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Newsletter

Daily Newsletter, Saturday, 12/24/2016

Table of Contents

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

Market Wrap

T'was the Friday before Christmas

by Jim Brown

Click here to email Jim Brown

T'was the Friday before Christmas and all through the markets not a creature was stirring not even a mouse.

Weekly Statistics

Friday Statistics

Friday should have been a market holiday. Volume was minimal at 4.01 billion shares, down from the 7.6 billion average. The indexes started negative as the few remaining traders closed their positions and headed out for the holiday. The S&P traded in a very narrow 4-point range until just before the close when a minor uptick appeared to increase that range to 5 points. The Dow traded a narrow 28-point range until that final tick higher. The uptick at the close was probably short covering and positioning for Tuesday. The first trading day after Christmas is normally bullish and sometimes quite bullish.

Once the minor amount of economic news was over it was a very quiet day. The New Home Sales for November rose from an annualized rate of 563,000 to 592,000 and beat estimates for 575,000. That is a rise of 16.5% from November 2015. The Midwest region was the strongest with a 43.8% spike while the South was the only area that saw sales decline at -3.1%. The Northeast was flat and the West rose 7.7%.

The average price for a newly listed home was $250,000, up +1.6% from October. The median sales price was $305,400, a +0.9% gain.


Consumer sentiment for December rose from the initial reading of 98.0 to 98.2 and the highest level since January 2004. The internals keep improving with the number of respondents saying the economy will be better over the next year rising from 46% to 51% in just the last month. The present conditions component rose from 107.3 to 111.9 and the expectations component rose from 85.2 to 89.5.

Fewer people expect to lose their jobs and more people said they believe jobs are plentiful. Nearly two-thirds of respondents said their household finances have improved over the last several years and nearly half said they improved over the last year. Business owners who feel economic conditions are now favorable rose 11% to 42%. More than 79% of respondents feel like this is a good time to make a major purchase.

The post election honeymoon phase is about to come to a close. Once Trump takes office and his promises begin to bog down in Congress, the outlook by consumers will fade. Longer term the outlook will remain positive but the initial honeymoon bliss will fade with the arrival of reality.


One of those points of reality will be the GDP. Earlier in the week, the last revsion on the Q3 GDP came in at +3.5% growth. Trump has been talking about 4% to 5% growth. He may be able to generate that 2-3 years from now but the Atlanta Fed is only projecting 2.5% growth for Q4. When the actual Q4 GDP number is announced on January 27th, it could be a wake-up call for overly bullish investors. The economy is improving but not at the rate currently priced into the market.



The only important report for next week is the Richmond Fed Manufacturing Survey. The rest are just filler as the calendar year comes to a close.


In stock news, Deutsche Bank (DB) agreed to a $7.2 billion settlement with the U.S. Justice Dept over the sale of mortgage backed securities during the financial crisis. The starting price was $14 billion so the settlement represented nearly a 50% savings. The agreement is expected to be finalized in early January. This is just one of multiple problems facing Deutsche Bank. There is an ongoing probe for alleged manipulation of foreign exchange rates, another on a violation of sanctions with Iran and another for suspicious equities trades in Russia. Shares of DB are recovering after trading down to $11 in September.


Lockheed Martin (LMT) shares lost $3.20 after Trump said he asked Boeing to come up with a replacement for the F-35 fighter because of enormous cost overruns. Trump requested Boeing price out an equivalent F-18 fighter as an alternative to the F-35. Lockheed has nothing to worry about. Comparing the 5th generation F-35 to the 4th generation F-18 is comparing apples to oranges. The F-35 is a stealth fighter that relies on its invisibility to get close to opponents before they know they are there. It is a "penetrating" aircraft that can sneak behind a country's defenses. The F-18 is a great plane but it is a top of the line traditional fighter that does not have stealth capability. When matched against the new generations of Chinese and Russian stealth aircraft it would be a tough fight. In a recent exercise, a group of four F-35 planes entered a test range to practice evading ground to air missiles. The planes were so stealthy they were forced to turn on their transponders so the antiaircraft missile batteries could see them even though the ground controllers knew they were there.

The key is the price on the F-35 at roughly $120 million each today. Lockheed said it expected to drive down the price to $85 million by 2020 as volume production increased. More than 5,000 are expected to be built for the U.S. and 11 of its close allies. The U.S. will have 2,616 F-22s and F-35s when the final contracts are completed. I would be a dip buyer on Lockheed in January.


Portola Pharmaceuticals (PTLA) spiked 33% after they announced positive results for the oral drug anticoagulant betrixaban over the injectable drug Lovenox from Sanofi. The FDA and EMA sent an official acceptance notice to Portola along with a promise for a priority review. This drug is in the same class as the blockbuster $3.5 billion a year drugs Eliquis from Pfizer and Xarelto from JNJ.


Tesla (TSLA) rolled out an upgraded Autopilot system with a lot of new safety features and the stock gained $5 to a new three month high. The new features force speed limits on undivided roads but still allow up to 90 mph on divided highways. The Autopilot requires hands on the wheel when moving at medium to fast speeds. If the car senses the driver removing their hands more than three times in one hour the Autosteer feature will disconnect and will not resume unless the driver stops the car and restarts it. At speeds less than 8 mph drivers do not have to touch the wheel. They also revealed an Easter egg hidden in the Model X OS that will set off a light show to the tunes of Wizards in Winter by the Trans-Siberian Orchestra. There are other eggs that transport the user into a "Mars" experience. There is a new OS due out next week that will enable the car to go from 0-60 in 2.4 seconds. If you order a new Tesla by the end of December, Tesla will include free supercharging.


Amazon (AMZN) continues to dominate the holiday shopping season and I really mean dominate. Retail Metrics surveyed online purchases and said shoppers are transacting purchases from mobile devices in record numbers. Adobe Digital said Black Friday and Cyber Monday both saw more than $3 billion in online sales and "virtually every day since has been $1 billion or more."

Slice Intelligence surveyed 1.7 million online shopping receipts from Nov 1st through December 16th and found that Amazon was killing everyone else. Amazon raked in a 36.9% share of sales. Best Buy was number two at 3.9% so Amazon was selling 10 times what Best Buy was selling. Target was number three at 2.9%, Walmart at 2.7% and Macy's at 2.5%.

CNBC Chart

If you put off shopping for some items until after Christmas, now is the time. I had about a dozen items in an Amazon "saved for later list" and over the last week, prices for some of them have fallen more than 30%. The buying rush is over and the prices are dropping fast.

The winner in the package delivery business this season is the Post Office. At my house, we shop for a lot of kids, spouses, grand kids, nieces and nephews. As an Amazon Prime member with free shipping, my wife takes advantage of that to order several dozen $3, $5, $10 items for the kids. Last year UPS delivered at my house nearly every single day from Thanksgiving through Christmas Eve. This year, UPS only came once. The USPS came nearly every day and FedEx came about twice a week. The difference was amazing. I asked my UPS driver when he showed up this week if he was seeing the same pattern on everyone else. His truck was still full but it was mostly larger, heavier packages. There were very few of the small junk size packages. He was pleased saying he was actually getting done at a decent time every day instead of working late into the night.

For investors that suggests a potential problem. With UPS shipping fewer packages but those packages having a higher average weight, did that increase profits or decrease profits? UPS was expecting to ship between 700-750 million packages and FDX 350-400 million.

Also, a problem is the Amazon cargo service. Amazon is now operating 40 "Prime Air" cargo jets on daily runs from shipping centers to regional distribution centers. They still use UPS, FedEx and USPS for the last mile delivery but they are taking away the long haul business from those delivery services. Also, they are carrying the larger, lighter boxes on the planes to avoid the move by UPS and FDX to charge by volume instead of weight. A case of paper towels does not weight much but it takes up a lot of space so those services charge more. By carrying the lighter packages, there is also less wear and tear on the planes. FlightAware said analysis of cargo, capacity and landing data from four airports showed that Prime Air planes were carrying between 37% to 52% of their maximum loads by weight.

Analysts were upgrading FedEx last week and keeping UPS at a hold in some instances. Several analysts had tried to determine what impacts this was having on revenue for UPS and FDX but were unsuccessful. They did decide from the research that Amazon was going to need a lot more planes as they grow past the current learning curve and expand their flight base to more than the 10 cities they are currently serving. Analysts believe the investments that weighed on earnings will help FDX in 2017.

FedEx missed on earnings last week and fell $10 from its recent highs. UPS does not report earnings until January 31st. They are expected to report $1.68 per share.



While most stocks and indexes were dormant on Friday, the biotech stocks were surging. The Biotech Index ($BTK) rose +2.3% on no specific news. There were some positive drugs results throughout the week but the index closed at two-week lows on Thursday. That may be the reason for the rebound. Investors are probably looking for something that has already sold off in hopes the trend will reverse and biotechs rise in January. The Biotech ETF (XBI) rallied 3.5%.


Crude prices continue to hover in the $52-$53 range while we wait for any potential OPEC production cuts to occur in January. Libya announced the reopening of the pipelines from the Sharara and El Feel fields and their intention to add 270,000 bpd to production over the next three months. Libya and Nigeria are exempt from production cuts. U.S. inventories rose +2.5 million barrels and that was unexpected. Inventories do not normally rise in December because refiners have to pay taxes on the oil in inventory on December 31st. Imports rose +1.11 million bpd last week to 8.47 mbpd and that was a nine-week high.

Refiners are trying to push as much refined product into the system as possible with 21.41 mbpd supplied last week. That was a multi-month high. Refinery utilization rose to 91.5% and that was also a post summer high showing they were running as fast as possible to turn the oil into refined products and pushed into the pipelines.

Also weighing on future prices was the government decision to sell 190 million barrels from the Strategic Petroleum Reserve starting in January. This was part of a budget deal where lawmakers agreed to sell the oil to pay for some budget expenses.


Producers activated another 16 rigs with 13 new oil rigs and 3 new gas rigs. The offshore activity also increased by 3 rigs to 25. The higher OPEC pushes prices, the faster U.S. producers are going to activate rigs.



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Markets

High-frequency trading accounted for 57% of the December average trading volume of about 7.56 billion shares. That means on average only 3.63 billion shares were traded by retail and institutional traders every day. The peak for high-frequency trading came in 2009 when about 61% of the 9.8 billion share daily average was computers or 5.98 billion shares per day.

Overall trading volumes have slowed significantly as baby boomers drift out of the market and younger workers never got into the investing marketplace. Active mutual funds have declined to about 4,500 and less than half of their prior peak. Retail investing has shifted in a large part away from day trading or swing trading and back into a buy and hold mentality because the market has moved mostly higher for the last seven years. The current economic expansion is the third longest in history and on its way to be the second longest. Recessions have not been legislated away but investors have forgotten their regularity. More than likely, there will be one in the first four years of the Trump administration.

At the same time there are analysts calling for Dow 23,000 to 24,000 in the next couple of years. Since Dow 23K is only a 15% rally from here that is easily obtainable. The next major milestone we will face is Dow 25K or 25% from our current location.

Analysts are rapidly updating their 2017 forecasts in light of the recent rally. These are the highest estimates on the street today.

2,300 Bank of America
2,350 Credit Suisse
2,400 JPMorgan
2,400 Barclays
2,424 Piper Jaffray
2,500 RBC Capital Markets

If any of those targets come true, buying some January 2018 SPY calls on a dip to 2,200 on the S&P could be a profitable trade. Unfortunately, they are expensive.

The S&P closed at 2,263 and my target for a January decline is 2,190 to 2,200. We are likely to get another bump higher early this week but then a fade into Friday on the pension fund rebalance. January could be a challenge but there are a lot of buyers waiting for the dip. I do believe we will trade significantly higher in 2017 but not without a pause for profit taking ahead of the inauguration.

The S&P traded flat all day but spiked from 2,261 in the last several minutes of trading. This was more than likely short covering ahead of an expected rally on Tuesday.


The Dow traded negative most of the day on Friday but spiked 17 points in the last several minutes of trading to end with a 15-point gain. UnitedHealth was the motivating factor and the only stock to move more than $1 for the day.

I expect the 20,000 level to be hit on Tuesday. The animal spirits tend to run on the first trading day after Christmas. That could easily be a sell the news event because of the pension fund rebalance later in the week. (See the Random Thoughts section)



The Nasdaq has been moving sideways in a tight range for two weeks with short term support at 5,425. The index is more than likely going to break support at 5,400 and has risk to 5,240. All of the FANG stocks were negative on Friday until right at the close when NFLX rebounded slightly to close with a penny gain.



The Russell posted two large declines on Wed/Thr and only a minor rebound on Friday. A break of short-term support at 1,355 could quickly drop to 1,310 and even fall below 1,300. The small caps have the biggest risk because of their limited liquidity. If funds need to exit in a hurry, the volatility can be significant.


Despite the market holding near its recent highs, Lipper said investors pulled $21.6 billion out of equity funds over the last week. This was the 41st consecutive week of fund outflows from stock mutual funds. Even ETFs saw fund outflows as investors positioned their portfolios for the coming tax bill.

I expect a positive market on Tuesday and a negative market on Thr/Fri as pensions funds rebalance and short sellers position themselves for a potential January decline. Investors that have been holding off on selling for tax reasons will be free to liquidate. Funds that have been holding on to gains waiting for 2016 to end, will be free to sell. Investors worried about a potential terrorist event surrounding the inauguration will also be moving to cash. If there is an early January rally, it will be one of the most unexpected events in recent memory.

I do expect any correction to be limited because there are so many people waiting for a buying opportunity. We will be buying any dip in anticipation of a Feb/Mar rally.

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

 



 

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Random Thoughts


When the market did not self-destruct last week, the bearish investors started to gravitate back to neutral. Bullish investors remain undeterred but nobody joined them. This survey ended on Wednesday.

Last week results


Pension Fund Rebalance

When bonds or equities suddenly surge an abnormal amount in a given quarter the pension funds typically rebalance their fund ratios at the end of the quarter because they are required to maintain certain ratios in the fund. With the market up very strongly since the election and bonds down an equal amount there is going to be a "near record" rebalance at the end of December.

Reuters surveyed 45 fund managers and CIOs and found that equity holdings rose to six-month highs as a result of the post election rally. Credit Suisse warned this imbalance could result in $38 billion in equity sales by month end and possibly as much as $58 billion.

Since the election, the value of global stocks has risen by about $3 trillion and bonds/treasuries have declined by a similar amount. Pension funds have strict asset allocation quotas and this sudden imbalance has to be corrected at the end of the quarter. Credit Suisse said pension funds could buy $22 billion in bonds as they take profits in equities. source


Another reason the U.S. markets are primed to move higher in 2017 is the capital flight out of the Eurozone. According to the Wall Street Journal, investors have withdrawn $550 billion from Europe in 2016 and the largest amount of capital outflows since the Eurozone was created 17 years ago. Investors are fleeing negative yields and the uncertainty of Brexit and the potential for other countries to follow Britain's lead. This has driven the Euro lower to near parity with the dollar and reduces Europe's buying power. Add in the banking crisis in Italy and a populist revolt against multiple European governments and that makes the U.S. a safe harbor for European investors. Most of that money has already been put to work in the U.S. but there are continued outflows from Europe that will boost the U.S. markets in 2017.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The market does not trade upon what everybody knows, but upon what those with the best information can foresee."

William Hamilton


 


Index Wrap

Dow 25,000

by Jim Brown

Click here to email Jim Brown
Yes, we have not even hit Dow 20,000 yet and analysts are already talking about Dow 25,000.

That would be a 25% rally from our current level and definitely possible IF the economy is going to improve, tax rates are going to be reduced and regulations lifted. The biggest impact will be the tax code changes.

The new administration continues to claim they are going to cut the corporate tax rate to 15%. When most corporations currently pay around 35% that is a monster boost to their bottom line. That means their net profits are going to rise significantly. Various analysts have said they believe S&P profits would rise roughly 15% across the board. That means the market would immediately begin pricing in those gains and stocks could easily rise 10% to 15% or more over the next two years.

There is also the cash repatriation issue. Trump wants to drop the tax to 15% but require certain uses for at least some of the money. The rest could be used for dividends and stock buybacks. A year ago there was a $2 trillion number being tossed around for cash held captive overseas. Several months ago that number rose to $2.5 trillion as more analysts studied the problem. Recently it has risen to $3 trillion but I believe we are getting well into the hype zone as the estimate rises. Secondly, companies are not going to just suddenly bring all the cash back. Many companies have uses for those funds and they should not be lumped into the total. Regardless of what final number comes back to the USA, it should be $1 trillion or more and that will fund a lot of dividends and buybacks and that lifts stock prices. That specific piece of legislation could be ready to go this summer.

Before we start talking about Dow 23,000 or even 25,000 we have to get past January first. There is a strong potential for a January correction for the reasons I have listed before. We should be dip buyers when/if that correction appears.

I believe the S&P is at risk for a decline back to 2,190-2,200. Given the strength of the recent rally, that would actually be only a mild dip. The current high close was 2,271. A drop back to 2,190 would only be 81 points or -3.5%. A real correction of 10% would knock us back to 2,043 and I do not see that happening. We spent far too long in the 2125-2175 range building a floor for a correction to move below that level unless market sentiment has really changed.


The Dow has risk to about 18,850, which would be a 5.5% decline. A full correction would take it back to about 17,900 but I seriously doubt we will see that level without a major headline event. A minimal decline would be the 19,000 level or about -4.5%. The Dow has been supported by the financials primarily Goldman Sachs. Goldman closed at $241 on Friday and has risk back to $210 or 31 points. That equates to about -240 Dow points all by itself. Obviously if Goldman is correcting the rest of the Dow components will be adding to that decline.



The Nasdaq Composite has a solid top at 5,485 and should not decline as far as the other indexes because it has not rallied as far or as fast. The rotation dip in early December killed the momentum and left the Nasdaq trailing well behind the Dow. If by chance the Nasdaq fell over 6.5% that next step would be a killer back to 4,600 but I doubt we will see that kind of a drop.


The small cap Russell 2000 Index always overshoots on the top and the bottom. The 20.1% post election gain at the December high close of 1,388 was far more than the other indexes. That suggests any decline will also be far worse. The 1,310 is too close to stop a material bout of selling. The uptrend support from Sept 2015 is too light to stop a determined decline. Once the index hits the congestive resistance between 1250-1200 it should slow considerably. My worst case forecast would be 1,200 but I think 1,250 is more likely even though that is not a clear support point.


The odds of a decent selloff in January are very high but never 100%. We need to prepare for a steep decline but also be ready to buy a dip. There is plenty of money still on the sidelines waiting for an opportunity. It remains to be seen if they buy any dip in volume until after the terror risk passes surrounding the inauguration on January 20th. I am sure there will be some bargain hunting beforehand but the big rally may not begin until after that event.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Naughty or Nice

by Jim Brown

Click here to email Jim Brown

Editors Note:

Santa may decide traders were naughty and not reward us with a continued rally. The "Santa Rally" is considered the last five days of the year and the first two days of January. There is a saying, "If Santa Claus should fail to call, bears may come to Broad and Wall."

There is a very good possibility Santa is going to let us down this year if the worries over the pension fund rebalance are correct.

As traders, we should also remain dormant the rest of the year. There is no fundamental reason to try and force a new play when next week could be very volatile.

Tuesday is now my bet for Dow 20K.

If you are just dying for something to play, buy February calls on the $VIX. The $15 call is now $2.40 and a spike to the $20 level would be a decent payday. I am not recommending it because we already have four shorts in anticipation of a January decline.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Four Days Left

by Jim Brown

Click here to email Jim Brown

Editors Note:

There are only four trading days left in 2016 and then the excitement begins. The markets wandered sideways today with a small uptick at the close that was more than likely short covering. Typically, the first two days after Christmas are positive, sometimes the first day is strongly positive. The last two days of the year, tend to be weak as traders begin to enter shorts in anticipation of a January decline. These trends do not always appear, thanks to varios headlines, but the trend does appear often enough to make investors wary.

I expect Tuesday is the most likely date for the 20K event.

I would strongly recommend investors remain very flat with your account in cash until we get to January.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.




Current Position Changes


No Changes



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BULLISH Play Updates


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. 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.


UNH - UnitedHealth - Company Profile

Comments:

No specific news. Shares up sharply in a weak market. We need to be out of this position by Dec 29th because Dow stocks could fall hard in the last two days of the year and first 7 of 2017.

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)

CAT - Caterpillar - Company Profile

Comments:

No specific news. The company announced some retirements and new appointments.

Original Trade Description: December 17th

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.

Position 12/19/16:

Long Jan $90 put @ $1.89, see portfolio graphic for stop loss.


DIA Dow ETF - ETF Profile

Comments:

No material news. Just passing time until 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.


DRI - Darden Restaurants - Company Profile

Comments:

No specific news. Just waiting on January correction.

Original Trade Description: December 20th

Darden Restaurants, Inc., through its subsidiaries, owns and operates full-service restaurants in the United States and Canada. As of May 29, 2016, it owned and operated 1,536 restaurants, which included 843 Olive Garden, 481 LongHorn Steakhouse, 54 The Capital Grille, 65 Yard House, 40 Seasons 52, 37 Bahama Breeze, and 16 Eddie V's restaurants. Company description from FinViz.com.

Darden Restaurants (DRI) reported earnings on Tuesday of 64 cents that beat estimates by a penny. Revenue of $1.64 billion missed estimates for $1.65 billion. They guided for the full year 2017 to earnings of $3.87-$3.97 per share. Same store sales growth was choppy. Olive Garden saw +2.6%, Longhorn Steakhouse +0.1%, Capital Grille+1.2%, Eddie V's +2.7%, Yard House +0.7%, Seasons 52 -0.3% and Bahama Breeze +2.6%. Shares spiked $2 on the news but faded in the afternoon to close negative. Darden had rallied 23% since the election.

The idea behind the rally was the end of the push for a $15 per hour minimum wage. When Clinton lost, that effort turned into wishful thinking because republicans have held the view that a lower wage offers entry level workers an opportunity and they can move up in the organization if they are qualified and work hard. Was that worth a 23% rally in Darden shares? I find it hard to believe.

Now that Darden earnings are over, we should expect a couple weeks of post earnigns depression and given the recent rally and the chance for a market decline in early January, the Darden drop could be significant.

Position 12/21/16:

Long Feb $72.50 put @ $1.55, see portfolio graphic for stop loss.


GATX - GATX Corporation - Company Profile

Comments:

No specific news. Only a minor loss as portfolio managers window dress their winners hoping to keep them up until January.

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 69% 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 69% 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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