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Newsletter

Daily Newsletter, Wednesday, 1/11/2017

Table of Contents

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

Market Wrap

Bulls Keeping the Bears Away

by Keene Little

Click here to email Keene Little
The stock market's rally looks tired and the bears are licking their chops while eyeing the bulls as just slabs of beef. But the bulls keep going and keep frustrating the bears by aborting any selling attempts. This could continue into next week.

Today's Market Stats

The market continued its choppy and whipsaw ways today as the indexes cycled in and out of red and green. Each time the bears look like they might be able to get some stronger selling started, like today's late-morning selling into the midday low, it got reversed. The sellers then gave up after another attempt to drive the market lower and a late-afternoon rally drove the indexes to their daily highs. Follow-through is now the key -- if the market can continue this afternoon's rally we might see the log jam break and take the indexes to new all-time highs again.

Part of the explanation for today's whipsaws comes from the Donald. Trump held is first formal press conference and disappointed many by talking less about his fiscal and tax policies and more about how he's going to beat up on China and Mexico. This created some turmoil in the markets -- stocks, bonds and currencies -- as the market tried to figure out what he might do. This confusion might get more significant the closer we get to the inauguration next week.

The challenge for the market at the moment is that the strength of the rallies has been declining. The momentum, as measured by such indicators as RSI and MACD, has been waning (leaving bearish divergences at the tests of previous highs) and trading volume is drying up. The rally from November seems to have pulled in most of the buyers and now it appears the market is struggling to attract new buyers.

Greg Schnell, who writes some very good technical analysis over at StockCharts.com, mentioned trading volume between Christmas and into this week is the lowest he's seen since 2009. The chart below shows this 3-week trading period for each new year and how this year it's running significantly below previous years, especially in January this year. Last year saw a significant price decline from December 29th into January 20th. This year we're having a rally from December 30th, so the opposite of last year. But the volume is much lower than it was in January 2016 and that should be worrisome for bulls. Volume is the power behind a move and right now we appear to have a 6-cylinder engine running on maybe 4 cylinders.

We're heading into opex week next week, which is typically a bullish week, and the rally since November has been largely with the assumption that a Trump administration and Republican Congress will be able to get some things done and spend more money that we don't have. We could see a continuation of the rally, even if slowly and in a choppy fashion, into the President's inauguration, which is Friday, January 20. Opex Friday and inauguration could be a good date for the completion of the rally (buy the rumor, sell the news). I can only speculate about that possibility but so far it appears doable. The charts will hopefully tell the story and show us what to watch for in the coming week.

The tech indexes have been the stronger indexes this January and I want to start a review of the charts with the weekly view of the Nasdaq. While it appears to have at least a little more upside potential I think there are some strong reasons to hedge any bets/positions on the long side.


Nasdaq Composite index, COMPQ, Weekly chart

The weekly chart of the Nasdaq shows an up-channel for the rally from 2010-2011. The wave count suggests the rally from February 2016 is the 5th wave and as usually happens, it has acted weaker than the rallies before it. It has been pressing up against the middle of the up-channel but other than minor breaks above it, such as right now, it hasn't been able to break through on a closing weekly basis. Currently near 5530 we'll see if it has better luck this week and then more importantly if it will be able to hold above the midline for next week's close.

You can see the bearish divergence on RSI since the end of 2013, which is not necessarily a rally killer but it does offer a reason to believe the rally will not be able to make it up into the top half of its up-channel. The leg up from February is also now a 5-wave move with the 5th wave being the leg up from November. It too is showing bearish divergence since August, which helps confirm the wave count. So we have a 5th of a 5th wave here and when it finishes it will mean a very larger retracement at a minimum. This is the riskiest time to be long the Nasdaq since a breakdown is likely to occur quickly.


Nasdaq Composite index, COMPQ, Daily chart

Today's daily candle for the Nasdaq is a hanging man doji up against the top of its rising wedge pattern for the rally from November (5th waves typically create ending diagonals (rising or descending wedges) since the momentum declines and it becomes more and more difficult to add more points). Today's hanging man doji is not a guarantee for a reversal but if Thursday finishes in the red it would be a confirmed bearish reversal pattern. But a rally above 5575, that stays above that level, would be a bullish breakout from the bearish rising wedge pattern and I'd expect to see the Naz proceed up to the top of its larger rising wedge (for the rally from February), which will be near 5645 by the end of next week (end of opex week and inauguration day).

Key Levels for COMP:
- bullish above 5575
- bearish below 5485


Nasdaq Composite index, COMPQ, 60-min chart

Trend lines for the short-term view are getting crowded around current price action and it's hard to say which one is the stronger one. But at the moment, the top of the rising wedge for the rally from November is currently near 5572 and we could see another test of that line, like Tuesday's test, to complete the rally. The short-term bearish divergence on the 60-min chart, along with the bearish divergence on the daily and weekly charts, tells us the rally is likely running on fumes and when the little rocket engine quits we're going to see a return to earth. This rally could see just enough buying to continue to work its way higher into next week, typically a bullish week, but I think it's a bet that carries higher risk than normal.


Nasdaq-100, NDX, Daily chart

NDX is similar to the Nasdaq in that it has run up into its trend line along the highs from November 10 - December 13 and closed on the line with today's close at 5050. On Thursday the trend line will be near 5060 and obviously it would be more bullish above that level (on a closing basis). If long this index (QQQ) I think a good stop is this morning's low at 5012 since a drop below that level would indicate a top is likely in place.

Key Levels for NDX:
- bullish above 5060
- bearish below 4960


S&P 500, SPX, Weekly chart

Not a whole lot has changed for the SPX weekly chart since not much has happened since it made a high at 2277 back on December 13th. It's been in a 50-point trading range since that high but with today's close at 2275 it's currently just below 2277. For several weeks I've been pointing to the trend line along the highs from April-July-August 2016, which fits as the top of a rising wedge for the rally from February, as the upside target if the bulls can keep the market heading higher. That line will be near 2310 by Friday, January 20, which would take us through opex week and into the President's inauguration, both of which could keep the market bullish. That would likely be a MOAP (Mother Of All Puts) setup if it happens.

After opex and after the inauguration is when things could fall apart, if not before then. Keep in mind that a rising wedge tends to be retraced faster than the time it took to build it and therefore a quick return to the February low at 1810 is the bearish potential in front of us. This would presumably happen because of disappointment from recognizing that nothing is going to change in Washington, DC. For those who remember all the "hope and change" talk back in 2008, as Sarah Palin later once asked, "how's that hopey changey thing workin' for ya?" Unfortunately, very little changes in Washington just because we get a new titular head in place. It's possible we're going to see disappointment settle in quickly after Trump gets sworn in.


S&P 500, SPX, Daily chart

While there is still the potential for SPX to rally up to the 2310 area, as mentioned above, there are some things that suggest it's not going to happen, or that it's not going to make it that high even if it is able to push higher. The first thing is the waning momentum in the rally, as can be seen with the bearish divergence on the daily momentum oscillators. Last Friday's new all-time high at 2282 was met with a significant bearish divergence and it would now be difficult to even suggest being in a long position here. SPX has been struggling near the important Gann Square of 9 level, at 2271-2273 (the levels that are aligned/square with the March 2009 low in both time and price), and today's close at 2275 makes it only the second day (January 6th being the first day) was a close above this Gann zone. Price action has been very choppy for weeks and it could go either way here but it's looking vulnerable to breaking down sooner rather than later. But if the buyers can push this index a little higher it would then be able to test price projections at 2286-2290, which are based on price relationships in the wave count.

Key Levels for SPX:
- bullish above 2291
- bearish below 2233


S&P 500, SPX, 60-min chart

The SPX 60-min chart below is to show an idea how this market could continue to frustrate both sides with a choppy rise higher (two steps forward, one step back). This is for the bullish possibility and is just an idea to watch for since it could keep the rally going in a move that continues to lose strength (momentum) in a small rising wedge to complete larger rising wedges (look out below if it completes next week the way I've depicted). Rising wedges are filled with choppy 3-wave moves (or something more complex but still corrective) and they make it difficult for traders to hang on. This pattern assumes the uptrend line from November 4 - December 30 will continue to hold, as it did this morning. If long, I'd use this uptrend line for a trailing stop and bears who want to play this conservatively, wait for a break of the uptrend line to confirm the top is likely in place.


Dow Industrials, INDU, Daily chart

There are many pundits who are bound and determined to put on their Dow 20K party hats and we could see a 4th attempt on Thursday if this afternoon's rally sees some follow through. Follow through is what has been lacking so if we get some Thursday morning that would be a stronger statement all by itself. On Monday the Dow broke its uptrend line from November 4 - December 30, which is now higher and near 20120, but has not been able to break down below its 20-dma (except marginally with Tuesday's close slightly below it), which is currently near 19890. Another close below this MA could spell trouble for the bulls but at the moment all the choppy sideways price action since mid-December looks like a bullish continuation pattern. If the Dow instead breaks down it would leave a failed bullish pattern, something we've seen at past important highs. Flip a coin for direction from here.

Key Levels for DOW:
- bullish above 20,000
- bearish below 19,718


Russell-2000, RUT, Daily chart

While the techs were running higher since mid-December the RUT ran sideways, chopping up and down between 1354 and 1389. This is a bullish continuation pattern following its November-December rally and upside potential is to its trend line along the highs from 2007-2015, which will be near 1408 by the end of next week. But at the moment the RUT has banged it head on the trend line along the highs from April-June-August 2016 (blue line), which it's been chopping around since mid-December. Today's rally might have been a back-test of the trend line and any selloff from here would leave a bearish kiss goodbye. A drop below 1354 would spell trouble for the bulls since it would leave a failed bullish pattern behind. But keep an eye on MACD at the zero line here since a turn back up from here would create a buy signal (the overbought condition has been relieved with the sideways consolidation). If MACD drops below zero and RSI drops below 50 we'd have further confirmation that the bears are running the show.

Key Levels for RUT:
- bullish above 1410
- bearish below 1354


KBW Bank index, BKX, Daily chart

The banking index has been consolidating sideways for a month now, since December 8th. This too is a bullish continuation pattern and if it breaks out to the upside, starting with a sustained rally above 93.70, we could see a run up to the top of a parallel up-channel from February, currently near 97.50, and perhaps up to a Fib projection at 100.44. The price projections shown on the chart are based off the rally leg from February to May 2016 and you can see how price reacted around each projection in the leg up from June. It's been consolidating on top of the 200% projection (where the leg up from June is twice as large as the February-May rally). As mentioned for the RUT, the sideways consolidation has relieved the overbought condition and if MACD turns back up from the zero line it would be a buy signal. The bears need to see BKX below the bottom of its consolidation range, near 90.80, to indicate the bullish pattern could be failing.


U.S. Dollar contract, DX, Weekly chart

The US$ has continued to pull back but it's not clear yet whether it's going to be just a small pullback correction before heading higher or if it is instead the start of the next leg down inside a megaphone pattern. The dollar rallied during the overnight session and into this morning's news conference by president-elect Trump. His lack of information about his expected fiscal and tax policies created some concern and the dollar crashed back in the late-morning session. Could this be the beginning of the recognition phase where the market begins to realize that not much is going to change out of Washington? As for the dollar, we simply need to see how the next week or two go before getting a better idea about what the next big move will be.


Gold continuous contract, GC, Daily chart

Gold has now made it up to the bottom of a previously broken down-channel for its decline from July. At the same location, near 1193, is its 50-dma so it's a double resistance level for the bulls to deal with. Gold is starting to attract a lot of buyers again so if they can keep up the buying pressure we could see a test of price-level resistance near 1205. A 38% retracement of the leg down from November 9th is 1206 so between price-level resistance and the 38% retracement I'd say gold would be more bullish above 1206. But at the moment it remains possible the bounce is just another head fake, like the one off the October 2016 low, and will be followed by another leg down.


Oil continuous contract, CL, Daily chart

This week oil dropped back below the line across the highs from October 2015 - June 2016, which leaves a failed breakout attempt in December. A pullback in early January held the trend line but Monday's decline dropped oil back below it at 52.40. Today's rally was back up to the line and now we'll see if it holds as resistance. This trend line has/had the potential to be an inverse H&S neckline, which had an upside projection to about 77.50. But a failure to hold the breakout is obviously not bullish and if today's back-test is followed by a bearish kiss goodbye it would likely start stronger selling. It's a good place to nibble on a short play for oil (such as with puts on one of the ETFs or buying an inverse ETF) since you can keep your stop relatively tight.


Economic reports

There are no significant economic reports on Thursday and then on Friday we'll get the PPI numbers, retail sales, business inventories and Michigan Sentiment. These could move the market but in reality the market remains disconnected from any kind of fundamentals and pretty much ignores all economic reports.


Conclusion

For about a month the stock market has been chopping sideways. The techs have been stronger in this regard with January's rally and new highs for the tech indexes. This has left us with a bit of quandary when looking at the different indexes since the sideways consolidations look like bullish continuation patterns and the expectation is for another rally leg out of them. But the tech indexes are now up against potentially strong resistance and look like they could top out at any time, including with today's highs. We could see some rotation into the safety of the blue chips and watch them rally while the techs pull back but at this moment that's pure speculation.

The other factor affecting the market is that we're heading into a typically bullish week, opex, and at the same time next Friday, January 20 is the president's inauguration day. The market has been rallying under the assumption (dare I say "hope") that the market will benefit from the Trump administration's policies. Hope-filled rallies too often turn into disappointment-filled selloffs and I see that as a distinct possibility. Call it a buy the rumor, sell the news setup in front of us.

But from here I can only speculate what factors could influence the markets and even then it's a fool's game trying to figure out how the market will react to those factors. We still have to consider what the Fed will say and how that will affect the market's mood. So we stick with the charts and at the moment each has to be traded on its own merits. The techs say be very careful with the indexes up against resistance. The other indexes say we should be getting ready to buy now for the next rally (but keep in mind that there's the possibility for the bullish continuation patterns to fail, in which case all of the indexes will come tumbling back down).

It's a good time to stay cautious through next week and while it might be a normally bullish period, when it's not it's usually very bearish. Manage your options positions carefully into next week.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

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New Option Plays

Retail Loser

by Jim Brown

Click here to email Jim Brown

Editors Note:

Competition is increasing, traffic is slowing and profits are plunging. Is Finish Line finished? Malls are dying and online shopping is exploding.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

FINL - Finish Line - Company Profile

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Buy May $17 put, currently $1.65, initial stop loss $19.25.



In Play Updates and Reviews

Nice Recovery

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq squeezed out a 7th consecutive daily gain but only barely. After Trump talked about drug prices in his press conference the biotech sector imploded and caused a sharp selloff in the Nasdaq. Late in the day the Nasdaq rebounded nearly 40 points to close at a new high with a 12 point gain.

The Dow rallied to within 27 points of 20K in the morning but also fell back into negative territory on the comments. Late day buying saw the Dow rebound +120 points to close with a 99 point gain and right at resistance at 19,950.

This was a perfect chance for the sellers to gang up on the buyers and it did not happen. It would appear we are in for another try at 20K on Thursday. It will be very interesting to see what happens by the close with the bank earnings on Friday.



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


CAT - Caterpillar

Long put position was stopped at the close.

FDX - FedEx

Long call position remains unopened until a trade at $191.85



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BULLISH Play Updates

FDX - FedEx - Company Profile

Comments:

Walgreens (WBA) and FedEx announced a long-term alliance where Walgreens will serve as a pickup and drop off location at thousands of Walgreens all across the country. This is a very positive development for FedEx. Customers can have their e-commerce packages shipped to their local Walgreens where they know the package will not be stolen off their front porch and where staff will be available to sign for the packages. Customers can drop off pre-packaged and pre-labeled shipments and not have to worry about finding a FedEx store that could be miles away from their neighborhood.

I said yesterday if FDX did not recover I would drop the recommendation. They did not recover but it does appear they have found support at $188. I am going to keep the recommendation for the rest of the week. I considered going long today and/or picking a longer dated option. Given the three-day weekend ahead and the inauguration risk next week, I would rather wait until our trigger is hit, which would signal a rebound in progress. Longer dated options are too expensive.

The position remains unopened until a trade at $191.85.

Original Trade Description: Jan 7th

FedEx Corporation provides transportation, e-commerce, and business services in the United States and internationally. The company's FedEx Express segment provides various shipping services for the delivery of packages and freight; international trade services specializing in customs brokerage, and ocean and air freight forwarding services; assistance with the customs-trade partnership against terrorism program; and customs clearance services, as well as an information tool that allows customers to track and manage imports. This segment also publishes customs duty and tax information; and offers critical inventory logistics, transportation management, and temperature-controlled transportation services, as well as international express transportation, small-package ground delivery, and freight transportation services. Its FedEx Ground segment provides business and residential money-back guaranteed ground package delivery services; and consolidates and delivers low-weight and less time-sensitive business-to-consumer packages, as well as offers third-party logistics services. The company's FedEx Freight segment offers less-than-truckload freight, and freight-shipping services. As of May 31, 2016, this segment operated approximately 65,000 vehicles and trailers from a network of approximately 370 service centers. Its FedEx Services segment provides sale, marketing, information technology, communication, customer, technical support, billing and collection, and other back-office support services; FedEx Mobile, a suite of solutions to track packages, create shipping labels, view account-specific rate quotes, and access drop-off location information; access to copying and digital printing through retail and Web-based platforms, signs and graphics, professional finishing, computer rentals, and ground shipping and time-definite express shipping services; and packing services, supplies, and boxes. Company description from FinViz.com.

On December 21st, FDX reported earnings of $2.80 that missed estimates for $2.91. Revenue rose 20% to $14.93 billion and beat estimates for $14.91 billion. The problem with the earnings was a large amount of spending to build new distribution hubs and improve others ahead of the holiday season.

FedEx said they were in the midst of a record-breaking holiday shipping season and package volume was expected to rise 10% or more over 2015. They raised full year guidance from $10.85-$11.35 to $10.95-$11.45. The CEO said the recent improvements would allow them to ship more packages at a lower cost with improved delivery.

During the holiday shopping season my family spends a lot of money on Amazon for gifts for our extended family. Because I am a Prime member, others in the family use my account to make purchases and everything comes to my house. In the 2015 season, UPS delivered to my house almost every single day from Amazon. I might get a box from USPS once a week and FedEx maybe once a week.

This year UPS only came twice between Thanksgiving and Christmas. Fedex came 3-4 days a week and USPS 3-4 days a week. That suggests FedEx gained a significant amount of market share from Amazon and moved a lot more packages than UPS. Hopefully this added to their profits on the improved shipping network.

Cowen just reiterated an outperform and raised the price target from $180 to $240.

Earnings are March 21st.

Because their earnings are expected to be good, the March option prices are out of sight at $7.50 for a $195 call with FDX at $190. We have to use the February options to get a reasonable price. Given the potential for market volatility between now and expiration, we do not want to spend a lot of money on premium.

I am putting an entry trigger on the position just in case the market decides to turn negative on Monday.

With a FDX trade at $191.85

Buy Feb $195 call, currently $3.25, initial stop loss $186.65


PVH - PVH Corp - Company Profile

Comments:

No specific news. Shares gave back most of their gains from Tuesday but the uptrend is still intact.

Original Trade Description: Jan 9th

PVH Corp. operates as an apparel company in the United States and internationally. The company operates through six segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. It designs, markets, and retails men's and women's apparel and accessories, branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, hosiery, socks, jewelry, watches, outerwear, small leather goods, and home furnishings, as well as other related products. The company offers its products under its own brands, such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner's, Olga, and Eagle; and licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection, and Chaps, as well as various other licensed and private label brands. Company description from FinViz.com.

In November, PVH guided lower for the full year because of a $1.65 per share negative impact from foreign currency exchange issues and some other problems. Shares fell from $119 to $90 where they spent most of December.

They guided for Q4 earnings in a range of $1.13 to $1.18 after a 23-cent impact for currency issues. On January 5th, the company updated guidance saying, "earnings would be at least at the top end of its guidance ranges for both Q4 and full year." That suggests a positive holiday shopping season. As of late last week 11 retail companies had reported sales for holiday shopping and 8 of them reported declines. It was a rough quarter and PVH raised guidance.

Earnings are March 1st.

I am playing PVH for multiple reasons, one of which is that they already lost $30 in the December guidance crash. The $90 support level has held and once a positive market returns, they should be favored by longer-term investors. Since they have already seen a steep decline, a market drop over the next couple weeks should not impact them materially.

I am reaching out to the March expirations so there will be some earnings expectations built into the premium when we exit before they report. If you want to use the February cycle the premiums are about $1 cheaper.

Position 1/10/17:

Long Mar $95 call @ $3.90, see portfolio graphic or stop loss.



BEARISH Play Updates (Alpha by Symbol)

CAT - Caterpillar - Company Profile

Comments:

No specific news. We ran out of time on CAT and shares rebounded just enough to stop us out. The Dow components did not decline in early January as expected so the premium on the January options evaporated.

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:

Closed 1/11/17: Long Jan $90 put @ $1.89, exit .20, -1.69 loss.


DIA Dow ETF - ETF Profile

Comments:

The Dow pulled to within 27 points of 20K this morning before the Trump comments tanked the market. Heavy buying at the close lifted the Dow from negative territory back to resistance at 19,950. We should have seen some consecutive declines by now. It is starting to look like we may not see weakness until after 20K is hit or the banks disappoint on earnings on Friday.

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. Darden has now posted back to back gains and closed near the highs for the day. We missed being stopped by 26 cents and that could happen on Thursday if the market continues higher.

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 gain of 1 cent but the stock is not declining. This is a January option so I lowered the stop loss again.

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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