Option Investor
Newsletter

Daily Newsletter, Thursday, 11/17/2016

Table of Contents

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

Market Wrap

Houston, We Are Ready For Lift Off

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Economic data and Fed rhetoric point to a December FOMC interest rate hike, but how much will it be? I ask this because today's data is pretty strong and with Trumponomics on the way the signs are pointing to some robust growth next year. The CME's Fed Watch Tool gives a 90% chance of a quarter point hike but I think the debate may turn to the possibility of more. At any rate the news supported the market but did not inspire a morning rally, traders being cautious ahead of testimony from Janet Yellen. In her prepared remarks she says that a hike is appropriate "relatively soon" and cites many dangers of waiting too long. During the Q&A she seemed to favor a rate hike and went on to say that slow business investment "isn't our fault", echoing their long running stance that more than fiscal policy was needed to spur the economy.

International markets were basically flat in today's session, the Japanese Nikkei really flat with a gain/loss of 0.00%. Asian indices were mixed but very near to 0.00% regardless of gains or losses. European indices closed largely in the green with gains in the range of 0.20% to 0.60%.

Market Statistics

Futures trading indicated a flat to mildly positive all morning and was fairly steady concerning the earnings and economic reports released before the opening bell. Once the bell sounded trading was choppy for the first hour or so but took on a slightly more bullish tone once Yellen's testimony was concluded for the day. By 12:30PM a high near 0.5% for the SPX had been set and the market was pulling back a bit. By 3PM support had been met and index prices were back near or setting new highs for the day, where they remained into the close of the session.

Economic Calendar

The Economy

There was a raft of data today and it all points to more robust economic growth and higher interest rates. Starting it off, Initial Claims for unemployment. Initial claims fell an unexpected -19,000 to hit 235,000. Last week's figures were not revised, this weeks figure is a new low dating back to 11/4/1973. The four week moving average also fell, -6,500, to hit 253,000 and is on the way to testing its long term lows. On a not adjusted basis this week's claims fell -12.9% versus the expected -5.7% and are down -14.8% over this same time last year. This is the widest margin between this year and last year not adjusted claims in about 10 months. This data is good and consistent with labor market strength.


Continuing claims fell by a larger than expected -66,000 to hit 1.977 million, the lowest reading since 4/15/2000. The previous week was revised up by 2,000, the four week moving average fell by -19,250 and also set a new low. This metric continues to trend lower and is consistent with improvement in an already strengthening labor force.

The total number of unemployment claims rose by 23,556 to hit 1.806 million. This gain is in-line with seasonal trends and likely to continue into the end of the year. The important thing to note is that the total number of Americans on unemployment has been trending lower over the last 2 years and more, how high this rise takes us is far more important than that the total number of claims is on the rise. Looking at my chart, I'd say that it should top out between 2.5 and 2.75 million. On a year over year basis total claims are down -7.3%.


The Consumer Price Index came in at a seasonally adjusted +0.4% in October, in line with expectations. On a not adjusted basis CPI is up 1.6% over the trailing twelve month period. Housing(+0.4%) and gasoline (+7.0%) were the largest contributors. The energy index rose by 3.5%, food was unchanged. Ex-food and energy up 0.1% month to month but holding steady above the Fed's 2% target on a year over year basis.


Today's housing data, starts/permits/completions, is what is really exiting, I think anyway. Housing starts jumped 25.5% on a month to month and 23.3% year over year to the highest level in 9 years. There is a large margin of error but nonetheless a bit of positive news. Withe the data single family homes start also saw a rather large increase, 10.7%. Permits rose at a more modest 0.3% month to month and 4.6% year over year, completions 5.5% in the month and 7.2% year over year. Economist have long theorized that rising employment, rising wages, rising demand and low, low inventory of new and existing homes would/could/should spur new construction . . . it looks like they could be right. If so it will feed the cycle of labor market improvement/housing market improvement that has led to last month's surge in starts.

The Dollar Index

Today's data, Yellen's statements and testimony have strengthened the dollar. The Dollar Index surged more than 0.5% to hit a new long term high and looks like it could extend the gains. The risk now is that we may have entered a period of buy-the-rumor-sell-the-news, unless of course the FOMC surprises with more tightening than expected. Both indicators are bullish and on the rise, stochastic showing some strength. Next upside target, as projected by Mr. Fibonacci, is near $102.50 but I wouldn't expect to see it get there in a straight line. There is likely to be at least some consolidation or test of support now that the index is breaking out.


The Oil Index

Oil prices spent a choppy day trading around the $46 level, closing near the lows of the day near $45.50. Today's action was driven by the oh so trustworthy Saudi's who are said to be "optimistic" about a production cut deal. WTI was first up on the news, gaining about 1%, and then later faded as the reality of over-supply and the enormous size an OPEC cut would have to be to really do anything to change the situation. They may keep trying to talk the market up but I don't trust it, not until they actually cut production to a level below that of January,2016 and that cut shows up in the data.

The traders of oil companies seem to share my skepticism. The Oil Index began the day trading just above the upper boundary of the 8 month trading range only to take a dive from that level and confirm resistance. The index is range bound and likely to remain so until this issue with oil supply/production/demand and prices gets settled. Support is near the middle of the range, between 1,120 and 1,150.


The Gold Index

Gold prices sank with a strong dollar dragging them down. Spot gold fell roughly -1% to hit a new low just above $1,210. With FOMC outlook so strong, the dollar rising and economic data in support it seems likely that gold will continue to fall. The risk I think here is reverse to that of the Dollar Index, sell the rumor and buy the news. Support target is $1,200 for now, a break below there could spell doom for gold bulls.

The Gold Miners ETF GDX fell nearly -4% on today's action, confirming resistance at the 50% retracement level. This now brings a possible full retracement to the table but with no time horizon offered. The indicators remain bearish and weak, consistent with a fall from resistance within a down trend and suggestive of lower prices. First target is the current low near $20, a break below here would have a target near $16.50.


In The News, Story Stocks and Earnings

Walmart reported before the bell and continues the story that where one retailer does well, another isn't. The company beat on the bottom line, barely, but fell short on revenue and guided next quarter to a range just below consensus. While all major metrics showed growth currency conversion hurt net income by nearly -2% and will continue to weigh on earnings into the future. Shares of the stock fell -3.5% on the news.


Union Pacific made an announcement intraday that helped support the stock. The board of directors approved a 10% increase to the quarterly dividend and renewed a 120 million share repurchase program. Under the new terms the company is authorized to repurchase up to 15% of shares outstanding, or about $12.2 billion. Shares of the stock gained 0.85% in today's session and look set to move higher, possible upside target near $108.


This is a big week for retail earnings in general. As mentioned, the story is mixed. Some are doing well and some are not, some are giving good guidance and some are not and the disparity exists even between competitors. One example is Home Depot and Lowe's, the one beat expectations and the other fell well short of them. Ross reported after the bell and delivered strong results with weak guidance. Williams Sonoma the same. The sector as a whole though seems to be in decent shape and is supported by labor trends, rising wages and outlook. The XRT Retail Sector gained just over 1% in today's session, extending the Trump Rally to 11.5%.


The Indices

Today's action was relatively light but significant in it's bullishness. Price action was led by the NASDAQ Composite which gained 0.74% and came within a half point of the all time high. The index looks like it is on a run higher and the indicators both confirm. The only thing standing in the way now is the current all time high which could act as resistance. A break above this level would be bullish and could lead to gains in the short, medium and long term.


The Dow Jones Transportation Average made the second largest gain today, just shy of 0.50%. The index made a small gain, but it is the third day of consolidation at this level, following a brisk rally, and looks a lot like a bull flag. Both indicators are bullish and strong but consistent with this consolidation/test for resistance. A continuation of the rally would be bullish and could take the index to 9,600.


The S&P 500 comes in third today, a tenth of a point behind the transports. The broad market index created a small white candle and extending the Trump Rally. The index is fast approaching the current all time highs and is supported by the indicators. Both MACD and stochastic are both bullish and on the rise, stochastic reconfirming an earlier signal with %D Line bounce from the upper signal line. Upside target is the all time high, near 2,193, a break above here would be bullish and could take the index up to 2,350 in the near to short term.


The Dow Jones Industrial Average made the smallest gain today, only 0.20%, but looks as bullish as any of the major indices. The index has consolidated for 4 days at this level and appears to be waving the same bull flag as the transports. The indicators are strongly bullish, MACD consistent with a peak or consolidation, and support higher prices in the near to short term. The MACD peak isn't incredibly strong but it is a 1 year extreme and significant in that. A continuation of the Trump Rally from here could go as high as 19,800 in the near term and much higher in the short to long.


All signs point to go and on more than one level. The economy and the Fed are signaling rate hike in December, the FOMC and the data are signaling health and expansion in the economy, labor market health and housing market health are fueling each other, earnings growth is back and expected to expand and the charts are looking bullish. The first wave of what could be a long running bull market has crashed, all we need now is some follow through and it looks like it is on the way. The risk now is that the data will cool, the holiday shopping season will be weak and that earnings won't grow but those are bricks in the wall of worry, at least for now. I'm still cautious, I've been waiting for this a long time, but very optimistic, looking to buy on weakness and getting more bullish day by day.

Until then, remember the trend!

Thomas Hughes


New Plays

Expect Volatility

by Jim Brown

Click here to email Jim Brown
Editor's Note

Friday's can be dangerous after a couple weeks of strong gains. Traders start looking at their implied profits and begin to worry about potential weekend events. Overbought Fridays can begin with a gain but then fade into the close as stop losses are hit and investors start thinking about cashing out their winners and moving into something that is not so overbought. I am recommending we not add to our risk until we see what Friday brings. The S&P futures are down -4 as I type this.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Go Russell, Go!

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 posted another nice gain to keep the streak alive. This was the ninth consecutive daily gain and another new high. It is very hard to find a small cap stock that is not obscenely overbought. There has to be some profit taking in our future any day now.

The S&P closed only 3 points from a new high and that could be the trigger for another surge higher or a sell the news event. This could happen on Friday so expect some volatility.

I apologize for the lateness of the newsletter today. Winter finally arrived in Colorado with a big snowstorm and we lost Internet access for several hours.




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


XLF - Financial ETF
The long call position was entered at the open.



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BULLISH Play Updates

FTK - Flotek - Company Profile

Comments:

No specific news. Shares gained only slightly with oil prices weak.

Original Trade Description: November 12th.

Flotek Industries, Inc. develops and supplies oilfield products, services, and equipment to the oil, gas, and mining industries in the United States and internationally. The company's Energy Chemistry Technologies segment designs, develops, manufactures, packages, and markets chemistries under the Complex nano-Fluid brand for use in oil and gas well drilling, cementing, completion, stimulation, and production activities, as well as for use in enhanced and improved oil recovery markets. This segment also constructs and manages automated material handling facilities; and manages loading facilities and blending operations for oilfield services companies. The company's Drilling Technologies segment inspects, manufactures, sells, markets, and rents down-hole drilling equipment that are used in energy, mining, and industrial drilling activities through direct and agent-based sales. Company description from FinViz.com.

In the Q3 cycle they reported a loss of 5 cents on revenue of $73.7 million. That was slightly more than the estimates for a 3-cent loss. Revenue estimates were for $79.5 million. The company explained their 16.2% decline in revenue saying there was a 43.2% reduction in the active rig count in Q3 compared to Q3-2015. In other words, their available business was cut nearly in half but they only recorded a 16% decline in revenue. That was actually a 1.0% increase sequentially from Q2.

Flotek services oil wells and especially new wells with their down hole products including their patented Complex nano-Fluid (CnF) technology that is used in fracking wells. Unlike fracking chemicals used by others, the Flotek CnF chemicals are completely non-toxic and have been proven to provide a slippery surface in the reservoir so that oil flows freely. This nontoxic chemical mix made from citrus oils is seen as a plus for producers constantly under fire for potential ground water contamination.

With rigs going back to work and drilled but uncompleted wells being brought online, the company said they were seeing signs of recovery in the sector. The drop in crude prices to $43 last week failed to depress the stock.

FTK has put in a bottom at $11 and could be ready to move towards the September highs at $16.

If OPEC actually announces some kind of production agreement on Nov 30th, the sector could respond aggressively.

Earnings Feb 1st.

Position 11/14/16:

Long FTK shares @ $11.72, see portfolio graphic for stop loss.

No options recommended because of price.



GNC - GNC Holdings - Company Profile

Comments:

No specific news. Only a minor gain.

Original Trade Description: November 15th.

GNC Holdings, Inc., operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

Just over a month ago there was a contingent of Chinese buyers circling GNC when it had a market cap of about $4 billion. When they reported earnings and lowered guidance that market cap fell to about $1 billion. Shares fell from $22 to $13 making the company even more attractive for the Chinese buyers.

The key here is not the U.S. or European business. The key point in a Chinese acquisition is the health conscious Chinese consumer. In China there are plenty of health products but most are scams or poorly processed with large amounts of unknown fillers. The health food and vitamin market is not well managed and all sorts of scary products exist.

GNC as a global brand is the answer. Chinese consumers would feel comfortable buying the brand and knowing there were no harmful ingredients.

Over the last several days, GNC shares have started ticking up again. GNC has hired Goldman Sachs to find a buyer and it is only a matter of time before that happens. The uptick in the shares could be due to rumors leaking out about a potential transaction. Option prices have also escalated suggesting something in progress.

Earnings Jan 26th.

Position 11/16/16:

Long GNC shares @ $14.75, see portfolio graphic for stop loss.

No options recommended because of price.



HUN - Huntsman Corp - Company Profile

Comments:

HUN has moved over $19 and our call expires at the close on Friday. Close the position at Friday's open.

We were stopped out of the long position on HUN shares on Sept 8th. We had a left over November $19 call.

Original Trade Description: August 23rd.

Huntsman Corporation manufactures and sells differentiated organic and inorganic chemical products worldwide. The company operates in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation was founded in 1970.

They reported Q2 earnings of 53 cents that beat estimates for 52 cents. Revenue of $2.54 billion matched estimates. They generated more than $350 million in free cash flow and made an early repayment of $100 million in debt. They also announced they were selling some of its European facilities and would use the proceeds to repay debt. They sold a manufacturing facility to Innospec Inc for $225 million and the transaction is expected to close in Q4. Huntsman will remain a raw materials supplier to the facilities once the transaction is completed.

They are also planning to close their titanium dioxide manufacturing (TiO2) facility in South Africa in addition to spinning off their remaining TiO2 business in early 2017. The closure/spinoff will save $200 million.

Update 10/28/16: Huntsman reported earnings of 38 cents that beat estimates for 35 cents. Revenue of $2.36 billion missed estimates for $2.49 billion. Free cash flow was $300 million after an early repayment of $100 million in debt. The announced the filing of a Form 10 registration statement for a spinoff og the Pigments, Additives and Textile Effects businesses expected to occur in the first half of 2017.

The earnings, restructuring and debt repayment plans have given the stock a positive bias. Shares broke over resistance on Tuesday to trade at a 52-week high. The next material resistance is $23.

Earnings Oct 26th.

Position 8/30/16 with a HUN trade at $17.65

Long Nov $19 call @ 54 cents. No stop loss.

Previously Closed 9/8/16: Long HUN shares @ $17.65, exit $16.65, -$1.00 loss.



IDTI - Integrated Device Technology - Company Profile

Comments:

No specific news. Nice continued gain after the breakout over resistance.

Original Trade Description: November 14th.

Integrated Device Technology, Inc. designs, develops, manufactures, and markets a range of semiconductor solutions for the communications, computing, consumer, automotive, and industrial end-markets worldwide. It operates in two segments, Communications; and Computing, Consumer, and Industrial. The Communications segment offers communication timing products, such as clocks and timing solutions; flow-control management devices comprising Serial RapidIO switching solutions; multi-port products; telecommunications products; static random access memory products; first in and first out memories; digital logic products; radio frequency products; and frequency control solutions. The Computing, Consumer, and Industrial segment provides clock generation and distribution products, programmable timing devices, computing timing solutions, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, and signal integrity products, as well as sensing products for mobile, automotive, and industrial solutions. Company description from FinViz.com.

IDTI reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $184.1 million barely edged ahead of estimates for $184.0 million. Revenue rose 8% making the 12th consecutive quarter of revenue growth.

They announced multiple new products for the quarter including a new 5G product in corporation with IBM for the connected car. They also obtained certification for their second production facility for automotive capabilities.

Earnings Jan 30th.

Shares spiked from $21 to $24 on the earnings then settled in for two weeks of post earnings depression. Over the last two days shares has ticked higher again and closed at $23.60 on Monday. This has been resistance from early October and from back in June. With the positive earnings and a positive market I expect the stock to breakout this time.

Position 11/15/16:

Long IDTI shares @ $23.69, see portfolio graphic for stop loss.

No options recommended because of price.



XLF - Financial SPDR ETF - ETF Profile

Comments:

Excellent entry. The XLF dipped to $21.81 at the open and the option price collapsed to give us a great entry at 29 cents.

Original Trade Description: November 16th.

The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.

The ETF is comprised of 44% banks, 20% capital markets, 19% insurance, 11% diversified financial services and 6% consumer finance.

All of those sectors will do better as rates rise. As of today the CME FedWatch Tool shows a 91% chance of a rate hike in December as well as a 91% chance for the February meeting and 92% for March. If they do hike in December the odds will decline for February but depending on their commentary the March meeting will still be on the table. Multiple Fedwatchers have speculated there could be 3-4 rate hikes in 2017 if the economy continues to improve.

The Fed has to hike rates in 2017 in order to have some room to maneuver if the business cycle rolls over and a recession appears. We are in the third longest expansion in history and we are due for another recession soon.

The banks rallied on the rise in treasury yields and the expectations for the December rate hike as well as the potential for decreased regulation. President elect Trump has said he would kill regulations harming the banking industry. There is even talk of modifying Dodd-Frank.

Banks have rallied significantly and I would not suggest buying the actual ETF after the big gain. However, I do not believe the gains are over. The gains last week spiked the ETF to a 7-year high but the 2007 highs were over $30.

On Tuesday, somebody bought 300,000 contracts of the March $23 call at an average of 55 cents. That was $16.5 million in option premiums. That takes some serious conviction. I am recommending we follow them and buy the same call option. That way our risk is limited to $50 per contract. I am willing to bet $50 that the ETF will be over $23 by March. This is a long term position and there will not be a stop loss.

Position 11/17/16:

Long March $23 call @ 29 cents. No stop loss.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

New historic low.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.





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