Option Investor
Newsletter

Daily Newsletter, Monday, 12/19/2016

Table of Contents

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

Market Wrap

4 Trading Days Left To Christmas

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Only 4 trading days left until Christmas. If there is going to a Santa Claus extension to the Trump Rally it's going to happened this week. Today's action was bullish and a positive sign but not quite enough to label as "rally". Even so, the Dow remains poised to hit 20,000 and could easily do so with only the slightest bit of good news.

International indices were mostly flat in today's session. In Asia this means the indices closed mostly in the red, if with minimal losses. In Europe the opposite as German business sentiment hits its highest level in over 2 years. In both regions trading was quiet.

Market Statistics

Futures trading was a bit muted this morning. The indices were indicated to open with small gains and there was little movement in that all morning. Trading at the open was quiet as well, the indices opened with small gains, made a quick dip to test Friday's closing prices, and then moved higher, if only by a small margin. The SPX hit an intraday high before noon, about +0.50%, and that high held for the day. After that the index pulled back from the high, remaining in positive territory, and trending sideways into the end of the day. Considering events in Turkey and Germany it's a bit of a wonder that the market was able to close higher at all.

Economic Calendar

The Economy

No economic data today but there is quite a bit this week. Due to the holiday, no closures this week, many of the reports will be delivered on Thursday. On the list; Existing Home Sales, 3rd quarter GDP revisions, jobless claims, Durable Goods, Leading Indicators, Personal Income and Spending, Michigan Sentiment and New Home Sales. There is a closure next week, Monday the 26th, so keep that in mind during the week.

Moody's Survey Of Business Confidence rebound by 1.3% in the last week, rising from a 2 week low. According to the survey global business sentiment is holding steady after bottoming out earlier this year. Mr. Zandi says sentiment is firm and shows a global economy expanding at the high end of its potential. Present and future conditions have softened but hiring and investment remain steady.


There have been 5 earnings reports for the 4th quarter so far this cycle. Of those 4 beat on the earnings side, 2 on the revenue. Since the start of the 4th quarter 8 of the 11 S&P sectors have been revised lower while at the same time the 12 month forward looking EPS continues to rise, moving above $130 in the past week. The blended rate of earnings growth has risen because of this, gaining 0.2% to hit 3.2%, the first increase in expectations in 10 weeks. Based on the historical data we can expect to see this figure continue to rise into the end of the cycle, possibly as high as 8%. Touching base with the energy sector, the single leading cause for all-index earnings decline over the past year, 4th quarter growth is expected to be flat at -0.01%, the first quarter the sector has not seen high double digit declines in earnings in more than 4 quarters.


Full year 2016 earnings growth outlook remains firm at 0.1% but is also likely to rise by the end of the cycle. Positive earnings growth is also expected to continue into next year and those expectations have expanded in the past week from 11.4% to 11.5%. First quarter 2017 growth is expected to rise to 11.2%, slightly lower than last week's estimate, while the 2nd quarter was revised higher to 10.6%. Third and fourth quarter estimates remain above 12%.


The Dollar Index

The Dollar Index made gains today after a morning spent testing near term support. The index rose 0.25% and set a new closing, but not intra-day, high. The indicators are bullish and confirm the move, suggesting that higher prices are on the way. This move is supported by economic trends, FOMC expectations and continued to QE from central banks like the ECB and BOJ. Upside targets remain at $105, targets for support are $102.50 and $100.50 should the index decide to pull back. Risks at this time include surprise comments from FOMC members, weak economic data, a toning down of FOMC outlook for 2017 and/or strength in overseas economies.


The Oil Index

Oil prices closed with a gain today, after a see-saw day as traders try to make sense of supply/demand outlook, the OPEC deal and early signs that the deal is being adhered to. WTI settled up about a half percent, just over $52 a barrel. Prices may hover at or near this level in the near to short term while we wait to see what really happens with supply, and market imbalance is corrected. Until then I remain skeptical but certainly open to a change in fundamentals. Even without a further advance in prices, current prices are enough to support outlook for earnings growth in the energy sector.

The Oil Index lost a half percent in today's session but remains within a near term consolidation pattern. The index has been trending higher in the near term on OPEC hopes and rising oil prices but recently reached a peak. The indicators are mixed, bullish but consistent with a peak and possible test of support, as is oil price outlook but it may not matter. Earnings outlook for the sector is robust for 2017, up nearly 350% after being down roughly -75% in 2016, and could easily keep investors interested and this index moving higher. The near term consolidation in which the index is now moving may become a flag pattern with upside target near 1,500.


The Gold Index

Gold prices held firm near $1140 but remain near long term lows. Prices were lifted by early weakness in the dollar but those gains were capped. Longer term outlook remains bearish, the FOMC is on a path of tightening and dollar strengthening, so I am not expecting to see any major rebounds in this metal anytime soon.

The gold miners remain under pressure as well. The miners ETF GDX gained about a half percent in today's session but is just holding steady near the recent low and below the 61.8% retracement level. The indicators remains bearish and point to lower prices, downside target remains near $16.50. Firm resistance is likely to be found near $20 should the ETF, or gold prices, decide to move higher.


In The News, Story Stocks and Earnings

Disney was one of today's top gainers. It's movie, Star Wars Rogue One, performed much better than expected bringing in more than $155 million in weekend box office sales. The stock rallied nearly 2% intraday but was capped by resistance. The success of Rogue One is great and cements the future of the Star Wars franchise but there are other issues to consider, including ESPN. Resistance is the 1 year high and does not look like it will be broken at this time. However, if it is, upside target is near $110. Support target, near term, is near $102.50.


Cintas was added to the NASDAQ 100 this morning. Cintas also reports earnings this week and should show another quarter of solid organic and acquisition growth. The company is the nations largest and #1 distributor of rental uniforms, safety and safety products for employers and employees with a long history of growth. Year to year earnings growth has been in the double digits since the current recovery began and on track for the same this year. On top of that the company has been in a multi year cycle of dividend increases, delivered annually, and continued this year. The company's strength lay in organic growth, supported by labor trends, that is super charged by the acquisition of new territory and business opportunities such as last years addition of ZEE Medical. The stock has been hovering at all time highs for about 2 weeks, since the announced inclusion, and could pop on earnings.


The VIX fell more than -3.0% today and is fast approaching the recent and long term low. The index shows a decline in fear, or at least the prices of options, and looks set to hit the low in the next day or so. The indicators are bearish and firing a sell signals, suggesting lower prices are the way, indicative of rally in the underlying S&P 500.


The Indices

The indices moved higher today but not strongly and no new all time highs. Today's leader was the Dow Jones Transportation Average which gained 0.72%. The index has retreat to the previous all time high and possibly at a support level. The index has, over the past 2 weeks of trading days, begun to form a classic flag pattern that bears watching. The indicators are consistent with a peak within an up trend and test of support so this pattern may not be fully formed, support target is currently 9,150, a break below here may find support at 9,000 or 8,500.


The NASDAQ Composite made the 2nd largest gain today, 0.37%. Despite the gain the index did little more than trend directly sideways for the 5th day in a row, and close just shy of the current all time high. The index is in a near term consolidation/congestion zone that could easily become support or resistance once price begins to move away from this level. The indicators are mixed in the near term but generally bullish although there is divergence in the short term that suggest some weakness in the market. A break to the upside would be bullish, target 5,750, a break to the downside would be bearish, target 5,450 or 5,350 in the near term.


The Dow Jones Industrial Average made the 3rd largest gain, 0.21%. The blue chips created a small white bodied candle with visible upper shadow, indicative of some resistance to higher prices, but price action is nothing more than another day, the 5th, of sideways action at the current all time high. Today's action leaves the index within 125 points of 20,000 with mixed indicators. The reading is bullish but like with the other indices divergences in the short term and mixed signals in the near suggest that support may be tested at current levels with the chance for a deeper pullback or correction. The caveat is that the current movement, the Trump Rally, was strong to begin with and may continue higher in the near to short term before momentum is fully exhausted. Near term support is just below today's open, near 19,750, a break below here would be bearish in the near to short term with downside targets near 19,500 and 19,250.


The S&P 500 made the smallest gain in today's session, only 0.20%. The broad market created a small white bodied candle, the 5th consecutive at this level, and looks like it is forming a flag continuation pattern. The caveat is that indicators, like with the other indices, are consistent with consolidation/pull back which leaves the door open for a deeper pull back to support than what we have currently seen is possible. If the index does continue the rally upside targets are 2,300, 2,350 and 2,500.


Today's action was simply another day of consolidation at the current all time highs while the market decides what it wants to do. The price patterns are highly suggestive of continuation, the indicators are beginning to come in line with that assessment, all we need now is the break out to confirm. This week could easily see it happen, there is little in the way of major market moving economic events or data on the calendar and earnings reporting will be light. I'm bullish in the near term, bullish in the long term, still cautious in the short term but ready to add another little speculative position in preparation for what could be nice little Santa Rally into the end of the year.

Until then, remember the trend!

Thomas Hughes


 

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New Plays

Passive, Aggressive

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some traders are aggressive and some are passive. There is a time for both styles. Making money in the market means making smart decisions. Sometimes that means staying out of the market. In the current environment the market "should" maintain a positive bias through Friday. The first three days of next week are a tossup but the last two days have a very good chance of posting losses. Once we enter January the odds of a significant decline increase sharply.

This is not a trading newsletter. There is nothing I can recommend today that we buy for a potential 3-4 day gain and then exit. The odds of a gain the rest of the week are only slightly better than 50:50. We should not trade unless there is a better chance of a longer term move. Option premiums decrease every day that the underlying stock does not rise. We do not want to buy a depreciating asset when the market is heading into a potential decline 7-10 days from now. Be patient. There is a buying opportunity ahead.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Prepare for Boring

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 posted a decent gain but resistance at 1,275 remained firm. All the indexes closed off their highs but it was a lackluster day of trading. This will be the highest volume day of the week because of option expiration settlements. Tuesday could see some activity but the rest of the week will slow to a trickle.

The market should remain choppy over this 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


AKS - AK Steel
Short position was entered at the open.



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BULLISH Play Updates

HOV - Hovnanian Enterprises - Company Profile

Comments:

No specific news. New 52-week high.

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. See portfolio graphic for 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. Nice 2.5% gain!

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.




BEARISH Play Updates

AKS - AK Steel - Company Profile

Comments:

No specific news on AKS. Steel Dynamics (STLD) guided for Q4 earnings between 36-40 cents and analysts were expecting 44 cents. This caused the steel stocks to gap lower at the open and our fill was lower than expected.

Original Trade Description: December 17th.

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.

Position 12/19/16:

Short AKS shares @ $10.17. See portfolio graphic for stop loss.

Optional:

Long Jan $10 put @ .69 cents. No initial stop loss.



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:

Minor gain to start the week but still below resistance.

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:

Sears is desperate. They are offering a 20% discount on Sears.com this week if you pick up the merchandise at a store. The offer applies to apparel, jewelry, luggage, furniture, bed & bath, home decor and air mattresses.

Starting 12/21 coats are 60% off, up to 60% off women's boots, up to 75% off jewelry.

Starting 12/23 sleepwear is 60% off, watches 30%, Craftsman's tool sets 50% off.

New 14-year closing low.

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.





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