Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/27/2016

Table of Contents

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

Market Wrap

Dow Resistance Held

by Jim Brown

Click here to email Jim Brown

The Dow traded to within 20 points of 20,000 but failed again to reach that level.

Market Statistics

Close only counts in horseshoes and hand grenades but the Dow has been close to 20K multiple times over the last two weeks. Each time that distribution resistance from 19,950 to 19,975 was hit we saw volume increase immediately and the index was unable to sustain its momentum.

There is an interesting pattern forming where the Dow continues to post higher lows. If this were a normal market without an imminent change in the calendar, I would be predicting a strong breakout ahead. The higher lows means traders are buying the dips at a higher level each time. It may also be a function of portfolio managers continuing to window dress their winning stocks in hopes of ending the year at the highs. This higher low pattern is making it more likely a touch of 20K could be the final buying climax for 2016.


The economic reports were bullish with the Consumer Confidence for December surging more than 4 points from 107.1 to 113.7 and the highest level since August 2001. Analysts were only expecting a rise to 108.5. After a 9-point spike in November to 132.0 the present conditions component declined to 126.1. The expectations component rose from 94.4 to 105.5 and the highest level since December 2003. Those respondents expecting business conditions to improve shot up from 16.4% to 23.6%. Those expecting more jobs rose from 16.1% to 21.0%.

The percentage of respondents planning on buying a car rose from 12.8% to 14.3%. Potential homebuyers declined from 6.8% to 6.5%. Appliance buyers rose from 51.0% to 52.3%.


The Richmond Fed Manufacturing Survey for December rose from 4.0 to 8.0 and well above the -11.0 low back in August. The index has only posted back-to-back positive numbers twice in 2016. New orders rose for the second month and backorders ended a four-month string of declines. Manufacturing in the U.S. is facing a short-term headwind with the dollar at 14-year highs. This is going to pressure revenue and earnings in the months ahead.

In the separate services survey the headline number barely improved from 3 to 4 and remains well below the September high at 13. Excluding retail the number fell to -1. Retail employment fell from +10 to -6 for December.



The Texas Manufacturing Outlook Survey for December improved from 10.2 to 15.5 and the highest level in more than a year. New orders rose from -1.4 to +7.3 but backorders declined slightly from -2.5 to -2.9. Employment also declined from 4.5 to -2.9.

The calendar for the rest of the week is lackluster and after Wednesday, there will be no traders around to pay attention to the reports. The street is already working with a skeleton staff after setting up their positions for yearend over the last couple of weeks. Anyone left on a trading desk is just trying to avoid any disasters for three more days.


The Santa Clause rally is running out of steam. The Santa rally has fallen on its face despite the new record on the Nasdaq today. The Santa rally is the last five trading days of the year and the first two days of next year. Santa may be down but he may not be out. I expected the Dow to tag 20K on Tuesday but it fell 20 points short. There were no Dow components with a change of more than $1 either positive or negative. Apple, Goldman, IBM, United Technology and Caterpillar were the biggest gainers and the keyword there was gainer. The components are continuing to tick up slightly with 21 closing positive for the day. We still have a possibility of hitting 20K on Wednesday but a failure tomorrow should end the possibility for 2016.


The pension fund rebalance for the end of December could see between $38 and $58 billion in equities sold according to Credit Suisse. Stocks have rallied so much since the election the pension funds have to sell stocks and buy bonds to bring their mandatory ratios back into balance. That suggests Thr/Fri should have a negative bias. Normal volume will be very low so that means even $38 billion in fund selling could have a significant impact.

Stock news today was negligible because of the holiday impact. After the bell, Delta said it had reached an agreement with Boeing to cancel a $4 billion order for 18 model 787 Dreamliners. The airline had assumed that 2005 dated order when it merged with Northwest in 2008. Delta said it would continue to take deliveries of 737-900ER aircraft through 2019 as they complete two orders for 120 aircraft. No agreement terms were released. Boeing still has almost 1,200 orders for the 787 aircraft with a list price of $225 million each. Boeing shares did not move in afterhours and Delta shares rose about 50 cents.


Iran was making headlines this morning after it said it had negotiated to pay only half of the announced $16.6 billion price. Boeing is selling (50) 737 Max 8s, (15) 777-300 ER and (15) 777-9s to Iran Air. Iran's official news agency, IRNA, had a quote from the country's deputy transport minister saying "given the nature of the order and its options, the purchase price for the 80 jets was approximately 50% of the list prices. Boeing typically discounts from the list price for large orders but numbers are never revealed. Airbus will supply 100 jets for a value of $18-$20 billion but the head of Iran Air said the contract value would not exceed $10 billion. Boeing said the Iran deal would support more than 100,000 jobs in the USA. It still has to pass Congress and gain presidential approval.


The biggest gainer on the Nasdaq for 2016 remains Nvidia. This mammoth gainer has risen from $33 to $117 in 2016 for a +255% gain for the year. The stock shot up another $7.50 today after being added to Goldman's "Conviction Buy" list last week. Shares continued to rally another $1.20 after the close to $118.50. Most people do not understand how Nvidia is revolutionizing the chip sector. This is the Intel of this decade. There will be a dip in January and everyone should buy it.


Tesla (TSLA) and Panasonic announced the completion of an agreement to begin manufacture of solar cells and modules at Tesla's factory in Buffalo, New York. The agreement will create 1,400 jobs. Production will begin in 2017 and rise to 1 gigawatt of panels per year by 2019. Panasonic will invest $256 million on the acquisition and installation of production equipment. The two companies are already building a $5 billion gigafactory to manufacture batteries in Nevada.


It was not a good holiday for the toy companies. One research report showed toy sales were down -9% for the six-week shopping period before Christmas. Not only were toy sales lousy, a couple of big sales winners turned into big disappointments. Mattel's Hello Barbie Dreamhouse is an application and voice controlled version of the regular Barbie Dreamhouse. Unfortunately, there were numerous communication problems using WiFi and Mattel was deluged with complaints.

The biggest disappointment was the Hatchimals from Spin Master. Animals are supposed to hatch from a plastic egg and the toy was in very high demand during the shopping season. The $59 retail item sold for as much as $250 on Ebay. However, many of the toys had defects and refused to hatch and batteries ran down almost immediately. The company was not answering the phone because of the volume of complaints. The "all agents are busy" greeting never went away. Twitter users were bombarding social media with complaints.


Seattle Genetics (SGEN) shares fell -15% after the FDA placed a hold on several early stage cancer drugs after six patients developed liver toxicity and four patients died. One trial was placed on full clinical hold and two-phase one trials were placed on partial clinical hold. No new trials can be started until the existing holds are removed.


Disney (DIS) shares were flat after news that Carrie Fisher, age 60, had died of a heart attack. Her Princes Leia character had just been rebooted in the latest episode of Star Wars. Fortunately, for Disney the filming for the 2017 release of Episode VIII had already been completed. That means the character will continue at least through 2017. She was also slated to be in the next episode due out in 2019 but filming had not begun. Under a 1985 California law a studio must get permission from the actor's estate to use their image for up to 70 years after a death. Fans are already discussing whether she should be given a glorious on screen death at the end of the 2017 episode or as some have suggested singer Stevie Nicks could take her place. The two have a similar appearance.

Carrie Fisher

Stevie Nicks


The Amazon Echo device has revolutionized many areas in the lives of users. However, after the death of one user, law enforcement agencies are demanding the voice records of the conversations held in the room of the deceased user. The Echo is always listening just in case someone wants to play a song, change the thermostat temperature or reorder some item from Amazon. This amounts to a voice recorder in the room that is always on. Amazon has already released some data and the users purchase history but they are refusing to release the voice transcript without a "valid and binding legal demand properly served on us." Amazon routinely rejects "overboard or otherwise inappropriate demands as a matter of course." The Echo device was so popular they sold out well before Christmas and are not available again until late January. Amazon helped power the Nasdaq to a new high on Tuesday.



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Markets

The Nasdaq made a new record high and briefly punched through the 5,500 level. However, all the indexes finished well off their intraday highs. Volume was very light at only 4.1 billion shares and that is likely to decline except for the potential increase from the pension fund rebalance selling on Thr/Fri. Wednesday is a tossup because the news of the pension selling is so widespread we could see traders begin to short into that move on Wednesday.

The futures are mildly positive tonight but there is a lot of darkness before morning. If the Dow were to spike again at the open and tag that 20K level, I really believe it would be ringing the bell at the market top. If it does not happen on Tuesday, it could be many weeks before we get another chance.

The S&P hit resistance at 2,270 once again. That is the fifth time in the last two weeks and each time resulted in selling. Support is 2,250 and then a long drop to 2,190.


The current Dow pattern over the last two weeks is bullish in a normal market. The Dow is wedging up to resistance at 19,975 with a pattern of higher lows. However, even if we did get a breakout at this level, it is likely to be short lived once the calendar rolls over. The top seven Dow gainers since the election, GS (+65), JPM (+19), UNH (+25), TRV (+17), HD (+15), BA (+15) and IBM (+15) have accounted for 1,171 of the Dow's 2,062 points. Goldman alone has added 445 Dow points. Most of those stocks are very overextended and should correct significantly once we hit January. With only 7 stocks accounting for 57% of the Dow's post election gain, the odds are very good those same 7 stocks are going to account for a lot of the potential loss in January.

I know it is hard for anyone to believe the market is going to roll over soon since it is not showing any material signs of weakness other than distribution at the recent highs. If the Dow does not give back 1,000 points, I will be shocked. However, I have been shocked before and I am sure it will happen many more times.



The Nasdaq Composite and the Nasdaq 100 both broke out to new highs on the strength of big cap techs. Apparently, there is some money already rotating back into the tech stocks and they had been the laggards. The Composite index collapsed back -25 points from the intraday high to close right on that prior resistance level at 5,485. The Nasdaq 100 surged to almost 5,000 before falling back -27 points to close at 4,965. It was a good day for the tech indexes.




The Russell 2000 had a decent day but failed at downtrend resistance at 1,380. The small cap index is lagging to some extent and a break below 1,350 could trigger a strong sell cycle.


I hate to sound like a broken record but the market is at a key pivot point. Volume is weak, resistance is strong and time is running out on the calendar. Wednesday could be our last chance to hit Dow 20K before the pension fund selling appears. I would continue to recommend not initiating new long positions until January. There is no compelling need to be long the market. There is always another buying opportunity in the future.


 

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Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Pass or Play

by Jim Brown

Click here to email Jim Brown

Editors Note:

At some point in a poker game you have to decide to either fold or play the cards you have been dealt. I am recommending we continue to hold our current positions ahead of what could be a significant market event.

If you are just dying for something to play, buy February calls on the $VIX. The $15 call is now $2.20 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

Dow Resistance Held

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow spiked to within 20 points of 20,000 at the open but sellers were waiting. The Dow closed barely positive after an opening surge that quickly ran out of volume. Resistance at 19,965-19,975 remains firm. The Nasdaq Composite closed at a new high but 26 points off its intraday high. The index surged over 5,500 at the open but faded almost immediately to close at the low for the day.

The selloff from the opening highs on what is normally the best day of the post Christmas week, is just one more sign there could be some serious declines in January.

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. Minor decline as Dow weakens. 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. Only a minor gain.

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. Dow resistance held. 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 gain 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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