Option Investor
Newsletter

Daily Newsletter, Saturday, 12/17/2016

Table of Contents

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

Market Wrap

Distribution in Progress

by Jim Brown

Click here to email Jim Brown

What we saw last week was a classic example of market distribution at a perceived top.

Weekly Statistics

Friday Statistics

Distribution is where large investors, portfolio managers and trading programs try to calmly exit the market just before a perceived top by slowly selling their positions to those who still believe the market will move higher. Rather than just put in a sell order for all of their positions, which could immediately crash the market, they liquidate their positions in bite-sized chunks a little at a time, whenever the market appears to be gaining momentum. By selling into the intraday rally, they capitalize on the buying volume to avoid depressing prices. This can go on for several days or a couple weeks depending on the market and the calendar. On Friday, they had an extra bit of help with the quadruple expiration and some rebalancing issues which increased volume significantly. If you want to hide your actions, it is best to do it in a crowded market.


Volume last week was very strong despite the lack of upward progress. This is another sign of distribution. Back before the election, the average volume was about 5.6 to 6.2 billion shares a day. The two days after the election that spiked to more than 12.1 billion shares on the 9th/10th of November before drifting back down to about 6.5 billion a day the week before Thanksgiving. Rising volume in a declining market is a bad sign and the Dow and the Nasdaq 100 were the only major indexes posting a gain for the week. Also, note the decline in the stocks making new 52-week highs.

Next week, volume on Monday should be heavy as option settlements provide some additional activity. Beginning on Tuesday volume will begin to slow drastically as the week progresses. With Christmas on Sunday, the market will be closed on Monday so this is a full week of trading.


The economic news for Friday was negative with new residential construction starts falling from a rate of 1.323 million to 1.090 million. That was an 18.7% decline. The consensus estimate was for a minor decline to 1.222 million. Single-family starts fell from 863,000 to 828,000 and multifamily starts fell -45.1% from 477,000 to 262,000.

Housing permits, a key indicator of future starts, fell from 1.260 million to 1.201 million. Single-family permits rose slightly from 774,000 to 778,000. Multifamily permits fell from 486,000 to 423,000.

On the positive side, completions rose 15.4% to 1.216 million units in November. This suggests builders accelerated their already started homes in order to complete them before the harsh winter weather arrived. With mortgage rates rising, the pace of sales and building should moderate.


The economic calendar for next week is very bland with the third revision of the Q3 GDP the only highlight. The GDP is not expected to change materially. The personal income and spending on Thursday will be of interest to the Fed but traders will not be around to see it.

Janet Yellen speaks on Monday and she is the only Fed speaker for the week.


One factor weighing on the market on Friday was a series of implied earnings warnings. Honeywell (HON) said Q4 earnings would be at the low end of their forecast range. The company guided to earnings of $1.74 per share compared to prior guidance of $1.74-$1.78. For 2017, they guided to earnings of $6.85-$7.10 and analysts were already expecting $7.08. The COO said they expect organic sales growth of 1% to 3%, margin expansion of 70-110 basis points and EPS growth of 6% to 10%. Despite the lowered guidance, everything else the company had to say was positive. Shares collapsed $3 on the news but recovered to close fractionally positive for the day.


The Honeywell news came on the heels of United Technology's lower than expected forecast on Wednesday. The company guided for adjusted earnings of $6.30-$6.60 for 2017 and analysts were already expecting $6.59. They actually admitted some of the earnings gain for 2017 was due to their buyback program reducing the number of outstanding shares. Rarely do companies actually admit that even though everyone understands the math. The company said they were confident they would see 2% to 9% sales growth in 2017 as a result of their many acquisitions. Revenue is expected to be $57.5 to $59 billion and that compares to $57-$58 billion in 2016.


On Wednesday, Caterpillar (CAT) said they were maintaining the quarterly dividend at 77 cents payable February 18th to holders on January 20th. However, they also cautioned that current earnings estimates were overly optimistic. They are in the midst of a dramatic change in their business and the business conditions. They said the energy sector had not recovered and overseas sales had not improved significantly. Earnings in 2014 were $6.38 per share, 2015 $4.64, 2016 is estimated to be $3.26 and 2017 is estimated at $3.15. Caterpillar said those estimates were overly optimistic. Shares had a bad week and closed at three-week lows.


The weak earnings guidance from three major industrial companies came after the Wall Street Journal ran an article on Thursday saying "the stock rally is more hope than substance." The article said, "When markets move a long way very fast, they become vulnerable." Momentum builds and builds and when investors finally jump off the roller coaster at the peak, the decline can be ugly. They were not saying anything we do not already know.

Merrill Lynch said fund managers rotated into industrials far too quickly and the actually results of the new president's changes will not be felt for a long time. The article warned of the sudden wakeup call when Trumps rhetoric meets congressional reality about midyear.

On the back of that headline, we had three major industrial stocks tell us that sentiment was too bullish for this point in the cycle. That is damaging to the momentum buying that has lifted the market to these levels. The impact on Friday was minimal but the irrational exuberance bell has already been rung.

JP Morgan downgraded Nordstrom (JWN) from neutral to sell following a meeting with management. JPM said the company had relatively flat sales and no "silver bullets" on the horizon to improve trends. Nordstrom management told analysts that traffic to brick and mortar stores were the worst since 1972 as more shoppers move online. JPM said "service and experience is the key foundation of the Nordstrom model, accelerating channel shift to the lower conversion online channel with no sightline to equilibrium, has structurally altered the company's multi-year top and bottom-line profile." Translation, brick and mortar retailers are being crushed by Amazon and other online sellers. Shares fell 9% on the news.


Gilead Sciences (GILD) got some bad news when a court ordered it to pay $2.54 billion to Merck in an ongoing legal battle on hepatitis C drug patents for Sovaldi and Harvoni. The court ruled that Gilead infringed on an Idenix Pharmaceutical patent covering methods used to develop the drugs in question. Merck acquired Idenix in June 2014 for $3.9 billion. Gilead will have to pay 9% royalties on future sales. That award is the largest patent dispute payout ever. A Gilead spokeswoman said the company "respectfully disagrees with the jury's verdict and damage award and intends to vigorously challenge the outcome through the appeal process." Gilead had $31 billion in cash at the end of the quarter. Shares fell -2% on the news.


Dow Chemical (DOW) announced the conversion of $4 billion of its Series A Convertible Preferred Stock into common stock. Each share of preferred will be converted into 24.1 shares of common stock. Why is this material? Dow has been paying $340 million a year in preferred dividends to Warren Buffett and Kuwait's sovereign wealth fund. Berkshire Hathaway was receiving $255 million a year and Kuwait $85 million. Those entities bought the preferred shares back during the financial crisis when Dow desperately needed the money. Shares declined because that means an additional 96.8 million outstanding shares of common stock.


Apple (AAPL) shares were flat for the last three days and the earnings from Jabil Circuit (JBL) did not help. The company posted earnings of 69 cents compared to estimates for 64 cents. However, analysts were looking for sales numbers since Apple accounts for 24% of Jabil's business. Revenue declined -2% and that was significantly better than the 12% decline analysts were expecting. Jabil said handset product volumes were softer than expected but would pick up in the latter half of 2017. That is when the iPhone 8 will begin manufacture. JBL shares rallied 12% on the better than expected revenue and that news kept Apple shares from declining in a weak market.



Chipotle Mexican Grill (CMG) reached a settlement with Bill Ackman and Pershing Square Capital. In September, Ackman announced a 9.9% stake in CMG. Now, after three months, CMG added four new directors to the board. Two of them were chosen by Ackman and two by CMG. One of Ackman's picks was Matthew Paull, former CFO for McDonalds. In exchange for the two directors, Ackman agreed to remain silent publicly for two years and refrain from increasing his stake to more than 12.9%. Ackman said the CMG board had always been blamed for being too close to management and the board needed a shakeup. Shares rallied $10 on the news.


Jefferies recommended UnitedHealth as its top pick in the managed healthcare sector ahead of the repeal of Obamacare. Jefferies said UNH had contracts with 850,000 doctors and more than 6,000 hospitals. Their broad spectrum of offerings, outstanding earnings and reduced exposure to the public exchanges made them the outstanding pick. Jefferies said even at current levels UNH is still undervalued to the market and it is the safest call amid the healthcare uncertainty. Shares broke out to a new high and helped keep the Dow from going deeper into negative territory.


Crude prices remain stuck in the $50-$52 range as we wait for the OPEC headlines to fade and the January production numbers showing a negligible decline in total production. U.S. production jumped 100,000 bpd last week to 8.796 mbpd. That is the highest level since June. Higher prices will continue to increase production in the USA.


Active rigs rose by 13 to 637 after a jump of 27 the prior week. Oil rigs increased by 12 and gas rigs by 1. This is the highest level of active rigs since January 22nd but still just one third of the 1,931 rigs that were active in September 2014.


 


 

Markets

The current post election rally is the largest one on record for 28 days after the election. The S&P was up 8.7% at Tuesday's close and the Dow was up 11.3%. In modern history, there were only five rallies of 5% or more post election. Of those, four went on to gain another 10% over the next six months.

History does not always repeat but it would be nice if it did in 2017. As one analyst put it, "starting in January there is going to be a tectonic shift in asset allocation." Stocks that have worked over the last 8 years are going to be kicked to the curb in favor of stocks expected to work over the next four years.

Other analysts believe the shift has already occurred and those favored for the next four years have already reached the top of their gains.

I am in the middle. Some stocks are grossly overbought. However, most portfolio managers are not going to completely restructure their portfolios in the six weeks before year-end. There are too many variables including peer performance, bonuses and tax planning just to name a few. Most managers will wait for January and the start of a new year for performance measurement and taxes before making wholesale changes. Did they buy some of the hot stocks over the last five weeks? Absolutely but they will buy more once the calendar turns over and they can liquidate existing positions.

I do believe we will see significantly higher highs in 2017 but probably not in January. If you remember January 2016, it would be hard to tiptoe blissfully ignorant into 2017. There was no warning and the selling started on December 30th. The Dow fell -14.7% at -2,270 points to hit a low of 15,540 on January 20th. The Nasdaq fell from 5,107 to 4,209 or -21.3%. The Russell 2000 fell from 1,160 to 943 or 23.0%. Given the gains in recent weeks, we could repeat that decline.

Dow - January 2016

However, given the stock rotation scenario, I do not expect any decline to be that violent. While we could easily decline 5% to 7%, the rotation into other stocks could prevent a complete washout.

NOBODY can accurately predict the market's future. However, there is a preponderance of evidence that suggests the first couple weeks of January could be rocky.

The Dow is clearly in distribution with solid resistance at 19,950 and big intraday declines. Thursday the Dow closed 100 points below the intraday high and Friday was an 80-point decline intraday. Short-term support has formed at 17,760 giving us about a 200-point range to watch for a breakout or a breakdown.

The four consecutive intraday failures over 19,900 have reduced the importance of Dow 20,000. I wrote over the last two weeks that sellers were probably going to begin selling just under Dow 20K in order to beat the rush and maintain that 20K target for those still investing in the rally. That has now happened for four consecutive days. That reduced a lot of the stock available to sell and should have made a touch of 20K a less reactive event.



The S&P has found some short-term support at 2,250 but it has also put in three consecutive lower highs that suggest that support will fail. The rotation from sector to sector has helped support the S&P because rising sectors are offsetting declining sectors.


The Nasdaq Composite is trapped in a narrow 50-point range between 5,430 and 5,480. The Friday close was just above that lower support and suggests further weakness ahead. A decline below prior resistance at 5,400 could see a drop to 5,200.

The big cap tech stocks cannot seem to post consecutive gains. One day they are up and then next they are declining. This is sector rotation. Some portfolio managers are taking the opportunity to lighten up on the techs when they get a good bounce to offset their selling.



The Russell 2000 Index closed with a -2 point loss but that was -15 points below the intraday high. The Russell was the largest gainer in the rally at +20.1% and that suggests it could be the biggest loser in any future decline.


I expect the market to be choppy this week but maintain a positive bias. Fund managers will be trying to keep their window dressing in place to exit the year on a high note. However, the closer we get to the end of December the more likely the selling pressure will increase.

I am looking forward to a major buying opportunity in January in hopes of establishing some long-term positions. I sincerely hope readers are ready for a potential dip. If it does not appear, the short covering and price chasing could be enormous because quite a few investors and analysts are expecting that buying opportunity.

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

 



 

ONLY 9 TRADING DAYS LEFT IN 2016
ORDER YOUR 2017 SUBSCRIPTION NOW!


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





Random Thoughts


A big chunk of investors jumped back to the bearish camp but a few became more bullish. The neutral camp is losing followers at a rapid rate. Neutral sentiment was at 42% before the election. At 23.0%, that is the lowest reading since November 13th 2014. This survey ended on Wednesday.

Last week results


The real election is Monday. The Electoral College will meet on Monday in their respective state capitals to cast the official votes for president. Twenty-nine states bind their delegates and they have to vote for whoever won the popular vote in the general election. One elector has resigned rather than vote for Trump. Three others in Colorado have sued to be released from their bindings so they can vote for Trump instead of Clinton.

There are 538 electoral votes to be cast. The 12th amendment requires 270 votes for the president to be elected with a majority. The votes will not be counted until January 6th, during a joint session of Congress and only then will the winner be announced. As president of the Senate, Joe Biden will preside over the joint session and announce the results.

Trump won 306 electoral votes in the general election. Republican officials have been in touch with all 306 and they believe only a "few" may vote for somebody other than Trump. A total of 68 electors from 17 states have asked James Clapper, the Director of National Intelligence, for a briefing on why the U.S. believes Russia was behind cyberattacks intended to influence the election. Clapper has refused saying he will not give any briefings until after President Obama's official review is completed in January.

It would require 37 "faithless electors" to withhold their votes from Trump to prevent him from being declared the winner. The election would then go to the house where the president would be chosen. Since the republicans hold a majority in the house, it is assumed they would choose Trump.

Obviously, this normally mundane Electoral College process could cause a real problem for the market and the economy if there are enough faithless electors to prevent Trump from getting the 270 votes. I do not want to even consider the potential impact to the market and to consumer sentiment. This would produce unimaginable market volatility.


Steven Gail began writing for Option Investor in March 2003. In the last 13 years, he has filled many roles and always did a great job. Steve was a finance teacher at UCLA, a singer and musician. He performed for thousands every year and was a hit everywhere he went. For the last several years, Steven has been fighting leukemia and he finally lost the battle last week. If I wrote another 1,000 words, I could not tell you what a great, funny, honest, sincere, hard working person Steven was. Reading the comments on his Facebook page show that he was equally admired by everyone he knew.

I know a lot of readers still kept in touch with Steven and he will be missed terribly.

Karaoke night. 6 months ago. Mac the Knife
Jamming with friends. December 10th. Steven being Steven



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"In almost every walk of life, people buy more at lower prices; in the stock market they seem to buy more at higher prices."

James Grant
Grants Interest Rate Observer


 


New Plays

Too Far, Too Fast

by Jim Brown

Click here to email Jim Brown
Editor's Note

I understand some of the post election bounce but there is a limit to the enthusiasm. AK Steel rallied +131% post election on expectations for some Trump changes. Seriously?



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

AKS - AK Steel - Company Profile

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

The steel sector rallied on expectations for Trump to place additional tariffs on imported steel and make American steel more competitive. While I am all for fair trade changes, that is likely to take many months if not a year or more to implement any changes what will help the U.S. steel companies. It will be months or quarters after that before the changes actually begin to show up in the earnings of these companies.

Earnings January 24th.

AKS rallied from $4.93 before the election to $11.39 for a +131% gain. Shares faded somewhat last week but still closed at $10.38 on Friday. When the post election balloon bursts, this stock could decline significantly. I would expect that to happen in the first week in January. I definitely do not expect the stock to be making higher highs.

Sell short AKS shares, currently $10.38. Initial stop loss $11.50.

Optional: Buy Jan $10 put, currently .64 cents. No initial stop loss.




In Play Updates and Reviews

Major Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 closed with a minor loss of -2 points but that was -15 points below its intraday high. That was a major reversal and shows how weak the broader market was on Friday. The minor 8-point loss on the Dow appears benign but that was -80 points below the intraday high.

Distribution, as I described it earlier in the week, is in full swing.

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



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

HOV - Hovnanian Enterprises - Company Profile

Comments:

HOV is exploding higher and I am putting a stop loss on the position to protect our gains. I moved it out of the Lottery Ticket section because it has graduated from that category. There was no specific news last week but long-term shorts are getting crushed.

Our Feb $2 call only cost 20 cents so we can afford to wait for a recovery. We are up 275% 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.

Update 12/9/16: 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."

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.



SMCI - Super Micro Computer - Company Profile

Comments:

No specific news. Minor gain despite Nasdaq decline.

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. Decent 2.5% decline with the negative tech sector. Still holding above prior resistance but the drop was enough to stop us out for a 10-cent loss.

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:

Closed 12/16/16: Long UIS shares @ $15.25, exit $15.15, -.10 loss.



YRCW - YRC Worldwide - Company Profile

Comments:

No specific news. Minor decline but after four consecutive days of minor losses it was enough to stop us out for a 80 cent gain. We saw a gain of $1.77 on the call option so this turned out to be a great play.

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

Closed 12/16/16: Long YRCW shares @ $14.05, exit $14.85, +.80 gain

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. New intraday low. The move is slower than watching grass grow but the trend is 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:

Big drop from the intraday highs to close near the lows. Next week's direction is going to be critical.

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.



SHLD - Sears Holdings - Company Profile

Comments:

No specific news. After a 14-year low on Thursday, it was not surprising to see a minor gain.

Original Trade Description: December 15th

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.

Position 12/16/16:

Short SHLD shares @ $10.17, see portfolio graphic for 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