Option Investor
Newsletter

Daily Newsletter, Saturday, 12/10/2016

Table of Contents

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

Market Wrap

Never Ending Rally

by Jim Brown

Click here to email Jim Brown

Despite multiple calls for its demise, the post election rally keeps going and going and going.

Weekly Statistics

Friday Statistics

The three major indexes completed a feat they have not been able to do in more than five years. The Dow, S&P and Nasdaq all posted gains for five consecutive days in the same week. They all ended at new highs with portfolio managers being forced to hold their nose and buy the overbought shares. The gains are continuing despite a likely rate hike next Wednesday. If the Fed claims it is bullish on the economy we could blow out to even higher highs.

Market sentiment is increasing rapidly and consumer sentiment is moving sharply higher on the Trump bump. For an election that created so many protests after the results the impact on sentiment has been very positive. Consumer sentiment for December rose from 93.8 to 98.0 and only 1 tenth of a point below a 12-year high. In January 2015, the reading was 98.1 and I expect that to be exceeded in the revision later this month. Sentiment was at 87.2 in October. That is better than a 10-point gain in only two months.

The present conditions component rose from 107.3 to 112.1 and the highest reading since 2005. The expectations component rose from 85.2 to 88.9 and the highest level since January 2015. The percentage of respondents expecting good economic conditions over the next year rose from 46% to 51%. Those business owners surveyed and saying business conditions were favorable rose +8 points to 43%. More than 80% of consumers said it was a good time to make a major purchase.

There are two reasons for these gains. The first is that the election is over and all the negativity in the campaign attack ads has passed. The second is the normal honeymoon period after a new president is elected. This particular honeymoon appears to be stronger and longer lasting than any I can remember in the recent past. The potential for lower taxes and reduced regulation have business owners very excited.


This boost of bullish sentiment is completely ignoring the potential for a rate hike next week. The current probability is now up over 97%. The key will be the guidance and how the Fed projects future rate hikes in 2017. I suspect they will try and maintain a dovish picture and not kill the market with a harsh outlook for multiple hikes.


There are a lot of reports next week but the normal economic releases pale in importance to the Fed statement and Yellen press conference.

Since the election, the routine economic reports have been ignored. Nobody seems to care what the economy is doing today because they expect it to do a lot better in 2017.


The Dow is well on its way to moving between 1,000 point milestones in a record amount of time. The 19,000 level was first hit on Nov-22nd and we could easily hit 20,000 as early as next week. The shortest time between 1,000 point increments was in 1999 when it took 35 calendar days, not trading days, to move from Dow 10,000 to Dow 11,000. It took 7.5 years to make it to the next level at 12,000.

Note that each increment requires a much smaller percentage move than the prior increment. To go from 1,000 to 2,000 is a 100% increase. To go from 10,000 to 11,000 was a 10% increase. The move from 19,000 to 20,000 will be a 5.26% increase. Using those percentage numbers it only makes sense that we should be reducing the time between milestones but there are those pesky bear markets to deal with. The first Dow print was 40.96 when it was introduced in 1896. To reach the first 1,000 milestone required a 2,341% rise and 76 years.


Stock news was very sparse on Friday with the market activity already starting to wind down for the holidays. The new market highs are about the only thing keeping investors in the markets. There are still some big losers on the radar because business still has potholes that have to be avoided.

A big loser on Friday was Restoration Hardware (RH) with an 18% decline. The company reported earnings after the bell on Thursday of 19 cents compared to estimates for 16 cents. Revenue of $549 million also beat estimates for $533 million. However, the guidance was a killer. They lowered Q4 revenue estimates to $562-$592 million with earnings in the 60-70 cent range. Analysts were expecting $637.62 million and $1.08 in earnings. Comp sales for Q3 also declined -6% compared to a 7% rise in the year ago quarter.

The CEO said there were multiple problems including excess inventories, too many SKUs and consumers did not like their new products. It was not an encouraging conference call.


Broadcom (AVGO) was a big winner after reporting earnings of $3.47 compared to estimates for $3.38. Revenue of $4.14 billion rose +125% and beat estimates for $4.12 billion. The company also doubled its quarterly dividend to $1.02. The company guided to revenue of $4.07 billion in the current quarter but did not guide on earnings. Analysts are expecting $3.18 on revenue of $3.96 billion, a 122% increase.


Vail Resorts (MTN) reported a loss of $1.70 compared to estimates for -$1.57. Revenue of $178.3 million missed estimates for $183.5 million. Losses in lodging and real estate sales offset rising revenue in lift ticket sales. The Q3 quarter normally produces a loss since the ski mountains are not yet open for business. They did raise 2017 guidance from $482-$518 million to $567-$597 million. Shares rallied 4% on the guidance.


Retailer Duluth Holdings (DLTH) reported earnings of a penny compared to estimates for breakeven. Revenue of $67 million missed estimates for $69 million. The company guided for the full year to revenue in the range of $360-$370 million and earnings in the 52-60 cent range. Analysts were expecting $380 million and 70 cents.

They opened three new stores in Q3 and two more in the current quarter to bring their total to 16. However, the most troubling statistic was the cash on hand of $173,000 compared to $37.87 million in the year ago quarter. That $173,000 is pocket change with a 16-store network that has salaries, rent and inventory requirements. They blamed the unusually warm Sept/Oct for the disappointing sales. Other retailers have had the same complaint. They also said it was a highly promotional environment, which others have also stated. Shares fell -33%.


InvenSense (INVN) shares spiked 27% after headlines broke claiming Japan's TDK Corp was in talks to acquire the chip company. InvenSense makes motion-sensing chips. Reportedly TDK has offered $12 per share, which was a 45% premium to Friday's opening price but only barely above the 52-week high from a year ago. The stock has been troubled with many competitors in its primary market. The company has been trying to diversify into things like drones, virtual reality, optical image stabilization, wearable devices and smart home IoT devices.


Bristol-Myers Squibb (BMY) raised its dividend +2.6% to 39 cents. It is payable February 1st to holders on January 6th. That equates to a 2.74% yield. The company also settled a multi-state probe over improperly promoted schizophrenia drug Abilify. The agreement with 42 states will result in a $19.5 million payment. The drug had been marketed for use on elderly patients with dementia without the FDA approval for that use. Shares rallied 3% from support at $55.


Stillwater Mining (SWC) spiked 18% after South African company Sibanye Gold Limited said it was acquiring the company for $2.2 billion and will assume $500 million in SWC debt. SWC is the only U.S. producer of platinum and palladium, the precious metals used to make catalytic converters and jewelry. The company has 1,400 workers in southern Montana. A U.S. subsidiary of Sibanye will pay $18 a share for SWC.


RigNet (RNET) shares rallied 16% after the company was awarded a contract with Statoil for their Mariner project in the North Sea. RigNet builds high specification networking and communications systems that operate from remote locations. The company will provide the latest VSAT communications and network technology for operating in the harsh North Sea environment. They will provide a fully managed voice and data network including video conferencing, crew welfare, asset monitoring and real time data services. No dollar value was given but it is in the millions of dollars.


Coca-Cola (KO) said CEO Muhtar Kent, was stepping down as CEO effective May 1st. Kent will be replaced by the COO, James Quincey, who has been at Coca-Cola for 20 years. Kent will remain chairman of the board. This announcement came at an odd time since Coke's biggest shareholder's son, Howard Buffett, resigned from the board on Thursday. Warren Buffett said he has known Quincey for a long time and was supportive of the move. Shares were up slightly on news that Warren would not be selling his shares.


OPEC officials and non-OPEC suppliers met in Vienna this weekend to discuss additional production cuts. They previously announced that non-OPEC producers would cut 600,000 bpd but there was no specificity. Russia said they would cut 300,000 bpd but then waffled on the commitment before the headline was even a day old.

The early headlines from the meeting claim the 11 non-OPEC producers agreed to cut 558,000 bpd for six months starting on January 1st. The eleven countries were Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan. Talk is cheap and there is no assurance a cut will actually occur.

Saudi oil minister Al-Falih said "the intent by all those who participated is to contribute to drawing down oil inventories that are excessive. And whether the reduction in that over-supply comes from deliberate intervention, like it is the case in Saudi Arabia, or by simply managing the decline in a way that makes them meet this agreement is left to the countries themselves." Ponder that for a minute. They can cut production OR they can just let current production erode and it may or may not actually reach any of the targets. That is hardly a strong agreement that will remove 558,000 bpd starting on January 1st. This is another "We are going to cut production, move along now, there is nothing to see here" headline.

I looked at every post meeting report I could find and there was nothing about specific cuts by each country. The only specific statements said Oman would cut by 45,000 bpd and Kazakhstan said it "would try to reduce by 20,000 bpd next year." Amrita Sen from Energy Aspects Consultants said, "While a lot of the countries are formalizing natural declines, cuts by Russia, Kazakhstan and Oman are real. Russia and Kazakhstan were between them expected to add 400,000 bpd to production next year." I think that is the bottom line. Only three countries actually claim they are cutting and the rest are just agreeing not to add any new production. Multiple Russians have said over the last week that the Russian cuts will never happen so it will be interesting to see what total production levels are in March/April after full implementation of the claimed cuts.

Crude prices rebounded to $51.50 on short covering ahead of the meeting and the hope by some traders for the participants to surprise us.


The formal agreement by OPEC the prior week did wonders for the rig count. Active rigs rose by +27 for the week ended on Friday. That was an addition of 21 oil rigs and 6 gas rigs. It will be interesting to see if the non-OPEC meeting commentary will impact rig activations in the coming weeks.


 


 

Markets

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." Sir John Templeton. The big question today is whether we are in the optimism phase or the euphoria phase.

Dow Theory also states that in any bull market there are three phases. They are called accumulation phase, public participation phase and excess or panic phase. Source

Generic Chart Example

This theory applies to all phases of a market whether it is multi years or multi months. The accumulation phase is the first stage of a bull market where patient, informed investors enter the market after a period of volatility where a bottom has formed. The bad news is priced into the market and institutions begin to build positions.

The public participation phase is where negative sentiment begins to fade and bullish sentiment grows. Good news begins to flow and the public, always in reaction mode, begins to build positions. This is typically the longest phase and as technical conditions improve, more technical and fundamental traders enter the market.

The excess phase is where the improved economic and market conditions have attracted the attention of retail investors and they begin to chase prices higher thinking the market is going to run away from them. Twenty years ago last week, Greenspan called this "irrational exuberance." The perception is that everything is pointing to a continued rally and investors believe only good things are in our future.

The first phase of a bear trend follows the excess phase. It is called distribution. This is where the informed investors sell their positions but not all at once. They "distribute" their holdings over several days or weeks to those panic buyers still expecting higher highs. The beginning of a distribution phase could look like minor profit taking or a topping in the market. The market does not go down but it begins to have trouble continuing its gains. Volume normally increases as the sellers feed shares to the panic buyers. Eventually, distribution turns into outright selling and the market rolls over.

In the Dow chart below, I have marked the phases according to the Dow Theory description. We are clearly in the excess phase where investors are chasing prices on the expectations for wonderful changes in 2017. Reality is going to be a harsh wakeup call when 2017 arrives and nothing happens for many months, if at all. It could be 2018 before many of the proposed changes actually occur.

If we see the excess phase transition into a distribution phase, we should head for the sidelines.


The Dow is up 1,868 points or 10.4% over the last 22 trading days. It is only 244 points from Dow 20,000. If we actually reach that level before the end of December, I see that as a sell the news moment. The index would be up roughly 2,100 points on optimism and euphoria. The expectations are lower taxes and reduced regulation. Since those things require approval by both houses and there is only a simple majority in each house, it could take months to get anything passed and the process could be ugly. Trump still has to get all his appointees confirmed by the Senate and this is where the battles for control will begin.

We also have to get past the inauguration without a disaster. Whenever you have a million people gathered in one location and the opposing party is trying to organize two million people to block the event, there is a tremendous potential for a disaster. Add in the obvious terrorist threat and investors could be in for a nasty surprise. This would be an added incentive to lighten up on long positions at Dow 20,000.

Fortunately, there are still 14 trading days left in 2016 and they are typically bullish. This year I would expect the high for the year to be made before Christmas. In the 22 trading days since the election, the Dow has closed at a new high 14 times.

The Dow gained nearly 600 points last week alone. Just looking at the Dow chart should give every investor nervous chills. I cannot imagine any investor wanting to buy that chart but everybody has their own ideas about investing.



The S&P gained +3% last week and is up 174 points or 8.3% since the election. The gains last week clearly qualify as panic mode. Asset managers are rotating out of bonds and into equities and fund managers are putting every penny to work trying to keep up with their peers. Charles Biderman said most funds are fully invested and have almost no cash on hand. That means any end of year or new tax year withdrawals will require selling to raise cash. Today, nobody is withdrawing money so every penny in the fund goes towards maximizing gains before year-end.

There is a disturbing historical trend where the post election honeymoon is sometimes followed by bear markets. I am not going to go back and dig up all the facts to present here but the trend exists. With the current economic expansion at 7 years and growing, there is always the potential for a recession. Greenspan said last week, his main worry for 2017 is stagflation. I do not see that potential but I am sure that risk exists.

The point to this discussion is that the S&P and the other indexes are in what Elon Musk would call insane mode. That is the mode on his cars where acceleration is insanely fast. The market gains last week were insane since they were on top of already strong gains.


The Nasdaq finally broke out to a new high but it is not nearly as over extended as the Dow and S&P. The Nasdaq big caps other than Google did not participate. Facebook gained only 77 cents, Amazon +1.33 and Netflix lost 36 cents. In order for the Nasdaq breakout to have any staying power the FANG stocks all have to contribute, not just Google.

The biotech sector remains weak and Trump's comments last week about bringing down drug prices caused a new wave of uncertainty. While that is significantly easier to say than actually do, it still causes selling in the drug stocks.




The Russell 2000 is up +232 points since the election or exactly 20%. That would be a great year under normal conditions but that occurred in only 22 trading days or roughly 1% per day. In any universe that is very over extended and due for a rest.


I do believe we will see higher highs before Christmas. However, I do not expect the kind of gains we saw last week. I believe the market could be choppy and toppy as we target that 20,000 level on the Dow.

I would refrain from being overly long and I would definitely keep my stop losses in place.

 



 

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Random Thoughts


There was almost no change in sentiment for the week. Everybody has made up their mind and those "not bullish" still make up 57% of the total. There are plenty of investors left to convert. This survey ended on Wednesday.

Last week results


Mark Zuckerberg in politics? Recently released documents in an ongoing lawsuit about the creation of the Class C non-voting shares, disclosed communications between board members and Zuckerberg. The board discussed giving the CEO a two-year leave of absence it he decided to become involved in "a government position." The "Facebook has no political bias" CEO apparently has an interest in serving in government. Since 98.1% of political donations from Facebook employees were to democratic candidates, we can guess which way Facebook is leaning.

The board member comments on the Class C share suit were concerned about Zuckerberg converting the majority of shares owned by the public into class C shares with no voting rights. That would allow Zuckerberg to basically abandon the company for years to go into government and have minimal input to Facebook but still retain total control. According to board members Erskin Bowles and Mark Andreessen they "rediscuss that problem on every call."


If you currently have a functioning Galaxy Note 7 phone by Samsung, it is about to become a paperweight. The phones have been under mandatory recall but apparently, some users liked them so much they refuse to give them back. Next week, Samsung will force a software update that will remove the ability to make calls and the ability to charge the battery. The phone will become totally useless and with a discharged battery, and no further danger to Samsung. In Canada, Samsung has already implemented those changes as well as disabling Bluetooth and Wi-Fi functions. Strangely, you can still buy a Note 7 on Ebay for about $350.


iPhones are shutting down all over the world as a result of two problems. One iPhone 6s problem is hardware and requires a battery replacement so the phones have to be exchanged. Apple has notified everyone impacted on how to get the exchange. The China Consumers Association disagrees with Apple saying it affects more than just the 6S and they have requested Apple step up their exchange program to cover other models.

The second problem is related to a recent update to iOS. The iOS 10.1.1 updates reduces battery life by increasing the phone's internal temperature. Some users claim the charge dwindles from 30% to 1% in only a few seconds and then shuts down. When it is rebooted after being recharged, it shows only 30% but runs for a couple hours before shutting down again. Users are resorting to carrying an extra battery to make it through the day.

JP Morgan cited information from Orbital Insight saying mall traffic is slowing. Orbital takes satellite pictures of mall parking lots and compares them to the same period in prior years. They claim mall traffic is down -4.1% from year ago levels and this could hurt Apple more than anyone else because they get a lot of their sales from big box stores like Best Buy and mall stores. JP Morgan expects iPhone sales to decline -11% compared to consensus estimates for a 7% rise.

The Wall Street Journal said Apple's high tech jack-less AirPod earbuds may not be available in the near future. Apple originally said they would be for sale in October at $159 a pair but then withdrew them saying they needed more time to provide a quality user experience.

According to the WSJ article, the problem is technical. Bluetooth technology cannot stream to two devices at the same time. Other devices like Bragi Dash and Samsung Gear IconX solve that by transmitting to one earbud and then that bud retransmits to the other earbud. However, results are spotty because people's heads tend to get in the way. Because we are all different, the transmission from bud to bud performs differently for each person and dropouts occur. Do not expect AirPods in the near future.

Apple shares were actually one of the better tech performers last week with more than a $5 rebound off Monday's $108.25 low.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Being a male is a matter of birth. Being a man is a matter of age. But being a gentleman is a matter of choice."

Vin Diesel


 


New Plays

Reversal Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Even novice traders should be aware there is a market reversal in our future. Everything is overbought. The Russell 2000 is up +20.1% in the last 22 trading days. This cannot continue forever.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

IWM - Russell 2000 ETF - ETF Profile

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -1,850 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

With an IWM trade at $137.00

Buy Feb $134 put, currently $2.95, no initial stop loss.




In Play Updates and Reviews

Gravity

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 acceleration slowed as gravity returned to the small cap index. The Russell 2000 gained only 1.7 points but that was after a 1.7% gain on Thursday. It was due for a rest. We did not get the Friday profit taking I expected but all but one of our positions closed with losses. The market breadth is shrinking again despite the change in trend that has the market rising into the close the last four days.

We are simply overbought again and the obvious trade is to look for the next bout of profit taking. With only 14 trading days left in 2016, portfolio managers who missed the rally are running out of time to play catch up. That could fuel further gains over the next two weeks but once Christmas arrives, I would start looking for the exits.





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


SMCI - Super Micro Computer
The long stock position was opened with a trade at $29.25.



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BULLISH Play Updates

SMCI - Super Micro Computer - Company Profile

Comments:

No specific news. Shares spiked over resistance at $29 to trigger the entry into the position and then they fall back below that level at the close.

Original Trade Description: December 7th

Super Micro Computer, Inc., together with its subsidiaries, develops and provides high performance server solutions based on modular and open architecture. It offers a range of server, storage, blade, workstation, and full rack solutions, as well as networking devices, server management software, and technology support and services. The company also provides a range of application optimized server solutions, including rackmount and blade server systems; and server subsystems and accessories comprising server boards, and chassis and power supplies, as well as other system accessories, including microprocessors, and memory and disc drives. In addition, it provides customer support services and hardware enhanced services. The company offers its products to data center, cloud computing, enterprise IT, big data, high performance computing, and Internet of Things/embedded markets. It sells its server systems, and server subsystems and accessories through direct sales force, as well as through distributors that comprise value added resellers and system integrators, and OEMs. Company description from FinViz.com.

Supermicro makes the best and most versatile computer servers, in my opinion. I have a tech background starting in 1967 and have been around servers and mainframes all my adult life. When I started Option Investor in 1997 we started with Super Micro servers and we have upgraded multiple times over the last 20 years and it has always been with Super Micro.

While they make great servers they have had some "public company" problems since coming public in 2007. Over the last four years they have traded as low as $7 and as high as $41. Back in July shares were crushed after they slashed guidance in half for a multitude of reasons including restructuring, component shipping delays and weaker than expected orders from several large accounts. Shares fell to $19 from $26. After three months they reported good earnings in late October and shares have been in rally mode since the election.

Earnings Jan 26th.

Shares are approaching resistance at $29 but I do expect them to break through given their recent guidance. It may not happen on the first test, but I expect it to happen.

Position 12/9/16 with a SMCI trade at $29.25

Long SMCI shares @ $29.25, see portfolio graphic for stop loss.

Optional: Long Jan $30 call @ 80 cents, see portfolio graphic for stop loss.



TRN - Trinity Industries - Company Profile

Comments:

Minor decline from the 52-week high on Wednesday.

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. Minor decline from 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. I am recommending we close the optional call option position. This is a January option and premiums will begin to decline rapidly next week. We are already up 300% so no reason to be greedy. Close the call at Monday's open. The stock position will remain open.

Exit the stock position with trade at $18.

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:

No specific news. New historic 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.

Update 12/8/16: Deutsche Bank downgraded FIT from buy to hold.

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:

Back into a losing trend but it will spike when this rally ends. I am considering closing the position and reopening on the next spike. I will decide on Monday.

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.




Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.


HOV - Hovnanian Enterprises - Company Profile

Comments:

HOV reported adjusted earnings of 20 cents on revenue of $805.1 million. Analysts were expecting 13 cents and $847 million. They paid off $320 million in debt in 2016 and raised their liquidity at the end of the quarter to $346.6 million. The CEO said we are now looking at opportunities for "expansion that will result in community growth and higher levels of profitability." Shares closed at an 16-month high on Friday at $2.50.

Our Feb $2 call only cost 20 cents so we can afford to wait for a recovery. We are up 150% and two months to go on the call.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Update 9/9/16: HOV reported Q2 earnings of zero compared to estimates for 6 cents. Revenue rose +32.6% to $716.9 million. For the full year the company guided to revenue of $2.7 to $2.9 billion and analysts were expecting $2.75 billion. The sold or joint ventured 21 communities to reduce their active selling communities from 214 to 193. This impacted revenue as the older communities were culled from the active business. They sold 1,467 homes in Q2 and slightly less than the 1,658 in the same period in 2015, also the result of selling some communities. Their order backlog rose 7.7% to $1.48 billion. There are 3,232 homes currently contracted to be built. They delivered 1,574 homes in the quarter, a +11.8% rise. After paying off $320 million in debt their cash position was $187.7 million. They acquired about 900 lots in the quarter in 20 different communities. They guided for a solid profit in the current quarter of $32-$42 million before some expenses including land acquisitions.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long February $2 call @ 20 cents. No stop loss.

Previously Closed 10/17/16: Long HOV shares @ $1.86, closed $1.61, -.25 loss.





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