Option Investor
Newsletter

Daily Newsletter, Thursday, 12/15/2016

Table of Contents

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

Market Wrap

Hut, Hut . . . Hike!

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The FOMC hiked as expected, was a little on the hawkish side as expected, and the market shook it off. Today's action recovered much of yesterday's losses, leaves the indices trading just below freshly set all time highs and has paved the way for Santa's rally to hit Wall Street. Supporting the move was a raft of better than expected economic data, and a substantial increase in forward outlook in manufacturing and housing markets.

Asian indices fell in the overnight session. The US decline, the rate hike, the outlook, the dollar strength all helping to depress prices. Losses were in the range of -1% although one index, the Nikkei, was able to eke out a small gain, about 0.1%. European markets were more cheered by yesterday's news. The FOMC, the rate hike, dollar strength all led to a surge in banking stocks that lifted the entire region by roughly 1%. The euro lost more than -1% versus the dollar bringing it a step closer to parity, maybe it'll get there this time.

Market Statistics

Futures trading was a bit mixed this morning, a little up down and sideways but generally around or just under break even levels. New and data did not seem to have much effect. At the opening bell the indices moved immediately higher and continued to drift higher for the first few hours of the day. Highs were set near lunch time, about +0.65% for the SPX, and then the market began to pull back. The retreat was slow to begin with, cutting the days gains by a third within about an hour of hitting the high. This level held for a few hours until just before 2PM when the retreat began to pick up speed. At this time the days gains were cut to just under half, about +0.25% for the SPX, where some early evidence of support began to kick in. Support held and from that point the indices trend sideways into the close.

Economic Calendar

The Economy

Lots of economic data and lots of surprises, all nicely positive. First up is jobless claims, initial jobless claims fell -4,000 from last week's not revised figure to hit 254,000. This is the 93rd week of claims below 300K and the 44th week of claims trending near 250K. The four week moving of claims rose, adding 5,250 to hit 257,000. On a not adjusted basis claims fell -13.5% versus an expected decline of -12.2%. On a year over year basis not adjust claims are down -2.6%. New York led with a decline of -15,000 new claims.


Continuing claims gained 11,000 from last weeks upward revision of 2,000 to hit 2.018 million. The four week moving average of claims gained 8,750 to hit 2.038 million, both numbers are just off their long term 43 year lows. Despite some recent volatility in claims this figure remains fairly stable around the 2.05 million mark and historic lows, consistent with labor market health.

The total number of Americans claiming unemployment jumped by 331,537, shy of my estimated 500,000. Regardless, the figure remains consistent with seasonal trends, long term improvements and overall health in the labor market. On a year over year basis total claims are down -10%. Over the next few weeks we can expect to see claims hover near today's level and then spike up to the seasonal high which should be somewhere near 2.75 million. After that claims should fall off into the spring and ealy summer.


The Consumer Price Index came in as expected, +0.2% on the headline and the core, month to month. On a year over year basis headline, not adjusted, CPI is running 1.7% and 2.1% ex-food and energy. Shelter and gas lead the increases, up +0.2% and +2.7% respectively, while food remains unchanged. While this increase is mild year over year inflation is running at/near the Fed's target and with PPI running on the hot side we could see this figure begin to rise in the near future.


There were two regional Fed business survey's released before the opening bell; the Philly Fed MBOS and the Empire State Manufacturing survey, both stronger than expected. The Philly Fed MBOS jumped 13.9 points to hit 21.5, the 5 month of positive reading and the highest level in over 2 years. Within the report New Order declined -5 but remains positive at 13.9, Shipment gained 3 to hit 22, Inventories turned positive and show growth, Unfilled Orders was positive for the 2nd month in a row and Employment rose for the 2nd month to turn positive for the 1st time in 12 months. On top of all that the 6 month forward outlook jumped 29.3 points to hit 52.6, also a 2 year high.


The Empire State Manufacturing Survey is slightly less robust but nonetheless positive and better than expected. The headline jumped 8 to 9.0, New Orders climbed 8 to hit 11.4, Shipments were unchanged at 8.5 and Unfilled Orders rose to 10.7. On the negative side Labor and Inventories both fell. Looking forward the 6 month outlook jumped 20 to hit 50.2.


The NAHB Housing Market Index was released at 10AM and help to send the market up to its intra-day highs. The headline number jumped 7 points on a month to month basis to hit 70, the highest level in over a year. On a year over year basis this month's reading is +10 or +16.6% higher than last year at this time. All regions saw increases with strength in the Northeast and the West. Single family homes sales came in at 76, up 7, the 6 month outlook came in at 78, up 7, and traffic of prospective buyers came in at 53, up 6 and the first positive reading in over a year.

The Dollar Index

The dollar, it got stronger today. The domino's have fallen into place; the Fed met expectations with a rate hike, the Fed upped their rate hike time line for 2017 and economic data remains positive and trending stronger. With all this in place the risks to the dollar and its rise are hiccups in economic recovery, strength in global economies and possible tightening by foreign central bankers. Until then the trend in the Dollar Index is up and looks strong, how high it goes is the question now. Today the index gained more than 1.5%, creating a long strong white candle, to hit a new high. And the move is confirmed by the indicators. Both MACD and stochastic are firing bullish signals within an uptrend, the stochastic qualifying as a strong signal (both %K and %D are pointing higher after %K dipped down in tandem with a test for support), and consistent with continuation. Upside targets are $103.50 in the near terms and $105 in the short to long.


The Oil Index

Oil prices are under pressure even as hopes the OPEC/Russia deal will rebalance the market. Today dollar strength helped to depress prices as traders try to balance the possibilities that OPEC will or will not be able to reduce overall supply and support the oil market. WTI closed today's session at a price of $50.85 with a loss near -0.40%.

The Oil Index managed to close with a gain today but action was not overly bullish. The index opened with a loss, gapping lower, and then moved up throughout the day to create a white bodied candle. While not a confirmation, it is a move lower following three days of action that could be a blow-off top. The indicators are bullish but also consistent with a peak and test for support so there could easily be more downside ahead. Support target is near 1,250, a break below here would have a next target near the short term moving average in the range of 1,225. All this of course dependent on oil prices, and how those prices affect earnings outlook. Longer term I am bullish on this sector based on earnings growth outlook but I expect there could be some volatility driven by oil prices/sentiment up to and until earnings growth becomes a reality.


The Gold Index

Stronger dollar, hawkish Fed, Gold is falling, that about sums it up. Spot gold fell $30 or -2.5% in today's session to break below my $1,150 support target and trade near the $1,130 level. The move looks pretty strong, in continuation of the short term down trends and supported by forward outlook, with downside targets near $1,100 in the near term and possibly lower. Now that we're below $1,150 a chance to retrace back to the long term low near $1,050 is a real possibility.

The Gold Miners ETF GDX has broken out of its multi-month trading range and consolidation. To the downside, in line with the prevailing short term trend. The ETF fell more than -4.5%, breaking below support at the 61.8% retracement level, and is heading lower. The indicators are consistent with a sell within a down trend, any rebounds or signs of strength are likely selling opportunities. Next downside target is $16.50, the 78.6% retracement level, in the near to short term with a full retracement back to the long term low near $12.50 highly likely.


In The News, Story Stocks and Earnings

Yahoo! it's execs, investors and board members were not yelling yahoo this morning. The company revealed another hack, this one affecting over a million users and under investigation by the FBI, and has thrown its takeover by Verizon into question. The news is completely unrelated to the previously disclosed hack and calls into question, once again, what is Yahoo! good for? Shares of the stock fell nearly -6% on the news to trade at 4 month low.


The Home Builder sold off despite the strong housing data. The XHB Home Builders SPDR fell more than -1.0% and created a large black candle with long upper shadow. This is the second such candle in a row and reveals a hard fought battle between bulls and bears in which the bears appear to be winning. The ETF is retreating from a long term resistance area, near $36, and this move is supported by the indicators. The indicators are bullish but in retreat and showing wicked divergence, consistent with a fall from resistance and potential for correction. Support target is near $34 and the short term moving average, a break below here would be more bearish and could lead to a move down to $33. Thinking about the housing market, we are entering the seasonally slow period so there could be some sideways movement/consolidation going into the winter and spring while we wait to see if there is any follow through on the recent round of strong housing data.


The VIX fell about -3.0% but flat over the past few days, holding steady just below the short term moving average. The index is trading near 12.50 and levels consistent with market calm if not rally. The indicators have turned bullish but look tentative, as if the market is not sure where it is going to go from here. A move above the moving average is likely bullish for the index, bearish for the SPX, with an upside target near 15 and then 17. A move lower would be consistent with rally with a target near the long term lows around 11.25. Now, tomorrow is Quadruple Witching Day and the option expiration immediately after a heavily speculated FOMC meeting so there is a chance for some volatility; intra-day action may not be indicative of the index closing price or overall market direction for the SPX, just be warned.


The Indices

The indices tried to rally but just couldn't sustain the gains. Despite late day weakness today's action is still more bullish than bearish, above near term support and consistent with a near term consolidation. Action was led by the Dow Jones Transportation Average which closed with a gain of 0.44%. The transports created a small, weak, tombstone doji which is often seen at the bottom of a down trend and confirming support. The indicators are consistent with a test of support and suggest that it may continue tomorrow, support being 9,250 or thereabouts (previous all time high). A break below this level would be bearish in the near term and could take the index down to 9,000 and the short term moving average. The near term trend remains up at this time.


The S&P 500 made the 2nd largest gain in today's session, 0.39%. The broad market created a small bodied white candle with long upper shadow, evidence of resistance to higher prices but also indicative of support at the 2,250 level. The indicators are a bit mixed but generally bullish and rolling into a possible buy signal within an uptrend. The caveat is that the indicators could remain mixed so confirmation is required. A move below support may go as low as 2,150 in the near term, a move up from support may find resistance at the current all time high, a break above that would signal a continuation of the up trend.


The tech heavy NASDAQ Composite comes in third today with a gain of 0.39%. The index created a small bodied white candle with longish upper shadow that came very close to touching the freshly set all time high. Today's action is weak and mild considering how far the index has come over the past few weeks and is consistent with the formation of a flag within a rally. The indicators are showing unconfirmed divergence, a red flag, but otherwise are bullish with stochastic firing a trend following buy signal, consistent with the continuation of an uptrend. Support is near 5,400, resistance is the all time high, a break above here would be bullish.


The Dow Jones Industrial Average brings up the rear with a gain of 0.30%. The blue chips created a small bodied white candle with visible upper shadow sitting just below the fresh all time high. The index appears to have hit a peak within an uptrend and the indicators are consistent with this. Both MACD and stochastic are showing near term weakness along with divergence from current highs that suggest consolidation or correction. Near term support is near 19,750 and yesterday's low, a break below here could take the index down to 19,500 or 19,000 with a quickness. A move higher would be consistent with the prevailing trend.


The indices rebound from yesterday's Fed induced sell-off, maintaining the integrity of near term trends. They appear to have entered a consolidation that could perhaps become the signal that near term trends will continue on into the short term. There are some risks, one of them is tomorrow's expiration day, but we're back to where economic data and outlook, and earnings outlook, are more important than the Fed and both of those are positive. The possibility of pull back remains, the charts look good but the indications are mixed, so I am cautious but remain bullish. If a pull back doesn't appear, if there is no dip to buy on, if yesterday's sell-off is all we get and the Santa Rally keeps on ho ho hoing up to new highs, I may have to pull the trigger on a second entry.

Until then, remember the trend!

Thomas Hughes


New Plays

Outlook Fading Fast

by Jim Brown

Click here to email Jim Brown
Editor's Note

Retailers continue to post ugly results thanks to the warmest September on record. While Sears blamed their loss on the weather that was just part of the problem.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

SHLD - Sears Holdings - Company Profile

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short before and excitement about the coming holiday shopping helped lift shares in early November. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is closer to bankruptcy today than they have ever been.

Last week they posted a GAAP loss of $748 million and an adjusted loss of $333 million. Gross margins fell to 19.2% compared to JC Penny at 37.2%. Sears is forced to severely discount items to attract what few shoppers they have. Same store sales at Kmart fell -4.4% and -10% at Sears. Revenue fell -12.5% to $5.0 billion.

Earnings March 9th.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand as planned will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Thursday and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in January once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

Sell short SHLD shares, currently $10.32, initial stop loss $11.75.

No options recommended because of price.




In Play Updates and Reviews

Market Toppy

by Jim Brown

Click here to email Jim Brown

Editors Note:

Yes, "toppy" is a technical term. It means the market is showing signs of distribution and could be ready to roll over. I doubt you will find that term in any book on technical indicators but I am pretty sure everyone understands what it means. The Dow has stopped its intraday gains at almost exactly the same place for the last three days. The Russell did stop at the same place the last two days. Resistance is forming and eventually investors are going to get tired of the intraday failures and start closing positions.

The Dow found resistance at 19,950 and i have written multiple times about the possibility for sellers to begin unloading positions a few points under 20,000 in order to avoid the rush. With some investors still in buy mode the sellers are trying to "distribute" stock to them at the intraday highs while the buyers are still thinking about a breakout over 20,000.

The market should remain choppy over the next week as buyers thin out and sellers increase. The market will depend on portfolio managers trying to leverage their last dollar to capture gains by the end of December. Once the calendar turns to 2017 there will be no reason not to take profits in many of the overbought stocks.





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



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BULLISH Play Updates

SMCI - Super Micro Computer - Company Profile

Comments:

No specific news. Only a minor gain with the market. Holding at resistance.

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.



UIS - Unisys Corp - Company Profile

Comments:

No specific news. Holding its recent gains.

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.



YRCW - YRC Worldwide - Company Profile

Comments:

No specific news. Minor decline.

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:
Previously Closed 12/12/16: Long Jan $15 call @ 53 cents. Exit $2.30, +$1.77 gain.




BEARISH Play Updates

FIT - FitBit - Company Profile

Comments:

No specific news. Minor gain after a month of declines. Trend still intact.

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.



IWM - Russell 2000 ETF - ETF Profile

Comments:

The Russell 2000 rebounded 10 points after losing 17 on Wednesday. The small caps are treading water until January.

Original Trade Description: December 10th

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.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.





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