The Russell 2000 posted only a fractional gain with the rest of the indexes strongly bullish. This is the third consecutive day of weakness on the Russell and there was no rebound from the 15 point decline from Monday. The Russell has always been the market sentiment indicator and it definitely seems to be signaling the end is near. However, we saw a four day decline in early December and the rebound was even stronger. That is always a possibility but being severely overbought that is a low odds chance.
We were stopped out of three positions today despite the strong market. There were a lot of small cap stocks that opened higher with the market but then closed in negative territory. I plan on keeping the portfolio slim for the next two weeks until we see what January brings.
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.
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
TRN - Trinity Industries
The long position was stopped at $27.65.
XLF - Financial ETF
The long call option position was stopped with a trade at $23.45.
VXX - Vix Futures ETF
The short position was stopped with a trade at $26.65.
If you are looking for a different type of trading strategy, try these newsletters:
Short term Calls and Puts on equities = Option Investor Newsletter
Credit spreads and naked puts = OptionWriter
Long term option investments = LEAPS Investor
3-6 month Option Trades = Ultimate Investor
Iron Condors = Couch Potato Trader
BULLISH Play Updates
SMCI - Super Micro Computer - Company Profile
No specific news. SMCI recovered yesterday's losses with a decent gain thanks to the nasdaq rebound.
Original Trade Description: December 7th
Super Micro Computer, Inc., together with its subsidiaries, develops and provides high performance server solutions based on modular and open architecture. It offers a range of server, storage, blade, workstation, and full rack solutions, as well as networking devices, server management software, and technology support and services. The company also provides a range of application optimized server solutions, including rackmount and blade server systems; and server subsystems and accessories comprising server boards, and chassis and power supplies, as well as other system accessories, including microprocessors, and memory and disc drives. In addition, it provides customer support services and hardware enhanced services. The company offers its products to data center, cloud computing, enterprise IT, big data, high performance computing, and Internet of Things/embedded markets. It sells its server systems, and server subsystems and accessories through direct sales force, as well as through distributors that comprise value added resellers and system integrators, and OEMs. Company description from FinViz.com.
Supermicro makes the best and most versatile computer servers, in my opinion. I have a tech background starting in 1967 and have been around servers and mainframes all my adult life. When I started Option Investor in 1997 we started with Super Micro servers and we have upgraded multiple times over the last 20 years and it has always been with Super Micro.
While they make great servers they have had some "public company" problems since coming public in 2007. Over the last four years they have traded as low as $7 and as high as $41. Back in July shares were crushed after they slashed guidance in half for a multitude of reasons including restructuring, component shipping delays and weaker than expected orders from several large accounts. Shares fell to $19 from $26. After three months they reported good earnings in late October and shares have been in rally mode since the election.
Earnings Jan 26th.
Shares are approaching resistance at $29 but I do expect them to break through given their recent guidance. It may not happen on the first test, but I expect it to happen.
Position 12/9/16 with a SMCI trade at $29.25
Long SMCI shares @ $29.25, see portfolio graphic for stop loss.
Optional: Long Jan $30 call @ 80 cents, see portfolio graphic for stop loss.
TRN - Trinity Industries - Company Profile
No specific news. Shares fell back below resistance to stop us out.
Original Trade Description: November 30th.
Trinity Industries, Inc. provides various products and services for the energy, transportation, chemical, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and couplers, axles, and other equipment, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2015, this segment had a fleet of 76,765 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other protective barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Company description from FinViz.com.
Trinity reported earnings of 56 cents that beat estimates for 52 cents. Revenue was $1.11 billion. They guided for full year earnings of $2.10-$2.20 per share. They currently have a trailing PE of only 8.94. Liquidity is currently over $2 billion.
They booked orders for 1,260 railcars in the quarter. Their order backlog is $3.7 billion representing orders for 34,870 railcars. The inland barge segment has an order backlog of $177.3 million. The order backlog for wind towers was over $1.0 billion.
Earnings Jan 25th.
Trinity has a good business. They have received fewer orders because of the energy slowdown but they have plenty of backorders to work through as the energy sector rebounds.
Shares rose nearly $1 today in a weak market and are holding right at 52-week resistance at $28. A breakout here could run to $35.
Position 12/1/16 with a TRN trade at $28.25
Closed 12/13/16: Long TRN shares @$28.25, exit $27.65, -.60 loss.
Closed 12/13/16: Long Jan $30 call @ 60 cents, exit .50, -.10 loss.
UIS - Unisys Corp - Company Profile
No specific news. Another minor decline from Thursday's 52-week high.
Original Trade Description: November 26th.
Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. Company description from FinViz.com.
The information technology sector is undergoing a transformation and older companies are becoming renewed as they change focus to the new cloud services offerings. Unisys was founded in 1886 making it 130 years old. You can imagine how many times they have changed products and focus over that period.
The company is focusing on cloud-based products and software as a service. They also offer physical security for data centers both physical security and software security. They offer a broad range of outsourcing services for building managers and clients. They have been selling their noncore assets and focusing their skills to build specialized capabilities to win industry specific projects.
They reported adjusted earnings of 41 cents compared to estimates for 29 cents. Revenue of $683.3 million beat estimates for $664 million.
Earnings Jan 24th.
Looking at a daily chart is scary since shares have risen from $10 to $15 since the election. However, the rise has been calm and without any material volatility on the days the market was weak.
On the weekly chart, resistance at $14.50 was broken on Thursday and there is nothing else to slow it down until $20.
Just in case the market tanks on Monday morning, I am putting an entry trigger on the position.
Position 11/30/16 with a UIS trade at $15.25:
Long UIS shares @ $15.25, see portfolio graphic for stop loss.
No options recommended because of price and spreads.
XLF - Financial SPDR ETF - ETF Profile
Shares dipped just enough to stop us out at $23.45. I had the stop tight to keep from giving back our gain if the market rolled over.
Original Trade Description: November 16th.
The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.
The ETF is comprised of 44% banks, 20% capital markets, 19% insurance, 11% diversified financial services and 6% consumer finance.
All of those sectors will do better as rates rise. As of today the CME FedWatch Tool shows a 91% chance of a rate hike in December as well as a 91% chance for the February meeting and 92% for March. If they do hike in December the odds will decline for February but depending on their commentary the March meeting will still be on the table. Multiple Fedwatchers have speculated there could be 3-4 rate hikes in 2017 if the economy continues to improve.
The Fed has to hike rates in 2017 in order to have some room to maneuver if the business cycle rolls over and a recession appears. We are in the third longest expansion in history and we are due for another recession soon.
The banks rallied on the rise in treasury yields and the expectations for the December rate hike as well as the potential for decreased regulation. President elect Trump has said he would kill regulations harming the banking industry. There is even talk of modifying Dodd-Frank.
Banks have rallied significantly and I would not suggest buying the actual ETF after the big gain. However, I do not believe the gains are over. The gains last week spiked the ETF to a 7-year high but the 2007 highs were over $30.
On Tuesday, somebody bought 300,000 contracts of the March $23 call at an average of 55 cents. That was $16.5 million in option premiums. That takes some serious conviction. I am recommending we follow them and buy the same call option. That way our risk is limited to $50 per contract. I am willing to bet $50 that the ETF will be over $23 by March. This is a long-term position and there will not be a stop loss.
Long March $23 call @ 29 cents. No stop loss.
YRCW - YRC Worldwide - Company Profile
No specific news. Only a 6 cent decline after a very strong rally.
Original Trade Description: December 5th.
YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2015, this segment had a fleet of approximately 8,500 tractors comprising approximately 7,300 owned and 1,200 leased; and approximately 32,000 trailers consisting of approximately 27,300 owned and 4,700 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, and other specialized offerings; expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates my.yrcregional.com and NewPenn.com, which are e-commerce Websites offering online resources to manage transportation activities. As of December 31, 2015, this segment had a fleet of approximately 6,600 tractors, including approximately 5,500 owned and 1,100 leased; and approximately 13,000 trailers comprising approximately 11,300 owned and 2,000 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. Company description from FinViz.com.
YRCW shares were crushed in early November after they reported earnings of 42 cents compared to estimates for 53 cents. Revenue of $1.22 billion missed estimates for $1.23 billion. The CEO said the results were impacted by a soft industrial backdrop and lower fuel surcharge revenue compared to the prior year. Who would have thought that low fuel prices would hurt earnings for a trucking company. Apparently, they have engineered their fuel charge program to profit from the fluctuations in the rates. Many companies do this since fuel prices are very volatile. Instead of changing the rates monthly and confusing customers, they project a quarterly rate. If they guess right they make a few cents on the fluctuations. If they guess wrong they lose a few cents but the customer rate is fixed for the quarter. With fuel rates relatively low and stable over the last couple quarters, the rate fixers probably assumed too low a base.
The CEO also said the less than truckload (LTL) sector remained steady despite the recent economic headwinds. With the economy ticking up for late Q3 and Q4, and this being a holiday shipping quarter, the Q4 earnings should be significantly better.
Earnings Jan 26th.
The transportation sector as evidenced by the Dow Transports ($TRAN) is on the verge of breaking out to a new high. Trucking is leading the charge.
Position With a YRCW trade at $14.05
Long YRCW shares @ $14.05, see portfolio graphic for stop loss.
Previously Closed 12/12/16: Long Jan $15 call @ 53 cents. Exit $2.30, +$1.77 gain.
BEARISH Play Updates
FIT - FitBit - Company Profile
No specific news. New historic low. Eleven of the last 12 ratings changes have been downgrades.
Original Trade Description: December 3rd.
Fitbit, Inc. provides wearable health and fitness tracking devices. It offers various products, including Fitbit Zip, an entry-level wireless tracker that allows users to track daily activity statistics, such as steps, distance, calories burned, and active minutes; Fitbit One, a clippable wireless tracker, which tracks floors climbed and sleep, as well as daily steps, distance, calories burned, and active minutes; Fitbit Flex, a wristband-style tracker that tracks steps, distance, calories burned, active minutes, and sleep; and Fitbit Charge, an activity and sleep wristband, which tracks steps, distance, calories burned, active minutes, floors climbed, and sleep. The company also provides Fitbit Alta, a customizable wristband that offers call, text, and calendar notifications when paired with the user's phone and SmartTrack automatic exercise recognition; and Fitbit Charge HR, a wireless heart rate and activity wristband. In addition, it offers Fitbit Blaze, a smart fitness watch that provides multi-sport functionality, tracks outdoor cycling activity, and provides run cues; Fitbit Surge, a fitness watch that features a GPS watch, heart rate tracker, activity tracker, and smartwatch; Aria, a Wi-Fi connected scale that tracks weight, body fat percentage, and body mass index; and Fitbit accessories that include bands and frames for Fitbit Blaze, bands for Fitbit Alta, colored bands for Fitbit Flex, colored clips for Fitbit One and Fitbit Zip, device charging cables, wireless sync dongles, band clasps, sleep bands, and Fitbit apparel. The company offers its products through consumer electronics and specialty retailers, e-Commerce retailers, sporting goods and outdoors retailers, and wireless carriers; and corporate wellness channels, as well as directly worldwide. Company description from FinViz.com.
FitBit is finding it is hard to move from the "nice to have" category to the "have to have" category. Quite a few of the millennial generation already have a FitBit but the majority are stuck in the back of a dresser drawer never to be worn again. The fitness watch is a fad. How many of us have bought a treadmill, stair climber, "insert your device name here" and it is either gathering dust in the corner or was eventually sold off in a yard sale to make room in the house?
The fitness watch is a great device if you are really into fitness. Since America is the most obese population on the planet, apparently the fitness crowd is in the minority.
When FitBit reported earnings, they guided for a bleak Q4 shopping season. There are too many competitors and not enough buyers. Last week FitBit offered between $34 and $40 million for Pebble, a smartwatch pioneer that has also fallen on hard times. Considering Pebble turned down an offer for $750 million in 2015, that shows you how tough the sector has become. Pebble has been laying off workers and trimming the product line. FitBit wants Pebble because of their unique operating system.
FitBit revenue rose at triple digit percentages in the prior three years. Over the last three quarters revenue has risen 50%, 47% and 23% in Q3. FitBit is only expecting 5% growth in Q4. Net income has posted double digit percentage declines in each of the last three quarters.
FitBit is in trouble. Some of the major watchmakers are now offering fitness watches and Apple is also chipping away at that market segment. FitBit closed at a historic low on Friday at $8 and it is almost a sure bet they will hit $5 without a surprise acquisition announcement by somebody else.
Earnings Feb 1st.
Update 12/8/16: Deutsche Bank downgraded FIT from buy to hold.
Short FIT shares @ $8.18, see portfolio graphic for stop loss.
Optional: Long Feb $7 put @ 50 cents.
IWM - Russell 2000 ETF - ETF Profile
The Russell 2000 only posted a fractional gain while the rest of the market was bullish. This could be a further sign the rally has run its course.
Original Trade Description: December 10th
The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.
The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.
I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -1,850 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.
Dow - January 2016
We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.
I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.
There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.
Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.
The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.
Position 12/12/16 with an IWM trade at $137.00
Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
The tightened stop did not last long. The VXX gained today despite the bullish market. This shows investors are buying a lot of puts in anticipation of a big decline. This was a great play with a $7.23 per share gain. We will launch it again when the market correction spikes the VIX.
Original Trade Description: September 6th.
The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.
Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.
Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.
Closed 12/13/16: Short VXX shares @ $33.88, exit $26.65, +$7.23 gain.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.