Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/14/2016

Table of Contents

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

Market Wrap

No Surprise From the Fed

by Keene Little

Click here to email Keene Little
The market expected a +0.25% rate increase and that's what it got. The market also expected some statements about an improving economy and the need for further rate increases in 2017 and that's what the Fed told us. The market's reaction was a bit of "but I want more" and promptly sold off on the news.

Today's Market Stats

There were no surprises from today's FOMC announcement, with the +0.25% rate increase and a promise for more, and the market had already baked this information into the cake. Without additional "good" news the market sold off in a sell-the-news reaction. But a post-FOMC reaction if often reversed the next day and there are some support levels tested this afternoon, leaving the door open for the bulls to charge back through and take the market higher. But they'll need to not waste time Thursday morning.

The market of course did not care about any of this morning's economic reports, nor will it care about tomorrow's or the next day's, or the next. This morning's economic reports were mixed with weaker than expected retail sales, industrial production and Business Inventories (lower inventory builds will lower GDP). PPI numbers came in stronger than expected -- November was up +0.4%, which is nearly +5% annualized. This could be one factor that has the Fed talking a little more hawkishly about rates in 2017.

As for what the market really cares about right now, I think it comes down to just two things -- WWTD and WWFD -- what will Trump do and what will the Fed do. And of course no one really has a clue about either. The strong rally from the beginning of November has been one based on hope and they're the most dangerous kind of rallies (most often found in bear markets). Nothing has changed and we have no idea how much or how little Trump's team will be able to accomplish. Hope-filled rallies are emotional rallies and they're subject to fast reversals when that hope is popped.

As far as what the Fed will do, following the no-surprise +0.25% increase, they told us today they were feeling confident enough in the economy to promise us 3 more rate hikes in 2017. That was a good-news, bad-news thing because on the one hand it's good for all of us if the economy is truly getting stronger and is able to handle 3 more rate hikes. But there are multiple bad-news scenarios with increasing rates, one being the greater difficulty in paying down debt that is tied to Treasury yields, such as mortgages. The Federal and State governments, companies and individuals are carrying massive amounts of debt and servicing that debt is going to become an increasingly difficult burden to carry. That will have a significantly negative effect on the economy.

More significant than even in the U.S. is what higher rates could do to worldwide economies and banking systems. A stronger dollar, which not surprisingly rallied strong this afternoon, creates negative problems for international companies. And because the U.S. dollar is the world's reserve currency a strong dollar makes it difficult for countries to service their debts in U.S. dollars (because their currency is devalued). Companies and countries have been borrowing in U.S. dollars because of our abnormally low interest rates over the years. These companies and countries that borrow in U.S. dollars will then typically hedge their position by buying U.S. dollar contracts and if the dollar rises they simply use the profits to offset the higher loan amount they have to pay back in their local currency. Problem fixed!

But one of the problems with borrowing U.S. dollars and hedging with long dollar contracts is that it's actually causing a shortage in U.S. dollars, which of course seems ludicrous with all the dollar printing the Fed has been doing. But this is a clear example of how the market is so much bigger than the Fed. And dollar shortages will cause problems for those wishing to buy more as a hedge against a devaluation of their own currency. With the inability to hedge they could find themselves unable to fully service their loans and that of course will hurt the banks. It's a global economy and a global financial system and the Fed should be fully aware of the problems they're creating on a global scale. But once again this is a good example of them being book smart and common sense stupid, just as they've demonstrated to us repeatedly since Greenspan's days at the helm. How this will all play out in the coming years is anyone's guess but there's very little likelihood it will play out well.

Even our own economy is very likely unable to handle rate increases. Too many economists see numbers indicating the strengthening in the jobs market but too few seem to notice or care that these jobs are mostly in the low-wage sectors. Consumers are once again at record levels of debt and higher interest rates are going to kill the engine of our economy -- the consumer. Many are looking positively at the idea that the Federal government will spend more money next year, money that it doesn't have, since they see it as a great way to boost the economy. After all, according to economists like Paul Krugman, we're simply paying the interest to ourselves, disregarding the fact that it's still money that was created out of thin air that needs to be paid back and we don't have it.

When people, companies and countries reach the level of debt we now see, borrowing more creates a tipping point and even for the government that can simply print more money it's been shown that more debt produces fewer positive results. We're trying to fly the airplane behind the power curve, which is the point where more power is needed in order to hold the airplane up while slowing further. It's taking more money to keep our economy flying but we're now behind the power curve and close to stall speed. The Fed is not helping.

The concerns mentioned above are of course down the road and if there's one thing we know about the stock market is that it disconnected itself from reality a long time ago. So we stick with short-term indications to help us figure out if the rally/decline will continue or if instead we're setting up for a reversal. At the moment, even though the rally could continue, we're seeing a plethora of signals that warn us of an impending trend change. Sentiment has swing far over into the bullish column and now dangerously so.

The CNN Fear & Greed index has shown a large and fast move from extreme fear in the beginning of November to extreme greed currently. Not only is it a dangerous time for bulls when too many become bullish (the market can simply run out of buyers) but it's also the rate of change that is dangerous. There's been no time for the market to "breathe" and let traders in and out of trades, and it's that "breathing" in and out that makes for a slower rally but a more committed one (longs have been tested with pullbacks and are committed to the upside). This northbound train has been on the express route with no stops along the way and when it stops we're going to see everyone trying to squeeze through the little doors to get out just about the time someone yells "FIRE!"

CNN Fear & Greed index

The market is overbought and overloved and we're seeing some short-term bearish divergences on the charts as the momentum slows. But all of this is not a rally killer today; these signals simply warn us not to be complacent about the upside and instead start looking behind you for possible trouble (like a bear on the rampage).

Because of the significance of the pattern for the RUT I'll start tonight's chart review with this index. I often talk about the RUT being a good "sentiment" index, showing us when investors are feeling bullish (risk-on) and when they're feeling more fearful (risk-off) and the rally off the November 3rd low showed us investors were clearly feeling frisky. The RUT led the charge back up the hill and while the RUT's pullback from last Friday could simply be a breather before at least one more charge against the stone wall it ran into last week, the risk here is that its rally completed last week.


Russell-2000, RUT, Weekly chart

The wall that the RUT ran into, or nearly so, is the trend line along the highs from 2007-2014-2015, currently near 1400. That continues to be upside potential if the RUT can push at least a little higher than last Friday's near 1393. It would be more bullish above 1400 but I'd be careful about a head-fake break. In addition to the trend line there is a price projection near 1392, which was achieved with last Friday's high. This is the 127% extension of its previous decline (June 2015 - February 2016), which is a common reversal level. With that price projection lining up so closely with the trend line I think it's going to be very tough resistance to break through. As mentioned on the chart, this trend line fits as the top of a bearish megaphone pattern (a topping pattern, which often is the left half of a diamond topping pattern). The bottom of this megaphone will be near its May 2011 high at 868 in April 2017. That's not a prediction but it is the vulnerability for price in this pattern (or it could take longer to go lower to the bottom of the pattern).


Russell-2000, RUT, Daily chart

Today's decline was a strong break of the uptrend line from November 3rd, which obviously looks bearish. But another bounce back up to a minor new high, for a back-test of the broken uptrend line, remains a possibility. That would also have it testing the top of its megaphone pattern shown on the weekly chart above. The RUT has dropped back down near a shorter-term trend line along the highs from July-September, currently near this afternoon's low at 1354, and then the next support levels would be it November 25th high at 1347 and then its 20-dma, currently near 1341 and climbing. But as is true for several indexes, the pullback from its recent high is only a 3-wave move and for the RUT it nearly achieved two equal legs down, at 1353.58, with this afternoon's low at 1354.07. That sets it up for the next rally leg if that's what's coming. This is one reason why the bulls need to step back in right away Thursday morning and prevent the bears from taking the ball back.

Key Levels for RUT:
- bullish above 1393
- bearish below 1347

Another reason to question the rally, or at least not get complacent about it, is that it isn't supported by market breadth. The chart below shows the advance-decline line for the AMEX since April. It peaked in September and is so far showing a lower high vs. the higher price high for the RUT. This is typically seen in the last leg of a rally and it supports the need to be wary of how far this rally has stretched without the underlying support of all the stocks in the index.

Before moving on to my regularly updated indexes I wanted to show a weekly chart of the NYSE Composite index and the Wilshire 5000 index, which are both arguably better indicators for the broader market. The weekly setups for both of them are for a trend change, back to the downside. They both reversed where the bears needed them to reverse and now the next couple of days will tell us whether or not the bears will capitalize on the setup.

NYSE Composite index, NYA, Weekly chart

What I find interesting at the moment is how well NYA reacted to a price projection at 11254.90, two trend lines defining its rally from February and its previous high in May 2015, at 11254.87. A price projection for two equal legs up from June, at 11254.90, is only 3 cents above the May 2015 high and it was achieved yesterday with its high at 11256, essentially just a point higher. Today's decline has it pulling back from this price-level resistance as well as a trend line along the highs from April-August and a back-test of its broken uptrend line from February-June, both of which cross this week near 11255. From a technical perspective we have multiple reasons to look at 11255 as strong resistance and today's pullback could be the start of something bigger, especially if today's selling is followed by more (instead of just a 1-day post-FOMC reaction).


Wilshire 5000 Total Market index, W5000, Weekly chart

The reason I mentioned the price projection for two equal moves up from June is because of a type of wave pattern that I'm watching for the rally from February. It hasn't been looking impulsive, which would suggest a stronger rally potential, and has instead looked corrective, which suggests only a bounce correction to its previous decline (into the February 2016 low). Some indexes do look more bullish but overall I'm not getting a strong bullish wave pattern. So far the W5000, I'm looking at two 3-wave moves up from January (a lower low in February does not negate the idea) and the first one is up to the April high and the 2nd 3-wave move is from June. The two 3-wave moves are equal near 23842, which was nearly achieved with Tuesday's high at 23802. For the 2nd 3-wave move up, two equal legs points to almost 23786, which was achieved this week. Another projection is the 127% extension of its previous decline May 2015 - January 2016, at 23621, was also achieved but now lost with today's decline. The 127% extension is important to watch because it's often a failure level for a correction.


S&P 500, SPX, Daily chart

A level that I talked about last week, with my discussion about the Gann Square of 9 chart, was 2271 and 2273. SPX 2271 is aligned with the March 2009 low at 666.79 while 2273 is square to March 6, the date of the 2009 low. Yesterday's high was 2277 but it closed at 2271 and today's high was 2276 but it closed at 2253 and it remains possible the 2271-2273 area will hold as resistance to any further progress. I remember back in October 2007 pretty much pounding the table about 1576 being an important number on the Gann Sof9 chart since it's on the same vector as the October 2002 low so we had alignment for the completion of the 2002-2007 cyclical bull. The high for SPX in October 2007 was 1576 and now we have the same alignment for the completion of the 2009-2016 cyclical bull (except with a 4 to 6-point throw-over if we don't get another new high). It's uncanny how this Sof9 chart works and right now it's telling us the bull just bought the farm and the bears are coming out of their caves. Only time will tell us whether or not it's true.

With today's low at 2248 SPX is back down to its broken/recovered uptrend line from February-June so we'll see if it holds as support. The bears need to see SPX below 2240 to give it a more significant break but it will still be the form of the pullback/decline that will tell us when a trend change has occurred. At the moment the pullback can be argued to be corrective but a sharp decline tomorrow morning would make it look more impulsive. Then we'd know to start looking for the subsequent bounce to short. For now the trend is still up but based on what I mentioned above, a break of the uptrend line from November 4th, near 2245, would trigger sell alarms (someone yelling "FIRE!" as people are trying to get off the northbound express train).

Key Levels for SPX:
- bullish above 2278
- bearish below 2240


S&P 500, SPX, 60-min chart

The SPX 60-min chart below gives a closer look at the trend lines currently in play. In addition to the uptrend line from February-June, near this afternoon's low at 2248, a trend line along the highs from November 10-25, near 2252, looks to be supporting the pullback. In fact it can be viewed as a back-test of the broken trend line and now all the bulls need is a bullish kiss goodbye to launch the next (and likely final) rally leg, potentially up to 2300. Below 2240 is when the bears would be in a little better shape (I never say in good shape because to be a bear is to expect sharp gashes from the bull's horns). It's how much steak a bear can eat before getting gashed that determines whether he lives or not.


Dow Industrials, INDU, Daily chart

With this week's highs the Dow achieved a price projection at 19904, which is where its rally from November 4th has two equal legs up, with the half-way point being the small sideways triangle that it formed November 14-18. A measured move like that is often a reversal level but it's too early to tell if it will lead to just a pullback before heading higher or something more bearish. The Dow has been strong (defensive play?) and needs to drop a lot further, at least below 19400, before the bullish pattern could be in trouble. But it's the need for an impulsive (5-wave) move down to tell us a trend change has been made.

Key Levels for DOW:
- bullish above 19,904
- bearish below 19,400


Nasdaq-100, NDX, Daily chart

Unless NDX blasts off to the upside from here it's looking like a choppy move up from November 4th for what looks like an ending pattern. Above Tuesday's high at 4960 would be bullish but at the moment it's looking like a failed attempt to bust through the top of a parallel up-channel from November 4th and a trend line along the highs from July-October, near 4938. But overall, the pattern is too choppy since August to give me any clear sense of direction. Follow the others.

Key Levels for NDX:
- bullish above 4960
- bearish below 4854

If you only like playing the long side and shy away from shorting anything, even buying puts, I think it's time to shift your focus from buying stocks to buying bonds. The bond market has been selling off strongly while the stock market rallied and now it's looking like we could be on the cusp of a reversal for both. If so, you can join the crowd rotating from stocks back into bonds.

Sentiment is ripe for a reversal as well since investors have become strongly bearish the bonds. Speculators held a record net short position in U.S. Treasuries, according to the most recent data from the Commodity Futures Trading Commission. Net shorts in the 10-year equivalent bonds increased to -$72B from -$58B a week earlier, which is the most since 2008. Many are calling the long bull market in bonds dead (I'm not so sure about that but I'm in the minority) but regardless, the sentiment setup is for at least a large correction before bonds continue selling off (and yields pull back).

20+ Year Treasury ETF, TLT, Weekly chart

TLT has dropped down to its uptrend line from February 2011 - December 2013, near 116.50, with today's low at 116.80. We'll soon see if support holds, in which case long against the low would be a long trade that could work nicely for at least a bounce correction to the decline.


Transportation Index, TRAN, Daily chart

A week ago the TRAN shot above two parallel up-channels, from January and June, and then above its November 2014 high at 9310. Yesterday it pulled back to the November high and looked like it was setting up for a bullish back-test. But today it dropped back below its high, which is bearish (potential failed breakout attempt), and is now close to testing the tops of the parallel up-channels that it broke out of, currently near 9190 and then 9150. I have a key level to the downside for the bears to break at 8906 (the November 30th low) but we'd have a bearish heads up with a break below multiple support levels down to its 20-dma, currently near 9077 and rising. There's still bullish potential here but the bulls can't waste much time.


U.S. Dollar contract, DX, Daily chart

The US$ bounced sharply back up this afternoon and made a new high above its November 25th high. At the moment it's looking more like a test of the high rather than something more bullish but obviously some follow through to the upside would help negate the bearish divergence seen on the daily chart. The weekly chart supports higher prices and we could see it stair-step higher into January if it doesn't get knocked back down quickly. If the dollar does continue higher we'll then likely start to hear how much it's going to hurt the profits of international corporations, as well as trouble brewing in other countries and the devaluation issues of their currencies. The Fed will then be pressured to back away from further rate increases.


Gold continuous contract, GC, Daily chart

Gold dropped further today as the dollar rallied but it should be nearing support at a price projection for the 2nd leg of its decline from July. The 2nd leg would be 162% of the 1st leg at 1121, which is now within spitting distance of gold's low at 1136.40 so far. What kind of bounce correction follows will then tell us whether or not to expect lower prices. A choppy consolidation near the low would point to lower and likely down to a test of its December 2015 low at 1045.40. But a stronger bounce, especially if it gets back above 1204, would be potentially much more bullish since the pullback from July is only a 3-wave move and a possible correction to what will become a more powerful rally.


Oil continuous contract, CL, Daily chart

With Monday's high for oil at 54.51 it nearly tagged a price projection for two equal legs in an a-b-c bounce correction off the August low, at 54.94. It had also poked above the top of a parallel up-channel for the bounce but then dropped back below and left a flaming shooting star for Monday's candlestick. The downside follow through today helps confirm a likely reversal back down. It could result in just a pullback before heading higher (above 55 would be bullish) but the choppy ending pattern for its bounce has it looking like it could continue its longer-term decline.


Economic reports

Thursday morning we'll get a slew of economic reports, which the market will likely largely ignore. CPI, Philly Fed, Empire Manufacturing and the NAHB Housing Market index will join the normal unemployment claims data. On Friday we'll get housing starts and permits. I will add that the chart for the home builders is looking bearish following its high in August 2015 and then lower high in July 2016.


Conclusion

The market rallied into the FOMC announcement and then sold off afterwards. Buy the rumor, sell the news. So far it's all been pretty typical but it's what happens the rest of this week that will tell us what to expect into next week and maybe for the rest of the month/year. The pullback from this week's highs (last Friday's high for the RUT) can be considered just a correction to the rally. A rising wedge pattern for SPX from November 4th points to the potential for one more leg up inside the rising wedge to complete a nicer looking 5-wave move. But the RUT has broken down from its rising wedge and it could be the canary that just fell off its perch.

I see upside potential for SPX to 2300 (only 24 points above this morning's high at 2276) but considering the alignment on the Gann Square of 9 chart, at 2271-2273, we might have just put in an important high, just like the one in October 2007. Again, we should know better in the next couple of days. The first thing the bulls need to do is recover from this afternoon's selloff, which is a typical pattern so we'll see if they can do it again. I continue to believe upside potential is dwarfed by downside risk but we don't have any clear signals yet for the bears to jump in. The upside is risky while it's still early to consider the short side. That means both sides should be staying cautious rather than aggressive.

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

Keene H. Little, CMT

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


 

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New Option Plays

Unloved Opportunities

by Jim Brown

Click here to email Jim Brown

Editors Note:

When the market is at its highs, we sometimes find good opportunities with stocks at their lows. Vertex Pharmaceuticals has been holding at its lows for a couple weeks now. When bullish markets roll over, traders go looking for previously beaten down stocks as buying opportunities, thinking there is little risk.



NEW DIRECTIONAL CALL PLAYS

VRTX - Vertex Pharmaceuticals - Company Profile

Vertex Pharmaceuticals Incorporated engages in discovering, developing, manufacturing, and commercializing medicines for serious diseases. The company focuses on developing and commercializing therapies for the treatment of cystic fibrosis (CF) and advancing its research and development programs. It markets ORKAMBI for the treatment of patients with CF 12 years of age and older who have two copies (homozygous) of the F508del mutation in their CFTR gene; and KALYDECO (ivacaftor) for the treatment of patients with CF 6 years of age and older who have the G551D mutation in their CFTR gene. The company also develops VX-661, a corrector compound that is in a Phase III development stage in combination with ivacaftor in multiple CF patients; VX-371, an investigational epithelial sodium channel, which is in a Phase II development stage; and VX-152 and VX-440 that are CFTR corrector compounds in Phase I clinical trial. In addition, it engages in the research and mid-and early-stage development programs in the areas of oncology, pain, and neurology. Company description from FinViz.com.

Vertex missed earnings by 2 cents with a 17 cent loss that was significantly better than the 39 cent loss in the year ago quarter. Sales of Kalydeco rose 6% to $176 million and revenue for Orkambi jumped 79% to $243 million. The problem is that the drugs have a very limited patient population in the U.S. of about 11,000 for this version of cystic fibrosis. They are close to receiving approval in the EU for these drugs. They have expanded their testing into other population groups to see if the drugs will continue to perform in other versions. There are 2,000 known mutations of the disease.

Shares declined in late November when one of the trials on a specific mutation failed to produce any additional results.

Shares have bottomed at the early November lows and have begun to rebound. If the market rolls over, Vertex could become a favorite oversold opportunity for institutional investors looking to put some profits back to work in a beaten down stock.

Earnings January 26th.

We cannot buy a post earnings option because there is no February strike and March is grossly expensive. That means the January expiration is our only option.

Buy Jan $82.50 call, currently $3.10, initial stop loss $73.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

One Step Backwards

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow gave up -118 points after the Fed meeting to push it one-step backwards in its attempt to reach 20,000. The Dow spiked to 19,966 intraday and only 34 points from the 20K level. However, selling was immediate and volume increased. I wrote last week about the potential for anticipatory selling before the 20K level as shorts tried to get a head start on the 20K sell the news event. The post Fed spike to the highs was hit with four waves of selling to knock the index back below 19,800.

The Russell 2000 was crushed again with a 17 point decline of -1.3%. This is the sentiment indicator for the market and this was the fourth consecutive day of either fractional gains or greater than 1% losses.

We lost three more positions when the market rolled over. I am purposely keeping the stop losses tight to limit our losses because of the anticipated decline over the next four weeks. I will be adding new positions only when there is a very strong reason to do it. We need to be conscious of the potential for a significant market decline and not put on new positions just to be stopped out.



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


CME - CME Group

The long call position was stopped out at $121.15.

ESNT - Essent Group

The long call position was stopped out at $31.85.

FLOW - SPX Flow

The long call position was stopped out at $31.75.



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BULLISH Play Updates


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. Minor decline after a 52-week high.

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. CME said open interest of all contracts surpassed 120 million contracts for the first time. That did not help the stock. Once the market began to roll over, CME shares lost $2 to stop us out at the low of the day. I will reinstate this position after the market corrects.

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

Closed 12/14/16: Long March $125 call @ $2.84, exit $2.15, -.69 loss.


ESNT - Essent Group Ltd - Company Profile

Comments:

No specific news. The two day selling event hit our stop loss at $31.85.

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:

Closed 12/14/16: Long April $35 call @ $1.82, exit .96, -.86 loss.


FFIV - F5Networks - Company Profile

Comments:

FFIV was upgraded by Citigroup from neutral to buy with a $175 price target. A big spike to $147.25 followed but collapsed back to prior resistance at $144 in the weak market.

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 of $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. Market weakness caused the stock to drop -3% to stop us out for a minor 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:

Closed 12/14/16: Long March $35 call @ $1.51, exit $1.31, -.20 loss.


UNH - UnitedHealth - Company Profile

Comments:

No specific news. Weakness in the Dow caused a minor decline.

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:

Finally a decent decline but far too early to know if it was a direction change. I suspect it was just a sell the news move on the Fed announcement and we will see some more Choppy trading over the next two weeks before a material decline in January.

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.




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