Option Investor
Newsletter

Daily Newsletter, Tuesday, 11/22/2016

Table of Contents

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

Market Wrap

Flushing The TPP

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Trump announced via YouTube video that he would withdraw the US from the TPP on day one, the market yawned. What I'm wondering is who is cashing in on the Adsense revenue the millions of views the video is sure to generate. Anyway, he also laid out his agenda for the first 100 days which is a mightily toned down version of his campaign rhetoric. Among the items pledged are a look into infrastructure security, immigration violations and banning lobbying by government employees; all items he can address with the stroke of his pen. As for the TPP, Trump just wants to renegotiate and we already knew this. My view; the US trade deficit runs at well over a half trillion dollars per year, in the negative, that's equal to more than 1% of GDP, would it be so bad if some of that business stayed home?

International markets were basically calm. Asia managed to eek out some gains in the aftermath of another Japanese earthquake. Damage assessments are so far positive, the Fukishima reactor had some problems but no leaks, and investors breathed a sigh of relief. The Hange Seng led with gains near 1.5%, the Nikkei was a laggard with gains closer to 0.3%. European indices were buoyed by positive action in Asia and yesterday's new all time highs in the US markets. Gains were posted across the board but they were muted, perhaps due to the holiday week or just waiting to see what happens with tomorrow's data dump.

Market Statistics

Futures trading indicated a higher open all morning and there was little in the way of news or events to move the market. The broad market opened with small gains, about 0.5%, and held them for the first hour or so but there was little strength and no follow through on yesterday's new highs. By 10:30AM the indices were in retreat and they remained under pressure until nearly 12 noon. An intraday bottom was put in during the lunch hour, about -0.25% below yesterday's close for the SPX, after which a rally sent the indices back up to approach the earlier highs, which by the way, were new all time highs in and of themselves. By late afternoon the indices were setting new intraday and all time highs, which they held into the close of the session.

Economic Calendar

The Economy

Only one economic release today, Existing Home Sales, and it was a nice follow up to last week's wickedly strong housing starts and permits data. Existing homes sales increased by 2.0% month to month to an annualized rate of 5.60 million. This is the 2nd month of gains and 5.9% above this same period last year. Lawrence Yun, NAR economist, says this is a convincing autumn revival for the housing market. The bad news, or good news for current home owners, is that prices are up more than 6% year over year and expected to rise at least 3% in 2017 as labor market and wage pressure increase pressure on already tight housing markets.

There will be a massive data dump tomorrow because of the holiday, all the releases ordinarily scheduled for Thursday and Friday are getting released on Wednesday. The FOMC minutes and New Homes Sales top the list.

The Dollar Index

The Dollar Index fell in overnight trading to make its first test of bounce from support. The index opened the session with a loss near -0.4%, just above the $101.50 support target, and was able to move up from there after a quick dip lower. The index managed to regain all of today's losses and more intraday, closing with gains near 0.00%. Today's candle is bullish and consistent with backing-and-filling following a rally/during a consolidation as the market prepares to move higher. The indicators remain bullish and convergent with new highs, if also consistent with a consolidation, peak or pull back. Consolidation is likely to continue into the next two weeks up to and until, no surprise here, the FOMC meeting. The index may break out the week before, at the ECB meeting, but I think the FOMC meeting is a better target for now.


The Oil Index

Oil prices closed flat after a day spent drifting sideways. The OPEC hope has helped lift prices and for now is supporting them, this hope may evaporate quickly at any time if the deal, whatever it is and if it even exists, appears to be falling apart, does not meet expectations or in fact fails to come to fruition. Supply remains high, demand remains tepid, that may change next year when the economy is booming but for now is the reality of the situation. Another reality is that OPEC is pumping at record levels and would have to produce a cut more than double the one first proposed earlier this year in order to even match its effect. I remain skeptical to say the least.

Once again the oil sector has been lifted on faith in OPEC's reliability to reach a deal, and then follow through on it. Once again that faith has led to a test of resistance, and a confirmation of that resistance, for the Oil Index. This time it is at a slightly higher level than last, at the very upper reaches of the 8 month trading range rather than at the upper boundary of a narrower range within the range, and that test has been confirmed. The Oil Index gained nearly 0.5% and actually set a new almost 12 month high only to have bears step in and drive prices lower. The index subsequently lost nearly a full percent to confirm resistance at the 1,190 level. How strong this resistance is is yet to be determined, the indicators continue to gain strength although there is little to show that the index has broken out or will break out of its range. Longer term outlook for earning growth in the sector remains positive, even with $45 oil, so it is possible a bull market is brewing with or without an OPEC deal.


The Gold Index

Gold prices tried to rise on early weakness in the dollar but later gave up the gains. By end of day spot price was back to break even and trading near the recent lows. With the dollar on the rise and outlook for a rate hike so strong it is hard to see gold rising. Next downside target is $1,200, a break below here would be bearish and could lead to a much larger downward movement.

The gold miners continue to consolidate near recent lows. The Gold Miners ETF GDX lost roughly -1% in today's session but recovered the loss and basically traded sideways for the the 7th day in a row. The ETF appears to be making a bear flag within a three month down trend, below the 50% retracement line, and this signal is confirmed by weakness in stochastic. MACD is bearish but consistent with a trough, test of support etc; stochastic is showing weakness by trending lower and crossing the lower signal line. A move in price action below support at the $20 level would be bearish and lead to a possible down to $16.50.


In The News, Story Stocks and Earnings

Lots of food companies in the news today. First up, Hormel. The maker of SPAM and Dinty Moore Beef Stew reported earnings before the bell and served up a tasty treat. Earnings and revenue were a company record. Earnings were in line with expectations, revenue slightly above. Forward outlook is good, guidance was raised to a range above the consensus $1.68. Shares of the stock jumped more than 3% but met resistance at the short term moving average.


Campbell's Soup Company reported before the bell as well, delivering a can full of results. GAAP EPS jumped 52%, adjusted EPS up 5%, on slightly lower revenue (still better than expected) to $1.00 per share. The company CEO says they are off to a solid start relative to expectations and has reaffirmed guidance to a range with consensus as the mid point. Shares of the stock jumped more than 3.5% to test resistance at the $57.50 level. Today's candle is a long legged doji with strong indications of higher prices.


Hewlett Packard Enterprises reported after the bell and gave mixed results, as did Hewlett Packard Incorporated. Both arms of the once whole Hewlett Packard also gave weak next quarter guidance. Both companies fell in after hours trading but the HPQ chart is more interesting. Shares fell a little more than 1% and confirming a near term double top. Downside target is $14, with a possible move to $13.


The Indices

The indices are still drifting higher on election momentum and have once again set new all time highs, except for the transports. The transports were laggard in today's session, gaining only 0.16%, but were at least able to make another new long term high. The Dow Jones Transportation Average created a very small doji candle in a slow creep up toward testing a 2 year high. The indicators remain bullish and suggest upward drift could continue but momentum is waning. Resistance could spark a sell off and near term correction, longer term outlook remains positive. Should the index make more than a cursory pull back, if it pulls back at all, 8,600 is my target for strong support.


The broad market S&P 500 made the next smallest move, just over 0.22%. Today's candle is a small doji testing support at the previous all time high which was broken yesterday. The indicators are both bullish and support higher prices. MACD is holding steady at the high of the move, stochastic moving up to the very upper reaches of the upper signal zone, both consistent with steady inflows to the market. Next upside target is 2,250.


The NASDAQ Composite is runner up in today's lineup with a gain of 0.33%. The tech heavy index created a small spinning top type candle, the 8th in a row of candles in a near perfect 45 degree uptrend, and looks set to continue drifting higher into the near term. It is moving steadily higher from the short term moving average and is confirmed by both indicators, which are showing strength. Stochastic is crossing the upper signal line while MACD is building to a peak that will be the highest in nearly a year. Upside target is 5,500.


The Dow Jones Industrial Average made the largest gains today, a stout 0.35%, and is the most bullish looking of all the major indices. Today's candle extends the flag pattern break-out begun yesterday and suggest a movement of up to 1,000 is likely in the near term. The candle is small but white and bullish, it is the flag pattern break and continuation, as it is a continuation signal, that is important. The move leading up to the flag is roughly 1,000 points, this means the move following the flag will be roughly the same. Upside target is Dow 20,000.


The market is coming to a slow boil. It's been simmering on the back burner for a long time, about 2 years, and has yet to come to full boil but I think that is on the way. Today's action was light, volume wasn't heavy, but we made new highs, resistance is yet to be seen, signals are present in all the major index charts and outlook is good. I can't think of a single thing that, right now, could derail the rally, which means that something is out there lurking to try and do just that, but that is a worry. The reality is that the market is moving to new highs, earnings outlook is positive, economic outlook is positive and it's likely to stay that way into the long term. I remain cautious, but cautiously bullish and more bullish by the day. I'm letting my winners run for now, and waiting for the next dip to start getting serious.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Exercising Caution

by Jim Brown

Click here to email Jim Brown

Editors Note:

The intraday market fade, low volume and overbought conditions require caution. The Russell 2000 small caps have been up for 13 consecutive days. Nothing goes up forever. Even though this week is typically bullish, we know there will be significant profit taking in the very near future. The volume is going to decline sharply over the next two days and that means an increased potential for volatility. I am recommending we hold off on adding new positions for the rest of the week.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Slow Start

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the major indexes spiked at the open into record territory but faded as the morning progressed. Around noon the market found a bottom and the buying accelerated into the close. The Russell 2000 posted gains for the 13th consecutive day.

The biotech index was the only loser with a -2.5% decline to stop us out of our XBI position with a nice gain.

Most of the individual stock gains were minimal with only a few exceptions. It appears the rally is starting to fade but this week is typically bullish. I am afraid next week could be a different story.



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


FFIV - F5 Networks

The call position was entered at the open.

XBI - Biotech ETF

The call position was stopped at $64.85.

YUM - Yum Brands

I am dropping the long put position.



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


AAPL - Apple Inc - Company Profile

Comments:

Apple teased a Black Friday sale on its website saying some products will be discounted and included free two-day delivery. The ad did not say what items but included pictures of the watch and links to holiday gift collections that included music items, photography, games and toys.

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.


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. Nice break through resistance at $96.

Original Trade Description: November 19th.

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.

Position 11/21/16:

Long Feb $95 call @ $2.50, see portfolio graphic for stop loss.


FB - Facebook - Company Profile

Comments:

No specific news. After the $4.75 gain on Monday, only a minor retracement today.

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.


FFIV - F5Networks - Company Profile

Comments:

No specific news. Big dip at the open was in reaction to the Palo Alto Networks earnings disaster. Shares rebounded quickly to retest resistance at $144.

Original Trade Description: November 21st.

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Link Controller, which monitors the health and availability of each connection in organizations with more than one Internet service provider; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; and Traffix Signaling Delivery Controller for diameter signaling and routing. Company description from FinViz.com.

The big attack on the Internet several weeks ago was driven by malware that had been placed on IoT devices including security cameras, cable boxes, burglar alarms and dozens of other device types. These devices are typically delivered without any material malware defenses. It is up to each manufacturer to overcome this in the future with some kind of defense.

However, FFIV provides software and hardware to prevent denial of service attacks from these devices as well as the more robust attacks from computers and servers. With more and more servers in the cloud it is harder to protect them from attack like you would dedicated physical servers in a dedicated data center. This is where FFIV excels.

The company's Silverline service places a sophisticated cloud based filter around critical infrastructure that stops attacks instantly. Aided by hardware based firewalls in dedicated data centers they protect data and equipment from all outside attacks.

For Q3 they reported earnings of $2.11 compared to estimates for $1.94. revenue ot $525 million beat estimates for $520 million.

Earnings Jan 21st.

FFIV shares spiked on earnings in late October and have been moving steadily higher. They are about to break over resistance at $144 and we could see another leg higher when that happens.

Position 11/22/16:

Long Jan $150 call @ $3.15, see portfolio graphic for stop loss.


IWM - Russell 2000 ETF - ETF Profile

Comments:

Excellent relative strength continued. The Russell 2000 is now up 13 consecutive days. That is the best 3-week performance since 1996. I am going to continue raising the stop loss because this cannot last.

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. Big move with a +2.27 gain to break through resistance at $90 by a fraction.

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. Only a fractional gain but another 10 month high.

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:

Biotechs finally experienced some profit taking with the $BTK falling -2.4%. The XBI fell -2.6% to stop us out for a nice gain at $64.85. This was a speculative play we put on before the election to capitalize on a possible Clinton loss. It worked out well.

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

Closed 11/22/16: Long Jan $60 call @ $2.37, exit $5.91, +$3.54 gain.



BEARISH Play Updates (Alpha by Symbol)

VXX - VIX Futures ETF - Company Profile

Comments:

Only a fraction gain in a positive market at the close. This looks like investors are buying protective puts against the possibility of a market decline after Thanksgiving.

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:

A sudden surge in fast food stocks lifted YUM to a 6-week high. This position did not work out. I am dropping it from the daily updates and removing from the portfolio for a total loss. I would not close the position at the current 10-cent price. I would continue to hold it just in case disaster strikes.

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:

Dropped 11/22/16: Long Dec $57.50 put @ $1.10, likely to expire, -$1.10 loss.




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