Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/25/2017

Table of Contents

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

Market Wrap

Dow 20K Party Hats Are Out!

by Keene Little

Click here to email Keene Little
It seemed to take forever to climb those last 100 points to 20K for the Dow but it finally did it today. Helped with an overnight rally (the best way this market knows how to deal with resistance), the bulls added buying pressure to the short covering and kept the Dow above 20K. Do I hear 30K?

Today's Market Stats

Today's accomplishment by the Dow, in reaching 20K, is seen as a big deal by many, even though it's just a number. But considering the Dow has rallied more than 2000 points since Donald Trump was elected it's hard not to be impressed, even if you have some doubts as to the sustainability of the rally. Following the month-long consolidation from mid-December we appear to be into the next rally leg and the bulls have some room to run.

While there remains further upside potential, especially if sidelined buyers decide to jump back in, we have some warning signs flashing, such as VIX at only 10.81 (when the VIX is low it's time to go). Bullish sentiment has actually backed off a bit and oftentimes that coincides with a top as the rally finds it difficult to find more buyers. Short covering probably powered much of today's rally, especially considering it started with a big gap up after the futures rallied last night to help get the indexes up and over some strong resistance levels. The market has been giddy before and there's lots of upside potential if that giddiness turns into real buying but it can also get bulls into trouble if they stop looking for signs of trouble. Breathing at high altitude can make your thinking very foggy and confused.

The Donald weighed in this morning about the Dow's achievement with a tweet saying "Great!" But this is from someone who called the stock market a bubble when the Dow was at 18K so I wonder how he feels about the stock market today. He of course can't come out and say "Wow, 20K! This is a bubble looking for a pin!" He has a lot to live up to after all the talk about how bullish his administration will be for the stock market. Based on time cycles and price patterns I see at least a little more upside potential but I also believe the hope-filled rally over the past three months is in fact a bubble looking for a pin.

The financial markets tend to swing in a cyclical pattern, matching the mood swings in investors. These can be long-term cycles (54-year Kondratieff) and down to intraday cycles. Finding those cycles can sometimes be a challenge but since the 2009 low we've had a 23-week cycle that has done a good job finding the highs in the market (for at least a decent pullback) and a few lows. These are never precise but it does provide a reason to look for the price pattern to support a possible turn date that's coming due.

The last turn week by this 23-week cycle was the week of September 11, 2016 whereas the actual high was about 3 weeks prior to that. The next turn week is the week of February 19 but if we see a high about 3 weeks prior to that week it would put us into next week. Based on this weekly turn cycle I think we should be looking for a possible high between sometime next week and right after February's opex week.

One thing to take note of on the weekly chart below is the ROC (Rate of Change), another momentum indicator. Note how dangerous it is for bulls when it reaches 10, as it now has. Buyers should be very careful from here when thinking about adding to long positions. I thinking sitting tight and pulling stops up closer is probably a smarter thing to do, especially since SPX is also close to the top of a rising wedge for the rally from February 2016.

SPX 23-week cycle

Another cycle to consider is the 50-day, which is shown on the daily chart below. I created a gap at the double bottom in January-February 2016 since the 50-day cycle seems to be working better off the February low rather than the January low. Before February 2016 the cycle starts at the March 2009 low, like the weekly cycle above. The next turn date is February 8, two weeks from today.

The 50-day cycle and the 23-week cycle coincide closely and are a reason to consider a top will be made in this period. But we need to keep in mind that the cycles are not precise and +/- a week or two needs to be considered. What we need to do is tie in the price pattern to see if and when we'll have both coming together for a possible reversal. The message from the turn cycles is to be watchful but still early for a turn.

One interesting thing to note from the chart below is where the green vertical line at February 8th crosses the top of a rising wedge pattern for the rally from February 2016, which is near 2320. As I'll show on the weekly and daily charts of SPX further below, there's another reason to consider 2320 as a good upside target.

SPX 50-day cycle


S&P 500, SPX, Weekly chart

The price pattern is not as clear as I'd like, which makes price projections more difficult but at the moment I one wave count idea that shows a projection to almost 2321. This is where an extended 1st wave for the rally from February 2016 is followed by the 3rd through 5th waves equal to 62% of the 1st wave. That projection crosses the trend line along the highs from April-July-August 2016 on February 1st, which makes a little earlier than the weekly and daily turn dates discussed above but well within the window.

The big question, assuming it will turn back down from near 2321, is whether it will lead to just a pullback before heading higher or something more bearish. We'll have to see what kind of pattern we get in the pullback/decline to help determine what it will mean in the bigger picture. SPX would be more bullish above 2321, in which case the bears would probably have to go back into hibernation.


S&P 500, SPX, Daily chart

In addition to the trend line along the highs from April-July-August 2016, which was almost tested with the December 13th high, there's another trend line along the highs from August-December 2016 (gray line) that's slightly lower. Currently near 2307, that trend line and the one slightly higher provide a resistance zone to watch carefully if reached. Today's rally took SPX up to a broken uptrend line from November-December 2016 (gray line) and one thing to watch for is a back-test followed by a bearish kiss goodbye.

A failure to hold above 2280 on a pullback, especially if that pullback is a sharp reversal back down (impulsive), would be reason to doubt further upside but it takes a drop below Monday's low at 2257 to tell us a high is in place. Keep looking higher, even if only to 2321, but hold the exit door open just in case you need to be the first one out.

Key Levels for SPX:
- bullish above 2282
- bearish below 2257


Dow Industrials, INDU, Daily chart

Today's rally had the Dow breaking out of its sideways expanding triangle, the top of which is now near 20,015. That should act as support on a pullback so we'll see if this is just a 1-day wonder rally or something more bullish. As I'll point out on the 60-min chart further below, there is a short-term projection at roughly 20,180-20,200 for an upside target for the leg up from January 19th. Keep a close eye on that level if reached in the next few days (we're due a pullback and then another leg up to get there).

Higher upside potential is to about 20,350 where the Dow would run into a trend line along the highs from April-December 2016 by the beginning of February and not shown is a trend line along the highs from August-December 2016, which will be near 20,500 by the first week of February. So there's clearly more upside potential if the Dow can get through 20,200 and only if it drops below Monday's low at 19732 would the bulls be in trouble.

Key Levels for DOW:
- bullish above 20,010
- bearish below 19,650


Dow Industrials, INDU, 60-min chart

The January 19th low fits well as the completion of the choppy consolidation off the December 13th high. Today's rally looks like it completed the 3rd wave of the rally from January 19th and ideally we'll see a choppy consolidation/pullback on Thursday before heading higher into what could be the final high early next week (end-of-month run up). Depending on where the 5th wave of the rally from January 19th starts will determine the upside projection but for now I'm showing a pullback to the top of the expanding triangle pattern, near 20,013, and then the 5th wave would equal the 1st wave at 20,183.


Nasdaq-100, NDX, Daily chart

Since the November 4th low for NDX its rally is occurring with steepening uptrend lines, which defines a parabolic rally. There's a good chance this will not end well but until the completion of the rally it's obvious bears don't want to step in front of this train. There's a trend line along the highs from April-September 2016 that's currently near 5165, only 12 points above today's high. I show a down-up sequence to finish its rally to the trend line along the highs, which will be near 5180 on February 1st. At the moment it's just speculation but for there are three points from this chart to consider -- trendline resistance is close, it's overbought and a breakdown from a parabolic rally could happen quickly.

Key Levels for NDX:
- bullish above 5100
- bearish below 5035


Russell-2000, RUT, Daily chart

The RUT is the last one to break out of its consolidation pattern off its December 9th high. The top of the down-channel from that high is currently near 1385, less than 2 points from this afternoon's high. The bulls need another gap up to get the RUT free and clear of resistance otherwise we could see a pullback before heading higher. Since December I've been looking for the RUT to make it up to its trend line along the highs from 2007-2015, currently near 1407. It would be even more bullish above that trend line but watch it carefully, if reached, to see how it reacts.

Key Levels for RUT:
- bullish above 1385
- bearish below 38


Volatility index, VIX, Weekly chart

It's time to watch the VIX closely. As mentioned in the beginning of tonight's report, it close at 10.81 today, which is the lowest closing price since July 3, 2014. It's getting close to the lows seen in 2005-2007-2014 and while it doesn't provide us a timing signal it does provide a warning sign.

There are a couple of things to watch on the chart. First is a large descending wedge since 2015, the bottom of which is just below 10. There's a 5-wave count for the move down inside this wedge, which means it's in the final move of the wedge. Second, a shorter-term descending wedge is from November and the bottom of it is currently near 10 and next week will intersect the bottom of the larger wedge near 9.90.

If the VIX drops below 10 next week I think it would be a MOAP setup (Mother of All Puts), especially if the indexes shown above are hitting their upside targets/resistance levels at the same time. Put options will be the cheapest you'll see for years. The third thing to note is the bullish divergence since April 2016, indicating waning momentum at the new VIX lows and this supports the idea that we're getting ready for a big turn.


10-year Yield, TNX, Weekly chart

With the renewed buying in the stock market it has created selling pressure in the bond market, which in turn has driven yields back up. By mid-January TNX had pulled back to its broken downtrend line from 2007-2013, as can be seen on its weekly chart below, and the bounce back up leaves a bullish kiss goodbye. This should be good for at least a minor new high and potentially up to the projection at 2.687 where the 2nd leg of the bounce correction off the January 2015 low would achieve 162% of the 1st leg. Some bond gurus say the 10-year above 2.6% would signify the end of the bond's bull market. I'd suggest a better number would be above 2.69%

The bearish interpretation for bond yields assumes the bounce is just a correction and not something more bullish. The sharp rally off the July 2016 low supports the idea that it's the c-wave of an a-b-c bounce off the January 2015 low and not the start of something more bullish. That interpretation means once this rally completes we'll then see a resumption of the decline in yields (rally in bonds) to a low below the July 2016 low at 1.336. I have long believed that deflationary pressures will drive the 10-year below 1% and until I see evidence to the contrary I'll continue to believe it.


KBW Bank index, BKX, Daily chart

Like the RUT, the banking index has not yet broken above the top of its consolidation range that it's been in since December 8th, which is near 94. Assuming it will join the race to the upside there is upside potential to a price projection at 99.47. The projection crosses the top of a parallel up-channel for the rally from February 2016 on February 6th, which is very close to the 50-day turn date discussed for SPX (on February 8th). BKX stays bearish above its January 18th low at 89.17 but questionable below that level.


U.S. Dollar contract, DX, Daily chart

With both Janet Yellen and Donald Trump beating up on the US$ (something they both happen to agree on), it's not a surprise to see the dollar losing some of its luster after peaking on January 3rd. It has now dropped below the bottom of an up-channel for the portion of its rally from August 2016 and a broken trend line along the highs from July-October 2016. It has also dropped back below the broken downtrend line from March-December 2015.

These trend lines all coincided near 100.30 and provided a little support for a bounce off the January 17th low at 100.23. But this week's decline now has it below the multiple trend lines and even though the dollar is oversold it's not showing much in the way of bullish divergence, suggesting we could see lower prices before setting up a bigger bounce. Maybe we'll see a bounce off the December 8th low at 99.49 to create a H&S top (left shoulder in November 2016, right shoulder to be created with the next bounce to a lower high).


Gold continuous contract, GC, Daily chart

Gold should have bounced about as far as it's going to go if the larger bearish pattern is going to remain the preferred wave count. If gold gets above its October 7 2016 low near 1243 it would negate the impulsive wave count for the decline from July. It could be in what will become a larger corrective move down (commodities are typically more corrective than impulsive) and that would simply make it more difficult to figure out its next move. But for now, assuming it's going to roll back over, the downside target is near 1386, which is where the 5th wave of the move down from July 2016 would equal the 1st wave. That projection crosses the midline of a down-channel on February 23rd. Perhaps a blow-off rally in the stock market would coincide with a strong drop in gold in the next month.


Oil continuous contract, CL, Daily chart

Oil is stubbornly holding onto the 51-54 area but it's looking vulnerable to another leg down, one which should drop it to at least the $49 area (two equal legs down from January 3rd. I think oil remains in a longer-term decline but it could be a slow choppy move. If oil bulls do manage to drive it back up, keep an eye on the top of its up-channel, which will be near 56.30 in early February.


Economic reports

A big jump in the MBA Mortgage Applications index this week helped spike the home builders today. We'll see if that good news is followed by an unexpected climb in new home sales in tomorrow's report. On Friday we'll get some GDP numbers, Durable Goods orders and Michigan Sentiment.


Conclusion

For what seems like forever, the market traded sideways since mid-December and that's what had me believing we'd see higher prices. That and the fact that too many pundits had turned bearish the market, saying the Trump rally was due a big correction. The market rarely accommodates the majority and today's relatively strong rally could have been more short covering than real buying but at least it broke most of the indexes out of their consolidation patterns.

The RUT and BKX have yet to break out and for a sustained rally we'll need to see them join the party. For the others, such as the blue chips, we'll want to see nothing more than a pullback to support (at the top of the consolidation ranges) and then a continuation higher. The bears obviously want to see a failure of support on a pullback and leave a failed breakout attempt. That's certainly a possibility but at this moment I think it's a lower probability. I think this rally has a little more room to run.

I need to emphasize "a little more room to run" because I don't think there's a lot of upside potential. This is likely to be the last leg of the rally from November and then the "Trump correction" will begin. Keep in mind that the rally has dropped the VIX down into dangerous territory and while I think it can drop lower, such as from today's 10.8 down to maybe 9.8, it's now lower than it's been since July 2014. It wasn't long after that when SPX bobbled a bit, made a minor new high in September and then dropped about 200 points (-10%) into October. The market doesn't repeat exactly but at the very least we have a warning sign.

The rally looks good for at least a little higher (SPX 2321 target) but when I consider the upside potential (+20 points) and the downside risk (-200 points) I know that I should be getting defensive and ready for a reversal, even if that reversal could be weeks away (or maybe next week after we close out a positive January). Trade carefully and pull up your stops on long positions. Bears need to continue exercising patience. I know you're hungry but sometimes that makes you stronger (wink).

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT


New Plays

Build the Wall

by Jim Brown

Click here to email Jim Brown
Editor's Note

The president appears to be on track to begin building his border wall. The one company that stands to benefit the most is Mexican. This is Cemex, a major supplier of concrete in the border states.



NEW BULLISH Plays

CX - Cemex - Company Profile

CEMEX, S.A.B. de C.V. produces, markets, distributes, and sells cement, ready-mix concrete, aggregates, and other construction materials in Mexico and internationally. The company also offers various complementary construction products, including asphalt products; concrete blocks and roof tiles; architectural products; concrete pipes for storm and sanitary sewers applications; and other precast products comprising rail products, concrete floors, box culverts, bridges, drainage basins, barriers, and parking curbs. In addition, it provides building solutions for housing projects, pavement projects, and green building consultancy services; and information technology solutions and services. The company has operations in Mexico, the United States, Northern Europe, the Mediterranean, South America, the Caribbean, and Asia. Company description from FinViz.com.

Bernstein Research researched all the contractors that could supply materials for a border wall. In the Bernstein map below Cemex is represented by the red blocks. Building 1,000 miles of wall, which is what Trump has promised will take a lot of concrete.


Cemex is one of the world's largest suppliers of cement and readymix concrete. Analysts believe the wall will cost between $15 to $25 billion to build and concrete would be a major expense. Based on various comments about what Trump is asking for, analysts expect 7 feet deep and up to 40 ft high for 1,000 miles. That will take 7.1 million cubic meters of concrete worth $700 million. However, engineers believe it would be easier and cheaper to build precast panels like the wall in Israel and other places. That would allow the panels to be constructed close to Cemex locations and not have 1,000 concrete trucks rotating up and down the wall every day. The picture below is the Israeli wall made with concrete panels and it stretches 420 miles.


Regardless of how the wall is constructed, it will take a lot of concrete and Cemex is going to be a supplier. Cemex has a large presence in the U.S. so it is immune from the US First rule.

Earnings Feb 9th.

CX shares have already spiked in January once it became apparent the wall was actually going to happen. The stock broke out to a new high on Wednesday and probably has a long way to go.

Buy CX shares, currently $9.49, no initial stop loss.

Optional: Buy July $11 call, currently 52 cents. No initial stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Moonshot!

by Jim Brown

Click here to email Jim Brown

Editors Note:

After two days of a short squeeze, it appears the market has picked a direction. The Dow, Nasdaq and S&P all closed at new highs but the Russell is still lagging. The Russell gapped open to 1,382.90 and closed at 1,381.78. There was no follow on buying in the small caps. It was purely a short squeeze and the Dow was the same pattern. However, the S&P closed at the high of the day just short of 2,300 and it looks like there will be more to come.

Market sentiment has changed significantly this week driven by expectations President Trump iss actually going to do what he promised with deregulation and a tax cut. This is bringing retail investors off the sidelines and the new highs will attract even more.





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

BOX - Box Inc - Company Profile

Comments:

No specific news. Nice gain to extend the breakout over resistance at $17.

Original Trade Description: January 21st.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

Box is rapidly growing its customer for document management for companies with a global workforce. They are competing with other companies for cloud collaboration and access. More than 69,000 companies worldwide now use Box. They have broken into the media sector and now many production companies use Box for storing and distributing their production content. This has given Box a new niche in the market. Box has partnered with Salesforce.com, IBM and Microsoft in the cloud space. Their goal is to partner and grow with them rather than compete with those giants.

The company reported a smaller than expected loss for Q3 and expect to post an even narrower loss for Q4. Their guidance for Q4 is a loss of 13 cents on revenue of $109 million. That is better than the 26 cents loss in Q4-2015.

Earnings March 1st.

Shares broke out to a new 52-week high on January 12th before pulling back slightly with the market. They closed 5 cents below a new 52-week high on Friday.

Position 1/23/17 with a BOX trade at $17.10

Long BOX shares @ $17.10, see portfolio graphic for stop loss.




BEARISH Play Updates

ENDP - Endo International - Company Profile

Comments:

No specific news. Only a minor 4 cent gain in a very bullish market.

Original Trade Description: January 14th

Endo International plc develops, manufactures, and distributes pharmaceutical products and devices worldwide. Its U.S. Branded Pharmaceuticals segment offers chronic pain management products, such as BELBUCA, OPANA ER, and Percocet; Lidoderm for opioid analgesics; and Voltaren gel for osteoarthritis pain, as well as XIAFLEX for treating Peyronie's and Dupuytren's contracture diseases. This segment also provides Supprelin LA for central precocious puberty treatment; testosterone replacement therapies, such as Aveed and TESTOPEL, as well as Fortesta and Testim gels; Frova and Sumavel DosePro for migraine headaches; Valstar, a sterile solution for intravesical instillation of valrubicin; and Vantas for the palliative treatment of prostate cancer. The company's U.S. Generic Pharmaceuticals segment provides tablets, capsules, powders, injectables, liquids, nasal sprays, ophthalmics, and transdermal patches for pain management, urology, central nervous system disorders, immunosuppression, oncology, women's health, and cardiovascular disease markets. Its International Pharmaceuticals segment offers specialty pharmaceutical products in various therapeutic areas, including attention deficit hyperactivity disorder, pain, women's health, and oncology; generic, branded generic, and over-the-counter products in the areas of dermatology and anti-infectives; injectables for the treatment of pain, anti-infectives, cardiovascular, and other therapeutics areas; and healthcare services, products, and solutions to hospitals, pharmacies, and practitioners, as well as for government healthcare programs. The company also provides Monarc subfascial hammock to treat female stress urinary incontinence; and Elevate transvaginal pelvic floor repair system for the treatment of pelvic organ prolapse. It sells its branded pharmaceuticals and generics directly, as well as through wholesale drug distributors. Company description from FinViz.com.

Endo is a small $3 billion market cap company but they have been around since 1920. They are headquartered in Dublin Ireland and could easily be impacted by an import tax. They do have some common products and they do have earnings.

Endo has been benefitting from raising drug prices and a study underway to determine how much companies have raised prices over the last ten years is bound to highlight Endo as a serial hiker. The company already warned that the pricing environment was going to remain challenging in 2017 with 30% year over year declines in generics. If the new replacement for Obamacare does require bidding for generic drugs as Trump has mentioned, Endo could be under a lot of pressure. Add in the import taxes and it could be ugly. Investors are anticipating these events and the stock is falling.

On Thursday somebody bought 4,000 February $12.50 put for 70 cents. That is a $280,000 bet they are going lower. If Trump repeats his desire for lower drug prices in the inauguration speech, the drugs companies are going to collapse again.

Earnings February 7th.

Position 1/17/17:

Short ENDP shares @ $13.22, see portfolio graphic for stop loss.

No options recommended because of price and spreads.



FRED - Freds Inc - Company Profile

Comments:

No specific news. Even a bullish market could not prevent FRED from losing ground.

Original Trade Description: January 23rd.

Fred's, Inc., together with its subsidiaries, sells general merchandise through its retail discount stores and full service pharmacies. The company, through its stores, offers household cleaning supplies, health and beauty aids, disposable diapers, pet foods, paper products, various food and beverage products, and pharmaceuticals to low, middle, and fixed income families in small- to medium- sized towns. It also sells general merchandise to franchised Fred's stores. As of January 30, 2016, the company operated 641 company-owned stores, which included 60 express stores in 15 states and 18 franchised stores under the Fred's name, as well as 372 pharmacies and 3 specialty pharmacy facilities primarily in the southeastern United States. It also operates 18 franchised stores under the Fred's name. Company description from FinViz.com.

Freds has been in retail trouble for over a year. Their same store sales continue to decline since every grocery store, Walmart and Target in America has added a pharmacy. Shares had been in decline until Walgreens/Rite Aid agreed to sell Fred's 865 Rite Aid stores in an effort to get FTC approval for the WBA/RAD merger. That would make Fred's the third largest drugstore chain in the U.S. and shares doubled on the news.

A funny thing happened on the way to the merger. The FTC said last week they did not believe that was enough of a consideration to approve the merger. Walgreens has 8,200 stores and Rite Aid has 5,000 stores. Selling Fred's 865 Rite Aid stores was not enough. The combined WBA/RAD would have more than 12,500 stores to Fred's 1,500. CVS would become number two at 9,655 stores. The FTC believes the post merger environment would create two heavyweights that would dominate their respective areas.

Shares of Fred's have been in decline for a week on the worry the FTC will either block the merger OR they will be forced to sell a much larger block of WBA/RAD stores to Fred's and the company will not be able to complete the transaction or they will become too big too fast and begin losing money like crazy as they try to ramp up distribution and management to handle the suddenly increased store count.

Fred's announced a secondary offering on Friday to raise money for the acquisition. If the deal changes that causes additional problems. If the deal were to triple in size, Fred's would have to do another secondary to raise the additional cash and it could be a whopper of an offering.

Earnings March 9th.

I believe Fred's will continue to give back those monster gains from the December headline. If the WAG/RAD merger approval gets extended that creates more indecision for Fred's.

Position 1/24/17:

Short FRED shares @ $14.97, see portfolio graphic for stop loss.



IWM - Russell 2000 ETF - ETF Profile

Comments:

The Russell 2000 gapped open to 1,382 and it closed at 1,381.78. This was a massive short squeeze but the gain of 13 points was less than the 21 points gained on Tuesday. There was no follow through, suggesting the rally was big cap only and the small caps were barely participating.

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 -2,150 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:

Fitch Ratings took another look at Sears and reiterated they expect a $1.6 billion cash burn for 2016 and $1.8 billion in 2017. The Barron's laid out the problems ahead for Sears and that tanked the stock on Wednesday.

Original Trade Description: January 9th

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 several times before. We were stopped out on Dec-30th when the CEO arranged a bridge loan to get them out of trouble temporarily. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is eventually expected to file bankruptcy.

In November, 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 will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Dec-28th and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in 2017 once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the sale of the Craftsman brand to Stanley Black & Decker for $900 million but they get less than half of that in cash. The rest is paid out over the next 3-5 years. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

With the Craftsman sale and the loan from the CEO and a new $500 million loan secured by real estate, they have developed about $1.5 billion in Liquidity. Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

When they announced the Craftsman sale at less than expected terms, the stock fell back from the early January gains. The outlook is grim despite the short-term cash inflows.

Update 1/11/17: In an OP-ED piece Forbes said the sale of Craftsman signaled the opening of the final chapter for Sears. They said the Craftsman sale and the potential sale of the Kenmore and Diehard brands represented a "going out of business" sale.

Update 1/19/17: Sears announced it was ending its decades old employee discount program. They are going to allow employees to earn points on purchases that will be good for future discounts. Currently they get a discount on items at the time of purchase. By scrapping that plan, the company gets the money up front and maybe the employee will use their points on future purchases. The point values differ on different types of merchandise. If Sears eventually files bankruptcy, the points would disappear. This is another sign the company is in trouble.

Update 1/21/17: Moody's downgraded Sears credit rating from Caa1 to Caa2. Moody's said Sears is running out of stuff it can sell for cash. They only have 211 properties that are unencumbered and worth about $2.5 billion. With the company burning cash at the rate of $1.5 billion they are rapidly approaching the end of the line. Moody's said they could raise cash with the sale of the Kenmore and Diehard brands but after that they are done. There is nothing left to sell that will produce a large inflow of cash.

Position 1/10/17:

Short SHLD shares @ $8.97, see portfolio graphic for stop loss.

No options recommended because of price.




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