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Daily Newsletter, Wednesday, 2/8/2017

Table of Contents

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

Market Wrap

Bulls Trying To Hold On

by Keene Little

Click here to email Keene Little
Other than the techs making minor new highs each day (only NDX today), the rest of the indexes are struggling just to hold onto recent gains. The bulls haven't done anything wrong yet but there are plenty of signs that they're weakening. This year's rally is looking like it's on wobbly legs.

Today's Market Stats

The stock market's rally this year has been largely due to overnight rallies in the futures market. That has given us gap-up starts to the day and then a quick bout of short covering that has typically finished in less than 30 minutes. Generally speaking, there's been very little, if any, follow-through to the gap-induced rallies. The sideways consolidations and/or selling of rallies has it looking like an effort to distribute stock to the retail crowd, with the help of continued corporate buybacks.

What looks like an effort to distribute stock from smart money managers to the retail crowd, which includes most mutual fund managers, has been a slow and steady effort that hasn't prevented the indexes from working their way higher (except for the RUT). Corporations continue to sell record levels of corporate bonds, which they're using to help fund their corporate buybacks. The retail crowd has backed away from buying stock this year after their initial excitement following the November elections so it's been a struggle to keep the rally going.

This morning reversed what we've seen in the past week by starting with a gap down and quick selling. Once the selling completed in the first 10-15 minutes we saw the indexes bounce right back up. But the jam back up into a mid-morning high (a minor new high for NDX but not the others) was then followed by another choppy consolidation. It's as if someone doesn't want the market to sell off yet but doesn't have quite enough buying power (or desire) to push the market much higher. It was a mixed day with the indexes floundering around the flat line for most of the day.

Other than the gap moves and maybe an early-morning move like this morning's jam back up there's been very little for traders to do this month as we watch the indexes work their way higher (except for the RUT, which remains trapped in a 2-month sideways choppy mess). The bulls have been able to hang on and participate in the incremental moves to the upside while the bears continue to be bewildered about how the market can continue to hold on a push slowly higher while momentum dies on the vine.

The stock market is showing many signs of tiring and I think the slow choppy move higher is an ending pattern for the rally and that soon the bulls will be stopped out as the bears enter their short trades. The result will likely be a strong decline in the coming weeks and as I'll get into with the charts, we could be days, if not hours, away from a significant high. At least we have the setup for a significant high but as always, we wait to see if the market agrees with my assessment or not.

Other than the crude inventories report this morning, there were no significant economic reports to sway the market. As I'll discuss later, with the oil chart, the large buildup in crude inventories (+13.8M barrels, which follows +6.5M in the prior week) combined with a relatively high price for oil, is not a good combination for bulls. And when the price of oil drops sharply it's usually not a good time to be long equities either (it's that slowing-economy thing).

In addition to what I see as topping patterns for the stock market indexes, there are some fundamental reasons to be concerned about the stock market. Overvaluation is one and while there are several methods used to value stocks there is one generally accepted way of using earnings, which is the cyclically adjusted price-to-earnings (CAPE) ratio.

CAPE is similar to the P/E ratio except that it uses the past 10 years' worth of earnings instead of just the previous year. This helps smooth out big fluctuations year-to-year. At the moment the CAPE for the S&P 500 stocks is 28.4, which is 70% higher than its historical average of 16-17. To put this into perspective, it's now higher than at any time since the dot-com bubble in 2000.

Another valuation method is the price-to-sale (P/S) ratio, which is similar to P/E in that it uses just the previous year's sales and the current price. For the S&P 500 this ratio is currently 2.02, which is 40% above its historical average of 1.44. Again, this ratio is at its highest level since 2000. Both the CAPE and P/S are above where they stood in 2007 (the housing bubble).

We know that the stock market has been out of whack with what's going on with the economy (Main Street and Wall Street have been disconnected for a long time). Since 2009 the S&P 500 is up nearly +240%, making it one of the strongest bull markets in history. But at the same time the U.S. economy has grown only +2% per year, about +15% since 2009. If the S&P 500 grew by the same +15% we'd be looking at 767 instead of 2300. That's not chump change.

Fundamental measurements of the stock market have never been good for timing the market and the above information is only to give some perspective how overvalued it is. The more overvalued the market becomes the more bubble-like it becomes and that makes it more vulnerable to a downside disconnect. Assuming the market is ready for a reversal, which I believe it is, what we can't know is whether we'll get just a healthy (-10%) pullback before heading higher or if instead we are at a similar point as we were in 2000 and 2007. I believe it's the latter but obviously my crystal ball is no better than anyone else's. I just think it's not a good time to ride a correction down thinking "it always comes back."

On top of what I see as a vulnerable time for the stock market we have extreme bullish sentiment as measured by Investors Intelligence. The latest report shows bulls at 62% and bears at 16%. That's a very wide spread and 62% bulls is the highest it's been since 2005. Again, this can't be used as a timing signal but it simply shows more vulnerability. Other than corporate buybacks the market is simply going to run out of buyers when pretty much everyone is already in the pool.

OK, with all of that as "background," let's see what the charts are telling us, starting off with the NDX weekly chart since this has been the stronger index.


Nasdaq-100, NDX, Weekly chart

At the January 26-27 highs NDX ran into the trend line along the highs from April-September 2016, which fits as the top of a rising wedge for the rally from February 2016. The wave count has us in the 5th wave of the rally, which is the leg up from November 4th. Following a quick pullback from the January 27th high NDX has again pushed up to the top of its rising wedge and until we see a clean breakout from this wedge I think it's important to watch for a possible top.


Nasdaq-100, NDX, Daily chart

The NDX daily chart shows the price action around the top of its rising wedge (the trend line along the highs from April-September 2016) and how it stopped yesterday's and today's rally (it closed on the line today). All it needs now is a gap-up over resistance to bring in the buyers. I say that tongue-in-cheek but it is the way this market deals with resistance.

A trend line along the highs from November 10 - January 27, at 5230-5250 depending on how long it takes to reach it, is the next upside target zone if it breaks above 5210 and holds above 5200. Otherwise, with an extended rally leg since December 30th and now showing bearish divergence against the January 27th high, I think it's a risky bet on the long side. A break of the uptrend line form December 30th, currently near 5174, confirmed with a drop below this morning's low at 5169, would be the first sign of a top being in place.

Key Levels for NDX:
- bullish above 5210
- bearish below 5086


Nasdaq-100, NDX, 60-min chart

There are two price projections for the 5th wave of the leg up from December 30th, with both coinciding closely at roughly 5205-5207. If we see a quick pop up to that level Thursday morning and then a drop below this morning's low near 5169 it would provide all the proof I'd need to see to declare a top in place. The bearish divergence vs. the January 27th high helps confirm we're into the final 5th wave. But if it rallies above 5207 and then uses the April-September trend line, currently near 5202, for support it will keep the pattern at least short-term bullish.


Powershares QQQ Trust, QQQ, Daily chart

The QQQ is of course the ETF that can be used as a trading vehicle for NDX and it's good to look at for volume. On its daily chart below I also have the Bollinger Band and you can see how it's been pushing up the top of the envelope since December. But while QQQ has been pushing higher it's been doing so on declining volume since November's rally started.

Declining volume is another indication that the rally is running out of buyers and in a rally that is pushing up against resistance it's reason enough to at least pull your stops up tighter. Note the bearish divergence on the Money Flow Index (MFI) at today's high vs. the highs at the end of January. This bearish divergence fits with what we see on the NDX charts above.


Semiconductor index, SOX, Daily chart

Helping the techs has been the semiconductor stocks and as long as they remain strong it's actually a good sign about the economy (semiconductors are so many different products that they're a good reflection of production). But the SOX is in an ending pattern and showing bearish divergence since the end of November. The wave pattern calls the rally from January 6th the final 5th of the 5th wave in the rally from February, which means the rally could reverse at any time.

The SOX has been following the trend line along the highs since last March and is approaching a trend line along the highs from July 2014 - June 2015, currently about 14 points higher near 986. I'm not sure if it will make it much higher, if at all but at the moment there's no reversal signal, just a warning sign that it could top out here.


S&P 500, SPX, Daily chart

Since the January 31st low I've been thinking SPX has a good shot at reaching the 2320 area where it would hit its trend line along the highs from August-December 2016 by the end of this week. There are some cycle studies that point to February 8-10 as a turn window. As an example, a 50-day cycle off the February 2016 low has today as a turn date, +/- 1-2 days. An important number on the Gann Square of 9 chart is 2321 since it aligns with the date March 6, which is the date of the 2009 low. There's also a full moon and lunar eclipse (and a comet flyby) this Friday night/Saturday morning.

So we have a lot coming together this week for what could be a very important high and frankly I thought we'd see SPX do better than it's done this week. Has it simply run out of steam? As Scotty would say to Captain Kirk, "I'm giving you all I got!" The choppy consolidation off last Friday's high could lead to one more leg up but like NDX, if it drops below this morning's low at 2285 I think the fat lady would be singing the blues for the bulls. That would not be confirmed until we see a drop below the January 31st low at 2267.

Key Levels for SPX:
- more bullish above 2325
- bearish below 2267


Dow Industrials, INDU, Daily chart

On January 31st the Dow broke its uptrend line from November 4 - January 19 and on February 3rd and again on Tuesday it back-tested the broken uptrend line. Today's decline leaves a bearish kiss goodbye following the back-test, which leaves it vulnerable to further selling. But we've seen the Dow in particular nuzzle up underneath broken uptrend lines before finally letting go. That remains a possibility but would become less likely if it closes below this morning's low at 20015.

Note also that with Tuesday's high the Dow came very close to the top of an expanding triangle off its December 13th high. This is a bearish topping pattern and can be viewed as the left half of a possible diamond top pattern.

Key Levels for DOW:
- bullish above 20,200
- bearish below 19,785


Russell-2000, RUT, Daily chart

The RUT has been banished to the desert for 40 days and now maybe it's finally ready to make a move. Since its December 9th high today is the 40th trading day inside a choppy sideways/down consolidation. Too bad we don't have any clues as to which way it's going to break. I've been viewing the pattern as a bull flag pattern but this has gone on so long that I can also now view it as a rolling top pattern.

We'll just have to wait for a breakout or breakdown from this pattern, with a rally above 1385 or a decline below 1333, before we'll know which way this is going to go. One caution is to watch carefully for a head-fake break that's then followed by a reversal back inside the pattern. That would be a good signal for a sustained reversal (e.g., if it does a quick drop below the bottom of the pattern but then reverses and closes back inside the pattern it would be a bullish buy signal).

Key Levels for RUT:
- bullish above 1385
- bearish below 1333


10-year Yield, TNX, Weekly chart

There was more buying in the Treasury market today, which didn't help the stock market as money could be rotating out of stocks and back into bonds. This is dropping the yields and TNX is back down to its broken downtrend line from 2007-2013, which it had broken above on December 1st. I thought the bounce off the line on January 18th would lead to a rally up to 2.687% where it would achieve a Fib projection for an a-b-c bounce correction off the January 2015 low. While that projection is still in play, it's starting to look like it's vulnerable to the downside from here.

A drop below its January 17th low at 2.313 would be bearish since it would leave behind a failed breakout above its longer-term downtrend line. We might get just a larger pullback to its 200-week MA, near 2.24, before heading back up but that can only be guessed right here. We'll have to see where it goes in the coming week to see whether or not support is going to hold. If the stock market is setting up a reversal to the downside I think TNX will be leading to the downside (as money pours into the relative safety of bonds).


High Yield Corporate bonds ETF, HYG, Weekly chart

While on the subject of bonds, the high yield corporate bond fund, HYG, is showing some vulnerability here as well. The decline off the October 2016 high found support at the 50-week MA and the November 14th low has been followed by a bounce back up to the October 2016 high at 87.56 (with a high at 87.69 on January 27th). HYG could continue up to at least its 200-week MA, currently at 89, but the daily chart says it could be trouble here.

The bounce off the November 14th low fits as an a-b-c bounce correction and achieved two equal legs up at 87.66 (only 3 cents higher on January 27th). The daily chart looks like a rolling top is developing since the end of December and you can see the bearish divergence on the weekly chart. If it drops back below price-level S/R near 86.30 it would be a good sell signal. As a measure of desired risk, a sell signal for junk bonds would be a warning sign for the stock market.


Transportation Index, TRAN, Daily chart

The transports look like they're in trouble as well. At its January 26th high the TRAN tested its December 9th high but then rolled back over, leaving a double top with significant bearish divergence. Each attempt, in December and again in January, it got above its November 2014 high at 9310 but was unable to hold above, which left two head-fake breaks.

The TRAN is currently trying to hold onto its 20- and 50-dma's, near 9238 and 9190, resp. Today's close near 9246 is marginally above both MAs and if it can get back above 9310 and hold above it for more than a day it could have a fighting chance to make a new high. But at the moment it's not something I'd bet on happening.


U.S. Dollar contract, DX, Daily chart

Last week I had mentioned I thought the US$ was ready for a bounce correction before continuing lower. The bounce started after a quick new low on February 2nd but has more upside potential before heading back down. However, it hasn't been able to bust through its declining 20-dma, currently near 100.40, and it's possible the dollar will drop further before setting up a bigger bounce correction.


Gold continuous contract, GC, Daily chart

With the dollar in decline it has given a boost to gold and while it's currently struggling to get past its October 2016 low at 1243.20 it's looking like it has at least a little more upside potential. Two equal legs up from December 15th points to 1273 but it has already met its minimum projections at 1237, where the 2nd leg of an a-b-c bounce is 62% of the 1st leg up. So it's possible gold will roll back over at any time but for now, between the projection near 1273 and its 200-dma at 1266 we'll see if gold can make it at least a little higher before rolling back over. Above 1274 would be more bullish for gold.


Oil Commitment of Traders (COT) chart, July 2010 - February 2017, chart courtesy tradingster.com

Before getting to oil's chart I wanted to provide a little background that supports the bearish picture I see on its chart. Starting with the COT (Commitment of Traders) report, it's at an extreme not seen since June 2014. As shown on the COT chart below, commercial futures traders are now more net short than in June 2014 while speculators are more net long since then. This wide of a split between the two almost always resolves in favor of the commercials. Speculators are betting huge that the oil rally will continue but it's wise to bet against them now.

The last time there was a wide split between commercials and speculators, in June 2014, it was followed by oil's price getting cut by two thirds, from more than $100 to less than $30. It's anyone's guess whether or not something similar will happen again but that's the risk for anyone betting on the long side of oil (or any number of ETFs associated with oil).

At the same time that speculators are strongly net long and commercials net short, the oil supply is building. The oil rig count has nearly doubled from the low near 300 in the spring of 2016 to the current count of 583. This will only exacerbate an already building inventory (last week's inventory build was +13.8M barrels and +6.5M the week before). An inventory build is only going to add to the price pressure on oil.

If the price of oil does start to drop how long do you think it will take for the latest OPEC agreement to fall apart? If they start cheating on production to make up for lower prices it will further exacerbate the inventory overhang.

U.S. inventories of gasoline have also been rising for the past four weeks, rising nearly 21M barrels in January. The normal build in January in the past 10 years has been 12M barrels. This is an indication of an increase in production (nearly half of a barrel of crude goes to producing gasoline) or a decline in demand, or both. In either case it's not bullish for price.

As discussed earlier, these fundamental issues are not good timing signals for trading oil but they are a strong warning sign that the price of oil will likely not climb much higher, if at all, and could drop precipitously like they did after the June 2014 high.


Oil continuous contract, CL, Daily chart

The price pattern for oil argues the February 2nd high was the completion of a small rising wedge pattern for the leg up from January 10th. The small rising wedge fits as the 5th wave of the rally from November 14th, which in turn completes an A-B-C bounce pattern off the August 2016 low, which in turn completes a more complex bounce pattern off the February 2016 low.

This bearish bounce pattern suggests the next decline could drop oil below at least the August low at 39.19 and likely below the February 2016 low at 26.05.

Short term, yesterday's decline dropped the price of oil out the bottom of the small rising wedge, the bottom of which is currently near 53.40. If the bounce off Tuesday's after-hours low at 51.22 manages to make it back up to the bottom of the rising wedge, near 53.40, we'll see if does a back-test and then drops back down. A drop below Tuesday's low at 51.22 would give us stronger confirmation that a high is in place.


Economic reports

There are no significant economic reports on Thursday and then on Friday we'll only get export/import prices before the bell and the preliminary Michigan Sentiment report at 10:00. The market is on its own to respond to overseas news and what happens in the overnight sessions.


Conclusion

I spilled a lot of electronic ink above to explain why I believe the fundamentals and technical picture suggests bulls are probably going to be done in the next couple of days, if not already done. But in reality there's just one thing to know as we go forward. If you're holding stock you should be selling and if you like to play the short side you should also be selling (or buying puts and inverse ETFs). Why? Because the Patriots won the Super Bowl.

As Sam Stovall, the Chief Investment Strategist at CFRA, noted, since 1967 the winner of the Super Bowl has predicted with 80% accuracy what the stock market, as measured by the Dow, will do that year. When the AFC wins, as the Patriots did, the stock market has finished the year in negative territory. An 80% success rate is nothing to sneeze at, even if it makes no sense at all. To many of you my EW counts make no sense either (wink).

In all seriousness, I think the AFC win this year will add to the accuracy of this predictor since I believe the market is setting up for a major top, similar to the one in 2000 and 2007. Obviously we'll know in hindsight but that's the risk I currently see for anyone willing to hold onto long positions with the belief that the market "always comes back." It will come back but a severe decline into 2018-2020 could take the next 20 years to recover. Why not get into cash and be ready for a generational buying opportunity later? In the meantime trade the short side and put some more cash into your account.

As far as timing for a high, I had mentioned some cyclical studies point to a February 8-10 turn window, which we're now in. Many times important turn dates occur around full and new moons and this Friday night will be a full moon.

SPX MPTS daily chart

At the same time as the snow moon (the name given to the full moon in February) there will also be a lunar eclipse of it Friday night. And then we'll have the New Year comet reach its closest point to earth in its flyby Saturday morning.

And lastly, Friday/Saturday marks a 1-year anniversary of the rally off the February 2016 low, which presents the "opportunity" to make this last bull run exactly one year old.

So there you have it -- we have fundamental, technical and astrological reasons for a significant market high this week, ideally on Friday but +/- 2 days is well within the turn window. Be careful out there.

Good luck and I'll be back with you next Wednesday to see how this unfolds in the coming week.

Keene H. Little, CMT


New Plays

Biotech Reload

by Jim Brown

Click here to email Jim Brown
Editor's Note

The biotech sector is not showing any signs of weakness despite recent political comments. I am now willing to venture back into the sector.



NEW BULLISH Plays

CARA - Cara Therapeutics - Company Profile

We played CARA last week and had a successful trade until there was a big drop on no news on the 2nd. Given the recent gains, that was probably just a healthy dose of profit taking. I am bringing it back as a recommendation after there was no follow through to that one day drop.

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 were taking off as investors learn about the potential for this drug.

Earnings March 9th.

With a CARA trade at $16.85

Buy CARA shares, initial stop loss $15.75.

No options recommended because of price.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Trend Intact

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq made a new high, the Dow floundered, S&P was flat and Russell declined. There was no material change from the prior two days. Sellers appear to be lacking conviction other than holding the line at resistance on the Dow and S&P. Dip buyers are alive and well and they even bought the Russell dip this morning.

We are just passing time until the current consolidation period ends. Earnings headlines are fading and there is no material economic news this week. Political news is hogging the headlines and that is raising questions about the future on the part of some investors. Whenever the political news flow concerning economic policies begins to slow, the press picks up on the tweets and petty squabbles and the market weakens.





Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


No Changes



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BULLISH Play Updates

AKS - AK Steel - Company Profile

Comments:

No specific news. Down with the sector today.

Original Trade Description: February 4th

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

Shares spiked from $5 to $11 after the election on hopes for a surge in infrastructure projects, lower regulations and a growing economy. AK shares peaked early and traded sideways for a month. The week before earnings they began to decline as analyst said the market gains were overdone.

The reported earnings of 25 cents on January 24th that beat estimates for 7 cents. Revenue of $1.42 billion was slightly lower than estimates for $1.43 billion. Shares spiked on the earnings news and collapsed on guidance that shipments to automakers had declined in Q4. The next day a spokesman clarified that saying the "decline in shipments compared to 2015 was primarily the result of a 41% decline in shipments to the distributor and converters market as the company intentionally reduced sales of commodity products." In other words, AK wanted to focus its efforts on the higher margin products and reduce exposure to low margin products.

Shares quit declining after the clarification and bottomed just under $8. Friday's close was right on the verge of a 7-day high. One more positive day and we could see a rebound begin.

Earnings April 25th.

The optional option position is for a longer-term holder with a June expiration. Very limited risk in terms of dollars invested and could be a decent winner if AKS returns to the $11.25 highs or higher on infrastructure stimulus headlines.

Position 2/6/17:

Long AKS shares @ $8.18, see portfolio graphic for stop loss.

Optional long-term option:

Long June $10 call @ 59 cents. No stop loss.



BOX - Box Inc - Company Profile

Comments:

No specific news. New 52-week high.

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.



STM - STMicroelectronics - Company Profile

Comments:

No specific news. Shares gapped down 40 cents on the decline in the overseas markets.

Original Trade Description: February 6th

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest chipmaker. The company reported revenue of $1.86 billion, an 11.5% increase. The also raised guidance for Q1 saying they expect 12.5% growth. The CEO said, "Based on market forecasts, a positive booking trend, and a strong performance at our distributors, we see the momentum from the second half of 2016 continuing as we enter 2017."

The chipmaker said improved efficiencies and product mix lifted gross margins from 33.5% to 37.5%. Their smartphone market share helped increase sales in that division by 17.8%. The automotive and industrial products segment saw sales increase 12.5%. STM is a supplier to Apple, Cisco Systems, HP, Seagate and Western Digital. Every one of those companies are reporting stronger sales and new product lines, all of which helps STM. They also make chips for drones, 3D printing and a wide variety of IoT products.

The consensus earnings estimates are for 103.4% growth in 2017.

Earnings April 27th.

Shares have caught fire because of expectations for a large boost in chips for the iPhone 8 or X whatever they end up calling it.

This stock is not cheap with a PE of 75 but the outlook is so strong that volume is exploding and the stock will not go down. We are going to hold our nose and buy it. A safer way to play this would be to buy the call option. That way your total risk is 70 cents a share.

Position 2/7/17:

Long STM shares @ $14.22, see portfolio graphic for stop loss.

Optional longer-term play:

Long April $15 call @ 65 cents. See portfolio graphic for stop loss.




BEARISH Play Updates

CONN - Conn's Inc - Company Profile

Comments:

No specific news. Shares still holding over 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.



GNC - GNC Holdings - Company Profile

Comments:

No specific news. Only a 10 cent rebound from the 3-yr low.

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 posted another decline and our put was actually in the money at the day's lows. With only two days left, I am recommending we close the position if the $134 level is touched again.

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:

No specific news. The National Retail Federation said retail sales for 2017 could rise from 3.7% to 4.2%. That lifted the entire retail sector.

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.

Update 2/7/17: Credit default swaps rose to $4.5 million annually to insure $10 million of Sears debt. While nobody is likely to actually pay that fee, it is another confirmation point that Sears is headed for default. Kiffen Worldwide said they expect a Sears default in 2017.

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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