Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/13/2016

Table of Contents

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

Market Wrap

Inflection Point

by Jim Brown

Click here to email Jim Brown

The Dow pulled close to 20,000 today and found sellers waiting once it moved over the 19,900 level.

Market Statistics

The Dow is nearing a market inflection point at 20,000 and the next 89 points could be tough. As soon as the index pushed through 19,900 this morning, the sellers began to appear. There was not a lot of volume but you could tell the trend had changed. The opening spike over 19,900 was immediately sold to push the index back to 19,850 by 10:30. Another run began shortly after that succeeded in pushing the index even higher to 19,953 but that was also sold immediately to close the Dow back at 19,911.

The Dow 20,000 level is such a large round number target that traders will become confused once it is hit. It is like a dog chasing a car. He does not know what to do once he catches it and that is the most dangerous part for the dog. Touching Dow 20K could be the most dangerous market event for the week other than the Fed decision.

The economic reports today were ignored. The Manpower Employment Outlook Survey for Q1 was neutral. In the USA 73% of employers expected no change, 6% were planning on decreases in employment and 19% expected to hire. That is a 13% net number for increases compared to 16% for Q4. In other words hiring plans shrank slightly but the holiday quarter always shows a high number because of the temporary holiday workers.

The NFIB Small Business Optimism Index for November rose from 94.9 to 98.4. Hiring plans increased and sales forecasts rose. Those expecting the economy to improve rose from -7 to +12. Expectations for higher sales rose from 1 to 11. The rest of the components were basically flat.

Import prices for November declined -0.3% compared to a +0.5% gain in October. Energy was the main driver with a -3.9% decline after a +6.9% gain in October. Crude oil prices fell -4.7%. Import prices excluding oil and products were flat for the month. The continued weakness in import prices is helping to keep a lid on inflation in the US.

The December Fed meeting started today and they are expected to announce a quarter point rate hike on Wednesday. Strangely, the CME FedWatch Tool declined -2% from the 97.2% reading on Friday.

The rate hike is already priced into the market. It is the guidance that could be a stumbling block. Continued dovish guidance could send the market even higher while an uptick in hawkish guidance could cause a market decline.


After the Fed decision, the next most important economic event is the Philly Fed Manufacturing Survey on Thursday. That is expected to show a minor gain. This is a preliminary view of what the ISM report should look like two weeks from now.


The Valeant saga may never die. Bill Ackman's Pershing Square fund said it sold more than 3.4 million shares in order to generate a tax loss for investors. Pershing's cost in those shares was thought to average more than $200 each. Shares are trading at $14.77 today. The sale cut Pershing's position to 7.8% of Valeant ownership. The drug company also announced the resignation of three top executives including Rob Rosiello, the former CFO. He had previously announced he was leaving in August but decided to stay after they sweetened his compensation. Today he decided to call it quits. I can imagine working on all the accounting problems at Valeant would not be a fun job. The other executives leaving were Anne Whitaker and Ari Kellen, both EVPs.


Wells Fargo (WFC) failed the living will requirement of the Federal Reserve. Regulators said Wells would damage financial markets if it were pushed into bankruptcy. They forced new rules on the bank after a second review under the post recession bankruptcy scenario. The living wills are required to outline how the bank would be dissolved and unwound in an orderly fashion. Wells was one of five banks to fail the requirement in April. On Tuesday, regulators announced the will had fallen short and Wells would face sanctions over the default. That means the bank cannot acquire any non-bank subsidiaries or establish any international banking entities. Wells has until March 31st to submit an amended will and regulators could remove sanctions if that document passes the test. The other banks that previously failed were approved in this latest analysis. They were JPM, BAC, STT and BK. Shares of WFC were flat on the day.


Hertz Global Holdings (HTZ) shares fell -4% in afterhours after CEO John Tague said he was stepping down from his post as CEO and president. Kathryn Marinello will become the new president and CEO. Carl Icahn, the company's biggest shareholder praised the move because of Marinello's experience.


Boeing (BA) said it was cutting production of the 777 passenger jet to five per month beginning next summer, due to a slowdown in sales. That is about a 40% reduction from the current rate. The company said it would not impact its earnings. Boeing has booked orders for 17 planes in 2016 compared to 58 in 2015. The company also increased its quarterly dividend 30% to $1.42 and authorized $14 billion in share repurchases to start in January. That brings the dividend yield to 3.6%. They repurchased $7 billion in shares in 2016. The company has a current backlog of more than 5,600 orders for commercial jets. Just last week Boeing scored a $3.5 billion order for Apache attack helicopters for the UAE. This week they said they had completed a deal to sell 80 planes to Iran Air for $80 billion. Unfortunately, that deal has to be approved by the Congress and president. Shares surged to a new intraday high on Tuesday but faded into the close.


FedEx (FDX) surged to a new high after JP Morgan initiated coverage with an overweight weighting and price target of $233. Shares closed at $201. UPS and FDX are both struggling to keep up with holiday shipping volumes that have rapidly exceeded even their most optimistic forecasts. UPS has temporarily relocated hundreds of workers from the headquarters areas to help at shipping hubs around the country. Both companies have already suspended delivery guarantees and extended delivery windows on many routes. Despite their best efforts, analysts say on time delivery rates were continuing to fall as the holiday package crush accelerates. Air shipments by UPS had fallen to only a 90.3% on time delivery rate, down from 98% or more in normal times. Both companies are increasing hours and overtime despite hiring nearly 200,000 temp workers. Analysts claim the extra workers, frantic relocations and late deliveries indicate the supply chain is already clogged and deliveries next week could become even more erratic.

I have noticed many items on Amazon this week that are in stock but the delivery window has already shifted into January. You can still get the items before Christmas but you have to pay a stiff expedited delivery charge of more than $20 in some cases. I suspect this is Amazon's way of recovering some of their shipping expenses since an in stock item should only be 3 days away at most. They know frantic shoppers will sometimes elect to pay the additional shipping to get that item delivered on time.


Crude prices declined slightly from their $54.51 post OPEC meeting high to close at $52.52. The headlines from the weekend meeting are starting to fade and the prices are starting to sink. The $50 level is likely to hold until we begin to get some of the follow on news on how the actual cuts will be handled when there is no monitoring of the process and no penalty for not cutting.


The big cap tech stocks finally found some traction and powered the Nasdaq 100 index to a new high. This index had been the weakest link with solid resistance at 4,900. Thanks to the big caps today, the NDX closed at 4,935 and a new historic high.

Apple was responsible for 11 of the NDX points, Amazon 8, Microsoft 7, Google 7 and Facebook 6. The Technology Sector SPDR (XLK) closed at a 16 year high.



Markets

Chief technical analyst at BTIG, Katie Stockton, warned investors should be prepared for a market pullback after the Fed decision. She warned there are some flashing sell signals with the markets showing signs of exhaustion.

Other analysts believe if the markets can survive the first week of January, they could easily move up another 5% to 10%. I want whatever they are smoking. They believe the combination of reduced regulation, fiscal stimulus, tax reduction and continued accommodative Fed, could boost S&P earnings by 15% to 18% in 2017. Since the odds of getting a tax program approved in 2017 are slim and if it happens it probably would not take effect until 2018, I think those earnings estimates are somewhat exaggerated.

However, headlines are the key. As long as the headlines show the new administration moving in that direction, the bullish sentiment could last for months. It is the "getting past January" part that I think is a deal breaker. I just do not believe we can get through January without a significant decline. Once that happens, I think we are good to go for a long-term rally.

The S&P continues to surge higher and was helped today by the big cap tech stocks. However, the overbought conditions continue to worsen and there will eventually be some pain. Support is well back at 2,215 and 2,190.


The Dow continues to amaze with another strong performance as it targets the 20,000 level. While I would not buy this index for any reason, a lot of investors are buying the components. Only seven components were in negative territory and the leaders continue to rotate from day to day. Support is well back at 19,250. The 20K level could be a big sell the news event but it depends on how we get there. If the Fed gives us an early Christmas present on Wednesday and the Dow blows through that level with a 200+ point gain then all bets are off and the short covering could be crazy. However, if the Dow creeps up to the 20K level, that could promote some wider selling.



The Nasdaq Composite had a good day but still finished -23 points below its intraday high. There were some sellers at the close but it was not serious. The rally in the big caps helped to support the composite. Support is now 5,400.



The Russell 2000 could be the canary in the coalmine or in this case the market. The index posted only a 1-point gain on Friday, a 15-point decline on Monday and only a fractional gain today when the rest of the market was very bullish. The problem for the Russell is the monster gains on some of the small cap stocks. While the Russell was up 20.1% on Friday from the post election bounce, many of the small cap stocks are up 30% or even 40% over the last four weeks. In my universe, those gains cannot hold. There has to be some major profit taking soon. Maybe I have entered a new alternate reality where the laws of gravity no longer apply but until I receive some proof of that transformation, I am still expecting a decline.



The last two days have seen a bullish market. However, the Volatility Index ($VIX) has risen on both days because of the high volume of put buying because many investors do not expect the rally to last. That poses something of a problem. If there are so many investors expecting a decline, will that decline actually happen? Normally when everyone expects the market to move in one direction, the alternate direction appears.


I think it should be pretty obvious from my recent commentaries that I am expecting a decline in January. The normal post Fed volatility could be muted this time but that depends on their statement and Yellen's press conference. She could send the markets into orbit or she could trigger a collapse. I believe she will try to thread the needle and say just enough to suggest the Fed plans to hike rates in 2017 but not enough to scare the market. Hopefully she will be successful.

I do expect a choppy market until Christmas. I cannot conceive that we will simply keep making new highs every day for two more weeks. I have been fooled before and I am sure I will be fooled again. I recommend keeping your stops tight and not adding new long positions until after we see what January brings.


 

ONLY 12 TRADING DAYS LEFT IN 2016
ORDER YOUR 2017 SUBSCRIPTION NOW!


Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day



Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

 


New Option Plays

Risk Takers

by Jim Brown

Click here to email Jim Brown

Editors Note:

There is a time to take risk and a time to avoid risk. I believe this is a day to avoid risk. We do not know what impact the Fed decision will have on the market and whether the Dow will blow through 20,000 or fall back to 19,000 on a sell the news event. The next 8 days could be choppy or worse. There is no reason to jump into the maelstrom until there is an obvious direction.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Step by Step

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow moved one-step closer to the 20,000 target level and it seems very likely that will be hit this week. All the big cap indexes closed at new highs, including the Nasdaq 100, which had been the weakest index. However, the Russell 2000 posted only a fractional gain after a big decline yesterday. The Russell could be our market canary and it appears to be running out of oxygen.

I tightened up the stop losses again because once that 20,000 level is hit we could see a sell the news event. I am going to begin reducing the portfolio size as we near the end of December and the potential for a violent January.



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


DIA - Dow ETF

Long second 1/2 position on DIA puts at $199.

UNH - UnitedHealth

The long call position was opened with a trade at $160.25.

SMG - Scotts Miracle Grow

The long call position was stopped out at $94.85.

VXX - Vix Futures ETF

The long put position was closed at the open.



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


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. New 52-week high close.

Original Trade Description: December 5th.

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.

Earnings Feb 1st.

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.

Shares took profits last week from a very nice climb and could be ready to try for a new high.

There is resistance at $97 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 12/6/16:

Long Feb $97.50 call @ $2.10, see portfolio graphic for stop loss.


CME - CME Group - Company Profile

Comments:

No specific news. New closing high.

Original Trade Description: December 12th.

CME Group Inc., operates contract markets for the trading of futures and options on futures contracts worldwide. The company offers a range of products across various asset classes, based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, and metals. Its products include exchange-traded; and privately negotiated futures and options contracts and swaps. It executes trade through its electronic trading platforms, open outcry, and privately negotiated transactions, as well as provides hosting, connectivity, and customer support for electronic trading through its co-location services. The company also provides clearing and settlement services for exchange-traded contracts, as well as for cleared swaps; and regulatory reporting solutions for market participants through its global repository services in the United States, the United Kingdom, Canada, and Australia. In addition, the company offers a range of market data services, including live quotes, delayed quotes, market reports, and historical data service, as well as index services. CME Group Inc. serves professional traders, financial institutions, institutional and individual investors, corporations, manufacturers, producers, governments, and central banks. The company was formerly known as Chicago Mercantile Exchange Holdings Inc. Company description from FinViz.com.

The Chicago Mercantile Exchange is in the right place at the right time. Trading in commodity and futures contracts of all kinds is exploding. On December 1st the volume of energy futures contracts hit a record 4.5 million contracts. That broke the prior record of 3,832,201 contracts from February 11th. With crude futures in the spotlight after the OPEC production cuts and prices changing rapidly, that record is not going to last long. On November 11th the CME set a new record for single-day volume in all contracts of 44,516,949 contracts. The prior record was 39,567,064 so that was a major beat. Globex electronic contracts traded 39,997,534 contracts, also a record. The CME collects a fee on every contract traded.

Earnings in 2016 are expected to be at record levels and 2017 is likely to be even higher.

Earnings January 26th.

The equity volume over the last month has been huge and futures volume is keeping pace. The CME is expected to post strong earnings so there is likely to be some run up into the event, market permitting.

Shares spiked back in early November after the CME declared a 60 cent dividend payable Dec 29th to holders on Dec 9th. We are already past that date and the stock did not decline materially. That was also when they announced the record contract volume.

Going long ANY stock over the next three weeks is risky. However, any selling should be muted because taxes are expected to be lower in 2017 so most heavy hitters will be holding until January to get the benefit of any lower tax rate. At least that is the theory.

Position 12/13/16 with a CME trade at $123.50

Long March $125 call @ $2.84, see portfolio graphic for stop loss.


ESNT - Essent Group Ltd - Company Profile

Comments:

No specific news. Somebody rotated out of ESNT and shares fell -$1.23 or -3.6%. The nice steady gainer suddenly hit an air pocket.

Original Trade Description: December 10th.

Essent Group Ltd., through its subsidiaries, provides private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. The company also provides information technology maintenance and development services; customer support-related services; and contract underwriting services. It serves originators of residential mortgage loans, such as regulated depository institutions, mortgage banks, credit unions, and other lenders. Company description from FinViz.com.

Essent reported earnings of 65 cents compared to estimates for 58 cents. Revenue was $121.3 million. For 2015 they saw earnings rise 65.1%. The current growth estimate for 2016 is 37.8%. While that is less than 2015 rate the relatively young company is still in a growth spurt. It is easy to show big percentages in the early years since there were little to no earnings when you started. The company began in 2008

Over the last month analyst consensus estimates have risen from 60 to 62 cents and full year estimates have risen from $2.27 to $2.34.

Shares have risen $5 over the last $3 weeks but not at the frantic pace of some other high visibility stocks. Essent is moving slowly higher a few cents a day. When the eventual profit taking appears in the broader market, Essent could be less impacted than some other stocks.

Options are cheap and we can buy well into the future for just a couple dollars.

Position 12/12/16:

Long April $35 call @ $1.82, see portfolio graphic for stop loss.


FFIV - F5Networks - Company Profile

Comments:

No specific news. Nice rebound. Waiting for a breakout over $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 12/8/16 with a FFIV trade at $142.25

Long Jan $145 call @ $3.80, see portfolio graphic for stop loss.


FLOW - SPX Flow Inc - Company Profile

Comments:

No specific news. Big spike to a new high at the open but declined with the small cap sector back to a loss.

Original Trade Description: November 30th.

SPX FLOW, Inc. provides various engineered solutions worldwide. The company engineers, designs, manufactures, and markets products and solutions used to process, blend, filter, dry, meter, and transport fluids with a focus on original equipment installation, including turn-key systems, modular systems, and components, as well as aftermarket components and support services. It operates through three segments: Food and Beverage, Power and Energy, and Industrial. The Food and Beverage segment offers mixing, drying, evaporation, and separation systems and components, as well as heat exchangers, and reciprocating and centrifugal pump technologies primarily under the Anhydro, APV, Bran+Luebbe, Gerstenberg Schroeder, LIGHTNIN, Seital, and Waukesha Cherry-Burrell brands. The Power and Energy segment provides pumps, valves, and related accessories, principally for use in oil extraction, production, and transportation at wells, as well as for pipeline applications under the APV, Bran+Luebbe, ClydeUnion Pumps, Copes-Vulcan, Dollinger Filtration, LIGHTNIN, M&J Valve, Plenty, and Vokes brands. This segment primarily serves customers in the oil and gas industry, as well as in nuclear and other conventional power industries. The Industrial segment offers air dryers, filtration equipment, mixers, pumps, hydraulic technologies, and heat exchangers under the Airpel, APV, Bolting Systems, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power Team, and Stone brands. This segment principally serves customers in the chemical, air treatment, mining, pharmaceutical, marine, shipbuilding, infrastructure construction, and general industrial and water treatment industries. Company description from FinViz.com.

SPX Flow was spun off from SPX Corp (SPXC) in September 2013. Shares sold off from the $40+ opening to $15 over the next six months. After a quick rebound to $31 in May the stock has moved sideways for the rest of the year.

They reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $466.8 million narrowly missed estimates for $467.7 million. They guided for full year earnings of $1.27-$1.47 with revenue of $2.0 billion.

The CEO said the company had made good progress in its restructuring efforts post split. Revenue was light in Q3 because of a delay in shipping some orders in the energy sector. They are looking forward to a rebound in the energy sector and manufacturing in general.

Earnings Feb 1st.

Shares closed right at 52-week resistance at $31.50 and are poised for a breakout, market permitting. The stock gained $1 today in a weak market.

Position 12/1/16:

Long March $35 call @ $1.51, see portfolio graphic for stop loss.


SMG - Scotts Miracle Grow - Company Profile

Comments:

No specific news but shares declined in a strong market. We were stopped out on the tight stop at $94.85 in order to capture our big gain. We will reenter this position once the market corrects.

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.

Update 12/8/16: Shares were upgraded by BAML from underperform to buy and raised the price target from $80 to $105 saying the stock has more room to run. Shares spiked $4 on the upgrade.

Earnings Feb 2nd.

Position 11/14/16:

Closed 12/13/16: Long March $90 call @ $3.90, exit $7.60, +$3.70 gain.


UNH - UnitedHealth - Company Profile

Comments:

No specific news. Shares rose over $160.25 to trigger our entry into the position.

Original Trade Description: December 7th

UnitedHealth Group Incorporated operates as a diversified health and well-being company in the United States. The company's UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, individuals, and military service members; and health care coverage, and health and well-being services to individuals aged 50 and older addressing their needs for preventive and acute health care services. It also provides services dealing with chronic disease and other specialized issues for older individuals; Medicaid plans, Children's Health Insurance Program, and health care programs; and health services, including commercial health and dental benefits. This segment serves through a network of 1 million physicians and other health care professionals, as well as approximately 6,000 hospitals and other facilities. Its OptumHealth segment offers health management services, including care delivery and management, wellness and consumer engagement, distribution, and health financial services. This segment serves individuals through programs offered by employers, payers, government entities, and directly with the care delivery systems. The company's OptumInsight segment provides software and information products, advisory consulting services, and business process outsourcing and support services to hospitals, physicians, commercial health plans, government agencies, life sciences companies, and other organizations. Its OptumRx segment offers pharmacy care services and programs, including retail pharmacy network management, home delivery and specialty pharmacy, manufacturer rebate contracting and administration, benefit plan design and consultation, claims processing, and clinical program services, such as formulary management and compliance, drug utilization review, and disease and drug therapy management. Company description from FinViz.com.

UNH will have about $184 billion in revenue in 2016 to put it at number six on the Fortune 500 list. With its broadening of scope using its various Optum programs it is maximizing profits by widening the service component of its business. Here is an excellent article on why UNH will be the most profitable. Amazon of Healthcare

I am not going to go into an in depth explanation of UNH. That article I referenced has plenty of information why UNH should be a long term holding of any investor.

Earnings January 17th.

I wanted to play UNH last week when it was at $152 but it had resistance at $153 and I decided to wait another day to see if that resistance was broken. Shares gapped up to $158 at the open the next day and ran to $162.50 over the next four days. Now that big gain has been digested and shares pulled back to $156 before adding a couple dollars on Wednesday. I believe the UNH rally will continue for the reasons listed in that article above. I am willing to take a shot here that the market rally also continues even if Wednesday's futures related spike fades in the days ahead. We have 16 trading days until 2017 and we should close the year at higher levels.

Position 12/13/16 with a UNH trade at $160.25

Long Jan $165 call @ $2.58, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

We entered the second half position on the puts with a trade at $199. We are now somewhat hedged against a market decline over the next four weeks.

Original Trade Description: December 7th

The SPDR® Dow Jones® Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

We exited the position for a breakeven at the open. The VXX rose again today in a very bullish market. Clearly, traders are buying a lot of puts.

The chances for a market decline over the next five weeks are increasing and it could be severe once we are in January. When that decline appears, I will reinstate the position at the VXX highs.

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.

Position 12/6/16:

Closed 12/13/16: Long March $24 put @ $2.36, exit $2.50, +.14 gain.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now