Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/20/2016

Table of Contents

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

Market Wrap

Unlucky 13

by Jim Brown

Click here to email Jim Brown

The Dow traded to within 13 points of 20,000 but could not reach that target.

Market Statistics

There was a decent amount of short covering at the open with Goldman Sachs spiking $4 to add about 30 points to the Dow. The Dow ETFs saw a huge spike in volume on what appeared to be traders trying to juice the Dow to that 20K level as shorts were forced to cover. The Dow 3X ETF saw a huge spike in volume right at the open and that caused the index to spike but the rally stalled by 10:AM. Another surge at the close was able to lift the Dow into the close but both efforts fell short.


Goldman Sachs rebounded +$4 after two days of declines as shorts were forced to cover. Goldman is now up 38% since the election or 67 points and has been responsible for more than 400 Dow points. The Dow is up 2,086 points since the election, which means Goldman has been responsible for 21% of the Dow's gains.


The Dow 20K topic was the only thing traders were focused on this morning. The only economic report was the State Personal Income for Q3. Incomes rose 1.1% nationwide compared to +1.2% in Q2 and +0.3% in Q1. The report was ignored.

The economic calendar for the rest of the week will also be ignored. Volume is declining sharply and it will continue to decline for the rest of the week as traders shutdown their PCs and head for the malls and holiday parties.


Darden Restaurants (DRI) reported earnings of 64 cents that beat estimates by a penny. Revenue of $1.64 billion missed estimates for $1.65 billion. They guided for the full year 2017 to earnings of $3.87-$3.97 per share. Same store sales growth was choppy. Olive Garden saw +2.6%, Longhorn Steakhouse +0.1%, Capital Grille +1.2%, Eddie V's +2.7%, Yard House +0.7%, Seasons 52 -0.3% and Bahama Breeze +2.6%. Shares spiked $2 on the news but faded in the afternoon to close negative. Darden had rallied 23% since the election. Given the choppy results, this looks like a potential short for January.


BlackBerry (BBRY) reported adjusted earnings of 2 cents, compared to expectations for a loss of a penny. However, revenue of $289 million missed estimates for $330 million. They guided slightly higher saying they now expect to post an adjusted profit for 2017 compared to prior expectations to breakeven to a 5 cent loss. CEO John Chen said, "We achieved significant milestones in Q3, delivering the highest gross margin in the company's history for the second consecutive quarter and continuing to transform our infrastructure and operations to support an enterprise software business." The company posted a record gross margin of 70% and 80% of gross revenue was recurring. Chen is transitioning the company from a hardware business to a software business. Shares spiked sharply on the earnings but faded to a loss by the close.


CarMax (KMX) reported earnings of 72 cents that beat estimates of 71 cents. Revenue of $3.7 billion rose 4.4% but missed estimates for $3.79 billion. Used vehicle revenues rose 6.2% with unit sales rising 9.1% to 156,789 vehicles. Same store sales rose 5.4%. During the quarter, the company opened six stores. In fiscal 2017, they plan on opening 15 stores and 13-18 in 2018. They repurchased 3.8 million shares and have $1.69 billion remaining under the current authorization. They had cash of $23.7 million at the end of the quarter.


Navistar (NAV) dropped more than $3 after reporting a loss of 42 cents on revenue of $2.06 billion compared to $2.59 billion in the year ago quarter. Analysts were expecting a loss of 24 cents and revenue of $2.18 billion. The company said weak demand for heavy-duty trucks hurt earnings and the industry conditions in the first half of 2017 would be challenging. Orders for Class 8 long haul 18-wheelers fell -46.5% in October. Shares fell -$3 at the open but the stock rebounded to close positive.


After the bell Dow component Nike (NKE) reported earnings of 50 cents compared to estimates for 43 cents. Revenue of $8.2 billion beat estimates for $8.09 billion. Revenues for the Nike brand were up 8% on a constant currency basis. The Converse brand saw revenues rise 5%. Nike repurchased 17 million shares during the quarter for roughly $900 million. That is part of a four-year $12 billion authorization. Only $3.1 billion has been spent. Cash on hand at the end of the quarter was $5.9 billion. Nike shares rallied $1.50 in afterhours. That would equate to about 10 Dow points.

Nike's sales growth in the U.S. continue to decline as Under Armour and Adidas gain market share. U.S. sales rose only 3% while sales in China rose 17% with strong sales in Western Europe as well.


FedEx (FDX) reported earnings of $2.80 compared to estimates for $2.90. Revenue of $14.93 billion rose 19% but barely beat estimates of $14.91 billion. The company lowered its outlook for 2017 from $11.85-$12.35 to $10.95-$11.45. Analysts were expecting $12.15. FedEx said shipping volumes were 10% higher than Q4-2015. The missed earnings were due to increased costs in building out extra capacity to handle the volume surges. The expansions will add capacity and make sure they can process the expected Q4 volume in 2017. The CEO said the Polar Vortex that hit the U.S. with snow, ice and very cold temperatures over the last week was hampering holiday deliveries. Shares fell $7 in afterhours.


Guggenheim and Nomura both initiated coverage of Square (SQ) with a buy rating. Nomura has a price target of $18, Guggenheim $16 and Needham initiated last week with a $17 target. Despite the upgrades, the stock only gained 12 cents. That is hardly a vote of confidence by investors.


Drexel Hamilton initiated coverage on SalesForce.com (CRM) with a buy rating and $100 price target. The analyst said the company was only a teenager compared to Microsoft and Oracle but they are already leading in the sector. The analyst called CRM the "Zen master of the Cloud." Shares rallied only 50 cents on the coverage.


Fred's Pharmacy (FRED) agreed to buy 865 stores from Rite Aid (RAD) in an all cash transaction for $950 million. The sale is needed to complete the Walgreens (WBA) acquisition of Rite Aid. The divestiture would make Fred's one of the largest pharmacy's in the USA. Walgreens has 13,200 stores in 11 countries and Rite Aid has 4,600 stores in 31 states. Fred's currently has 641 stores.



Nvidia (NVDA) is leading a charmed life. Goldman Sachs added the stock to its conviction buy list with a target of $129. Goldman said the positive secular trends in gaming, virtual reality (VR), artificial intelligence (AI), machine learning (ML) and automotive were all benefits to Nvidia. The bank sees Nvidia's datacenter business doubling in fiscal 2018 and rising another 53% in 2019. Nvidia is currently in the middle of its fiscal 2017 so that forecast starts next year.

I am continually kicking myself for letting us get stopped out on that last dip through $90 in Option Investor.


The current crude futures contract expired at the close at $52.23. The new front month contract became current at $53.58 and a 17-month high. I expect this to bleed off over the next two days because there was no headline to support the higher price.


Markets

Dow 20,000 will be hit. It is a big fat target and hitting it before the holiday weekend will have Dow 20,000 headlines in all the papers and social news. For fund managers this would be the perfect scenario as it would bring in a lot more money from retail investors who do not normally focus on the market but would see the headlines.

I wrote about the distribution in progress last week. Today was no different. The market gapped open above resistance at 19,950-19,965 and the sellers were waiting. The initial spike was immediately sold and every recovery intraday was also sold. This is classic distribution. The surge at the close was more than likely short covering or another attempt to spike the index to 20,000 that failed.


The Dow closed at a new high and left the index close enough to 20,000 that any decent spurt of buying at Wednesday's open could hit that target but it is not likely to last. There will be too little overall volume the rest of the week to push the index significantly higher.

However, if we get a headline or a big buy program that gaps significantly through that 20K level we could get another big surge of short covering that pushes the market higher. There are a lot of traders expecting a decline in January and quite a few of them are short various stocks and indexes in expectation of that decline. If the market suddenly powers through 20K the short squeeze could be strong.



The S&P hit solid resistance at 2,270 at the open and failed to move above that level the rest of the day. The S&P continues to benefit from the sector rotation where today's strong stocks offset weakness in yesterday's strong stocks. The key level to watch is 2,250.


The Nasdaq Composite closed at resistance at 5,485 for a new high close but not quite a new intraday high. That is currently 5,486.75. The Nasdaq benefitted from a rally in financials, semiconductors and biotechs. The Nvidia upgrade helped as did another upgrade to Western Digital (WDC). The Nasdaq is poised to breakout with next resistance well above at 5,550. The key is getting past the potential January meltdown.



The Russell 2000 had a nice gain of 12 points to put it within reach of the prior closing high at 1,388. The small caps also benefitted from the surge in financials. We need to watch for a possible double top at 1,388 as that would be the logical level for a failure.


Over the last 20 years, the Dow has posted gains in 16 years for the week before Christmas. The average gain was 1.6%. None of those years had an 11% gain in five weeks prior. There are two potential outcomes. There is a chance that a touch of 20K results in a temporary decline that could last the rest of the year but could be minimal because window dressing will keep it supported. Once into January those windows will be undressed. The second option is a surge through 20K that triggers enormous short covering and price chasing by those that think the market is running away from them.

The seven days of distribution at the 19,950 level has weakened the potential for an electric shock type of rejection after a touch of 20K. Much of the stock that would have been for sale has already been sold. Volume has already collapsed. The last two days have averaged only 6.1 billion shares and the rest of the week will be even lower. While low volume can increase volatility, it can also produce boredom. Since the close tonight, the S&P futures have been flat at +0.25. There is almost no movement other than a .25 point twitch up or down every 30 min. Traders are already shutting down for the holidays. This is why I do not expect a big move over the next three days. Anything is always possible because the program traders can move the market if they want to make a splash. I would continue to recommend keeping a low profile, mostly in cash until January. Take your kids shopping instead!


 

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Jim Brown

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New Plays

Final Countdown

by Jim Brown

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Editor's Note

Time is ticking off the end of year clock and volume is dwindling to nothing. 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. 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

Last Gasp?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big short squeeze at the open came close to Dow 20K but was unable to make it happen. The Dow spiked up on another big gain in Goldman Sachs that was equivalent to more than 30 Dow points. A surge in buying of the Dow ETFs also helped fuel the opening short squeeze but in the end, the resistance at 19,950-19,975 was able to hold the index below 20K all day.

This may have been the last gasp on an attempt to power through 20K. Volume will decrease significantly the rest of the week but that may also allow program traders to orchestrate one more surge so they can check Dow 20K off their do list for 2016.

I tightened up the stop losses again so when the market does roll over we will exit near the top.

The market should remain choppy 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


No Changes



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BULLISH Play Updates

HOV - Hovnanian Enterprises - Company Profile

Comments:

No specific news. New 52-week intraday 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. No material move.

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. Nucor (NUE) bought Republic Conduit for $335 million. Shares of AKS spiked 6% on short covering. The stock is now up +136% since the election.

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 closing low. This 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:

Decent gain but all on short covering in the first 30 minutes of trading.

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. Opening bounce on short covering was immediately sold.

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.

Update 12/19/16: 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.

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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