various preferred shares from $18.75 to as much as $414.06 per share depending on the preferred series. Also after the bell, bank regulators revoked WFC's right to be exempted from some executive compensation rules and said it might attempt to claw back some pay from executives. The bank also has to apply for permission before appointing any new officers. In the period after the scandal, new account openings declined 44% year over year and -27% from September to October. Account closures rose 3%. Based on all the bad news I agree with the BMO call. WFC looks over extended here.


Citigroup (C) was cut to neutral by Macquarie with a $57 price target. The stock closed at $55.45.

Gap Inc (GPS) was cut to sell by Citigroup with a $25 price target, about $6 under the Thursday close at $30.71. The reason was the weak outlook in Thursday's earnings. The stock immediately crashed to $25.50 on the combination of the headlines.


The earnings cycle is coming to a close and there are very few companies reporting next week. Jack in the Box (JACK) on Monday will be a highlight along with Hewlett Packard Enterprise (HPE) on Tuesday. Hewlett was raised to outperform at Raymond James ahead of the earnings. Deere & Co (DE) will report on Wednesday and this could be an interesting event. The stock is very extended given the weak global demand for tractors.


According to Factset, more than 95% of S&P-500 companies have reported earnings for Q3. More than 72% beat their earnings estimates and 55% beat their revenue estimates. The blended earnings growth for Q3 is +3.0% and the first quarter of growth since Q1-2015. At the beginning of the quarter, the consensus was for a -2.2% decline. Companies posted 2.7% revenue growth and that was the first quarter with growth since Q4-2014.

For Q4, 68 companies have issued negative guidance and 32 companies have issued positive guidance. The forward S&P-500 PE is 16.7. Another 13 S&P companies will report earnings this week.

Q4 earnings growth is now expected to be 3.4% with 4.9% revenue growth. For all of 2017 analysts are projecting 11.4% earnings growth and 5.9% revenue growth. This will change significantly from quarter to quarter. For instance, Q1 earnings growth is expected to be 13.4% alone but the strong dollar is likely to knock that back considerably.

The dollar has surged to a 14-year high at $101.21 on the dollar index, which values the dollar against a basket of currencies. This is going to be very damaging to companies that export and sell products overseas. The rising dollar is going to negatively impact commodities and that will eventually be a drag on equities.


The rising dollar along with the Brexit issues in Europe have pushed the Euro to within .02 of a ten-year low. The Euro could reach parity with the dollar in a short period of time if the current trends continue.


Gold prices have collapsed back to $1,200 on the surging dollar and the outlook for a stronger economy. The gotcha in this decline is that Trumps policies could fuel inflation and make gold a good investment in the future.


The yield on the ten-year treasury has spiked nearly 65 basis points over the last three weeks. That is a 35% increase in yield in a very short period of time. This is causing havoc in the mortgage market with 30-year rates now in the 4.25% range. Borrowers are now being rejected because they no longer qualify at the higher rates. Obviously, 4.25% is not high on a relative basis but it is high compared to the 3.25% advertised rate just a month ago.


The equity rally may be ending its run in the short term. As I reported above the analyst downgrades are starting to flow because so many stocks, especially financials, have risen significantly. While reducing a rating on one or two banks is not likely to subdue sentiment, having a dozen analysts reduce ratings on the leaders will have an impact.

Temporarily, the big banks are holding their gains but this is not likely to last. There will be profit taking. I would look at the December 14th Fed announcement as a sell the news event if we have not already seen some significant profit taking before that event.


OPEC has still not made up their collective minds about a potential production agreement and the meeting is the following Wednesday. Crude prices have traded between $43-$46 for the last two weeks with the exception of the one-day dip to $42. U.S. inventories are building again with the addition of 22.1 million barrels over just the last three weeks. I expect volatility to pick up slightly as we get closer to the meeting and the headlines begin to flow.


Last week was a good week for the drilling sector. Despite oil prices hitting $42 the week before, the active rig count rose by +20 to 588. Oil rigs added 19 and gas rigs added 1. The offshore count increased by 2 to 23. Producers have been mixed in their comments about the odds for an OPEC agreement but they are putting rigs to work as though they expect it to happen.


 


 

Markets

There have been multiple studies done covering trading patterns surrounding Thanksgiving week. Each reached a similar conclusion but different reasoning for the pattern. Without going into a lot of detail, it is sufficient to say that the market is typically bullish in Thanksgiving week. Black Friday is normally bullish and it is blamed on the positive consumer sentiment because of the holiday and the fact a lot of investors are not working on Friday so they tend to be on the computer rather than out wandering the malls.

The week after Thanksgiving is random and some blame the direction on the results of the Black Friday-weekend sales. If the retail reports are bullish then it is seen as a positive event for a strong holiday season. If the post weekend reports are negative then sentiment turns negative. There are analysts that are recommending selling retailers on Black Friday in a sell the news trade.

The Stock Trader's Almanac first noted the positive Thanksgiving trend in 1987. For the 35 years prior, the Wednesday before Thanksgiving and the Friday after were up 33 of 35 years. Unfortunately, that trend changed as soon as it was discovered. In the 29 years since 1987, there have been 13 declines and 16 advances. However, since 1987 the Dow has posted gains from the Black Friday close until year-end 22 of 28 times.

The big question is whether post election bounce has pulled all the buying forward and left us with another confused market until 2017.

The S&P had a strong chance of making a new high last week but missed it by a few cents. The record closing high from August is 2,190.15. The opening high on Friday was 2,189.89. That missed the old high by .26 points.

I speculated last week that a retest of that high could either produce a breakout where those shorts still in denial suddenly raced to cover OR it could turn into a double top followed by a decline.

So far, neither has happened but the selling was immediate when the S&P spiked to that Friday high. Fortunately, the decline was minimal and the S&P only lost 5 points.

The setup for next week is bullish. If the S&P could break through that 2,190 level in a normally bullish week, we might get some follow through. Nothing attracts new investors faster than new highs.

Support levels are now 2175, 2165 and 2150.


The Dow ran into resistance from November 2015 at the 18,900 level on Monday and never progressed any further for the rest of the week. With all the Dow earnings behind us, there is only post earnings depression ahead and profit taking from the post election bounce. I would like to think that the dead stop for a week at 18,900 was that consolidation and the trend higher will resume. However, what I wish and what really happens seldom comes to pass.

I am very encouraged that while the Dow failed to move over 18,900 it also failed to decline for the entire week with a progression of higher lows, even though the lows were only microscopically higher. The Dow traded in roughly a 100-point range from around 18,813 to 18,913. Given the +959 point gain the prior week, this tight range with no material profit taking was remarkable. That also gives us the support and resistance levels to watch for next week.



The Nasdaq closed only 6 points below a new high on Thursday at 5,333. Friday's intraday high at 5,346 was a new intraday high by 3 points but it could not hold the gains. Like the S&P, it flirted with the high but was not able to push through.

This tells us there are sellers waiting in both cases. However, like the Dow, the Nasdaq did not decline materially with only a 12 point loss on Friday ahead of weekend event risk. The indexes are poised to move higher but it will require a new sentiment spark to make it happen.



The Nasdaq 100 is still lagging but it did recover somewhat from the post election volatility. The biggest drag on Friday was GOOG and GOOGL with a combined 20-point decline. The sector rotation is still taking its toll but once the profit taking begins in the financials the techs should improve.


I have mixed emotions about next week. It is typically bullish and the indexes did not pull back significantly from resistance. That suggests underlying strength that is more than just a trading bounce. However, we are very overextended and due for a dip.

I mentioned last week that analysts tend to always be looking for the "end" of the trend rather than the extension of the trend. That happens in both bullish and bearish markets when a strong reversal appears. I can remember years ago expecting the end of a sudden bullish reversal every week for months and every week it failed to occur. Because of that memory, I hesitate to predict an end to this rally. The investing paradigm has changed. Bonds are being sold and money is pouring into equities, Since the election more than $35 billion has flowed into equity funds and $10 billion has flowed out of bond funds. Bank of America's Michael Hartnett, said it was the largest equity inflows in two years and the largest bond fund outflows in 3.5 years. He also said it was the largest weekly disparity ever. It is entirely possible we are seeing the long awaited Great Rotation out of bonds and into equities. If that is the case, equities have a long way to go.

On Friday, Tom Lee of Fundstrat was still predicting 2,325 for the year end S&P. He also believes the paradigm has changed. He said more than 21,000 new regulations have been created over the last 8 years that can be wiped out with the stroke of a pen. This will free businesses from hundreds of billions in regulatory costs. He said Washington's regulatory staff has increased by more than 25% at a cost of $108 billion a year to enforce these regulations.

With multiple big name analysts now predicting a continued boom it would be tough for portfolio managers to bet against the trend. Of course, the last 8 days does not make a trend. It would be a good start but we need the S&P and Nasdaq to follow the Dow and Russell to new highs before we can actually call it a trend.

 

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Random Thoughts


The surge in bullish sentiment continues and with good reason. Bullish sentiment has risen more than 23% over the last two weeks. Bearish sentiment declined -7.8% over two weeks and neutral sentiment has declined -15.3%. This survey ended on Wednesday before the Nasdaq made the new intraday high.

Last week results

Prior week results


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."

Paul Samuelson


 


Index Wrap

It Will Never Happen

by Jim Brown

Click here to email Jim Brown
It would really be nice to reach a point in the market where we could just relax and enjoy the trend for 2-3 months without worrying about what the next week will bring.

Unfortunately, it will never happen. Regardless of how dramatic a move the market is making we will always have to worry about what will happen in the future. In our current case, the markets are up sharply and there is no material sign of an impending decline. Support is holding, no profit taking has appeared and the paradigm has apparently shifted from bonds and dividend stocks to financials and industrials.

Our worry for next week is the potential for profit taking as analysts whip out their downgrade pens and begin to slash ratings based on price.

There was a story out this weekend that could send the markets into overdrive. Trump, Pence and Mitt Romney met to discuss a potential cabinet appointment. Some analysts believe that would be the crowning achievement of the Trump selection process and would solidify the idea that the upcoming administration will be a game changer rather than a continuous stream of disturbing headlines.

The article suggested a Romney appointment would put the markets into overdrive. However, if that were the case, what happens if Romney declines? Does that send the markets careening back into a bearish direction?

I seriously doubt it but that is just one example of how everything impacts the markets and we may never be able to just launch a bunch of positions and then go on vacation for three months. I went on vacation for a week back in 2000 and it cost me a fortune. I will never do that again.

As traders, we have to continually monitor the market with an eye on support and resistance and our other eye on economics, headlines and politics. Long-term investors ignore all the signposts at their peril.

I was talking to a long-term investor several weeks ago about selling his position in Amazon when it was around $840. I explained that Amazon had a habit of selling off between Black Friday and the end of January. In some cases, it was a significant drop of $200 or more. He said it did not make any difference because he was a long-term investor. Ten years from now Amazon would be "well" over $1,000. While I agree with him in theory, I have seen too many stocks that had Amazon like charts at one point and then events changed and today they are only a fraction of their original price.

Here are some painful memories for people who were buy and hold, long-term investors.




Lastly, one of the stock rockets of the Nasdaq glory days was Microstrategy. On a split adjusted basis the stock traded at $3,300 at the highs in 2000. In reality, I think it was only about $800 or roughly the level where Amazon trades today. People who bought the hype on the way up and held on, were crushed at the bottom.


The point to this story is that things change. The market changes, the stock story changes, competition changes, products evolve and valuations evolve. Nothing ever grows forever in the investing world. Amazon's PE of 170 today could correct if the company focus changed or the investing public grew tired of a company that rarely posts a profit. While I do not see that in the near future, we should never grow complacent in our holdings. What would happen to the market if another 9/11 or worse were to occur on Monday? It could happen at any time.

The market today could be on the verge of breaking out to a new leg higher. With Tom Lee projecting 2,325 by year-end and others predicting 2,500 in two years, we could be getting ready for a major bull market. However, analyst predictions are only worth the digital ink they are printed with. The market makes its own decisions.

Wharton professor Jeremy Siegel has been predicting Dow 20,000 in 2016 for most of the year and that was back when the Dow was just barely over 16,000. Of course, Siegel was also predicting 10% earnings growth in Q3/Q4 as well. We may actually see Siegel's prediction come true but not for the reasons he was claiming. The election changed the course of the market and could change the course of the country and Siegel was not even considering that back in March when he was making his predictions for year-end.

We need to remain focused on the short-term market patterns so we are not surprised by the long-term changes.

The Dow surged 950 points the prior week and gained only 20 last week. However, that was remarkable in its own right. The Dow did not decline after the monster gains. The pattern of higher lows suggests investors are still looking for a dip and they are willing to buy even the slightest decline. That could be signaling a pending breakout next week if the bullish Thanksgiving trend continues.


The S&P is my flash point to watch for next week. If the S&P can move over the prior high at 2,190 and extend its gains even a little bit, I think we could see some short covering and price chasing by funds. Traders that shorted the month long stall at the highs back in August are probably still in denial that the index will push through those levels.

Portfolio managers are probably keeping some cash in reserve hoping for a decent dip on profit taking to add to positions. If that dip never appears and the S&P breaks out over 2,190 they will begin to throw cash at the market in an effort to not be left behind. We could see another sharp spike higher if that occurs.


One chart that is both scary and promising is the Dow Transports. They have exploded higher and are confirming the Dow gains. The Transports have to close over the prior high of 9,198 in order to give a Dow Theory buy signal the transports must also breakout to new highs. While they are already confirming the Dow move, the next major signal would be a new transport high. The index closed at 8,856 on Friday putting it about 350 points below a new high level. The transports have gained about 800 points over the last two weeks or 9.7%.


Another factor for the market remains the biotech sector. Since the election, the sector has gained roughly 19% because the Clinton price control threat evaporated. The $BTK index has resistance at 3,475 and we need to see that resistance broken with another big gain. The Nasdaq and the Russell 2000 need that support to continue their moves.


Lastly, the semiconductor sector has to continue its gains. The Semiconductor Index has gained 9% over the last two weeks and appears to be accelerating. We can think Nvidia and AMD for the recent sprint higher. However, big cap chip stocks like Intel are still lagging. We need for the laggards to break out of their doldrums and contribute to the SOX gains. This is a major Nasdaq component that can help lift the index higher.


Currently the $SOX is leading the Nasdaq by a wide margin and we want that to continue because eventually the Nasdaq will accelerate to catch up.


The two week rebound has significantly improved the internals. The percentage of S&P stocks back over their 50-day average has risen from 27% to 59% in only two weeks. The percentage over the 200-day improved from 53% to 65%.



The percentage of stocks with a buy signal on the Point & Figure charts has risen from 50% to 61.4%. Compared to the 77% in August when the S&P was at the same 2,185 level, this is significantly lower. This is due to the damage done in the two weeks before the rebound.


The worry for this week is the potential for a double top on the S&P and Nasdaq. Since the Dow and the Russell 2000 have already broken out, I feel this possibility is low. However, we need to be prepared just in case it does happen. Keep those stops in place because it is always better to look back and say "I am glad I got out" instead of "I wish I had gotten out." There is always another day to trade as long as you have capital to invest.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Sleeper Stock

by Jim Brown

Click here to email Jim Brown

Editors Note:

ADP is a sleeper stock. People forget about the payroll processor because the performance of the stock was lackluster for the prior three months. That changed after the recent earnings beat.


NEW DIRECTIONAL CALL PLAYS

ADP - Automatic Data Processing - Company Profile

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

ADP reported a 26.5% rise in earnings to 86 cents that beat estimates by 9 cents. Revenues rose 7.5% to $2.92 billion and beat estimates for $1.91 billion. The number of employees on client payrolls rose 2.7%. They ended the quarter with $2.82 billion in cash and long-term debt of $2 billion. The announced the sale of their CHSA and COBRA business to WageWorks for $235 million. The sale will be completed in Q2 2017.

The company guided for 2017 revenue growth of 7% to 8% and 15% to 17% earnings growth. The PEO Services segment revenues are expected to rise 14% to 16%.

The company just declared a 57-cent quarterly dividend to raise the annual dividend to $2.28.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

There is resistance at $96 but given the time of year and the overbought conditions in the rest of the market, we could see a breakout. Options are relatively cheap.

Buy Feb $95 call, currently $2.50, initial stop loss $91.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Rally Slowing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes all closed the week with in the green but the pace of gains is slowing. The Dow has created a flag pattern and in theory that should result in a continuation move. However, the index is very overbought and due for some additional profit taking.



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


No Changes




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Long and short equity trades = Premier Investor



BULLISH Play Updates


AAPL - Apple Inc - Company Profile

Comments:

No specific news. Apple has reportedly asked Foxconn Technology and Pegatron Corp to explore the feasibility of making the iPhones in the USA. Pegatron declined the exercise. The average iPhone costs $225 to make in China. Analysts believe that cost could double in the U.S. because of the difference in wages and the regulations and taxes that would apply to any U.S. factory.

Original Trade Description: November 16th.

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.

Position 11/17/16:

Long Jan $115 call @ $1.85, no initial stop loss.


FB - Facebook - Company Profile

Comments:

After the close Facebook announced a $6 billion stock buyback program to start in January 2017. They also announced the chief accounting officer, Jas Athwal, has resigned but will remain with the company through the year-end accounting process. Shares rose $1 in afterhours.

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 continued. The Russell 2000 is now up 11 consecutive days. I miscounted yesterday when I said 9 days.

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 closed flat after coming back from an early dip.

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. Shares finally broke over 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:

The XBI traded in a tight range with the biotech index down about 1%. This was a "take profits before the weekend" day.

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. Shares were flat just below resistance at $50.

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:

New historic low.

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.


YUM - YUM Brands - Company Profile

Comments:

The downtrend was reversed at least for one day because of the $2 billion buyback announcement. I did not have a stop loss on this position because the option was only 31 cents for the last two days.

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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