Option Investor
Newsletter

Daily Newsletter, Monday, 1/30/2017

Table of Contents

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

Market Wrap

Uncertainty Abounds

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Oh the difference a weekend makes. Trump's temporary immigration ban has sent the world into upheaval, how long it lasts is anybody's guess. Today's action saw the indices retreat from last week's all time highs but did not break the near term trend, or put an end to the Trump rally. In fact, by end of day when the dust settled much of the early losses were recouped and the trends looked as intact as ever.

Other news affecting early trading including Personal Income and Spending data, good if a little on the light side, and earnings. There were only about 40 names on today's earnings calendar, none with too high a profile, the rest of the week will be much different. There are 105 S&P 500 companies reporting,the busiest week of the season to date with reports from pharma, transportation, retail and mega-cap energy.

International markets were hit by the news but the reaction was not as intense as it could have been. Indices in Asia were led by a -0.90% decline in Australia, balanced by gains in both the Korean and mainland Chinese indices. European stocks were hit harder, falling more than a full percent in most cases to close at the lows of the day.

Market Statistics

Futures trading indicated a lower open for the indices all morning but only about -0.40%. The immigration order is to blame and may be the spark to start a major correction. However, the rhetoric and outrage already seem to be subsiding as the facts and alternative facts are disseminated so just how low this can drive the market is very questionable. The open was a little hectic, the indices fell as indicated and then fell and fell until hitting their lows just before 11AM. From that point forward the tone changed, back to bargain hunting and slow steady buying, pushing the indices back up to regain about half the days losses at the close of trading.

Economic Calendar

The Economy

There was a little more data released today than we get on a typical Monday and it was good. It wasn't perfect, not really robust, definitely not bad but consistent with long term trends and expansion of the economic recovery. Personal Income and Spending was released at 8:30, both figures rising but missing on the income side. Personal income came in at +0.3% versus an expected 0.4%, the good news is that the miss was made up in the revisions. The previous month was revised up a tenth from unchanged to +0.1%. Disposable Personal Income also increased by 0.3%. Spending rose as expected, +0.5%, with no revisions to the previous month. On the inflation side of things the PCE Prices index gained 0.2% for the month, 0.1% at the core level, and is up 1.6% YOY and 1.7% YOY ex-food&energy. The Pending Homes Sales index increased 1.6% in December, better than the 1.0% predicted by economists, led by strength in the west and the south. On a year over year basis the December figure is up 0.3%. Looking forward Lawrence Yun, economist at the NAR, says low inventory remains an issue. What houses there are available are on the high end of the scale and putting additional pressure on the market.

Moody's Survey of Business Confidence gained 0.3% in the last week as present and future outlook indicate growth. Mr. Zandi says that global business confidence is strong but cautious in some areas. Outlook for present conditions has picked up somewhat while forward outlook held steady.


Earnings season is well underway and moves into high gear this week with another 103 S&P 500 companies on the list. To date, 34% of the index has reported with 65% beating earnings estimates and 52% beating revenue estimates, both a little on the low side but near the 4 year averages. In terms of growth the blended rate for the 4th quarter is now 4.2%, up 0.8% in the last week alone, and 0.3% for the year, up a tenth.


Looking forward, estimates are on the rise and looking good. First quarter 2017 estimates have moved up more than a full percent to 12% while full year 2017 has increased by 0.2% to 11.6%. There is one red flag although not too alarming as yet; second quarter estimates fell slightly, -0.3%, and bear watching as we move forward.

The Dollar Index

The Dollar Index tried to move higher, buoyed by today's data and a miss on German inflation data, but was capped at resistance. The index created a small to medium sized pin bar that confirms resistance at the short term moving average and the $100.50 level although the indicators suggest that resistance will be tested again. Both MACD and stochastic are consistent with a shift in momentum to the upside consistent with prevailing trends. These trends were supported today by the data, data later in the week may do the same, and there is always the FOMC meeting to be wary of. The travel ban may have held the index back today, I doubt it will if the data and the FOMC are in support. Support is near $100, just below today's close, resistance is just above today's close, near $101.


The Gold Index

Gold prices edged higher on uncertainty to tickle the $1,200 level. Spot prices gained about 0.75% to trade just above $1,199. Prices may remain elevated on fear and flight to safety but the real move will be sparked by the FOMC Wednesday afternoon, possibly the NFP on Friday. A hawkish tone, strong data and enhanced rate hike expectations could send gold back down to test recent lows, near $1, 150.

The gold miners got a little lift from the rise in gold prices but not much. The gold miners ETF GDX gained only about 0.60%, creating a small doji candle, with indicators that continue to weaken. Stochastic is already indicating a pretty strong buy, consistent with the recently broken down trend, that may be confirmed by MACD in the next few days. MACD hit the zero line today, a crossover looks likely but not guaranteed. Support is just below the current level, near $22.50, at the short term moving average and the 50% retracement line. A break below here would be bearish, downside target near $20.00. A bounce would be bullish but faces resistance at or just above $24.00.


The Oil Index

Oil prices fell about -1% today as rising US rig counts, storage and production levels offset OPEC production cuts. Rig counts have been on the rise for months, last weeks was the highest in more than a year, an even forecast last year, triggered by $45 oil. Activity in the US is likely to at least hold steady if not increase so long as prices hold above $45, which in turn will add downward pressure to prices. If demand doesn't pick up to support prices OPEC may have no choice but to reopen the pumps in order to cash in while they are still high.

The energy sector took a dive today, along with the broader market, as uncertainty for the future gripped the market. The Oil Index fell nearly -2%, dropping below the near term congestion band and the 1,250 level. The indicators are both pointing lower and consistent with further downside in the near term. Today's action suggests there may be some support at 1,225 although 1,200 is a firmer target. The long term outlook is still quite bullish, so long as that doesn't change this dip will likely turn into a buying opportunity.


In The News, Story Stocks and Earnings

Sanmina Corporation, a leader in the realm of manufacturing solutions, reported earnings after the bell and the results are good. The company reported revenue above estimates and showing growth from the previous and year over year quarter. Earnings grew 75% on a GAAP basis, 30% on a non-GAAP basis and led the company to raise guidance. Guidance for 2Q 2017 is now $0.67 to $0.72, above the consensus estimate. Shares of the stock moved up to a ten year high on the news.


Tech innovator Rambus reported in line with estimates, EPS up 9% quarter to quarter and 27% year over year, as the company continues to move closer to the consumer. The company expects to return to profitability in 2017 as it looks to expand away from its core business. Forward guidance is in a range with consensus near the low end. Shares of the stock moved higher in after hours trading but remain with the 12 month range.


The VIX spiked today and may move higher. The index gained more than 17% to move above the short term moving average but met resistance at the 12.50 level. The indicators are pointing higher in the near term but remain weak at this time. A move higher is very possible with Trump fall-out hitting the market, if 12.50 is broken the next target is 15.00.


The Indices

The indices tried to sell off hard but only made a halfway decent attempt of it, recovering roughly half the day's loss before the end of the session. Today's leader was the Dow Jones Transportation Average which closed with a loss of -1.23%. The transports had been down as much as -2.8% intraday, touching support at the short term moving average, before bouncing back to recover more than half the day's losses. The index created a doji candle, confirming support, although the indicators have weakened. MACD is making a small peak and stochastic is beginning to roll over, both consistent with indications of resistance but not reversal. The index may test support again in the next day or so, a break below which would be bearish in the near term. If support is broken, near 9,250, next target for support is 9,000.


The NASDAQ Composite made the second largest decline, -0.83%, but did not fall far enough to hit the short term moving average. The tech heavy index created a small bodies black candle with long lower shadow, indicative of support, and may fall further in the next day or so. The index is still about 1.6% above the moving average, first target for firm support. The indicators are mixed and consistent with a peak or resistance within an uptrend, not so much reversal, and point to prospective entry point within an uptrend. If support is broken at the moving average next targets are near 5,500 and 5,250, -4% and -8% from the recent all time high.


The Dow Jones Industrial Average made the third largest decline today, -0.61%, edging out the broad market S&P 500 by a mere hundredth. The blue chip index created a small black bodied candle with long lower shadow, touching and confirming support at the short term moving average. The indicators slipped a hair in the nearer term but remain consistent with a trend following shift in momentum in the longer. MACD is still on track to make a zero line crossover, provided support holds, and stochastic is still moving higher so the set up looks more like the text book trend following entry than it does any form of reversal. Is support at the current level fails and the index moves lower the next targets for support are near 19,500 and 19,000.


The S&P 500 made the smallest decline today, -0.60%, and created a small doji candle. Today's candle confirms support at the short term moving average, the long term up trend line and the top of the January consolidation range. The indicators are weakly bearish and suggest support may be tested further, they are also set up to fire another trend following entry signal on the next puff of positive news to whip through the market. The long, short and near term trends are all up, and support has not yet been broken, so this looks like a buying op to me.


The market sold off today yes but it did not sell off hard and there was no commitment in it. The indices all found support intraday, they all regained a fair amount of today's losses and none came even close to doing any real damage to the technical trends. Quite the opposite is more likely, a little selling is what a good rally needs for the bulls to keep their legs and carry the market upward.

The immigration news was ill-delivered and shocking but once the facts are swallowed and digested, however unpalatable, it's just not worth the amount of outrage that was caused by it, and I think today's market action shows it. The real question is, does the issue have legs? Does it really have an impact on the market other than in the near term, will outrage continue into the short term and spill over into the economy? My guess is that it won't.

There are more important things afoot this week. There is a lot of data, starting tomorrow and ending with Friday's NFP, and that includes the FOMC meeting and policy statement on Wednesday. There is no expectation of a policy change but lots of expectation for news or hints within the statement. If they seem worried it could add momentum to today's sell off, if they endorse the economy it will likely add support. I'm still still cautious, the sell off might not be over, but I am bullish on the broad market, and now forward earnings estimates are starting to rise and my trigger finger is getting itchy.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Billion Here, Billion There

by Jim Brown

Click here to email Jim Brown

Editors Note:

If you lose a billion dollars every couple weeks pretty soon that adds up to real money. Qualcomm has been hit with three suits/probes over the last several weeks and each was for a billion dollars. There are likely to be more.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

QCOM - Qualcomm - Company Profile

QUALCOMM Incorporated develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access (OFDMA), and other technologies for use in voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of certain wireless products comprising products implementing CDMA2000, WCDMA, CDMA TDD, and/or LTE standards, as well as their derivatives. The QSI segment invests in early-stage companies in various industries, including digital media, e-commerce, healthcare, and wearable devices for supporting the design and introduction of new products and services for voice and data communications. The company also develops and offers products for implementation of small cells; mobile health products and services; software products, and content and push-to-talk enablement services to wireless operators; and development, and other services and related products to the United States government agencies and their contractors. In addition, it licenses chipset technology and products for data centers. Company description from FinViz.com.

Qualcomm it under attack from every direction. A while back China's regulator assessed a $975 million fine for improper licensing and made them lower royalties. The South Korean FTC imposed a fine of $853 million because it found the company's licensing practices to be monopolistic. The KFTC found that Qualcomm's market share had risen from 34% in 2010 to 69% in 2015 while many competitors were forced out of the market.

In early January, the US FTC attacked the company for anticompetitive practices that prevented competitors from supplying chips to handset makers. This is another billion dollar problem.

Three days later Apple sued Qualcomm for $1 billion claiming Qualcomm charged five times as much for licensing than all other cellular patent licensors combined. Apple also claimed the company withheld $1 billion in rebates because Apple had cooperated with KFTC when that investigation was active.

There is blood in the water and there will probably be other suits from companies that suffered under the Qualcomm licensing scheme as well. The odds are also good that Qualcomm will have to change their licensing scheme, which will probably result in lower fees.

With roughly $4 billion in fines and suits over the last few weeks, the investor appetite for QCOM shares has evaporated. Brokers are slashing their ratings from buy to hold or even sell.

Last week the company reported earnings of $1.19 that matched estimates but missed on revenue. They guided for $1.15-$1.25 for Q1 and analysts were expecting $1.17. Other than that the guidance was lackluster with a lot of excuses and questions deflected.

Earnings April 26th.

Shares have collapsed on the news of the suits and fines and are threatening a steeper decline. Initial support is $50.

Buy March $52.50 put, currently $1.65, initial stop loss $57.35.



In Play Updates and Reviews

Bought the Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets opened sharply lower but dip buyers appeared immediately to lift the indexes off the lows. The immigration ban was widely quoted as the reason for the market drop but it was probably more of an easy excuse for profit taking. The dip buying began immediately but on light volume. We did not see the volume accelerate until late in the afternoon. Traders were probably waiting to see if there was going to be another leg down before they risked money on a tentative rebound.

The Dow did not close above 20,000 but it did recover 100 of the -223 point loss at the lows. The Nasdaq was hit with a harder loss at -47 points thanks to another implosion in the biotech sector. Small caps were also down hard with a -1.3% loss.



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


GIII - G-III Apparel

The long put position was entered at the open.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

PANW - Palo Alto Networks - Company Profile

Comments:

No specific news. Nice rebound off the big $3 drop at the open.

Original Trade Description: Jan 23rd

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November, PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 20th.

Because of the price of the options I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85


RHT - Red Hat Inc - Company Profile

Comments:

No specific news. Excellent rebound from the opening drop.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.


SLCA - U.S. Silica - Company Profile

Comments:

No specific news. Drop in the market and in oil prices triggered profit taking today.

Original Trade Description: Jan 25th

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants, and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. As of December 31, 2015, it had approximately 400 million tons of proven and probable recoverable mineral reserves. Company description from FinViz.com.

In the gold rush in the 1800's it was not the miners that got rich but it was the companies that sold them the picks, shovels and wheelbarrows. In the energy sector every shale well has to be fractured and that required mountains of sand. We are not talking regular beach sand. The primary frac sand is mined in Wisconsin and other northern states. There are various grades of sand depending on the geology of the well and what the drillers are trying to accomplish.

In 2014 it took an average of 4.2 million pounds of frac sand per well. However, in 2015 and 2016 there was a significant increase in fracking intensity that began to use much larger quantities per well. In late 2015 the amount of sand rose from 9% of the fracking fluid to 20%. In early 2016 Simmons & Co reported two wells in the Permian that used 60 million pounds of sand each while two in the Haynesville Basin used 35 million pounds each.

Houston based oilfield logistics company Twin Eagle reproted receiving "historic shipments" of frac sand at its facility outside the Eagle Ford. They reported receiving one 130-car train of sand a week. One car carries 100 tons so that is 13,000 tons per week. That is 26 million pounds of sand per week. If wells are now using 20 to 25 million pounds per well that is one train per well.

Last week the active rig count rose by 29 oil wells to 551 active oil wells. Each rig drills a minimum of two wells per month. If each well used 25 million pounds that would be more than 1,100 trains of sand per month.

There are rumors making the rounds that because of the increased intensity of sand in fracking there could be a sand shortage as the number of active rigs increase and producers began to rapidly complete the 3,000 or so wells that have been drilled over the last 18 months but never completed because of low oil prices. There is going to be a surge in the demand for sand.

U.S. Silica is one of the major sand suppliers with multiple facilities. They have used the downturn in the drilling industry to buy multiple competitors in order to bulk up for the future demand.

Earnings Feb 2nd.

SLCA has earnings on Feb 2nd but almost every company trading today has earnings over the next three weeks so that is just something we have to deal with. I am recommending we buy a longer-term option to get past any potential volatility around earnings. Their guidance should be good.

Position 1/26/17:

Long June $65 call @ $4.10, no stop loss until after earnings.


SPY - S&P-500 ETF - ETF Profile

Comments:

Nice rebound from the opening dip. The SPY lost $2.50 at the open and recovered $1 on the rebound.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

Position 1/25/17 with a SPY trade at $228.25

Long MAR $232 call @ $1.69, no initial stop loss.


$VIX - Volatility Index - Index Description

Comments:

The VIX rebounded 20% at the open but faded when the market rebound began. The final 12% gain for the day was not enough to move the needle on the option.

Original Trade Description: Jan 26th

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.

The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.

There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.

The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.

Position 1/27/17:

Long March $12 call @ $2.60, no stop loss because the VIX cannot go much lower from here.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

The Dow posted a -223 loss at the open but everything rebounded in the afternoon to leave the Dow with a -122 point loss. We will need a lot steeper decline to rescue this position.

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.


FINL - Finish Line - Company Profile

Comments:

No specific news. A minor 4 cent gain on bargain hunting.

Original Trade Description: January 11th.

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.

Update 1/26/17: Finish Line said it was selling its unprofitable JackRabbit running shoe business to CriticalPoint Capital. The company said it expected to realize a cash tax benefit of $30 million from the sale. Shares declined -28 cents.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.


GIII - G-III Apparel Group - Company Profile

Comments:

No specific news. Only a 33 cent rebound from the three-year closing low.

Original Trade Description: January 28th

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates through two segments: Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. Company description from FinViz.com.

The holiday shopping season was not kind to any retailer except for Amazon. Most retailers are reporting negative comps and warning about slowing traffic. GIII was no exception. GIII warned Q4 saw a significant decline in sales that would cut 20 cents off earnings. They guided for the full year 2016 that ended January 31st, for revenue of $2.41 billion and earnings of $1.21-$1.31 compared to their prior guidance of $2.43 billion and earnings of $1.41 to $1.51. For 2017, they guided to earnings of $1.41-$1.51 compared to $2.44 in fiscal 2016.

The company said they were expecting positive comps in Q4 but now expect low double-digit negative comps. That is a heck of a swing. They blamed warmer weather and significantly lower traffic in the stores.

Earnings March 2nd.

Shares broke below support and closed at a three-year low on Friday. Given the trends in the retail sector, they could continue significantly lower with their guidance warning.

Position 1/30/17:

Long March $25 put @ $1.60, see portfolio graphic for stop loss.


LB - L Brands - ETF Profile

Comments:

No specific news. Only a minor decline bit other retailers were slightly positive.

Original Trade Description: January 14th

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Position 1/17/17:

Long Feb $60 put @ $1.85, see portfolio graphic for stop loss.




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