Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/6/2016

Table of Contents

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

Market Wrap

Another Goldman Gift

by Jim Brown

Click here to email Jim Brown

Goldman Sachs added another $3 to their post election gains to add roughly 23 points to the Dow and power it to a new high.

Market Statistics

Goldman has gained $57 since the election and added about 441 points to the Dow or roughly one third of the Dow's 1,363 point rally since November 8th. Thank you Goldman Sachs. However, we know this Goldman spike will eventually end badly and the Dow will suffer as a result. When? Nobody knows.

The markets did break a new trend today. That trend was opening high and closing at the lows. That was broken today when buyers flooded into the intraday dip and pushed the indexes to close at the highs. That is a very positive sign and suggests the market weakness is easing.

Portfolio managers cannot afford to fade this rally with only 17 trading days left in 2016. They have ride the wave and try to stimulate it whenever possible in order to keep up with or exceed all of their peers. There should be ample window dressing over the next three weeks. Unfortunately, that is setting up for a sudden surprise in January when everyone is free to take profits from all these monster gains.

The U.S. economics just keep getting better. Factory Orders for October rose +2.7% compared to +0.3% in September. That was the largest monthly increase in about 18 months. Durable goods saw the biggest gain at +4.6% with nondurables at +0.9%. However, shipments, the component that feeds into the GDP, only rose +0.4%. They are running at the slowest pace since 2011. Backorders rose +0.7% and the first gain since April.

The International Trade deficit for October rose from $36.4 billion to $42.6 billion. That was over the forecast for $41.7 billion. It was the largest deficit since June. Exports declined -$3.4 billion to $186.4 billion and imports increased $3.1 billion to $229.0 billion. The larger deficit was largely responsible for the pull forward of the soybean exports into Aug/Sep. Exports of soybeans in October declined -30.6% after being up 45% in the prior two months.

The Core Logic Home Price Index rose 6.7% for October compared to a 6.3% rise in September. Those are annualized rates. The actual rate of change for October was +1.1% and the 22nd consecutive monthly increase. Home prices are still -4.7% below their 2007 peak.

The market ignored all those reports.

The calendar for the rest of the week is just as boring with nothing that should move the market. The next highlight will be the Fed rate announcement next Wednesday. William Dudley said yesterday he expects four rate hikes in 2017. That is exactly what I have been saying, one at the end of each quarter. However, I do not expect the Fed to be that clear in their guidance. They would like to maintain all their options and that means repeating the stance of "rate hikes will be data dependent" even though they have ignored the data for the last two years. Yellen's press conference could be telling since she will maintain her dovish posture but try to walk a thin party line.

At the close today the chance of a December rate hike was at 92.7%.



Apple was in the news for multiple reasons on Tuesday. The Supreme Court threw out the $399 million judgment against Samsung in the patent dispute over the iPhone design. The court said Samsung did not copy the entire phone but only some icon placements and Apple was not due the $399 million. The court ruled 8-0 against Apple and sent the case back to a lower court to decide how much the copied items were worth compared to the entire phone.

CEO Tim Cook came out on the attack against an IDC article on Monday that said Apple watch sales had declined -72% in Q3. IDC said Apple watch sales were 1.1 million units in Q3, down from 3.9 million in the year ago quarter. Tim Cook responded to a question about the report from Reuters saying, "Sales growth is off the charts. In fact, during the first week of holiday shopping, our sell-through of Apple Watch was greater than any week in the product's history. And, as we expected, we are on track for the best quarter ever for the Apple Watch."

The problem is the lack of context. Since Apple has never reported unit sales for the watch, analysts have nothing to compare "off the charts" to in order to make a rational decision. Also, Cook reported on "sell through" rather than IDC's reports on "sell in." It is one thing to sell retailers a lot of watches, but the key is the sell through to consumers. If you sell retailers one million watches but only 100,000 actually get sold to consumers then your sell through could be high on a relative basis to the past but lousy compared to the amount of inventory on hand.

The entire thing is a tempest in a teapot. Josh Brown said "If Apple decided to write off the entire watch unit, no one would even blink." Because they have not reported unit numbers or revenue, nobody knows if they are making money on them or not.


Autozone (AZO) reported earnings of $9.36 and that beat estimates for $9.31. Revenue of $2.47 billion rose +3.47% but missed estimates for $2.5 billion. During the quarter, they opened 16 new stores and bought back $363 million in stock. Cash on hand rose $30 million to $195.54 million.


Microsoft (MSFT) received the final approval for its acquisition of LinkedIn (LNKD). The European Commission was the last regulatory agency to sign off on the acquisition after the announcement six months ago. Microsoft will pay $26 billion for the company. Microsoft will have to make some changes to Windows to insure they are not forcing LinkedIn on new PC buyers. The company will have to continue allowing other developers to interface with the Office Add-in program that allows developers to integrate with Outlook and Office. Other developers will be able to continue marketing their products in the Office Store. Microsoft has to allow PC builders to "opt-out" of including LinkedIn software in the version of Windows they sell with their PCs. Any future Windows users must be able to seamlessly uninstall any LinkedIn software and not be repeatedly asked if they want to reinstall it.


Toll Brothers (TOL) reported earnings of 67 cents that missed estimates by a penny. Revenue of $1.86 billion beat estimates for $1.79 billion. For the full year, they reported earnings of $2.18 and revenue of $5.17 billion. Toll said the weak earnings were due to a $121.2 million warranty charge for some older stucco homes. The company said they expected to deliver 1,000-1,250 homes in the current quarter with an average price of $750,000-$780,000. For the full year for 2017, they expect 6,500 to 7,500 homes with a selling price of $775,000-$825,000 with gross margins around 25%. Shares spiked 5% on the guidance.


Netflix (NFLX) shares soared after Evercore ISI upgraded the stock saying the competition it feared never appeared. "Netflix seems to be in a good position now." The analyst said many of the announced over-the-top (OTT) competitors had either been delayed or were finding it hard to scale in the current environment. The deluge of original Netflix content in 2017 was going to be insurmountable. Netflix is producing more than 1,000 hours of original content in both movies and TV shows. That is up from 600 hours in 2016. Their content budget for 2017 is $6 billion. They are creating an athletic competition show called "Ultimate Beastmaster" that will have separate versions in six countries with local languages.

There are continuous rumors that Disney, Amazon or Apple will eventually buy Netflix if for no other reason than to prevent them from being a competitor in the decades ahead. Amazon and Disney are in the content generation business and they could eliminate their biggest opposition by making the acquisition.


Pandora (P) saw another lift today after Oppenheimer upgraded them to outperform with a price target of $21. The analyst says a buyout by SiriusXM is a legitimate possibility. This was speculated last week as well and shares rallied 15% on the call. Today's gain added another 3%. The SiriusXM CEO admitted he has made a new contact with Pandora about the potential.


Shares of Nike (NKE) were downgraded by Cowen & Company saying they were losing market share to Adidas and Under Armour. The preference for Nike shoes has declined from 55% to 44% in the latest survey. Cowen also said promotional discounts for Nike branded products appear "elevated" with 25% discounts at Dicks Sporting Goods and Kohls. The analyst warned of a high probability for a guidance cut for 2017. Shares fell slightly on the news.


After the bell Western Digital (WDC) raised guidance saying it now expected current quarter revenue to be $4.75 billion, up from prior guidance of $4.7 billion. The company announced it was shipping its new 12TB and 14TB hard drives along with 256GB MicroSD cards. They said acceptance of their new products was very strong and a new cross license agreement with Samsung would also increase revenue. Shares spiked 3% in afterhours to $67. WDC is a current long position in this newsletter.


Chipotle Mexican Grill (CMG) saw its shares fall 7% today after the co-CEO said they were nervous about hitting the guidance they gave in October. He said the company was not satisfied about their rate of recovery and the quality of the restaurant experience. Analysts were quick to slash forecasts. Instinet cut their Q4 forecast from $1.30 to 95 cents and the full year from $1.91 to $1.46. CMG management also said about half of their 2,000 stores would be graded C, D or F on customer service.


Boeing (BA) recovered from an early decline after Trump said the contract to produce the two new Air Force One planes was overpriced and should be cancelled. The reported price for two 747-8 custom built planes is around $4 billion. However, these are not just normal 747 aircraft. They have complete electronic shielding to protect them from EMP and nuclear blasts. They have the equivalent of armor plating around sensitive systems to make them more survivable from external threats. They have antimissile components and nearly as much communications gear as Cheyenne Mountain to enable the president to talk to anyone on earth at any time. The electrical and fuel systems are fully redundant. There is a complete operating room in the lower level in case someone is injured in an attack. There is a communications cabin, kitchen, crew quarters including his protection detail and more than 4,000 sq ft of living/meeting space. Each of the two planes is custom built to Air Force specifications and is not expected to be delivered until 2023 or later.

The Air Force said the 2016 commitment is $170 million for analysis and design. The budget for 2017 is $2.9 billion once the design is accepted and construction is expected to start in 2019. The current Air Force One plane and backup went into service in 1990 and are approaching the end of their service life after thousands of flights and many millions of miles. They need to be replaced and I am sure Boeing will continue with the contract. The comments from Trump are the first salvo in a long contract negotiation process.


Crude prices are holding over $50 but just barely after a 2% decline today. The OPEC news is fading but we could get some more headlines on Friday when they meet with the non-OPEC producers to firm up any proposed cuts. This meeting may not end well.


Markets

The S&P closed within 0.12 points of a new closing high. The index closed at the high for the day and that was a change in the recent trend. It would appear the market has shaken off the recent weakness but we are still facing some significantly overbought levels. The markets my go higher from here but they will not likely go in a straight line. The next 17 trading days are likely to be choppy with an upside bias.

For tomorrow, the prior high at 2,213.35 is the target and hopefully it does not produce a sell the news event. Support is well back at 2,190 and it held on two days last week.


The Dow hit resistance at 19,250 and came to a dead stop. The 35-point gain was driven by a 23-point lift from Goldman Sachs. If traders decide to start taking profits in Goldman the Dow is going to find it tough to move higher. Goldman's weighting in the Dow will be a major drag, just like it has been a huge lift on the way up.

Support from last week is in the 19,135 range and resistance if 19,250.



The Nasdaq Composite squeezed over the 5,325 resistance level but only by 8 points. That is still within range and can provide some downward pull in a weak market. Overhead resistance remains the 5,400 level and the historic highs. The big cap techs were in the wrong column today but the individual losses were minimal.




The small cap Russell 2000 rebounded back to a new high in only two days after a four-day decline. The small caps were the strongest sector today and that is very positive. As long as they continue to make new highs, the broader market will not crash.


Twenty years ago today Alan Greenspan uttered the words "irrational exuberance" saying external factors were driving the market to unreasonable gains. It would appear we are back in the irrational exuberance camp again with all manner of investors and analysts almost giddy with excitement over the potential for corporate tax cuts and the removal of a decade of regulatory burdens. Greenspan said today he would like nothing better than to see Dodd-Frank disappear. That bill was originally 2,300 pages with 293 new regulations. However, the bill is being modified by regulators almost daily and the page count is reportedly up to 80,000 pages and the overhead to banks and institutions is massive.

We are at the point where everyone is starting to project their hopes and dreams on the Trump administration but we are a long way from the reality of what will appear. I believe the market will finish the year higher, but I also believe January could be ugly. Enjoy the rally while it lasts and then get ready for a buying opportunity in 2017.


 

PUT OPTION INVESTOR
ON YOUR SHOPPING LIST


Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day



Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

 


New Plays

Promising New High

by Jim Brown

Click here to email Jim Brown
Editor's Note

With the Russell 2000 closing at a new high the outlook is promising. However, in my scans today I did not see anything that jumped out at me with a screaming buy signal. There is no reason to just keep adding plays just because the market is open. Today was a promising gain but the S&P did stall right at the old high. There is always time to add new plays if the rally continues.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

New Russell High

by Jim Brown

Click here to email Jim Brown

Editors Note:

After only a four-day decline, the Russell 2000 has stormed to new highs in a two-day sprint. The S&P closed only 0.12 away from a new high and the Dow did close at a new high thanks to Goldman Sachs.

The markets reversed their prior trend of closing on the lows and buying intensified in the afternoon to close on the highs. That is a positive development that could mean the weakness from last week is over.





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


YRCW - YRC Worldwide
The long stock position was entered at $14.05.



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

BOJA - Bojangles Inc - Company Profile

Comments:

No specific news. No gain. Secondary was scheduled to close today.

Original Trade Description: November 30th.

Bojangles', Inc. operates and franchises limited service restaurants in the United States. Its restaurants serve chicken items, made-from-scratch buttermilk biscuits, flavorful fixin's, and iced tea. As of September 25, 2016, the company had 699 system-wide restaurants, including 301 company-operated and 398 franchised restaurants primarily located in the Southeastern United States. Bojangles', Inc. was founded in 1977. Company description from FinViz.com.

In early November they reported earnings of 25 cents that beat estimates for 21 cents. Revenue of $133.2 million missed estimates by only $200,000. They guided for the full year to earnings of 92-95 cents and revenue of $530.5-$533.5 million.

Earnings February 2nd.

Shares spiked $1.50 on the earnings and continued to make solid progress until today's minor bout of profit taking. However, after the bell they announced that certain existing shareholders had filed to sell six million shares in an underwritten public offering. Nearly every broker on the street is participating in the offering so there will not be a problem selling the shares. The company will receive none of the proceeds with everything going to the shareholders.

Shares fell to $18.30 in afterhours after closing at $19.70. Typically, when a company gets hit on a secondary, it rebounds almost immediately to the original price unless the shares are sold significantly under the market, which is not expected in this case.

On Wednesday 11/30 shares dropped with the market to stop us out of the initial position. I still believe the company will set a new high once the secondary is priced.

Position 12/2/16 with a BOJA trade at $18.65

Long BOJA shares @ $18.65, see portfolio graphic for stop loss.



TRN - Trinity Industries - Company Profile

Comments:

No specific news. New 52-week high close.

Original Trade Description: November 30th.

Trinity Industries, Inc. provides various products and services for the energy, transportation, chemical, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and couplers, axles, and other equipment, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2015, this segment had a fleet of 76,765 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other protective barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Company description from FinViz.com.

Trinity reported earnings of 56 cents that beat estimates for 52 cents. Revenue was $1.11 billion. They guided for full year earnings of $2.10-$2.20 per share. They currently have a trailing PE of only 8.94. Liquidity is currently over $2 billion.

They booked orders for 1,260 railcars in the quarter. Their order backlog is $3.7 billion representing orders for 34,870 railcars. The inland barge segment has an order backlog of $177.3 million. The order backlog for wind towers was over $1.0 billion.

Earnings Jan 25th.

Trinity has a good business. They have received fewer orders because of the energy slowdown but they have plenty of backorders to work through as the energy sector rebounds.

Shares rose nearly $1 today in a weak market and are holding right at 52-week resistance at $28. A breakout here could run to $35.

Position 12/1/16 with a TRN trade at $28.25

Long TRN shares @$28.25, see portfolio graphic for stop loss.

Optional: Long Jan $30 call @ 60 cents, see portfolio graphic for stop loss.



UIS - Unisys Corp - Company Profile

Comments:

No specific news. New 52-week high.

Original Trade Description: November 26th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. Company description from FinViz.com.

The information technology sector is undergoing a transformation and older companies are becoming renewed as they change focus to the new cloud services offerings. Unisys was founded in 1886 making it 130 years old. You can imagine how many times they have changed products and focus over that period.

The company is focusing on cloud-based products and software as a service. They also offer physical security for data centers both physical security and software security. They offer a broad range of outsourcing services for building managers and clients. They have been selling their noncore assets and focusing their skills to build specialized capabilities to win industry specific projects.

They reported adjusted earnings of 41 cents compared to estimates for 29 cents. Revenue of $683.3 million beat estimates for $664 million.

Earnings Jan 24th.

Looking at a daily chart is scary since shares have risen from $10 to $15 since the election. However, the rise has been calm and without any material volatility on the days the market was weak.

On the weekly chart, resistance at $14.50 was broken on Thursday and there is nothing else to slow it down until $20.

Just in case the market tanks on Monday morning, I am putting an entry trigger on the position.

Position 11/30/16 with a UIS trade at $15.25:

Long UIS shares @ $15.25, see portfolio graphic for stop loss.

No options recommended because of price and spreads.



XLF - Financial SPDR ETF - ETF Profile

Comments:

New 8-year high for the XLF.

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.



YRCW - YRC Worldwide - Company Profile

Comments:

No specific news. Closed at new 11-month high.

Original Trade Description: December 5th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2015, this segment had a fleet of approximately 8,500 tractors comprising approximately 7,300 owned and 1,200 leased; and approximately 32,000 trailers consisting of approximately 27,300 owned and 4,700 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, and other specialized offerings; expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates my.yrcregional.com and NewPenn.com, which are e-commerce Websites offering online resources to manage transportation activities. As of December 31, 2015, this segment had a fleet of approximately 6,600 tractors, including approximately 5,500 owned and 1,100 leased; and approximately 13,000 trailers comprising approximately 11,300 owned and 2,000 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. Company description from FinViz.com.

YRCW shares were crushed in early November after they reported earnings of 42 cents compared to estimates for 53 cents. Revenue of $1.22 billion missed estimates for $1.23 billion. The CEO said the results were impacted by a soft industrial backdrop and lower fuel surcharge revenue compared to the prior year. Who would have thought that low fuel prices would hurt earnings for a trucking company. Apparently, they have engineered their fuel charge program to profit from the fluctuations in the rates. Many companies do this since fuel prices are very volatile. Instead of changing the rates monthly and confusing customers, they project a quarterly rate. If they guess right they make a few cents on the fluctuations. If they guess wrong they lose a few cents but the customer rate is fixed for the quarter. With fuel rates relatively low and stable over the last couple quarters, the rate fixers probably assumed too low a base.

The CEO also said the less than truckload (LTL) sector remained steady despite the recent economic headwinds. With the economy ticking up for late Q3 and Q4, and this being a holiday shipping quarter, the Q4 earnings should be significantly better.

Earnings Jan 26th.

The transportation sector as evidenced by the Dow Transports ($TRAN) is on the verge of breaking out to a new high. Trucking is leading the charge.

Position With a YRCW trade at $14.05

Long YRCW shares @ $14.05, see portfolio graphic for stop loss.

Optional: Long Jan $15 call @ 53 cents. No initial stop loss.




BEARISH Play Updates

FIT - FitBit - Company Profile

Comments:

Daugherty & Co said Google sell through trends showed FitBit sales continued to decline in November. Shares closed at a new low.

Original Trade Description: December 3rd.

Fitbit, Inc. provides wearable health and fitness tracking devices. It offers various products, including Fitbit Zip, an entry-level wireless tracker that allows users to track daily activity statistics, such as steps, distance, calories burned, and active minutes; Fitbit One, a clippable wireless tracker, which tracks floors climbed and sleep, as well as daily steps, distance, calories burned, and active minutes; Fitbit Flex, a wristband-style tracker that tracks steps, distance, calories burned, active minutes, and sleep; and Fitbit Charge, an activity and sleep wristband, which tracks steps, distance, calories burned, active minutes, floors climbed, and sleep. The company also provides Fitbit Alta, a customizable wristband that offers call, text, and calendar notifications when paired with the user's phone and SmartTrack automatic exercise recognition; and Fitbit Charge HR, a wireless heart rate and activity wristband. In addition, it offers Fitbit Blaze, a smart fitness watch that provides multi-sport functionality, tracks outdoor cycling activity, and provides run cues; Fitbit Surge, a fitness watch that features a GPS watch, heart rate tracker, activity tracker, and smartwatch; Aria, a Wi-Fi connected scale that tracks weight, body fat percentage, and body mass index; and Fitbit accessories that include bands and frames for Fitbit Blaze, bands for Fitbit Alta, colored bands for Fitbit Flex, colored clips for Fitbit One and Fitbit Zip, device charging cables, wireless sync dongles, band clasps, sleep bands, and Fitbit apparel. The company offers its products through consumer electronics and specialty retailers, e-Commerce retailers, sporting goods and outdoors retailers, and wireless carriers; and corporate wellness channels, as well as directly worldwide. Company description from FinViz.com.

FitBit is finding it is hard to move from the "nice to have" category to the "have to have" category. Quite a few of the millennial generation already have a FitBit but the majority are stuck in the back of a dresser drawer never to be worn again. The fitness watch is a fad. How many of us have bought a treadmill, stair climber, "insert your device name here" and it is either gathering dust in the corner or was eventually sold off in a yard sale to make room in the house?

The fitness watch is a great device if you are really into fitness. Since America is the most obese population on the planet, apparently the fitness crowd is in the minority.

When FitBit reported earnings, they guided for a bleak Q4 shopping season. There are too many competitors and not enough buyers. Last week FitBit offered between $34 and $40 million for Pebble, a smartwatch pioneer that has also fallen on hard times. Considering Pebble turned down an offer for $750 million in 2015, that shows you how tough the sector has become. Pebble has been laying off workers and trimming the product line. FitBit wants Pebble because of their unique operating system.

FitBit revenue rose at triple digit percentages in the prior three years. Over the last three quarters revenue has risen 50%, 47% and 23% in Q3. FitBit is only expecting 5% growth in Q4. Net income has posted double digit percentage declines in each of the last three quarters.

FitBit is in trouble. Some of the major watchmakers are now offering fitness watches and Apple is also chipping away at that market segment. FitBit closed at a historic low on Friday at $8 and it is almost a sure bet they will hit $5 without a surprise acquisition announcement by somebody else.

Earnings Feb 1st.

Position 12/5/16:

Short FIT shares @ $8.18, see portfolio graphic for stop loss.

Optional: Long Feb $7 put @ 50 cents.



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.





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now