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Daily Newsletter, Wednesday, 11/23/2016

Table of Contents

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

Market Wrap

Bullish Thanksgiving Week

by Keene Little

Click here to email Keene Little
The Thanksgiving holiday-shortened week is typically bullish and this one kept the "tradition" alive. The rally is now extended (and the bond market selloff is also extended), especially the small caps, which makes it a risky time to bet on the long side. But the bullish sentiment says investors are going to be looking for dips to buy and that could keep up the buying pressure.

Today's Market Stats

Not surprisingly, and in spite of the strong rally off the November 4th lows, this week has continued the "tradition" of a bullish Thanksgiving week. The bulls are certainly in a thanks-giving mood as the indexes continue to press higher. The market is now a wee bit overbought but we all know the market can remain overbought (or oversold) for much longer than most think possible. The ones rewarded in this market are the true believers in the idea that the rally is going to take us much higher into next year. In the meantime the bears stare in amazement that the market is even rallying at all after the Trump election.

Into the November 4th low SPX had dropped nearly two weeks and the decline appeared to be accelerating. Most market pundits turned bearish as the election approached and it appeared Clinton might be in trouble. On Monday, November 7th, the market gapped up after learning Clinton once again was going to escape further FBI scrutiny and rallied hard. There was a little bobble following the election of Trump but the bulls were not to be thwarted, regardless of the election results.

The decline into the November 4th low has now been completely reversed and we're getting new all-time highs this week. All the hand wringing and gnashing of teeth at the beginning of November has turned into unbridled bullish enthusiasm (as seen in the Investors Intelligence bull-bear numbers). Bulls have once again been convinced that buy-and-hold is the only way to go and for the past 7+ years there's been no denying that they're right. The risk of course is that those who are convinced of this "fact" are the ones who will be most hurt when it stops working.

That is of course the big question -- will the market suffer a decline worse than the 2007-2009 decline, which was worse than the 2000-2002 decline? I believe it will but certainly I'm in the minority with that belief. That actually makes me more comfortable in my belief since we know the market likes to fool the majority when the majority believe in something. Just look at the rally following the Trump election when more than 90% of the pundits believed the market would suffer at least a 5-10% correction (if not crash) following a Trump victory.

There appears to be a strong belief in inflation and higher rates, which has effectively killed the bond market (driving yields higher) and sent the U.S. dollar strongly higher. Both of these do NOT support a rising stock market and therefore the euphoria in the stock market deserves to be questioned. Is it just a relief rally, albeit a strong one, or is it something more bullish? Interest rates have spiked too much too fast and should be hurting the stock market. One or the other is going to correct and I'll show where those corrections could happen.

There were a slew of economic reports this morning since a lot were issued today instead of tomorrow (Thanksgiving holiday) but the market largely ignored them since it doesn't really matter. The market continues to ignore anything that doesn't fit the current bullish agenda. The one thing that was bullish was the Durable Goods orders, which came in stronger than expected. That will help the Fed's case for a rate increase next month. But with the bond market already showing higher rates it's now the Fed that has to play catch-up (which it usually does since it rarely leads the bond market).

The FOMC minutes released at 14:00 barely caused a ripple in the market since the market has already priced in the probability of a rate increase. Or I should say the bond market has priced it in; the stock market has likely not priced it in and has jumped way out ahead of itself.

I'm going to start tonight's chart review with the RUT since it's the one that's been on fire this month. When it's rallying it's hard for the bears to make any headway with any of the indexes (although the relative weakness in NDX has been one area for them to play). When the RUT turns back down from its current rally it will provide a heads up for at least a trader to play a pullback.


Russell-2000, RUT, Weekly chart

Back in February, March and April, especially when it climbed above 1080, I was wondering if the RUT might play out the last leg of a megaphone pattern off its March 2014 high but I thought at the time "nah, that would be too strong of a rally in a market that had already run too far to the upside." But it was the 3-wave pullback from the June 2015 high into February 2016 that had me thinking about the possibility. Following the September high and the rollover into the November low I thought it did a nice job completing a 3-wave bounce pattern and would start back down to a new low. Now just 3 weeks later and nearly 200 points here we are with the RUT about 4.4% away from the top of the pattern, near 1400. The top of a parallel up-channel for the rally from February is currently near 1360 and could be the immediate upside target but if the bulls hang on through December we could see the top of the megaphone tagged by early January. Not until the RUT drops back below its June 2015 high at 1296 would I turn at least a short-term bearish.


Russell-2000, RUT, Daily chart

There's a short-term projection for the RUT near 1250, which is only 8 points away and I see that possibility for Friday to cap off a strong Thanksgiving week. But today's rally made it up to the trend line along the highs since July and it's possible we'll see the start of at least a larger pullback from here. If the RUT drops below the November 15th low near 1290 it would confirm the leg up from November 3rd had completed. What form the next pullback/decline takes will provide the clues needed to help determine whether or not there will be another leg up into the new year.

Key Levels for RUT:
- bullish above 1350
- bearish below 1290


Russell-2000, RUT, 60-min chart

Diving in closer to the RUT's rally from November 3rd, it counts well as a 5-wave move and at this point I'm watching and waiting for the 5th wave (the leg up from November 15th) to complete. Confirmation of completion of the rally would be a drop below this morning's low at 1327, which would confirm a breakdown form the up-channel that it's been in since November 15th.


S&P 500, SPX, Monthly chart

There's an interesting fractal pattern that could be playing out and since these are often good predictors of market moves (the same pattern tends to repeat since they're reflections of sentiment swings). The first chart is a monthly chart for SPX and it shows a 3-wave pullback from 2000 into the 2009 low. That's been followed by a 5-wave move up into the current high. The trend lines on the charts are just something I'm watching and not germane to this discussion but it is interesting to see the trend line along the highs from March 2000 - May 2015 and how price has stalled at that line since July. Note that the March 2000 high is the 3rd wave in the longer-term rally for last century and the trend line goes from that 3rd wave through the 3rd wave of the rally from 2009 (the August 2015 high). The 5th wave of the rally from 2009 is showing significant bearish divergence against the 3rd wave, as expected. So we have a 3-wave pullback followed by a 5-wave rally up to the trend line through the 3rd wave highs. The weekly chart that follows shows the same pattern.


S&P 500, SPX, Weekly chart

As mentioned above, the May 2015 high fits as the 3rd wave of the rally from 2009 and that was followed by a 3-wave pullback into the February low (similar 3-wave pullback as 2000-2009 shown above). That's been followed by a 5-wave rally into the current high and note the trend line along the highs from 2000-2015 -- it's going across the 3rd wave of the rally from February and now the current rally has brought SPX up to the trend line and showing significant bearish divergence (as expected for the 5th wave). This fractal pattern is no guarantee that the rally is about to complete but it's a warning that it just might. Considering the daily chart is overbought I think it's a risky time to challenge the potential bearish meaning from this comparison.


S&P 500, SPX, Daily chart

Following the November 4th low SPX is now into the 5th wave of the rally from February and the daily chart shows at least a little more upside potential if the bulls can keep things going for the rest of the month. A broken uptrend line from February-June is currently near 2218 and will be near 2223-2224 at the end of the month. This 2223-2224 level could be important, if reached, because it's the 127% extension of its previous decline (the 4th wave pullback from August into November) and that's an important extension to watch for a possible reversal. SPX stays bullish above 2194 but a drop back below that level would be a bearish warning sign.

Key Levels for SPX:
- bullish above 2194
- bearish below 2151


Dow Industrials, INDU, Daily chart

Following the Dow's descending wedge into the November 4th low (with the typical small throw-under below the bottom of the wedge before reversing hard) the rally ran straight up into its broken uptrend line from February-June, consolidated sideways for more than a week and then started up again on Monday. It has climbed back above its broken uptrend line but is now approaching the trend line along the highs from April-August, currently near 19125. A rally above 19130 would be more bullish but watch to see if resistance at the trend line holds, especially since its overbought and showing bearish divergence against its November 15th high. Keep in mind that the rally from November 4th fits as the 5th wave of the rally from February and as such could lead to something much more bearish than just a pullback correction of the November rally (which is the reason I wanted to show the fractal pattern on SPX).

Key Levels for DOW:
- bullish above 19,130
- bearish below 18,853


Nasdaq-100, NDX, Daily chart

The techs were relatively weak again today while the Dow and RUT showed relative strength (an odd combination). Yesterday NDX left a small star doji near resistance -- its broken uptrend line from September-October (the bottom of a rising wedge) and a trend line along the highs from July-November 2015, which is the trend line where NDX struggled in September and October. Yesterday's gap up, star doji and then today's gap down created an evening star reversal pattern and the bulls need to rally NDX above yesterday's high at 4884.63 in order to negate the signal. It could hold on during Friday's half-day session but at the moment this one is a sell.

Key Levels for NDX:
- bullish above 4900
- bearish below 4780


Semiconductor index, SOX, Weekly chart

I like to see the SOX support a rally in the techs and it's been doing well, including today since it at least finished in the green. But this is one of the sectors that has me wondering how much upside potential is left to the current rally. The wave count for the rally from February looks to be in its 5th wave (the leg up from November 10th) and it is now again up against the top of a parallel up-channel for the rally from February. Today it left a little doji star with the high at the top of the channel, which puts it in the same position as NDX -- if it gaps down Friday morning it would create a sell signal. In the meantime I see a little more upside potential to 905-906 where it would achieve a 62% retracement of its 2000-2002 decline. But it's not something I'd bet my money on.


10-year Yield, TNX, Weekly chart

With the strong selloff in the bond market, with the assumption that the economy is going to heat up and inflation is going to increase, yields rallied strong. This drives up the cost of borrowing, including mortgages, and that in turn will put downward pressure on the economy and should put downward pressure on the stock market. Certainly the rate at which yields have increased is something that should be hurting stocks and I'm sure that disconnect will be corrected but that's another discussion. For now I'm watching to see where yields might stop and at the moment TNX might be there.

Last week I discussed my belief that we're in for a period of disinflation and a reader questioned me on that since it's a minority opinion. Certainly the selloff in bonds the past couple of weeks challenges my assertion. But higher rates will choke off economic growth and those with adjustable rate mortgages are going to find it harder to make payments. Auto loans will be at higher rates and a decline in auto sales would be another negative.

My assertion that we're heading for a period of "disinflation" has to do with debt destruction, which can be done by paying off debt or declaring bankruptcy. Both decrease the amount of debt and that's deflationary. Expanding the number of loans and increasing the velocity of money is what creates inflation (something the Fed has been trying for years to accomplish) but we've been in a period of declining velocity of money and if the debt overhead declines it's not inflation we'll have to worry about. It's my opinion that traders are looking in the wrong direction and are going to be surprised by the D-monster sneaking up on them.

But back to bonds, Deutsche Bank reported that they're seeing investors flee from bonds at the fastest pace since at least 2013. At the same time, as reported by the Wall Street Journal, traders have increased their bets to an all-time record that interest rates will rise, which is a very large swing from sentiment just a few months ago. You know what happens when too many bet the same way and it's likely those traders are going to be disappointed.

RSI on the TNX weekly chart below has risen above 70, which is a warning sign that the trend is in danger of reversing. TLT, the bond ETF, has dropped down to its 200-week MA and looks like it could find support there. TLT has declined about 8% below its 50-dma and it rarely strays more than 3% from that MA. That's obviously an extended move (more than has been seen before) and it's itching for a correction.

Yesterday TNX rallied up to its downtrend line from June 2007 - December 2013, tried to rally above it today but closed on the line. With the overbought condition I think it's more likely the downtrend line will hold. Whether it will pull back just a little and then head higher or instead start back down can't be known yet. It will be the form of the pullback/decline (assuming we'll get one from here) that will provide clues for what to expect next.


SPX vs. HYG, Weekly chart

While on the subject of bonds, the junk bond fund, HYG, is not keeping up with the stock market and that's simply another warning sign at the moment. The desire for the risk-on trade by getting into stocks, especially the riskier small caps, is not showing up strongly in the junk bonds. Yes, HYG has bounced off its November low with the stock market but it has retraced only about half of its October-November decline and is currently showing a large bearish divergence against the stock market. Meanwhile the bulls just keep whistling past the graveyard...


KBW Bank index, BKX, Daily chart

The banks have responded strongly to the expectations for a rate increase from the Fed in December and it certainly looks like it's now priced in. One can only imagine what would happen if the Fed makes a pass again but regardless, we could be seeing a buy the rumor, sell the news setting up. BKX is significantly overbought on the daily and weekly charts and at the same time it has run up into potentially significant resistance. A previous uptrend line from February-May, which was broken in June, which is parallel to the current uptrend line from June-September, is currently crossing the trend line along the highs from April 2010 - July 2015, near 86.80. Today's high was 86.82 and as overbought as it is there is a strong likelihood that resistance will hold. Assuming we'll see at least a pullback in the coming week (that's admittedly a questionable assumption in the current market) we'll then get some clues about whether to expect a stair-step move higher (bold green) or instead the start of a more serious pullback/decline (bold red).


Transportation Index, TRAN, Daily chart

The TRAN's rally now has both the daily and weekly charts overbought and now it has run up to the top a parallel up-channel from June. Only slightly higher, near 9020, is the top of a parallel up-channel for the rally from February. The tops of the two up-channels cross near 9050 in the first week of December. Betting on the long side from here (today's high was near 9004) is too risky in my opinion.


U.S. Dollar contract, DX, Weekly chart

The US$ is bullish above its previous highs near 100.60 but I remain unconvinced the rally will continue much higher before at least pulling back for a test of support-turned-resistance at 100.60. If that level holds as support and then the dollar rallies above its high it would be a stronger buy signal. At this point we could be seeing a megaphone pattern off the 2015 high so the risk for dollar bulls is a drop back down to the bottom of the megaphone, which will be near 91 by next spring.


Gold continuous contract, GC, Daily chart

Gold broke down further today and in doing so it dropped below the bottom of its parallel down-channel for the decline from July, currently near price-level support at 1199. It made it down to the next price-level support near 1180 and might start a bigger bounce off this support level. But it would obviously be more bearish if support at 1180 doesn't hold. The 62% retracement of its rally from November 2015, near 1172 is also a potential support level. If that doesn't hold then the next downside target would be 1116-1121 to meet a price projection for its decline and the 78.6% retracement. Breaking below the bottom of the down-channel puts it on a stronger sell signal which can only be negated with a rally above today's high near 1215. But with silver at strong price-level S/R near 16 I think there's a good chance for at least a bounce.


Oil continuous contract, CL, Weekly chart

At the beginning of August oil had pulled back to its 50-week MA and bounced back up to test its June high. The pullback into November was another test of its 50-week MA and that led to another bounce into this week's high at 49.20 (yesterday). I see the possibility for an ascending triangle pattern off the June high, which could mean we'll see oil consolidate into next spring before starting another rally. It could of course rally from here following a double-test of the 50-week MA but so far the bounce off the November 14th low is a 3-wave move up that achieved two equal legs up at 48.44 for a possible a-b-c bounce correction to the impulsive decline from October 19th. That's a bearish setup for the resumption of the decline from here. Oil and the stock market have rallied in synch and therefore a selloff in oil could put downward pressure on the stock market.


Economic reports

You can see the number of economic reports that were released today and how quiet it will be Friday morning. The market is ignoring these reports anyway and will start to focus more on what it thinks the Fed will do at its next FOMC meeting in December.


Conclusion

We've had the kind of rally that runs over anyone even thinking about shorting it. The BTFD crowd is pleased to see their buy-and-hold strategy working so well, especially after the worry following the decline into the beginning of the month. Now there's very little doubt by investors that the rally will continue much higher (BIG swing from bearish sentiment to bullish sentiment). Those who believe the market has much higher to go will be anxious buyers of the next dip after swearing to themselves that they're not going to let another rally get away from them. In my opinion that's a dangerous position to take since the longer-term pattern is setting up something more bearish than just a pullback.

But we'll have plenty of time to consider the bullish vs. bearish potential after seeing what kind of pullback comes next. If it's a choppy pullback/consolidation then I'll join the bulls and buy the dip. But if we see a sharp impulsive decline I'll then look for a bounce correction to get short. In the meantime trade carefully since the rally is extended and several indexes are up against potentially tough resistance. We might see the rally hold up during Friday's half-day session but even that is not a sure thing at this point. Next week could see a hangover following the rejoicing by the bulls.

Enjoy Thanksgiving and I hope you have great food with family and friends. It's my favorite holiday since there are no expectations of presents and the only intent is to see how much food your belly can hold, how much football you can watch and to share it all with the people you love. It doesn't get much better than that.

Have a great long weekend and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

14 Day Streak

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Russell 2000 continued to power ahead with the 14th consecutive day of declines Nothing goes up forever. We know there will be significant profit taking in the very near future. The volume is going to decline sharply over the next two days and that means an increased potential for volatility. I am recommending we hold off on adding new positions for the rest of the week.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Shook Off Sellers

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 opened lower but shook off the opening decline to extend its string of gains to 14 days. The small cap stocks refuse to die but the Nasdaq indexes both closed with losses ahead of Thanksgiving. The Dow also rebounded from the opening loss to post a decent gain well above 19,000 and another new high.

The market breadth continues to shrink but there were quite a few reversals today. The holiday trading is likely to keep the indexes positive but next week could be a challenge.





Current Portfolio


Stop Loss Updates

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


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


No Changes



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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

FTK - Flotek - Company Profile

Comments:

No specific news. Minor profit taking in the energy sector.

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. New 3-week high.

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.



IDTI - Integrated Device Technology - Company Profile

Comments:

No specific news. Minor gain to new 10-month high.

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.



OCLR - Oclaro Inc - Company Profile

Comments:

No specific news. Minor decline. Still holding over prior resistance.

Original Trade Description: November 19th.

Oclaro, Inc. designs, manufactures, and markets lasers and optical components, modules, and subsystems for the optical communications, industrial, and consumer laser markets worldwide. The company's products generate, detect, combine, and separate light signals in optical communications networks. It offers client side transceivers, including pluggable transceivers; line side transceivers; tunable laser transmitters, such as discrete lasers and co-packaged laser modulators; lithium niobate modulators to manipulate the phase or the amplitude of an optical signal; transponder modules for transmitter and receiver functions; and discrete lasers and receivers for metro and long-haul applications. Company description from FinViz.com.

Oclaro posted strong earnings of 14 cents compared to estimates for 10 cents. Revenue of $136 million also beat estimates for $132 million. The company raised guidance for Q4 to revenue in the $146-$154 million range.

Piper Jaffray said Oclaro will be the only company shipping products in volume in the next two quarters. They cited a lack of price competition today that will appear in mid 2017 as new competitors enter the market in volume. The industry is currently under capacity constraints. PJ also said there was strong demand from China and traction in the U.S. was accelerating due to the surge in IoT devices and video streaming.

Earnings Jan 31st.

Shares surged after earnings then faded the prior week in the Nasdaq uncertainty. Last week the stock broke over resistance at $9.25 and is now breaking out to five-year highs. I believe the rally will continue now that it is in breakout mode.

Position 11/21/16:

Long OCLR shares @ $9.86, see portfolio graphic for stop loss.

No options recommended because of price and spreads.



XLF - Financial SPDR ETF - ETF Profile

Comments:

Only a minor gain but it was another new 8-year high.

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:

Minor gain in a mixed market. This is probably due to investors buying puts ahead of next week.

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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