Option Investor
Newsletter

Daily Newsletter, Saturday, 12/17/2016

Table of Contents

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

Market Wrap

Distribution in Progress

by Jim Brown

Click here to email Jim Brown

What we saw last week was a classic example of market distribution at a perceived top.

Weekly Statistics

Friday Statistics

Distribution is where large investors, portfolio managers and trading programs try to calmly exit the market just before a perceived top by slowly selling their positions to those who still believe the market will move higher. Rather than just put in a sell order for all of their positions, which could immediately crash the market, they liquidate their positions in bite-sized chunks a little at a time, whenever the market appears to be gaining momentum. By selling into the intraday rally, they capitalize on the buying volume to avoid depressing prices. This can go on for several days or a couple weeks depending on the market and the calendar. On Friday, they had an extra bit of help with the quadruple expiration and some rebalancing issues which increased volume significantly. If you want to hide your actions, it is best to do it in a crowded market.


Volume last week was very strong despite the lack of upward progress. This is another sign of distribution. Back before the election, the average volume was about 5.6 to 6.2 billion shares a day. The two days after the election that spiked to more than 12.1 billion shares on the 9th/10th of November before drifting back down to about 6.5 billion a day the week before Thanksgiving. Rising volume in a declining market is a bad sign and the Dow and the Nasdaq 100 were the only major indexes posting a gain for the week. Also, note the decline in the stocks making new 52-week highs.

Next week, volume on Monday should be heavy as option settlements provide some additional activity. Beginning on Tuesday volume will begin to slow drastically as the week progresses. With Christmas on Sunday, the market will be closed on Monday so this is a full week of trading.


The economic news for Friday was negative with new residential construction starts falling from a rate of 1.323 million to 1.090 million. That was an 18.7% decline. The consensus estimate was for a minor decline to 1.222 million. Single-family starts fell from 863,000 to 828,000 and multifamily starts fell -45.1% from 477,000 to 262,000.

Housing permits, a key indicator of future starts, fell from 1.260 million to 1.201 million. Single-family permits rose slightly from 774,000 to 778,000. Multifamily permits fell from 486,000 to 423,000.

On the positive side, completions rose 15.4% to 1.216 million units in November. This suggests builders accelerated their already started homes in order to complete them before the harsh winter weather arrived. With mortgage rates rising, the pace of sales and building should moderate.


The economic calendar for next week is very bland with the third revision of the Q3 GDP the only highlight. The GDP is not expected to change materially. The personal income and spending on Thursday will be of interest to the Fed but traders will not be around to see it.

Janet Yellen speaks on Monday and she is the only Fed speaker for the week.


One factor weighing on the market on Friday was a series of implied earnings warnings. Honeywell (HON) said Q4 earnings would be at the low end of their forecast range. The company guided to earnings of $1.74 per share compared to prior guidance of $1.74-$1.78. For 2017, they guided to earnings of $6.85-$7.10 and analysts were already expecting $7.08. The COO said they expect organic sales growth of 1% to 3%, margin expansion of 70-110 basis points and EPS growth of 6% to 10%. Despite the lowered guidance, everything else the company had to say was positive. Shares collapsed $3 on the news but recovered to close fractionally positive for the day.


The Honeywell news came on the heels of United Technology's lower than expected forecast on Wednesday. The company guided for adjusted earnings of $6.30-$6.60 for 2017 and analysts were already expecting $6.59. They actually admitted some of the earnings gain for 2017 was due to their buyback program reducing the number of outstanding shares. Rarely do companies actually admit that even though everyone understands the math. The company said they were confident they would see 2% to 9% sales growth in 2017 as a result of their many acquisitions. Revenue is expected to be $57.5 to $59 billion and that compares to $57-$58 billion in 2016.


On Wednesday, Caterpillar (CAT) said they were maintaining the quarterly dividend at 77 cents payable February 18th to holders on January 20th. However, they also cautioned that current earnings estimates were overly optimistic. They are in the midst of a dramatic change in their business and the business conditions. They said the energy sector had not recovered and overseas sales had not improved significantly. Earnings in 2014 were $6.38 per share, 2015 $4.64, 2016 is estimated to be $3.26 and 2017 is estimated at $3.15. Caterpillar said those estimates were overly optimistic. Shares had a bad week and closed at three-week lows.


The weak earnings guidance from three major industrial companies came after the Wall Street Journal ran an article on Thursday saying "the stock rally is more hope than substance." The article said, "When markets move a long way very fast, they become vulnerable." Momentum builds and builds and when investors finally jump off the roller coaster at the peak, the decline can be ugly. They were not saying anything we do not already know.

Merrill Lynch said fund managers rotated into industrials far too quickly and the actually results of the new president's changes will not be felt for a long time. The article warned of the sudden wakeup call when Trumps rhetoric meets congressional reality about midyear.

On the back of that headline, we had three major industrial stocks tell us that sentiment was too bullish for this point in the cycle. That is damaging to the momentum buying that has lifted the market to these levels. The impact on Friday was minimal but the irrational exuberance bell has already been rung.

JP Morgan downgraded Nordstrom (JWN) from neutral to sell following a meeting with management. JPM said the company had relatively flat sales and no "silver bullets" on the horizon to improve trends. Nordstrom management told analysts that traffic to brick and mortar stores were the worst since 1972 as more shoppers move online. JPM said "service and experience is the key foundation of the Nordstrom model, accelerating channel shift to the lower conversion online channel with no sightline to equilibrium, has structurally altered the company's multi-year top and bottom-line profile." Translation, brick and mortar retailers are being crushed by Amazon and other online sellers. Shares fell 9% on the news.


Gilead Sciences (GILD) got some bad news when a court ordered it to pay $2.54 billion to Merck in an ongoing legal battle on hepatitis C drug patents for Sovaldi and Harvoni. The court ruled that Gilead infringed on an Idenix Pharmaceutical patent covering methods used to develop the drugs in question. Merck acquired Idenix in June 2014 for $3.9 billion. Gilead will have to pay 9% royalties on future sales. That award is the largest patent dispute payout ever. A Gilead spokeswoman said the company "respectfully disagrees with the jury's verdict and damage award and intends to vigorously challenge the outcome through the appeal process." Gilead had $31 billion in cash at the end of the quarter. Shares fell -2% on the news.


Dow Chemical (DOW) announced the conversion of $4 billion of its Series A Convertible Preferred Stock into common stock. Each share of preferred will be converted into 24.1 shares of common stock. Why is this material? Dow has been paying $340 million a year in preferred dividends to Warren Buffett and Kuwait's sovereign wealth fund. Berkshire Hathaway was receiving $255 million a year and Kuwait $85 million. Those entities bought the preferred shares back during the financial crisis when Dow desperately needed the money. Shares declined because that means an additional 96.8 million outstanding shares of common stock.


Apple (AAPL) shares were flat for the last three days and the earnings from Jabil Circuit (JBL) did not help. The company posted earnings of 69 cents compared to estimates for 64 cents. However, analysts were looking for sales numbers since Apple accounts for 24% of Jabil's business. Revenue declined -2% and that was significantly better than the 12% decline analysts were expecting. Jabil said handset product volumes were softer than expected but would pick up in the latter half of 2017. That is when the iPhone 8 will begin manufacture. JBL shares rallied 12% on the better than expected revenue and that news kept Apple shares from declining in a weak market.



Chipotle Mexican Grill (CMG) reached a settlement with Bill Ackman and Pershing Square Capital. In September, Ackman announced a 9.9% stake in CMG. Now, after three months, CMG added four new directors to the board. Two of them were chosen by Ackman and two by CMG. One of Ackman's picks was Matthew Paull, former CFO for McDonalds. In exchange for the two directors, Ackman agreed to remain silent publicly for two years and refrain from increasing his stake to more than 12.9%. Ackman said the CMG board had always been blamed for being too close to management and the board needed a shakeup. Shares rallied $10 on the news.


Jefferies recommended UnitedHealth as its top pick in the managed healthcare sector ahead of the repeal of Obamacare. Jefferies said UNH had contracts with 850,000 doctors and more than 6,000 hospitals. Their broad spectrum of offerings, outstanding earnings and reduced exposure to the public exchanges made them the outstanding pick. Jefferies said even at current levels UNH is still undervalued to the market and it is the safest call amid the healthcare uncertainty. Shares broke out to a new high and helped keep the Dow from going deeper into negative territory.


Crude prices remain stuck in the $50-$52 range as we wait for the OPEC headlines to fade and the January production numbers showing a negligible decline in total production. U.S. production jumped 100,000 bpd last week to 8.796 mbpd. That is the highest level since June. Higher prices will continue to increase production in the USA.


Active rigs rose by 13 to 637 after a jump of 27 the prior week. Oil rigs increased by 12 and gas rigs by 1. This is the highest level of active rigs since January 22nd but still just one third of the 1,931 rigs that were active in September 2014.


 


 

Markets

The current post election rally is the largest one on record for 28 days after the election. The S&P was up 8.7% at Tuesday's close and the Dow was up 11.3%. In modern history, there were only five rallies of 5% or more post election. Of those, four went on to gain another 10% over the next six months.

History does not always repeat but it would be nice if it did in 2017. As one analyst put it, "starting in January there is going to be a tectonic shift in asset allocation." Stocks that have worked over the last 8 years are going to be kicked to the curb in favor of stocks expected to work over the next four years.

Other analysts believe the shift has already occurred and those favored for the next four years have already reached the top of their gains.

I am in the middle. Some stocks are grossly overbought. However, most portfolio managers are not going to completely restructure their portfolios in the six weeks before year-end. There are too many variables including peer performance, bonuses and tax planning just to name a few. Most managers will wait for January and the start of a new year for performance measurement and taxes before making wholesale changes. Did they buy some of the hot stocks over the last five weeks? Absolutely but they will buy more once the calendar turns over and they can liquidate existing positions.

I do believe we will see significantly higher highs in 2017 but probably not in January. If you remember January 2016, it would be hard to tiptoe blissfully ignorant into 2017. There was no warning and the selling started on December 30th. The Dow fell -14.7% at -2,270 points to hit a low of 15,540 on January 20th. The Nasdaq fell from 5,107 to 4,209 or -21.3%. The Russell 2000 fell from 1,160 to 943 or 23.0%. Given the gains in recent weeks, we could repeat that decline.

Dow - January 2016

However, given the stock rotation scenario, I do not expect any decline to be that violent. While we could easily decline 5% to 7%, the rotation into other stocks could prevent a complete washout.

NOBODY can accurately predict the market's future. However, there is a preponderance of evidence that suggests the first couple weeks of January could be rocky.

The Dow is clearly in distribution with solid resistance at 19,950 and big intraday declines. Thursday the Dow closed 100 points below the intraday high and Friday was an 80-point decline intraday. Short-term support has formed at 17,760 giving us about a 200-point range to watch for a breakout or a breakdown.

The four consecutive intraday failures over 19,900 have reduced the importance of Dow 20,000. I wrote over the last two weeks that sellers were probably going to begin selling just under Dow 20K in order to beat the rush and maintain that 20K target for those still investing in the rally. That has now happened for four consecutive days. That reduced a lot of the stock available to sell and should have made a touch of 20K a less reactive event.



The S&P has found some short-term support at 2,250 but it has also put in three consecutive lower highs that suggest that support will fail. The rotation from sector to sector has helped support the S&P because rising sectors are offsetting declining sectors.


The Nasdaq Composite is trapped in a narrow 50-point range between 5,430 and 5,480. The Friday close was just above that lower support and suggests further weakness ahead. A decline below prior resistance at 5,400 could see a drop to 5,200.

The big cap tech stocks cannot seem to post consecutive gains. One day they are up and then next they are declining. This is sector rotation. Some portfolio managers are taking the opportunity to lighten up on the techs when they get a good bounce to offset their selling.



The Russell 2000 Index closed with a -2 point loss but that was -15 points below the intraday high. The Russell was the largest gainer in the rally at +20.1% and that suggests it could be the biggest loser in any future decline.


I expect the market to be choppy this week but maintain a positive bias. Fund managers will be trying to keep their window dressing in place to exit the year on a high note. However, the closer we get to the end of December the more likely the selling pressure will increase.

I am looking forward to a major buying opportunity in January in hopes of establishing some long-term positions. I sincerely hope readers are ready for a potential dip. If it does not appear, the short covering and price chasing could be enormous because quite a few investors and analysts are expecting that buying opportunity.

I would refrain from being overly long and I would definitely keep my stop losses in place.

 



 

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Random Thoughts


A big chunk of investors jumped back to the bearish camp but a few became more bullish. The neutral camp is losing followers at a rapid rate. Neutral sentiment was at 42% before the election. At 23.0%, that is the lowest reading since November 13th 2014. This survey ended on Wednesday.

Last week results


The real election is Monday. The Electoral College will meet on Monday in their respective state capitals to cast the official votes for president. Twenty-nine states bind their delegates and they have to vote for whoever won the popular vote in the general election. One elector has resigned rather than vote for Trump. Three others in Colorado have sued to be released from their bindings so they can vote for Trump instead of Clinton.

There are 538 electoral votes to be cast. The 12th amendment requires 270 votes for the president to be elected with a majority. The votes will not be counted until January 6th, during a joint session of Congress and only then will the winner be announced. As president of the Senate, Joe Biden will preside over the joint session and announce the results.

Trump won 306 electoral votes in the general election. Republican officials have been in touch with all 306 and they believe only a "few" may vote for somebody other than Trump. A total of 68 electors from 17 states have asked James Clapper, the Director of National Intelligence, for a briefing on why the U.S. believes Russia was behind cyberattacks intended to influence the election. Clapper has refused saying he will not give any briefings until after President Obama's official review is completed in January.

It would require 37 "faithless electors" to withhold their votes from Trump to prevent him from being declared the winner. The election would then go to the house where the president would be chosen. Since the republicans hold a majority in the house, it is assumed they would choose Trump.

Obviously, this normally mundane Electoral College process could cause a real problem for the market and the economy if there are enough faithless electors to prevent Trump from getting the 270 votes. I do not want to even consider the potential impact to the market and to consumer sentiment. This would produce unimaginable market volatility.


Steven Gail began writing for Option Investor in March 2003. In the last 13 years, he has filled many roles and always did a great job. Steve was a finance teacher at UCLA, a singer and musician. He performed for thousands every year and was a hit everywhere he went. For the last several years, Steven has been fighting leukemia and he finally lost the battle last week. If I wrote another 1,000 words, I could not tell you what a great, funny, honest, sincere, hard working person Steven was. Reading the comments on his Facebook page show that he was equally admired by everyone he knew.

I know a lot of readers still kept in touch with Steven and he will be missed terribly.

Karaoke night. 6 months ago. Mac the Knife
Jamming with friends. December 10th. Steven being Steven



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"In almost every walk of life, people buy more at lower prices; in the stock market they seem to buy more at higher prices."

James Grant
Grants Interest Rate Observer


 


Index Wrap

Not Unanimous

by Jim Brown

Click here to email Jim Brown
Everyone keeps talking about all the indexes hitting new historic highs. Unfortunately, that is not true.

Granted all the major indexes that investors normally follow have hit new closing highs but the NYSE Composite Index failed to achieve that goal. The actual difference is negligible but it is worth noting. The May 21st, 2015 closing high was 11,239.66. The December 13th, 2016 closing high was 11,237.17, about 2.5 points short. However, the December intraday high at 11,256.07 was higher than the May high at 11,254,87. While I think that is close enough to count there is a critical difference.

Trading programs do not have a true "close" feature. They deal in absolutes. While I am sure some enterprising programmers have included a margin of error or a fudge factor in the programming, most of them deal in real numbers.

When the index hit a new intraday high on the 13th, that was the high point for the week. The trading programs took over and the distribution began. The selling came from programs because no single investor or portfolio manager could manipulate 2,800 stocks to decline when the 11,000 point index exceeded its old intraday high by a single point.

Is it material? Ask me again in two weeks. Why would programs be keying on the NYSE Composite Index? I seriously doubt it was just a coincidence but the amount of selling was minimal. We will be able to draw additional conclusions after we see what happens over the next two weeks.


I do not know if everyone remembers but back in November 2015 every headline was about the strong dollar and how it was killing earnings. The Dollar Index peaked at about 100 in November and every earnings report had big charges for currency conversion issues.

Today, the dollar index is 3% higher at $103 and nobody even mentions it. The dollar index jumped +2 points after the Fed announcement and with the Fed's increased rate hike guidance for 2017 the dollar is likely to continue rising.

Did some universal law suddenly remove the dollar from importance to earnings? Not hardly and you can bet the Q4 earnings cycle is going to have a lot of earnings misses or at least a lot of charges do to the dollar. This is being totally ignored today and it is only going to get worse as the dollar gains in strength.


The one place the impact of the dollar is really painful is in commodities like the precious metals. Gold has declined from $1,375 to $1,136 due mostly to the impact of the dollar and the expectations for a stronger economy. Silver is down -23% from the $21 high over the summer and is now at 7-month lows.



The S&P is starting to show signs of weakness. The RSI uptrend has been broken. The MACD averages are about to have a bearish cross and the last three days have each seen a lower high.

I laid out the case last week for some imminent market weakness in late December and early January. The distribution over the last week appears to suggest we are in the early stages of a market top.

While nobody can predict the market from day to day, I would be very surprised if we did not move lower in the weeks ahead. There may still be a push in the low volume market this coming week to try and hit Dow 20,000 but there are plenty of sellers waiting at 19,950.


If the broader market is going to fail, this is exactly the right spot. The Russell 3000, the largest 3,000 stocks in the market, came to a dead stop at uptrend resistance and is threatening to break short-term support at 1,340. This is the market and there is risk to 1295-1300.


The Semiconductor Index fell -1% on Friday after setting a new high on Thursday. The SOX leads the Nasdaq and that was a major reason for tech weakness on Friday. The two indexes have been in lock step for the last month and a decline by the SOX would drag the Nasdaq lower.



Lastly, the yield on the ten-year treasury has moved to a two-year high and this impacts the market in multiple ways. Real rates are rising and that impacts earnings. Investors with a large bond allocation in their portfolio, are getting killed with the sell off and they should be rotating into equities. Lastly, with yields back up in a respectable range, companies with a need for long term stability like insurance companies, will move away from equities and back into treasuries to guarantee that income. Overall, rising treasury yields are supposed to be negative for equities but in this environment, there should be more rotation out of bonds and into equities. There is reportedly a large number of pension funds that are being forced to reduce holdings in bonds/treasuries by year-end and rotate into equities. That could support the equity market going into the end of December.


I continue to believe that the market will be choppy over the next two weeks. However, I would be careful holding long positions past December 28th. The last couple days of the year are typically negative as traders position themselves for a potential January dip. This year has significant potential for a January decline so there may be a lot more end of year sellers.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Pile On

by Jim Brown

Click here to email Jim Brown

Editors Note:

When a stock's outlook turns negative all the analysts begin piling on the downgrades. For Caterpillar that has not begun but with their caution to analysts last week, you can bet there are some downgrades ahead.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

CAT - Caterpillar - Company Profile

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company's Construction Industries segment offers backhoe, small wheel, skid steer, multi-terrain, compact track, medium and compact wheel, and track-type loaders; mini, wheel, and track excavators; track-type tractors; and select work tools, motor graders, telehandlers, soil compactors, and pipelayers, as well as its related parts for the heavy and general construction, rental, mining and quarry, and aggregates markets. Its Resource Industries segment provides electric rope and hydraulic shovels; draglines; drills; highwall and longwall miners; hard rock vehicles; articulated, large mining, and off-highway trucks; large wheel loaders; wheel tractor scrapers; wheel dozers; machinery components; hard rock continuous mining systems; electronics and control systems; and select work tools for use in mining and quarry applications. The company's Energy & Transportation segment offers reciprocating engines, generator sets, marine propulsion systems, gas turbines and turbine-related services, diesel-electric locomotives, and other rail-related products and services. Its Financial Products segment provides retail and wholesale financing for Caterpillar equipment, machinery, and engines; offers property, casualty, life, accident, and health insurance; insurance brokerage services; and purchases short-term trade receivables. The company's All Other segments remanufactures Cat engines and components, and provides remanufacturing services for other companies; offers business strategy, and development, management, manufacturing, marketing, and support primarily for paving, forestry, industrial, waste, and Cat products. Company description from FinViz.com.

Caterpillar's business has been in decline for several years as the energy sector went into hibernation and Asia's economic growth appeared to slow. For some reason, the stock bottomed on January at $58 and rallied to almost $100 despite a weak outlook in every earnings cycle. The $18 post election bounce was just another example of irrational exuberance. The election did not sell more tractors overnight and a pickup in their business could be several quarters away.

The best thing Caterpillar has in its favor is OPEC's decision to cut production. That means a year from now oil prices may have recovered slightly and energy companies may begin to buy more tractors. That is a long time off for an $18 spike.

Earnings in 2014 were $6.38, 2015 $4.64, 2016 they are estimated to be $3.26 and for 2018 analysts expect $3.15. However, CAT said last week that the estimates were overly optimistic. While Asian sales may have quit declining there is no material rebound at present.

Earnings Jan 24th.

This is a play on the retracement of that $18 bounce. When the company says analyst expectations are overly optimistic you can bet analysts will begin to lower their numbers. That should produce an extra weight on the stock in addition to any normal decline with the Dow in January.

The earnings are Jan 24th and the February options are expensive. Since this is a short-term position I am recommending the January options. I believe any material decline will happen in the first two weeks of January.

Buy Jan $90 put, currently $1.85, initial stop loss $96.85.



In Play Updates and Reviews

Tick Tock

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors are counting down the days before Christmas and more importantly before year-end. The market has turned choppy as expected and the Dow and Nasdaq 100 were the only indexes to squeeze out a gain for the week.

While next week could have a positive bias, I expect the trading to be choppy as portfolio managers just try to hold on to what profits they have accumulated until January begins. With a lot of analysts expecting a January decline, there may be some managers that decide to pull the ripcord after Christmas instead of waiting for 2017.

Adding profitable new long positions in this market will be very difficult if it plays out as analysts expect.



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


VRTX - Vertex Pharmaceuticals

The long call position was entered at the open.



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Long and short equity trades = Premier Investor



BULLISH Play Updates


ADP - Automatic Data Processing - Company Profile

Comments:

Goldman upgraded from neutral to buy. $2 gain. New 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.


FFIV - F5Networks - Company Profile

Comments:

No specific news. Barely holding above prior resistance on a weak Nasdaq.

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.


UNH - UnitedHealth - Company Profile

Comments:

Jefferies said UNH was the top stock to buy ahead of the Obamacare repeal. They have contracts with more than 850,000 doctors 6,000 hospitals. The analyst said despite the recent gains it trades at a discount to the market.

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.


VRTX - Vertex Pharmaceuticals - Company Profile

Comments:

No specific news. Generic headlines about Trump taking on big pharma next depressed the sector.

Original Trade Description: December 14th.

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.

Position 12/15/16:

Long Jan $82.50 call @ $2.70, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

No forward progress. The Dow closed -80 points off its highs with a 9-point loss and the DIA did likewise. Market could continue to be choppy over the next week.

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.


GATX - GATX Corporation - Company Profile

Comments:

No specific news. Intraday spike sold.

Original Trade Description: December 15th

GATX Corporation leases, operates, manages, and remarkets assets in the rail and marine markets in North America and internationally. The company operates in four segments: Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. The Rail North America segment primarily leases railcars and locomotive, as well as other ancillary services. This segment also offers repair, maintenance, modification, and regulatory compliance services on the railcar fleet. The Rail International segment leases railcars, as well as offers repair, regulatory compliance, and modernization work for railcars. The ASC segment operates a fleet of vessels that provide waterborne transportation of dry bulk commodities, such as iron ore, coal, limestone aggregates, and metallurgical limestone for steel makers, automobile manufacturing, electricity generation, and non-residential construction markets. The Portfolio Management segment is involved in leasing, asset remarketing, and marine operations, as well as manages portfolios of assets for third parties. As of December 31, 2015, it operated a fleet of 17 vessels; a fleet of approximately 106,100 cars; a fleet of 18,400 boxcars; and a fleet of 611 older four-axle and 26 six-axle locomotives. Company description from FinViz.com.

There has been no news since the company announced a 40 cent dividend on Oct 28th. The dividend is payable on Dec 31st to holders on Dec 15th. That is today. That means nobody else is going to be buying the shares to get the dividend.

Earnings Jan 19th.

GATX has rallied 45% since the election. I can only assume it was because of the rally in the Dow Transports in anticipation of a better economy in 2017. There is no current fundamental reason for a 45% rally and odds are good once the stock begins to roll over with the market it could fall very hard. Apparently other investors believe the same way since the only put strike with any volume is the January 60 puts. There is more volume in that one strike than all the other strikes combined.

Position 12/16/15:

Long Jan $60 put @ $2.35, no initial stop loss to avoid any volatility spikes.




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