The Santa rally found some traction this morning but the sleigh was sliding backwards intraday. The Dow spiked +176 points at the open after a big rally in Asia carried over into the S&P futures. The Dow spiked to 19,938 at the open but fell back to 19,775 intraday.
The Santa rally is the last five days of the year plus the first two days of January. This is when the end of year retirement funds hit and fund managers put that money to work. A one day rebound is not a trend.
The rest of the week will be key for market direction.
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BULLISH Play Updates
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BEARISH Play Updates (Alpha by Symbol)
CAT - Caterpillar - Company Profile
No specific news. Big spike with the Dow but sellers appeared instantly.
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.
Long Jan $90 put @ $1.89, see portfolio graphic for stop loss.
DIA Dow ETF - ETF Profile
No material news. Big rally overseas spiked the U.S. futures to trigger short covering at the open. This should be temporary.
Original Trade Description: December 7th
The SPDR Dow JonesÂ® 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.
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
No specific news. Nice decline in a bullish market.
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.
Long Feb $72.50 put @ $1.55, see portfolio graphic for stop loss.
GATX - GATX Corporation - Company Profile
No specific news. Shares closed at a two-week low after a minor rebound from support.
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.
Long Jan $60 put @ $2.35, no initial stop loss to avoid any volatility spikes.
MAT - Mattel - Company Profile
Mattel spiked on the announcement of a smart baby monitor named Aristotle. It is similar to Amazon's Echo/Alexa. Mothers can reorder diapers, formula, etc, have it play music for the baby, soothe infants back to sleep, read bedtime stories, play games and teach toddlers different words. It has an HD camera for observation from another room. This device will cost $300 and will begin selling this summer. This is actually a very good move for Mattel and the stock decline could be over. Announcement
Original Trade Description: December 28th
Mattel, Inc. designs, manufactures, and markets a range of toy products worldwide. The company operates in three segments: North America, International, and American Girl. It offers dolls and accessories, vehicles and play sets, and games and puzzles under the Mattel Girls & Boys brands, including Barbie, Monster High, Disney Classics, Ever After High, Little Mommy, Polly Pocket, Hot Wheels, Matchbox, CARS, Disney Planes, BOOMco, Radica, Toy Story, Max Steel, WWE Wrestling, and DC Comics. The company also provides its products under the Fisher-Price brands, such as Fisher-Price, Little People, BabyGear, Laugh & Learn, Imaginext, Thomas & Friends, Dora the Explorer, Mickey Mouse Clubhouse, Disney Jake, the Never Land Pirates, and Power Wheels. In addition, it offers its products under the American Girl brands comprising Truly Me, BeForever, and Bitty Baby; and construction, and arts and crafts brands, such as MEGA BLOKS, RoseArt, and Board Dudes, as well as publishes the American Girl magazine. Mattel, Inc. sells its products directly to consumers via its catalog, Website, and proprietary retail stores, as well as directly to retailers, including discount and free-standing toy stores, chain stores, department stores, and other retail outlets; to wholesalers; and through agents and distributors. Company description from FinViz.com.
Retail surveys showed a 9% decline in toy sales over the holiday shopping season. Several of the high profile toys that did sell, suffered serious glitches that have buyers burning up the phone lines wanting refunds and/or replacements.
Zacks downgraded Mattel to a sell saying earnings growth at Mattel, even before the holiday disaster, was only 3.1% compared to the industry average of 21.2%. For the current year Mattel is only expecting 1.2% growth and that was before the holiday news. The company has already projected sales for 2016 to decline -1.9% and that forecast is sure to be revised lower. Analyst earnings estimates were already moving lower and the holiday sales news should accelerate that trend.
Toymakers are facing something called "age compression." Previously the age range for Barbie toys was 3 to 9 years. Now that has compressed to 3 to 6 years. Electronic games are making kids smarter and taking up a large percentage of their playtime. Toys are being left in the toy box. This is good news for companies like ATVI and EA but bad news for Mattel.
The company is also vulnerable to the strong dollar because of sales overseas. The dollar is at 14 year highs and Q4 earnings are going to be impacted.
Earnings January 18th.
This is going to be a short play. With earnings on the 18th, we are going to use a February option and we will exit before the earnings report. The expected market decline in early January should accelerate any drop in Mattel shares.
Long Feb $27 put @ $1.30, see portfolio graphic for stop loss.
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