Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/1/2017

Table of Contents

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

Market Wrap

Bulls Weak But Holding On

by Keene Little

Click here to email Keene Little
This week we've seen rally attempts get sold into. But then the morning lows have been followed by a bounce back up and the two things combined has it looking like controlled selling (distribution) and it provides a warning sign. But it doesn't prevent new highs for at least some of the indexes, such as the techs, although it might be a choppy ride higher.

Today's Market Stats

This morning started with a big gap up in the stock market indexes but it was short-lived as the sellers hit almost immediately. Rallies are being sold into but not aggressively. Following the morning selling we've seen the market slowly march back up into the close, even if not to new highs, to set it up all over again. It looks like a distribution pattern with smart money handing off inventory to the retail crowd. We should be doing the same, even if the indexes will be making new highs in the coming week. The market is holding up but is not strong and that's our cue to protect positions while waiting for the green light to play the short side.

This morning's economic reports were not all that encouraging, although the market pretty much ignored them. Mortgage applications were down -3.2% in the past week, down significantly from +4.0% the previous week.

In the pre-market session we received the ADP Employment report and it was much stronger than the expected +165K, coming in at +246K. There was barely a bobble in the futures market.

At 10:00 we received the ISM Index (a little better than expected, at 56.0) and Construction Spending, which was worse than expected. At -0.2% for December, construction spending was down from +0.9% in November and it was the opposite of the expectations for +0.2%. The market was already selling off when this report came out so this was probably ignored as well.

In the afternoon we heard from the FOMC and to no one's surprise they kept the rate the same (0.5% to 0.75%). They believe the economy is still on a moderate growth path and while consumer and business sentiment has improved since the November election they note business investment remains "soft." The market is expecting two more rate increases this year with the first one in June. Nothing in the Fed's statement changes the market's expectations.

The Fed wants to see what becomes of the tax and infrastructure spending plans from Congress and whether or not Trump will be able to successfully push his agenda. By the Fed's next meeting in March they'll have a better idea about what those plans might be. In addition to Congressional tax and spending plans the Fed wants to see if the consumer and business sentiment holds up and improves the economy.

If the Fed wants to raise rates 3 more times this year it was expected they would start dropping hints about when the first one would come, even as early as March. With no hints it has some wondering if the Fed sees trouble ahead and wants more data before even hinting about when to expect the next rate increase. There is of course the possibility that it will be another one-and-done rate increase like 2016.

Helping today's stock market was AAPL's rally following its earnings report last night. Its price shot higher in the after-hours session yesterday and then continued higher most of the day today and was up +9.14 before giving back some in the final hour, finishing +7.40 (+6.1%). While it helped the market, especially the techs, it wasn't enough to thwart some of the selling pressure and other than a small gain for the Dow (+0.1%), it was only the techs that did well today. But AAPL hit an important level today and is now at risk of a reversal.

As can be seen on AAPL's weekly chart below, it has rallied back up to its broken uptrend line from June 2013 - August 2015, which had stopped it previous rally into its September and October 2016 highs. In addition to this trend line there is a price projection at 130.74 for two equal legs up from May 2016 (today's high was 130.49). It's possible that today's rally capped off an a-b-c bounce correction off its May 2016 low that will now be followed by a stronger decline. There is currently no evidence that AAPL is making a high here but the bearish setup is for one (and reason enough to protect positions in this stock). What happens in the next week will tell us more.

Apple Inc., AAPL, Weekly chart

One of the reasons why I suspect AAPL could fall back down (after all, AAPL tells us gravity works) is because I see enough evidence in the major indexes that provide at least a warning sign that the market could be in trouble. I've been thinking we'll see a market high around some coinciding cycle turn dates in the February 8-10 window. That could still be the case and it's reason enough to stay cautious about the short side but the price patterns are not clear enough to suggest either a top is already in place or that we are still due one more new high. Both sides need to be especially cautious here.

I'll start tonight's chart review with a weekly view of the Nasdaq since it's one of the stronger indexes (along with the stronger NDX) but is also showing reasons why we should be very careful about further upside expectations.


Nasdaq Composite index, COMPQ, Weekly chart

I've shown the Nasdaq weekly chart before to point out how it has ridden up underneath the midline of its up-channel from 2010-2011. It has pushed marginally above this midline, which is currently near 5600, but it's also running into the top of a rising wedge pattern for the rally from February 2016. There's a 5-wave move up inside the wedge and the 5th wave is the leg up from November 2016.

The 5-wave move up from February 2016 fits well as the 5th wave of the rally from October 2011, which fits well as the completion of the c-wave of an A-B-C move up from March 2009. In other words the current high has the potential to be a MAJOR top to complete the cyclical bull market off the 2009 low. Upside potential is significantly dwarfed by downside risk and I think it's appropriate to position/protect yourself accordingly.


Nasdaq Composite index, COMPQ, Daily chart

The price pattern for the move up from November is not clear enough to say with confidence that a top is either already in place or still has some more upside to go. We have a rising wedge for the rally from November to complete a rising wedge from February 2016, both of which are bearish patterns and suggest complete retracements of the wedges in a time that will be faster than it took to build the wedges.

Depending on how the top of the larger rising wedge from February 2016 is drawn (from April through either the August or September highs) we have upside potential from 5677 tomorrow up to about 5760 in another week. The top of the rising wedge from November is currently near 5703 and will be near 5730 in another week. I depict a stair-step move higher into next week but I think the risk is for a breakdown at any time.

Key Levels for COMPQ:
- bullish above 5668
- bearish below 5522


S&P 500, SPX, Daily chart

SPX is holding inside a little parallel up-channel for the leg up from December 30th, the bottom of which was tested on Tuesday and as long as SPX stays above its January 23rd low at 2257 it remains potentially bullish for a rally to trendline and Fib resistance near 2321. But the short-term pattern suggests the bulls could be in trouble from here.

We have what looks like a small impulsive move down from last Thursday's high followed by a corrective bounce. At the moment it looks like we have a good setup to be short against this morning's high at 2289. Above 2289 would keep the bullish pattern alive but as with the Nasdaq, there is strong potential for a stronger decline to kick into gear at any time.

Key Levels for SPX:
- bullish above 2301
- bearish below 2257


S&P 500, SPX, 60-min chart

If SPX does manage to push higher into a turn window near February 8th it could happen something like what I've depicted -- another a-b-c move up from Monday to the 2315-2321 area. But as already mentioned, with a corrective looking bounce pattern off Monday's low I think it's important to recognize the bearish potential from here. The next leg down, whether from here or after another quick spike up Thursday morning, would likely be much stronger selling than we've seen so far.


Dow Industrials, INDU, Daily chart

The Dow's pattern is very similar to SPX and looks just as vulnerable to breaking down at any time. But if the cyclical time studies will continue to support the bulls we should see another push higher into at least the February 8-10 time window. Upside potential for the Dow, if they can get some stronger buying going, is near 20400 where it would run into the trend line along the highs from April-December 2016 by next week.

The pullback from last week has been stubbornly holding onto the uptrend line from February-June 2016 (purple line), which acted as support at the January lows and is so far holding as support. But a drop below its 50-dma, currently near 19700, and its January 19th low near 19678, would likely lead to much stronger selling. Between 19675 and 20126 could be filled with a lot of chop and therefore be careful not to get whipped around.

Key Levels for DOW:
- bullish above 20,126
- bearish below 19,675


Russell-2000, RUT, Daily chart

For nearly two months the RUT has been consolidating in a shallow down-channel off its December 9th high. This looks like a bull flag pattern and the expectation is to see a rally out of this. I'll continue to lean this way, which challenges the bearish patterns for the blue chips, until price proves the bullish projection wrong. Upside potential is to the trend line along the highs from 2007-2015, near 1410 next week, but the bulls can't waste any time breaking out of this bull flag pattern.

The first indication of trouble for the bulls would be a drop below the January 23rd low near 1341. But because we could get a 3-wave pullback from last Thursday, with two equal legs down at 1332.71, I'd want to see a drop below 1332 before believing a stronger decline is underway. The risk if you're hoping for higher prices is that what looks like a bullish pattern could fail and failed patterns tend to fail hard. If the indexes have peaked (or we might see some peak while others are already done) I suspect the RUT will lead the way down.

Key Levels for RUT:
- bullish above 1385
- bearish below 1341


30-year Yield, TYX, Daily chart

Treasury yields bounced back up from their January 12th lows but so far to only a lower high vs. their December 12th highs. The 30-year yield, TYX, is again challenging its downtrend line from February 2011 - December 2013 and so far is not having any better luck than December's challenge. If I look at the daily chart below with the log price scale the downtrend line from 2011-2013 is up near 3.25% and I show the possibility for a rally to that level before turning back down. It's not clear yet whether TYX is going to head back down from here or after a little higher but the expectation is for a turn back down.


KBW Bank index, BKX, Daily chart

The banks have been running sideways for as long as the RUT, since the December 8th high for BKX. As with the RUT, the sideways consolidation looks bullish and the expectation is for another rally leg. Upside potential for another leg up this month is to the 100 area and a break above 94 would have me leaning that way. But if the sellers step in and drop BKX below its January 18th low at 89.17 it would look more bearish. Below 87 would tell us an important high is already in place.


Transportation Index, TRAN, Daily chart

The TRAN had a nice 3-day run last week into the high on January 26th. But over the next 3 days it gave it all back and now it's trying to again hold onto its 50-dma, currently near 9165. A loss of support here could spell trouble for the bulls, especially following a double top with its December 9th high and the significant bearish divergence between the two. A breakdown in the Transports would not be a good sign for our economy. A slowing economy would put the Fed on hold, which would have huge ramifications for stocks, bonds, commodities and currencies. Keep an eye on this index.


U.S. Dollar contract, DX, Daily chart

The US$ has been chopping its way lower since the high on January 3rd but it's been a steady decline. It's starting to show some short-term bullish divergence and could be setting up a larger bounce correction into February before continuing lower. I think there's a good chance we'll see the dollar decline over the next few months and drop down to its 200-dma, which coincides with an uptrend line from May-August 2016, currently near 97.30.

Over the next few months I think we'll see the dollar drop down to its 200-week MA, currently at 90.30 and probably near 91 by May where it would also meet a trend line along the lows since early 2015. It will likely be a choppy decline over the next few months, which will make projections difficult, but until I see some bullish evidence that negates the bearish wave pattern I'll stick with the idea that we need one more new low for the dollar before it will be ready for a stronger rally later this year.


Gold continuous contract, GC, Daily chart

Gold remains potentially bullish as long as it holds above its 50-dma, which was tested last Friday. It is again back above price-level S/R near 1205, closing slightly above it the past two days. The bulls need to drive gold above its October low at 1243.20 in order to negate the bearish wave count that calls for another new low before setting up a larger bounce. If gold drops back below its 50-dma, currently near 1176.70, it would be a stronger signal that a new low is coming.


Oil continuous contract, CL, Daily chart

The short-term pattern for oil makes it difficult to make short-term projections but the setup continues to support the idea that we're going to get at least a deeper pullback and potentially something more bearish. But first we need to see oil below the trend line along the highs from October 2015 - June 2016 (bold blue line), currently near 52.45. This line has been acting as support since January 23rd and if it breaks we should see lower prices. A drop below the January 10th low at 50.71 would confirm a breakdown but until that happens there remains upside potential to 57 later this month where it would again run into the top of a parallel up-channel from last August.


Economic reports

There are no significant economic reports Thursday morning. Friday morning's we'll get the NFP numbers, which are expected to be significantly higher than the December numbers. Based on today's ADP report it's looking good for the higher numbers but if they come in lower than expected we could see a negative reaction in the stock market.


Conclusion

The stock market is acting weak. We're seeing evidence of distribution with active selling into rallies. The short-term patterns for the Dow and SPX support the idea that last week's highs were THE highs and we're in the early stages of a more significant selloff.

The rally pattern has been choppy for the techs, which looks like an ending pattern (small rising wedge within larger rising wedges). But the choppy move could extend higher and with a turn window on February 8-10 I continue to look for supporting evidence that the rally will extend higher for another week.

I see a lot of downside risk right now and considering the small amount of upside potential I don't think you have the reward vs. risk in your favor on the long side. There will be better opportunities to trade the long side. Having said that, it's early to be thinking aggressively short.

I did like the setup for a short play following today's bounce off the morning lows but with a stop at the morning highs. This might work better for the blue chips than the techs. But it's a time for caution by both sides until we get a clearer signal to expect either a new high into next week or to abandon the long side and get more aggressive on the short side.

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

Keene H. Little, CMT


New Plays

New 52-Week High

by Jim Brown

Click here to email Jim Brown
Editor's Note

It has been a long dry spell for Freeport McMoran but the future is bright. The global economy is recovering and they have reduced debt by restructuring.


NEW BULLISH Plays

FCX - Freeport McMoran - Company Profile

Freeport-McMoRan Inc., a natural resource company, acquires, explores, and develops mineral assets, and oil and natural gas resources. The company explores for copper, gold, molybdenum, cobalt hydroxide, silver, and other metals, as well as oil and gas. It holds interests in various mines located in the Grasberg minerals district in Indonesia; Morenci, Bagdad, Safford, Sierrita, Miami, Chino, Tyrone, Henderson, and Climax in North America; Cerro Verde and El Abra in South America; and the Tenke Fungurume minerals district in the Democratic Republic of Congo, Africa. The company's oil and gas operations include oil production facilities in the Deepwater Gulf of Mexico; oil production facilities onshore and offshore in California; onshore natural gas resources in the Haynesville shale in Louisiana; natural gas production from the Madden area in central Wyoming; and a position in the Inboard Lower Tertiary/Cretaceous natural gas trend onshore located in South Louisiana. As of December 31, 2015, its consolidated recoverable proven and probable mineral reserves included 99.5 billion pounds of copper, 27.1 million ounces of gold, 3.05 billion pounds of molybdenum, 271.2 million ounces of silver, and 0.87 billion pounds of cobalt; and its estimated proved oil and natural gas reserves totaled 252 million barrels of oil equivalents. Company description from FinViz.com.

Freeport has had its share of problem over the last couple years. They bought back their spinoff oil and gas company in 2014, just as the price of oil began to crater. They bought the dip and added additional reserves in the deepwater gulf but the dip was not over. They tried for a year at the worst of the market to sell the energy business and could find no takers. Finally in Q4 they sold the deepwater assets to Anadarko Petroleum for $2 billion and far less than they were worth but at least they stopped the bleeding.

The decline in the global economy caused prices for copper to fall sharply and they were forced to sell some copper reserves as well as some other mining properties. Copper was selling for less than it cost to mine it so mines shut down and the industry restructured.

After copper bottomed at $1.93 in early 2016 it remains just over $2.00 for nine months until the surplus inventories started to deplete. Copper was $4.50 back in 2011. With copper prices at a 52-week high this week, Freeport shares also made a new 52-week high today.

Freeport has also had a battle with the government of Indonesia. With copper a major export, the government implemented a program a couple years ago that only allowed refined copper to be exported. The idea was to have the multiple mining companies build huge copper smelters and hire a lot of workers at decent wages. The miners battled the government to a standstill several times and production slowed to a crawl. With copper revenue crashing the government relented to some extent. However, Freeport reported with earnings that the pressure was on again and they were going to be forced to shut down production if the government did not allow them to export. A multiweek standoff occurred. On Tuesday, the government said it was going to exempt Freeport from some of the rules and shares rose.

Freeport is actually in good shape right now. The global economy is accelerating and commodity prices are rising. They have reduced debt and refocused their priorities. I expect shares to continue climbing.

Earnings April 26th.

Buy FCX shares, currently $16.85, initial stop loss $15.45.

Optional: Buy April $18 call, currently $1.04, initial stop loss $14.85



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Saved Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

A late day surge by the biotech sector lifted the Russell almost out of negative territory. The Russell failed at 1,375 resistance with a 13 point opening rally but fell back to 1,357 intraday. The late day surge in the biotech sector helped erase the Russell loss to close only fractionally lower.

Apple added more than 50 points to the Dow and 34 points to the Nasdaq and without those gains both indexes would have closed negative. Despite Facebook's earnings beat after the close, the S&P, Nasdaq and Russell futures have drifted into negative territory.





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


EMES - Emerge Energy Services
The long stock position was entered at the open.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

BOX - Box Inc - Company Profile

Comments:

No specific news. Still holding the recent highs. No weakness at all.

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.



CARA - Cara Therapeutics - Company Profile

Comments:

No specific news. Another monster gain of 8% t a new 52-week high. M&A rumors with CARA being mentioned.

Original Trade Description: January 30th

Cara Therapeutics, Inc., a clinical-stage biopharmaceutical company, focuses on developing and commercializing chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors in the United States. The company is developing product candidates that target the body's peripheral nervous system. Its lead product candidate includes I.V. CR845, which is in Phase III clinical trials for the treatment acute postoperative pain in adult patients, as well as completed Phase II clinical trials for the treatment of uremic pruritus disease. The company is also developing Oral CR845, which is in Phase IIa clinical trials for the treatment of moderate-to-severe acute and chronic pain; and CR701, which is in preclinical trial stage for treating neuropathic and inflammatory pain. It has licensing agreements with Chong Kun Dang Pharmaceutical Corporation to develop, manufacture, and commercialize products containing CR845 in South Korea; and Maruishi Pharmaceutical Co., Ltd to develop, manufacture, and commercialize drug products containing CR845 for acute pain and uremic pruritus in Japan. Company description from FinViz.com.

This is a small company with only a $400 million market cap. However, the drug they are current testing has the potential to be a multibillion dollar blockbuster. The drug is CR845 and it treats acute and chronic pain. It does not cross the blood brain barrier to there is no euphoria that users get when they take opioid drugs. Test subjects were injected with 15 times the normal dosage and they reported feeling no different than when taking a placebo. There is no risk of overdose and it is not habit forming.

It does not have any of the other opioid side effects including nausea, vomiting, respiratory depression, sedation and constipation. The drug is also an anti inflammatory and long lasting. The typical dosage it 1 pill twice a day.

In hospital tests post operative use of morphine was cut almost in half. For chronic osteoarthritis the drug was more effective than controlled release oxycodone.

There are 60 million post operative patients in the U.S alone each year. There are more than 140 million prescriptions written for pain meds. This has the potential to be a blockbuster.

Cara presented at the JP Morgan Healthcare Conference in mid January and shares are taking off as investors learn about the potential for this drug.

Earnings March 9th.

Position 1/31/17:

Long CARA shares @ $14.37, see portfolio graphic for stop loss.

No options recommended because of wide spreads and low volume.



CX - Cemex - Company Profile

Comments:

The company said it sold a concrete tubing business for $500 million and the proceeds would be used to reduce debt.

Original Trade Description: January 25th

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.

Position 1/26/17:

Long CX shares @ $9.42, see portfolio graphic for stop loss.

Optional: Long July $11 call @ 52 cents. No initial stop loss.



EMES - Emerge Energy Services - Company Profile

Comments:

No specific news. Shares gapped open to launch our entry at the high of the day. Shares dipped intraday but returned to a minor gain before the close.

Original Trade Description: January 31st

Emerge Energy Services LP acquires, owns, operates, and develops a portfolio of energy service assets in the United States. The Sand segment is involved in the production and sale of various grades of industrial sand primarily used in the extraction of oil and natural gas, as well as in the production of building products and foundry materials. Company description from FinViz.com.

Emerge recently sold off its fuel division to Sunoco and it now a pure play on frac sand. According to analysts the demand for frac sand was in the 63 billion pound range in 2016. That is expected to grow to 107 billion pounds in 2017 and 146 billion in 2018. The prior peak was in 2014 at 106 billion pounds.

Selling a commodity that every energy producer needs is similar to store merchants getting rich during the gold rush by selling picks, shovels and wheelbarrows. There is very little risk in sand as long as energy prices are stable over $50.

Emerge raised $167 million through its sale of the fuel business and another $34 million in a secondary offering in November. Funds were used to acquire more sand and continue development of their SandMaxx technology, which is a proprietary fluid for keeping sand in a liquid state while fracking. Normally sand sinks in water so some sort of suspension liquid is needed to keep it in the fluid while it is circulated through the well.

Emerge pays a dividend that yields 15.25% at current prices.

Earnings Feb 23rd.

Shares were up on Tuesday despite a weak market.

Position 2/1/17:

Long EMES shares @ $18.45, see portfolio graphic for stop loss.

No options recommended because of wide spreads.




BEARISH Play Updates

CONN - Conn's Inc - Company Profile

Comments:

No specific news. Drifting lower again and testing support at $10.

Original Trade Description: January 26th

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through Retail and Credit segments. The company's stores provide home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home office products consisting of computers, tablets, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. Conn's, Inc. also provides repair service agreements, installment credit plans, and various credit insurance products. As of March 29, 2016, the company operated approximately 100 retail locations in Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Company description from FinViz.com.

In the Q3 earnings cycle, Conn's reported a smaller than expected loss of 12 cents. Analysts were looking for -19 cents. Revenue of $308.4 million and below the $395.23 million in the year ago quarter. They guided for Q4 same store sales to decline -10%. At the end of Q3 analysts were expecting a profit of 13 cents and revenue of $453.44 million. The odds of them beating this forecast are slim. Zacks said the analyst estimates have declined significantly to a loss of 52 cents for Q4. They have dropped 11 cents in just the last 30 days.

Conn's sells electronics along with appliances and furniture. Electronics sales are being dominated by Amazon and Best Buy. The furniture sector has been slow and appliances are hit and miss. With appliance prices rising sharply it has cut down on buyers that can afford the big ticket items.

Earnings March 7th.

I believe Conn's will continue lower. Shares broke to a two month low on Thursday when support at $10.75 failed.

Position 1/27/17:

Short CONN shares @ $10.50, see portfolio graphic for stop loss.

No options because of wide spreads and no open interest.



ENDP - Endo International - Company Profile

Comments:

No specific news. Shares traded negative most of the day but a 19 cent spike at the close produced a 10 cent gain. The earnings date changed from 2/7 to 2/27.

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.

Update 1/26/17: Endo announced 90 jobs cuts as part of a restructuring effort to save $40-$50 million a year. The company said it would take a charge of up to $20 million on the terminations. Those must have been some very highly paid people. Endo employs 6,400 so these layoffs are minimal. Shares rose 10 cents on the news.

Earnings February 27th.

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 but the decline continues. Shares closed at a post announcement low.

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.

Update 1/26/17: The Walgreen's CEO said the company remains "actively in discussions" with Rite Aid about the regulatory concerns. We are discussing "all the instruments and actions we can put in place to facilitate this process." The merger agreement is set to expire on Friday and he did not say whether it would be extended.

Update 1/30/17: Walgreens and Rite Aid announced a restructuring of their merger agreement. Walgreens said in order to satisfy the FTC they may have to sell more stores, possibly a lot more. Fred's is contractually liable to buy any stores that Walgreens or Rite Aid decide to sell. Over the long term this would be positive for Freds but over the short-term it means they would have to take on more debt and probably make another secondary offering. That should be negative for the stock price.

Update 1/31/17: Evercore expressed doubt that Fred's could financially complete the acquisition of additional Walgreen's stores as required in the WBA/RAD merger. The new agreement contemplates Walgreens may have to sell an additional 335 stores. That is nearly 50% more than the 865 Fred's has already agreed to buy. Evercore said that may be too large of a commitment for Fred's.

Position 1/24/17:

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



GNC - GNC Holdings - Company Profile

Comments:

No specific news. Shares were declining into the close.

Original Trade Description: January 28th

GNC Holdings, Inc., together with its subsidiaries, operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

On January 19th GNC was cut to a sell by Goldman saying the already reduced earnings estimates were still too optimistic. GNC tried to sell itself last year and the deal fizzled. Then they announced a restructuring of the brand and the store format. As part of the relaunch of GNC they slashed prices across half their product line and discontinued many products entirely. The company also ended its Gold Card loyalty, which had been in effect for more than a decade. Six million members were paying $15 a year in exchange for discounted prices.

The GNC CEO said "the new GNC leaves the old, broken model behind" but we know "it will take time for the changes to take hold and translate into improved financial results." That is an implied earnings warning for the next couple quarters.

Earnings Feb 9th.

With earnings in two weeks this will be a short-term position. After looking at the cart I doubt many investors will want to hold the stock into the earnings event and that should cause a further decline next week.

Updare 1/31/17: The NFL rejected GNC's proposed advertisement. The NFL said they had a standing policy not to promote supplements. The NFL said GNC was on a list of prohibited companies because they promote products banned by the league.

FOX has been getting an average of $5 million per 30 seconds of airtime and that is a fee GNC will no longer have to pay but the ad was supposed to be a kickoff of their new marketing campaign.

Position 1/30/17:

Short GNC shares @ $8.77, see portfolio graphic for stop loss.

No options recommended because of the distance from the stock price. However, the Feb $7.50 put is only 25 cents. That might be an interesting lottery play to hold over their earnings report. If they get slammed on earnings again that could be a winner.



IWM - Russell 2000 ETF - ETF Profile

Comments:

The Russell gapped 13 points higher at the open but faded intraday to trade under support at 1,350. However, the biotech sector began to rise late in the afternoon and allowed the Russell to close with only a fractional decline.

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:

Sears and Citigroup announced a new rewards MasterCard. It did not help the stock. New 14-year low.

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.

Update 1/25/17: 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.

Update 1/26/17: Moody's joined Fitch in another downgrade on Sears credit instruments. The debt instruments were cut from Caa2 to Caa3 because of accelerating cash burn and declining asset base. The WSJ had another article today negative on the outlook for Sears. Sales at companies like Mattel and Hasbro declined sharply in Q3 suggesting Sears and others did not reorder and earnings could be dismal.

Update 1/30/17: Sears announced a sale-leaseback arrangement with CBL & Associates for five Sears stores and two auto stores. A sale-leaseback is where the company sells the properties to raise cash and then agrees to lease them back from the buyer for a specific term. This is another sign Sears is continuing to have a cash crunch. This transaction leaves Sears with only 204 properties that are unencumbered and could be sold for cash out of the 1,680 stores they operate. Every time they sell a property they take on debt in the form of leases and that means the amount of cash burn increases with each deal.

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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