Option Investor
Newsletter

Daily Newsletter, Thursday, 1/21/2016

Table of Contents

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

Market Wrap

ECB Supports Prices

by Thomas Hughes

Click here to email Thomas Hughes
The market rebound on dovish comments from the ECB; could this be the Draghi Bottom?

Introduction

The market rebound from yesterday's lows after dovish comments from the ECB. The central bank held its key interest rates and policy steady but comments from Mario Draghi make it clear that there could be additional QE in the EU as early as next month. The comments; "there are no limits on how far we are prepared to act" and the back would "reconsider its policy stance at the next meeting". The reasons include a significantly diminished inflation outlook and the reemergence of increased downside risk. EU and US indices rallied on the news.

Asian indices did not get a lift from the ECB, they were closed long before the news was announced. These indices are likely to bounce back in Friday trading.

Market Statistics

Futures trading gave a mixed picture. In early trading they were indicating a negative open for the markets but this changed throughout the morning. The ECB comments gave the biggest boost but economic data and earnings helped as well. Following the 8:15AM ECB statement and the 8:30AM release of data futures climbed to break-even levels, and then into positive territory with an indicated opening gain of about 10 points for the SPX.

The open was a little weak. The indices opened positive, made a quick try for higher prices and then dipped into the red. By 9:45AM support, just below yesterday's closing prices, was hit resulting in a rally and today's move higher. By 10AM the indices were back in positive territory and continued to make gains up to and through the lunch time hour. Intraday gains were in the range of 1.5% to 2% but these levels did not hold. After lunch the rally lost its spark and fell back to break even level. This level held and led to a late day rally which reclaimed about half of the early gains by the close of the session.

Economic Calendar

The Economy

Initial claims for unemployment added 10,000 to hit 293,000. Last week's figure was revised lower by -1,000 for a net increase of +9,000. The four week moving average also rose, adding 6,500 to reach 285,000 for the first time in nearly 10 months. On a not adjusted basis first time claims fell -24.9%, slightly less than the -27.3% predicted by the seasonal factors. Not adjusted claims are now only -1.5% lower than last year, the narrowest margin since October 2015. The increase in claims is seasonal and should reach a peak over the next month or so. Despite the rise claims remain low relative to the long term trend and at levels consistent with the recovery.


Continuing claims fell by -56,000 to hit 2.208 million from last week's upward revision. Last week was revised up by 1,000. The four week moving average rose 3,250 to 2.227 million, steady near 2.225 as it has been for several months. So far the rise in initial claims has not affected this number but that will likely change over the next couple of weeks as seasonal job losses hit the market. Until then, this figure remains trending near the long term low and consistent with labor market health.

The total number of Americans receiving unemployment benefits jumped 302,793 to hit 2.852 million. This is the highest level since the comparable week last year and was predicted by the historical data. If the historical indication remains constant this week should be the peak in total claims. With the gain this week's data is -6.5% below last year and consistent with strengthening labor market trends. We'll need to keep an eye on all of these figures over the coming 6 weeks noting the peak and duration of claims increases relative to last year.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey was reported at -3.5 for January, the 5th straight month of negative readings and contraction in manufacturing. Although negative, the number was a little better than expected and shows a notable increase from December's -10.2. Readings of sub indices were mixed; Shipments gained +12 to hit positive levels for the first time in 4 months while New Orders, Employment and Inventory all declined into negative levels. The 6 month outlook remains positive but has declined below 20. Responses to a question about energy prices reveal that manufacturers see low prices as positive for the overall economy.


Tomorrow Leading Indicators and Existing Home Sales are both released at 10AM. Leading indicators are expected to remain steady with a 0% increase over last month. Existing home sales are expected to rise above 5.0 million from last month's 4.76 million. Next week's calendar is full as well with the key event the FOMC meeting on Wednesday.

The Oil Index

Oil prices were volatile today, imagine that. WTI fell more than -1% in early trading to dip below $28 only to spike on the ECB news. Oil gained more than 5% in later trading to move back above $30 but this move is likely to be driven by profit taking and short lived. Inventory data, released today because of the holiday, shows a much larger than expected build in US stockpiles and only increases the bearish outlook for oil. At the same time there are other signs of increased production, not even counting Iran. We may be getting close to a bottom in oil but I'm don't think we're there just yet.

The oil sector was able to bounce back from yesterday's decline with today's pop in oil prices. The Oil Index itself gaining close to 3%. Today's action may indicate a bottom in the near term but that is yet to be seen. If today's bounce continues higher there is resistance just above at the 950 level and the 78.6% Fibonacci Retracement. The indicators are mostly bearish but we may see further upside in the near term. MACD is diverging from the latest new low and stochastic is oversold with a bullish crossover, both consistent with a bear market rally. A break above 950 would find next resistance near 1,000 and the short term moving average, of course dependent on oil prices. If the rally in oil prices peters out any rally in the oil sector will do the same.


The Gold Index

Gold prices had a seesaw day today although prices are holding steady near $1100. Prices were up in overnight trading on safe haven bids then fell after the ECB meeting, neither event having much strength, probably because of the FOMC meeting next week. I don't think they are likely to raise rates again so soon but their view of when the next will come will drive the dollar and move gold. The ECB has set the euro up for weakness, if the FOMC sounds hawkish at all it could send the dollar index back above 100.

The miners got lift from today's rally but remain near their recent lows. The miners ETF GDX gained about 0.15% but remains below recently broken support. The indicators are bearish with stochastic pointing lower but diminishing momentum may indicate the latest down turn in prices is coming to an end. Resistance is now $13, my previous support target, and needs to be reclaimed else prices may fall to new low. If broken next target for resistance is just above near the short term moving average. If resistance holds and prices decline next downside target is $10.


In The News, Story Stocks and Earnings

Rail carrier Union Pacific reported before the bell and missed expectations. The street was calling for earnings near $1.45, actual results were $1.31 and a 19% decline from the previous quarter. Volume and lower surcharge revenue are primary culprits, volume declined by -9% and was only partially offset by price gains while declining oil prices reduced the impact fuel surcharges had to revenue in the prior year. Shares of the stock fell more than -5% in pre-open trading and fell to a new low. The indicators are bearish but significant divergences in both stochastic and MACD suggest support may be present near $70.


Not all transportation companies are hurting. Trucker JB Hunt reported before the bell, beating expectations by a penny. EPS of $1.01 is a 9% gain from last year, driven by a 6% increase in volume. The east led with an 8% increase in loads but all areas saw increases. Product mix and fuel surcharges combined for a 1% gain in revenue; +5% discounting the affect surcharges. Shares of the stock jumped in early trading, opened with a gap and sold off from there. Momentum may be shifting to the upside with support target $65 and resistance near $70 and the short term moving average.


Starbucks reported after the bell and didn't quite live up to market expectations. Bottom line earnings of $0.46 beat by a penny on slightly weaker than expected revenue but that's not what got investor attention. Guidance for the 2nd quarter of $.048 did not meet approval and sent the stock down in after hours trading. Shares closed the session with a gain near 3.7% then gave up all of those gains and more in the after market.


Boeing gave an earnings warning in the after hours. The company announced that it is cutting production of the 747 in half due to lack of demand and is going to be taking a $0.84 per share charge on its upcoming report. Shares of the stock fell -3.5% on the news.


American Express also reported after the bell. The credit and charge company announced earnings per share of $1.23, more than 10 cents above median estimates and despite currency exchange headwinds. The company also provided mixed guidance which probably accounts for mixed performance in the after hours market. 2016 guidance is in a range above consensus but 2017 guidance is below. Shares of the stock popped on the news then quickly gave up the gains.


The Indices

The indices tried to bounce today and did an OK job of it. Today's action is promising, at least in the near term, but needs to see some follow through before we start getting too bullish. The Dow Jones Transportation Average was today's market leader. The transports gained about 1.20% in a move confirming yesterday's test of support. Support is between 6,500 and 6,700, about even with a bullish continuation pattern which formed in 2013, and is beginning to look stronger.

The indicators are consistent with support and a possible bounce but not strong or bullish. The current MACD peak is diverging from the new low, set yesterday, and rolling over in the near term, consistent with support and/or a bounce but not a bullish signal. Stochastic is similar showing a bullish crossover and oversold in the near term while remaining weak and consistent with a bear market in the short term. Upside target is near 7,000 or 7,250 if the first target is broken.


The Dow Jones Industrial Average made the second largest gain in today's session, just under 1%. Today's action helps confirm support at 15,700 and yesterday's closing price. Today's candle is another sign that bulls are present in the market and when combined with the Hammer-like quality of yesterday's candle make 15,700 the strongest candidate for support we've seen since this down turn began. The indicators are mixed; they are weak and bearish but showing signs consistent with support and a possible bounce. If the market follows through on today's move upside target is near 16,500.


The SPX made the third largest gain in today's session, about 0.82%. The broad market has also confirmed support and managed to close above the August low of 1867. In the nearer term it looks like momentum may be shifting to the upside. Additionally, an oversold stochastic is firing a bullish crossover so it looks like a bounce is coming. In the short to long term the indicators show a weak market and strong downside momentum so a retest of 1,850 is likely, even if a sustained bounce develops now. A move up from here will find some resistance at the 1,900 level and then clear sailing up to 1,990. If the market falls through 1,850 a move to 1,800 is probable.


The NASDAQ Composite made the smallest gain in today's session and while confirming yesterday's test of support, it is also confirming resistance at 4,500. The small doji candle says it all, balance in today's session but indecision of where the market is going. The indicators are consistent with support and could lead to a bounce but remain weak in the longer term. If the index can break above 4,500 a move to 4,800 is possible. Risk is that the index will remain range bound near the recently set low.


The market has been in correction since the first of the year and now looks like it may have found support and begun to bounce. Today's action was a promising follow up to yesterday but needs additional follow through to confirm. Earnings and may help us to hammer out a bottom over the next couple of weeks. The reports are mixed but so far more positive than negative, support should step in so long as the long term outlook for earnings growth remains positive. If oil prices or a sluggish economy drag 1st quarter earnings growth into the negative we could see more downside.

The real risk is the FOMC. If they decide to raise rates, or sound to hawkish in the statement, it could drive the market lower simply out of fear. If they back off and indicate a more dovish approach we may see a repeat of today's ECB driven rally and make today the Draghi Bottom.

Until then, remember the trend!

Thomas Hughes


New Plays

Starting the Year with a Bang

by Jim Brown

Click here to email Jim Brown
Editor's Note

The major indexes remained volatile today but they also remained mostly in positive territory. With one day left in the week the direction could still be volatile.

Friday could be a settlement day where traders clean up all their left over trades that are not working for 2016. After Wednesday's volatility I am sure there are a lot of broken trades and probably some that were bought on the dip that failed to gain traction today. Friday will be a good day for traders to rethink the cards they are holding and clear the decks for a fresh start next week.

I am recommending we start next week with a bang by adding Smith & Wesson as a long position, market permitting.


NEW BULLISH Plays

SWHC - Smith & Wesson

Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.

The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.

December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.

While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.

S&W said they were on the hunt for candidates but did not have any announcements at the current time.

This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.

Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.

Earnings March 8th.

With a SWHC trade at $21.35:

Buy SWHC shares, initial stop loss $18.85

Optional:

Buy June $23 call, currently $1.80, initial stop loss $18.85.



NEW BEARISH Plays

No new bearish plays


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Jim Brown

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In Play Updates and Reviews

Not Yet a Trend

by Jim Brown

Click here to email Jim Brown
Editors Note:

One day does not make a trend and the whipsaw in the markets intraday suggested there was still some indecision among traders. The intraday spike allowed us to close three shorts for a nice gain.

The Russell was the weak link once again while the Dow declined over -200 points from its highs intraday. The Nasdaq dipped back into negative territory intraday and barely closed in the green. However, many of the prior momentum stocks were starting to show up in the winners list so it is possible today was just a period of recovery from Wednesday's traumatic decline.

I hesitate to load up the portfolio until we see which way the market is headed. If today's gains and yesterday's rebound was just a bear market rally then we should know tomorrow.


Current Portfolio


We are changing the format slightly this week. The entry date, earnings date, current price, change for the day and stop loss are all in the portfolio graphic. They will no longer be listed in the individual play descriptions. Everything you need is now available in a single location.




Current Position Changes


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Our long running shorts finally ended.

CF was stopped out at $30.95 for a gain of $7.70 in the stock and $4.00 in the option.

HOG was stopped at $41.25 for a gain of $4.50 in the stock and $2.26 in the option.

ETN was stopped at $48.35 for a minor gain. This play was only added last week.


OIH - Oil Service ETF

The OIH play was entered at the open as oil prices rallied from the front month contract change. We are ready for that temporary spike to fade.


BULLISH Play Updates

KRE - SPDR S&P Regional Banking ETF

Comments:

KRE shares resumed their slide in the afternoon with a 50-cent loss. However, support remains $35 so we have a little room for some volatility.

The initial stop loss on the stock position is $34.25. However, I took the stop loss off the option position. Our entry was 63 cents and any stop would give us nothing back. That means we can hold the option side until expiration without any additional risk.

Original Trade Description: January 13, 2016:

Many people thought banks would be winners after the Federal Reserve hiked rates in December. While the Fed did raise rates (barely) the financial stocks didn't see much progress.

The Fed is still talking about raising rates multiple times in 2016. There is a growing camp of market watchers who believe the Fed will be forced to back track. Deteriorating economic conditions both in the U.S. and abroad may force the Fed to pause their rate hike plans or even cut rates again.

Even if the Fed does try to raise rates the yield curve, where many banks make their money, could struggle. If the stock market remains sour throughout 2016 it will drive money into the perceived safety of U.S. bonds and that will keep yields on the 10-year low. So now that I have painted a rather unappetizing picture for the banks I'm adding a new bullish play.

All of the issues above are long-term troubles that could plague financials throughout 2016. On a short-term basis the banks are oversold and due for a bounce. Tonight's trade is a short-term technical one. The KRE is nearing major support and should rebound.

If you are not familiar with the KRE it is an ETF that tracks the S&P regional banks select industry index. The top ten holdings in this ETF are: PNC, BBT, KEY, STI, HBAN, CIWV, RF, FITB, MTB, ZION,

You can see on the daily chart below the KRE is plunging. On the weekly chart I have highlighted long-term support at the $35.00 level. Odds are good that if the KRE is going to bounce that is the spot to watch. Tonight I am listing a buy-the-dip trigger at $35.50. We will start this trade, if triggered, with a stop loss at $34.40. Remember, this is a short-term trade. We want to get in, catch a bounce, and get out.

Position 1/20/16:
Long KRE shares @ $35.50, initial stop loss $34.25

Optional:

Long March $38 call @ 63 cents, no stop loss.



UFPI - Universal Forest Products

Company Description

Comments:

UFPI remained positive for the day and that is a good sign in a volatile market.

Original Trade Description: January 16th

UFPI recently experienced a -20% pullback from its December 2015 highs but shares are still trading at levels not seen for almost ten years. More importantly it appears that the correction is over.

UFPI is in the industrial goods sector. According to the company, "Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America and in Australia that supply wood, wood composite and other products to three robust markets: retail, construction and industrial. The Company is headquartered in Grand Rapids, Mich., and is celebrating its 60th year in business."

The big surge in the stock in mid October was a reaction to the company's Q3 earnings report. It was a record-breaking quarter for UFPI in spite of a -17% drop in the lumber market. Here is an excerpt from the company's earnings press release:

"UFPI announced record-breaking 2015 third-quarter results. The Company posted the best third-quarter earnings in its history with net earnings attributable to controlling interests of $25.6 million, an increase of 32.9 percent over the same period of 2014. It also posted the highest year-to-date net earnings in its history, at $61.7 million. Earnings per diluted share were $1.26 in the third quarter of 2015, up from $0.96 in the third quarter of 2014. Net sales of $762.3 million for the third quarter were up 6.8 percent over the same period of 2014."
The stock has been trading very technically with investors keying in on support and resistance levels. Shares of UFPI did see a rough December after a downgrade on December 8th. However, after a -20% pullback investors started buying UFPI last week. That is noteworthy since the broader market was crashing lower last week. You'll notice on the daily chart that UFPI found support at its simple 200-dma and delivered a pretty good gain for the week.

We think this bounce continues and want to hop on board. There is very short-term resistance at $67.00. Tonight we are listing a trigger to launch bullish positions at $67.15. Investors may want to limit their position size to reduce risk since UFPI has proven itself to be somewhat volatile.

FYI: UFPI does have options but the spreads are too wide to trade them.

Position 1/19/16:

Long UFPI stock @ 67.37, stop loss 61.90



BEARISH Play Updates

CF - CF Industries

Comments:

CF finally rebounded to our lowered stop price to take us out of the play with a nice gain. With earnings coming up in two weeks it was time to take our profits off the table.

Original Trade Description: January 5, 2016:

CF underperformed the broader market and its sector in 2015. The S&P 500 lost -0.7% for the year while the IYM basic materials ETF lost -14.4%. Shares of CF returned a -25% loss last year. Momentum remains to the downside.

According to the company, "CF Industries Holdings, Inc., headquartered in Deerfield, Illinois, through its subsidiaries is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States, and distributes plant nutrients through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States. The company also owns a 50 percent interest in an ammonia facility in The Republic of Trinidad and Tobago."

It is important to note that CF is currently in the process of merging with OCI. Here's a brief description, "OCI N.V. is a global producer and distributor of natural gas-based fertilizers and industrial chemicals based in the Netherlands. The company produces nitrogen fertilizers, methanol and other natural gas based products, serving agricultural and industrial customers from the Americas to Asia. The company ranks among the world's largest nitrogen fertilizer producers, and can produce more than 8.4 million metric tons of nitrogen fertilizers and industrial chemicals at production facilities in the Netherlands, the United States, Egypt and Algeria."

Once the merger is completed they plan to move the new company's headquarters to the Netherlands to reduce their tax burden. Last year some U.S. government officials voiced their displeasure at these tax-inversion mergers to avoid paying U.S. taxes. There is a chance (albeit a small one) that the U.S. tries to stop this merger before it's completed.

Meanwhile the company continues to struggle with weak prices for nitrogen fertilizer. Looking at CF's last four quarterly earnings reports they have missed Wall Street's earnings estimates three of the last four quarters (and two quarters in a row). Revenues were down -8.3%, -15.8%, -10.9%, and -0.7% in the most recently reported quarter.

CF faces tough competition from fertilizer producers in China and in Russia and the Ukraine. It is worth noting that Bank of America just recently came out with a bullish call on CF. The BoA analyst suggested that fertilizer prices are too low and will bounce and CF's stock price should bounce with it. CF claims demand remains strong but that doesn't help if prices keep falling (obviously demand isn't strong enough or prices would rise).

Technically the path of least resistance is down and CF just broke support near $40.00. These are new two-year lows. Tonight we are suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to CF's earnings report in mid February.

Position 1/6/16, closed 1/21/16:

Closed: Short CF shares @ $38.65, exit @ $30.95, +$7.70 gain

Optional:

Closed: Long Feb $35 put @ $1.20, exit $5.20, +$4.00 gain.

Trade History:
01/20/16 new stop @ 30.95
01/16/16 new stop @ 33.25
01/13/16 new stop @ 33.60
01/11/16 new stop @ 34.15
01/09/16 new stop @ 35.75
01/07/16 new stop @ 37.05
01/06/16 new stop loss @ 38.75
01/06/16 triggered on gap down at $38.65, suggested entry was $38.85



ETN - Eaton Corp

Comments:

I lowered the stop loss to $48.35 to prevent us from seeing this position turn into a loss. We were stopped out today for a gain on the stock but we lost a nickel on the option position.

Eaton was trying to put in a bottom at $47 and I lowered the stop to avoid a rebound that turned the play into a loser.

Original Trade Description: January 9, 2016:

Industrial stocks did not have a good 2015. The XLI industrials ETF and the Dow Jones Industrial Average both fell more than -6% last year. ETN significantly underperformed its peers with a -23% decline for 2015. Part of the problem is weak demand overseas compounded by a stronger dollar. Plus, the manufacturing sector in the U.S. is in recession.

ETN is in the industrial goods sector. According to the company, "Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."

Earnings and revenue growth for ETN was challenging last year. The company lowered guidance four times in 2015. Their most recent earnings report (Q3 results) from October 30th showed revenues were down -9.2% from a year ago. Earnings were down -25%.

ETN management is trying to be proactive. They plan to expand their restructuring efforts into 2016. Hopefully they will be able to cut costs by another $190 million if all goes as planned. The one positive side of ETN's slide has been the surge in its dividend. The stock just closed at three-year lows, which as boosted the dividend yield to 4.2%. Although I don't know why you'd buy ETN for the dividend if you are in jeopardy of losing more than 4% in the stock. The point & figure chart is forecasting a $42.00 target.

The ISM index measures manufacturing activity in the United States. December's ISM reading was negative for the second month in a row and marked the sixth monthly decline in a row. Numbers under 50.0 on the ISM index represent contraction. November's was 48.6. December's slipped to 48.2. Odds are it will be under the 50.0 again this month.

With the industrial sector in recession, revenues and earnings falling, the bearish momentum in ETN should continue. Last week's market decline has pushed ETN below round-number, psychological support at the $50.00 level. Now shares are poised to accelerate lower. Tonight we are suggesting a trigger to launch bearish positions at $48.85. My only caution is our time frame. ETN has earnings coming up in early February (no confirmed date yet). This could be a short-term three-four week play.

Position 1/11/16, closed 1/21/16:

Closed: Short ETN shares @ $48.85, exit $48.35, +.50 gain

Optional:

Closed: Long Feb $47.50 put @ $1.55, exit $1.50, -.05 loss.

Trade History
01/20/16 new stop @ $48.35
01/13/16 new stop @ $50.75
01/11/16 triggered @ $48.85



HOG - Harley Davidson

Comments:

HOG is definitely trying to form a bottom at $40 and we exited the play today on the five-day high intraday when our stop at $41.25 was hit. This was a nice gain on the stock and the option.

Original Trade Description: December 9, 2015:

HOG was a big winner during the market's rally off the 2009 bear-market low. Shares surged from about $8 in early 2009 to over $74.00 in 2014. Unfortunately that bullish momentum is long gone.

HOG is in the consumer goods sector. According to the company, "Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson Financial Services. Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom with custom, cruiser and touring motorcycles, riding experiences and events and a complete line of Harley-Davidson motorcycle parts, accessories, general merchandise, riding gear and apparel. Harley-Davidson Financial Services provides wholesale and retail financing, insurance, extended service and other protection plans and credit card programs to Harley-Davidson dealers and riders in the U.S., Canada and other select international markets."

The company has seen sales slow down. Their most recent earnings report was October 20th. Q3 earnings growth was flat (+0%) from a year ago at $0.69 a share. That missed estimates by 8 cents. Revenues only rose +0.9% to $1.14 billion, which also missed estimates. The company said their dealer new motorcycle sales were down -1.4% worldwide from a year ago. Their U.S. sales fell -2.5%. Shipments came in below guidance.

Matt Levatich, President and Chief Executive Officer, said, "We expect a heightened competitive environment to continue for the foreseeable future." The company lowered their shipment guidance for 2015. They also lowered their margin guidance. The stock reacted with a big drop on the earnings miss and lowered guidance. Multiple analyst firms downgraded the stock in response to the news.

Technically HOG is in a bear market. Shares have a bearish trend of lower highs and lower lows. HOG spent most of November struggling with resistance at $50.00. The recent weakness has pushed shares to new two-year lows. The next drop could push HOG toward $40 or lower. Tonight we are suggesting a trigger to launch bearish positions at $45.75.

My biggest concern is some analyst deciding that HOG looks "cheap" on valuation. At this point HOG could be a value trap. Cheap stocks can always get cheaper.

Position 12/11/15, closed 1/21/16:

Closed: Short HOG shares @ $45.75, exit $41.25, +$4.50 gain

Optional:

Closed: Long Feb $45 put @ $2.59, exit $4.85, +2.26 gain

Trade History:
01/16/16 new stop @ 41.25
01/11/16 new stop @ 44.15
01/06/16 new stop @ 44.55
12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75



OIH - Oil service Index

Comments:

The OIH rebounded slightly on the temporary spike in crude prices. Once the newness wears off the new March contract the down trend will begin again.

Original Trade Description: January 20th

The OIH ETF represents 25 oil service stocks including Schlumberger, Halliburton and Baker Hughes. Once you get past those three largest holdings the rest of the pack has little balance sheet strength and we could easily see multiple bankruptcies or credit defaults. The bottom of the list contains Tidewater (TDW), Carbo Ceramics (CRR), Seadrill (SDRL), etc. The risk of default is high for the bottom half of the list. View Full List

The "perceived" bounce in oil prices by shifting to a new contract at $28.81 instead of the $26.55 close may cause some investors to buy energy stocks in a knee jerk reaction. Do not be fooled. The bottom in oil prices is still ahead.

The API Inventory report tonight after the close showed a larger than expected gain of 4.6 million barrels of oil and 4.7 million barrels of gasoline. The more accurate EIA inventory report comes out at 10:30 on Thursday.

The inventory build season runs from January 6th to the end of April. Last year inventories rose a whopping +106 million barrels to record levels during that period. There is not likely to be another rise like that because there is very little available storage capacity in the USA. Canadian oil is now selling for $15 below WTI because all the Midwest storage locations are virtually full. Bakken oil is selling for $8-$10 below WTI prices for the same reason plus transportation is expensive to other locations.

I believe we will see WTI at $25 or below over the next two months and possibly even $20 because of the price pressure from the Iranian oil sales. They have about 50 million barrels stored on tankers and that oil is now available for sale. Prices are going lower.

This will probably drag the equity market lower as well but eventually there will be a disconnect between equities and oil prices at some level. The constant headlines about lower oil prices will eventually become old news. Of course, key levels like $25, $22, $20 could cause some additional market weakness.

Energy stocks will continue to react to the low oil prices because every dollar of decline is very painful and impacts their ability to service debt and keep the doors open. Analysts claim as many as 50% of the U.S. producers could default or worse if prices remain low for very long.

I am recommending we short the OIH and expect to hold the position until April. The plan will be to close it about the time inventories top out in early April. We could see a minor uptick at the open on Thursday because of the new front month contract. When inventories are announced at 10:30 we should see a decline in WTI if they are high as expected.

Position 1/21/16:

Short OIH shares @ $21.26, stop loss $24.25

Optional:

Long July $20 put @ $1.92, no initial stop loss.



VXX - VIX Futures ETF

Comments:

No harm, no foul today. The intraday volatility swing of more than -200 points on the Dow held the VIX/VXX up but it is only temporary. Be patient. The volatility will eventually die.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82



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