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Daily Newsletter, Thursday, 1/5/2017

Table of Contents

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

Market Wrap

Almost, But Not Quite

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The Dow came within spitting distance of 20K yet again, and backed away, again, while a wave of Trump-Tweets washes over the market. The President-Elect took aim at Toyota and the proposed Time Warner/ATT merger today, tweeting that Toyota would face penalties if it moved ahead with its plans to build a facility in Baja, Mexico with the intention of shipping cars into the US. No comments from Toyota yet, I will not be surprised if the company changes its mind and builds in the US instead. Other news moving today's market is important employment data, and anticipation for tomorrow's release of NFP, Unemployment and Hourly Earnings.

International markets were pretty quiet. Asian indices closed flat and mixed with one exception. The Hang Send gained more than 1%. European indices were much the same, flat but mostly positive after a choppy session.

Market Statistics

Futures trading was fairly quiet this morning, indicating a relatively flat if slightly negative open for the indices. This held throughout the morning, with a little chop, with little to no movement around the release of today's data. The open was calm, the indices fell a tenth of a percent in the first few minutes, regained that, held near break even for the next hour and then proceeded to move down to test near term support. Support was found, within near term ranges and just below all time highs, just before lunch and sent the market drifting back up toward break even.

Economic Calendar

The Economy

It's the first week of a new month, new quarter and new year which means the last round of major monthly employment data for 2016. First up is the Challenger, Gray & Christmas report on planned layoffs. The number of layoffs planned in December jumped 25% month to month and 42% YOY but remains very low relative to recent trends. The December total is below the 2016 monthly average of 43,910, the 12/2015 figure was a 15 year low so a bounce back is not unexpected, the Q4 2016 total is the lowest quarter since Q2 2000 and the 2016 total is 12% below 2015. Layoffs this year were led by energy, computers and retail. The energy layoffs were mostly in the first half of the year and have fallen off to near 0 since then. Computer layoffs are due to restructuring and can be primarily attributed to Microsoft and Hewlett Packard. The retail layoffs have been due to restructuring but based on some other news today may accelerate in the first half of 2017.


ADP figures were released today instead of on Wednesday as is usual due to the Monday New Year Holiday. ADP says that non-farm payrolls increased by 153,000 in December, revising November lower by -1,000. Medium and large size businesses led, as did gains in the services sector. The good producing sector saw a decrease in jobs of -16,000. Within services Trade And Transportation led with a gain of 82,000 new jobs, followed by Financial, Education and Leisure which added a combined 71,000 new jobs.


Initial claims for unemployment benefits fell more than expected, -30,000 from last week's figure, while the previous week was revised lower. The 4 week moving average of claims fell -5,750 to 256,750. Both have moved back to levels just above long term 46 year lows and are consistent with labor market health. This the 96th week of claims below 300,000. On a not adjusted basis claims gained 3% versus and expected +15.2% and are down -14.2% YOY. The YOY spread has widened noticeably this week and shows a decoupling from seasonal trends. This may resolve itself in the next few weeks, or be a sign of further changes/improvements within the labor market.


Continuing claims rose by 16,000 to hit 2.112 million. Last week's figure was revised lower by -6,000 so not much change week to week. The 4 week moving average gained 26,250 to hit 2.067 million. Recent gains in 2nd week claims are slowing and may, if the initial claims are an indication, begin to fall as soon as next week. Regardless, claims remain low relative to long term trends and consistent with labor market health.

The total number of Americans claiming unemployment benefits crept higher in the week of 12/17, rising a mere 4,326 to hit 2.144 million. This gain is within expectations and seasonal trends. Based on those trends we can expect to see the total claims figure spike to a peak within the next 3 weeks, and then taper off into the spring and summer hiring season. Based on long term trends the peak should be near 2.75 million. This week's total claims is also consistent with long term labor market health and improvement.


ISM services was released at 10AM and is unchanged from the previous month at 57.2. This shows a services sector that is expanding at the same rate as the previous month and is the 83rd month of expansion within the sector. Within the report business activity came in at 61.4, New Orders at 61.6 and Employment at 53.8. All in all a decent report.

The Dollar Index

The Dollar Index fell today under pressure of what was seen by the market as lack-luster employment data. While I agree that the data is not spectacular it is still good, shows a labor market that continues to tighten even as the FOMC views it as near full-employment and supportive of economic health, inflation outlook and interest rate normalization. Today's move trimmed a little more than -1% off the index, creating a medium sized black candle. This move has broken the index out of the near term trading range and below the short term moving average but may be whipsaw and not a true break-out. The dollar, currencies, have seen a lot of volatility in the past week with the onset of the New Year, surprise EU inflation data and rapidly shifting sentiment toward Trumponomics.

The indicators are bearish and indicate that prices may continue to test support but there are some early signs of support at or just below today's low, about $101.50. A break below this level would be bearish in the near term with a target near $100.50. If the index is able to recover from today's sell-off resistance is at $102.50. A break above this is bullish in the near term with target near the recently set high. Tomorrow's NFP data could be the news that does it, or maybe CPI/PPI, or the next FOMC meeting which is only 4 week's away. At this time the CME Fedwatch Tool shows a near 100% chance that the FOMC won't hike rates at this meeting so it will be the rhetoric that moves the market.


The Gold Index

Gold prices got a big boost today on technical buying and the drop in the dollar. Spot prices gained roughly 1.35%, about $16.25, to trade above $1180 and at a 4 week high. The move looks like the short term down trend could be broken, the caveat is that there is likely to be at least a retest for support, possibly as low as the recent low, if not a further move lower before a full reversal, even to range bound from down, can be confirmed. Dollar outlook remains biased to the bull side if questionable; an overly aggressive FOMC, strong CPI/PPI data or a less hawkish than expected ECB/BOJ could easily put the bull back into the dollar and send gold back down to it's lows.

The gold miners got the expected boost form today's rebound in gold prices. The Gold Miners ETF GDX gained nearly 6% on the news, gapping up at the open and then creating a medium size white candle, breaking above the short term trend line and the 50% retracement level. This move is bullish in the near term and breaks the short term down trend, upside target is near $25. The caveat is that this move is more momentum than anything else, gold outlook is neutral at best so upside potential is limited. The indicators are bullish and support a move higher. Stochastic is still weak though and consistent with a down trending market. MACD is the one that needs to be watched now, it is making a near 1 year extreme peak that signifies a major shift in direction. Whether or not it means reversal or near term volatility is yet to be seen. If, and this is not improbable, sentiment towards the FOMC, rate hikes and the dollar shifts back the other way we could easily see this ETF slam back to support. Once again, tomorrow's NFP could be the data point to do it, or maybe PPI/CPI over the next two weeks.


The Oil Index

Oil prices were choppy today, conflicting news driving the market in different directions. First up was surprising US inventory data. WTI stockpiles fell more than 7 million barrels versus an expected decline of only about 1 million, this was offset by a build in gasoline and distillates that more than made up the difference. Gasoline stockpiles rose by 8.3 million barrels, we were only expecting about 1.8 million, while distillates rose by more than 10 million, 9 million more than expected. This news, as a whole, was seen as bearish. The bullish news is talk that Saudi Arabia is shopping around for places it can make cuts to deliveries in order to comply with the OPEC deal. WTI closed the day with a gain of 0.75% near $53.75.

The Oil Index made small gains as well, following a day of listless trading. The index created a very small doji spinning top near the middle of the near term consolidation range and may be gearing up for a move higher. The indicators are bearish but rolling over, consistent with support at current levels and continuation of near term trends. This move is not confirmed, resistance is at the top of the near term range near 1,300. A break above this level would be bullish with upside target near 1,350 in the near term. Volatility in oil prices may drive day to day volatility in the Oil Index, the longer term is bullish and dominated by earnings growth outlook. The risk is of course oil prices, so long as there is no major correction outlook should remain positive.


In The News, Story Stocks and Earnings

Today's sector news was dominated by the retailers. The first bit of news to hit the market came from Macy's. The department store says that December comps were well below expectations, full year earnings will be soft, forward outlook is soft and they will move forward with closing 68 of the planned 100 or so stores currently on the chopping block. Shares of the stock fell more than 11% in the pre-opening session and dragged the entire sector down with it.


Apparel maker PVH, owner of iconic brands like Hilfiger, IZOD, Arrow, Speedo, Calvin Klein and more, gave early guidance for the current quarter. The company reaffirmed guidance to the to end of the range for GAAP and adjusted earnings, contrary to indications from retailers like Macy's. This means that either PVH had tremendous foresight into how the quarter would turn out or that weaknesses in the industry are isolated. Shares of the stock gained 1% from a recent low, confirming support at this level.


Amazon is proof that the retail war is being fought, and won, online. The ironic thing is that the web-based company that is responsible for the decline and downfall of the US small and family-owned book store industry just announced that it is opening a book store in NYC. Go figure. Shares of this stock gained more than 3% in today's session to close near the top of its near term consolidation range.


The Indices

The indices, for the most part, made very small moves today. Action was a bit choppy and led by the Dow Jones Transportation Average. The transports fell -0.70% creating a small black bodied candle sitting on the short term moving average. The moving average is emerging as near term support, at 9,050, and this is confirmed by the indicators. The short and long term trends are up so with the indicators rolling over near term support looks strong enough to hold, at least for now. A break below this level would be bearish with downside target near 8,500. A bounce would be trend following with upside target near 9,500, near term, and 10,000, short to long term.


The Dow Jones Industrial Average made the 2nd largest decline, -0.21%, and created a small spinning top doji within a near term trading range. Today's action is indeterminate and shows a market waiting for something to happen. The short and long term trends are up and the indicators are rolling over into possible buy signals so it looks like there is a good chance we'll see the Trump Rally extend itself. Resistance is the psychological 18,000 level, a level that on my charts has little other significance, a break above here being bullish. Upside target on a break is 20,500 in the near term. Support, should the index fail to move higher, is 19,500 in the near term.


The SPX made the smallest decline in today's session, only -0.08%. The broad market made a small spinning top doji, within its near term trading range, but looks like it is set to move higher. The index is trading within a near term range, but is also bouncing up from a long term trend line and supported by the indicators. Both the indicators are rolling into trend following buy signals, led by stochastic which is already showing the early and weaker trend following crossover signal, the only thing now is for the index to break out to new highs. Resistance is at the current all time high, a break above here would be bullish with upside target near 2,300 in the near term, 2,500 in the short to long.


The NASDAQ Composite made the only gains in today's session, 0.20%, and set a new all time closing high. If the market is going to move higher this could be the leader. The index created a small white bodied candle, spinning top variety, within the near term trading range. It is bouncing up from a near/short term support level, confirmed by the short term moving average and the indicators. Both indicators are rolling into trend following buy signals with upside target near 5,750 once resistance at the all time intraday high.


The indices continue to consolidate. The market is waiting on something and what that something is could be tomorrow's NFP but is more likely a combination of the NFP, next week's data, the onset of earnings season (next week), the next FOMC meeting and the inauguration of Donald Trump. The signs are positive, the trends are bullish, I am hopeful and bullish yet remain cautious (fingers been burned too many times to go all in too soon now), looking to buy on the dips.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Three Days Old

by Jim Brown

Click here to email Jim Brown

Editors Note:

2017 is only three days old and the markets are having trouble focusing on a direction. Today the markets were mixed with the Dow, S&P and Russell losing ground. However, there was a slight bullish bias thanks to the new high on the Nasdaq Composite. The Nasdaq only exceeded the old high by 50 cents so it could also be seen as a dead stop at resistance. The rally was totally driven by the FANG stocks with Amazon gaining a whopping $24.

We still have the same setup we had last week with the indexes stalling right at resistance and not being able to push through to begin a new leg higher. Every day produces a new round of earnings warnings suggesting the Q4 earnings may not live up to expectations. Eventually that will matter to investors.

There was a definite souring of momentum on the Dow stocks. Financials weakened, Travelers, Home depot, Exxon and some of the recent leaders began to lose ground.

I know it is boring not to have any new plays but we need to be patient for one more day. If the market does not pick a direction on Friday, I will be surprised. Shorts waiting for a January decline my get tired of waiting and decide to cover rather than face weekend event risk. Longs may feel the same way and get tired of waiting and decide the rally is over. Friday's tend to be decision day for traders. Let's wait one more day and even if we do not get a direction I will hold my nose and add some new plays in the weekend newsletter.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Uncertainty Increases

by Jim Brown

Click here to email Jim Brown

Editors Note:

Just when you thought the market could not get more confusing, it does just that. The Dow declined -126 at the lows at 19,811 but then rebounded +88 to close with a minor 43 point loss. The Nasdaq Composite closed at a new high by 50 cents but the Russell 2000 collapsed -1.2%. With the Dow and the Russell as our sentiment indicators, they are both giving different signals. While the Nasdaq made a new high by only 50 cents, that could also be seen as a dead stop at resistance. This week is driving me crazy but on strictly a technical basis it looks more bullish than bearish. Friday will be the key.



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


No Current Bullish Plays



BEARISH Play Updates (Alpha by Symbol)

CAT - Caterpillar - Company Profile

Comments:

CAT said it was considering moving 800 jobs out of Illinois in order to balance its manufacturing in other states. Illinois is an expensive state for manufacturing. Shares moved back towards support and closed near the low for the day.

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:

The Dow rebounded +88 points from the low but still ended with a 43-point loss. That rebound suggests there may be very little weakness ahead. Friday will be a decision day.

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:

Argus upgraded DRI from hold to buy. Only a minor gain in a mixed 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.

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. Big decline after failing at resistance at $62.50.

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, see portfolio graphic for stop loss.




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