The Dow gave up -118 points after the Fed meeting to push it one-step backwards in its attempt to reach 20,000. The Dow spiked to 19,966 intraday and only 34 points from the 20K level. However, selling was immediate and volume increased. I wrote last week about the potential for anticipatory selling before the 20K level as shorts tried to get a head start on the 20K sell the news event. The post Fed spike to the highs was hit with four waves of selling to knock the index back below 19,800.
The Russell 2000 was crushed again with a 17 point decline of -1.3%. This is the sentiment indicator for the market and this was the fourth consecutive day of either fractional gains or greater than 1% losses.
We lost three more positions when the market rolled over. I am purposely keeping the stop losses tight to limit our losses because of the anticipated decline over the next four weeks. I will be adding new positions only when there is a very strong reason to do it. We need to be conscious of the potential for a significant market decline and not put on new positions just to be stopped out.
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
CME - CME Group
The long call position was stopped out at $121.15.
ESNT - Essent Group
The long call position was stopped out at $31.85.
FLOW - SPX Flow
The long call position was stopped out at $31.75.
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Long and short equity trades = Premier Investor
BULLISH Play Updates
ADP - Automatic Data Processing - Company Profile
No specific news. Minor decline after a 52-week high.
Original Trade Description: December 5th.
Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.
ADP reported a 26.5% rise in earnings to 86 cents that beat estimates by 9 cents. Revenues rose 7.5% to $2.92 billion and beat estimates for $1.91 billion. The number of employees on client payrolls rose 2.7%. They ended the quarter with $2.82 billion in cash and long-term debt of $2 billion. The announced the sale of their CHSA and COBRA business to WageWorks for $235 million. The sale will be completed in Q2 2017.
The company guided for 2017 revenue growth of 7% to 8% and 15% to 17% earnings growth. The PEO Services segment revenues are expected to rise 14% to 16%.
The company just declared a 57-cent quarterly dividend to raise the annual dividend to $2.28.
Earnings Feb 1st.
ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.
Shares took profits last week from a very nice climb and could be ready to try for a new high.
There is resistance at $97 but given the time of year and the overbought conditions in the rest of the market, we could see a breakout. Options are relatively cheap.
Long Feb $97.50 call @ $2.10, see portfolio graphic for stop loss.
CME - CME Group - Company Profile
No specific news. CME said open interest of all contracts surpassed 120 million contracts for the first time. That did not help the stock. Once the market began to roll over, CME shares lost $2 to stop us out at the low of the day. I will reinstate this position after the market corrects.
Original Trade Description: December 12th.
CME Group Inc., operates contract markets for the trading of futures and options on futures contracts worldwide. The company offers a range of products across various asset classes, based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, and metals. Its products include exchange-traded; and privately negotiated futures and options contracts and swaps. It executes trade through its electronic trading platforms, open outcry, and privately negotiated transactions, as well as provides hosting, connectivity, and customer support for electronic trading through its co-location services. The company also provides clearing and settlement services for exchange-traded contracts, as well as for cleared swaps; and regulatory reporting solutions for market participants through its global repository services in the United States, the United Kingdom, Canada, and Australia. In addition, the company offers a range of market data services, including live quotes, delayed quotes, market reports, and historical data service, as well as index services. CME Group Inc. serves professional traders, financial institutions, institutional and individual investors, corporations, manufacturers, producers, governments, and central banks. The company was formerly known as Chicago Mercantile Exchange Holdings Inc. Company description from FinViz.com.
The Chicago Mercantile Exchange is in the right place at the right time. Trading in commodity and futures contracts of all kinds is exploding. On December 1st the volume of energy futures contracts hit a record 4.5 million contracts. That broke the prior record of 3,832,201 contracts from February 11th. With crude futures in the spotlight after the OPEC production cuts and prices changing rapidly, that record is not going to last long. On November 11th the CME set a new record for single-day volume in all contracts of 44,516,949 contracts. The prior record was 39,567,064 so that was a major beat. Globex electronic contracts traded 39,997,534 contracts, also a record. The CME collects a fee on every contract traded.
Earnings in 2016 are expected to be at record levels and 2017 is likely to be even higher.
Earnings January 26th.
The equity volume over the last month has been huge and futures volume is keeping pace. The CME is expected to post strong earnings so there is likely to be some run up into the event, market permitting.
Shares spiked back in early November after the CME declared a 60 cent dividend payable Dec 29th to holders on Dec 9th. We are already past that date and the stock did not decline materially. That was also when they announced the record contract volume.
Going long ANY stock over the next three weeks is risky. However, any selling should be muted because taxes are expected to be lower in 2017 so most heavy hitters will be holding until January to get the benefit of any lower tax rate. At least that is the theory.
Position 12/13/16 with a CME trade at $123.50
Closed 12/14/16: Long March $125 call @ $2.84, exit $2.15, -.69 loss.
ESNT - Essent Group Ltd - Company Profile
No specific news. The two day selling event hit our stop loss at $31.85.
Original Trade Description: December 10th.
Essent Group Ltd., through its subsidiaries, provides private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. The company also provides information technology maintenance and development services; customer support-related services; and contract underwriting services. It serves originators of residential mortgage loans, such as regulated depository institutions, mortgage banks, credit unions, and other lenders.
Company description from FinViz.com.
Essent reported earnings of 65 cents compared to estimates for 58 cents. Revenue was $121.3 million. For 2015 they saw earnings rise 65.1%. The current growth estimate for 2016 is 37.8%. While that is less than 2015 rate the relatively young company is still in a growth spurt. It is easy to show big percentages in the early years since there were little to no earnings when you started. The company began in 2008
Over the last month analyst consensus estimates have risen from 60 to 62 cents and full year estimates have risen from $2.27 to $2.34.
Shares have risen $5 over the last $3 weeks but not at the frantic pace of some other high visibility stocks. Essent is moving slowly higher a few cents a day. When the eventual profit taking appears in the broader market, Essent could be less impacted than some other stocks.
Options are cheap and we can buy well into the future for just a couple dollars.
Closed 12/14/16: Long April $35 call @ $1.82, exit .96, -.86 loss.
FFIV - F5Networks - Company Profile
FFIV was upgraded by Citigroup from neutral to buy with a $175 price target. A big spike to $147.25 followed but collapsed back to prior resistance at $144 in the weak market.
Original Trade Description: November 21st.
F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Link Controller, which monitors the health and availability of each connection in organizations with more than one Internet service provider; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; and Traffix Signaling Delivery Controller for diameter signaling and routing. Company description from FinViz.com.
The big attack on the Internet several weeks ago was driven by malware that had been placed on IoT devices including security cameras, cable boxes, burglar alarms and dozens of other device types. These devices are typically delivered without any material malware defenses. It is up to each manufacturer to overcome this in the future with some kind of defense.
However, FFIV provides software and hardware to prevent denial of service attacks from these devices as well as the more robust attacks from computers and servers. With more and more servers in the cloud it is harder to protect them from attack like you would dedicated physical servers in a dedicated data center. This is where FFIV excels.
The company's Silverline service places a sophisticated cloud based filter around critical infrastructure that stops attacks instantly. Aided by hardware based firewalls in dedicated data centers they protect data and equipment from all outside attacks.
For Q3 they reported earnings of $2.11 compared to estimates for $1.94. revenue of $525 million beat estimates for $520 million.
Earnings Jan 21st.
FFIV shares spiked on earnings in late October and have been moving steadily higher. They are about to break over resistance at $144 and we could see another leg higher when that happens.
Position 12/8/16 with a FFIV trade at $142.25
Long Jan $145 call @ $3.80, see portfolio graphic for stop loss.
FLOW - SPX Flow Inc - Company Profile
No specific news. Market weakness caused the stock to drop -3% to stop us out for a minor loss.
Original Trade Description: November 30th.
SPX FLOW, Inc. provides various engineered solutions worldwide. The company engineers, designs, manufactures, and markets products and solutions used to process, blend, filter, dry, meter, and transport fluids with a focus on original equipment installation, including turn-key systems, modular systems, and components, as well as aftermarket components and support services. It operates through three segments: Food and Beverage, Power and Energy, and Industrial. The Food and Beverage segment offers mixing, drying, evaporation, and separation systems and components, as well as heat exchangers, and reciprocating and centrifugal pump technologies primarily under the Anhydro, APV, Bran+Luebbe, Gerstenberg Schroeder, LIGHTNIN, Seital, and Waukesha Cherry-Burrell brands. The Power and Energy segment provides pumps, valves, and related accessories, principally for use in oil extraction, production, and transportation at wells, as well as for pipeline applications under the APV, Bran+Luebbe, ClydeUnion Pumps, Copes-Vulcan, Dollinger Filtration, LIGHTNIN, M&J Valve, Plenty, and Vokes brands. This segment primarily serves customers in the oil and gas industry, as well as in nuclear and other conventional power industries. The Industrial segment offers air dryers, filtration equipment, mixers, pumps, hydraulic technologies, and heat exchangers under the Airpel, APV, Bolting Systems, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power Team, and Stone brands. This segment principally serves customers in the chemical, air treatment, mining, pharmaceutical, marine, shipbuilding, infrastructure construction, and general industrial and water treatment industries. Company description from FinViz.com.
SPX Flow was spun off from SPX Corp (SPXC) in September 2013. Shares sold off from the $40+ opening to $15 over the next six months. After a quick rebound to $31 in May the stock has moved sideways for the rest of the year.
They reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $466.8 million narrowly missed estimates for $467.7 million. They guided for full year earnings of $1.27-$1.47 with revenue of $2.0 billion.
The CEO said the company had made good progress in its restructuring efforts post split. Revenue was light in Q3 because of a delay in shipping some orders in the energy sector. They are looking forward to a rebound in the energy sector and manufacturing in general.
Earnings Feb 1st.
Shares closed right at 52-week resistance at $31.50 and are poised for a breakout, market permitting. The stock gained $1 today in a weak market.
Closed 12/14/16: Long March $35 call @ $1.51, exit $1.31, -.20 loss.
UNH - UnitedHealth - Company Profile
No specific news. Weakness in the Dow caused a minor decline.
Original Trade Description: December 7th
UnitedHealth Group Incorporated operates as a diversified health and well-being company in the United States. The company's UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, individuals, and military service members; and health care coverage, and health and well-being services to individuals aged 50 and older addressing their needs for preventive and acute health care services. It also provides services dealing with chronic disease and other specialized issues for older individuals; Medicaid plans, Children's Health Insurance Program, and health care programs; and health services, including commercial health and dental benefits. This segment serves through a network of 1 million physicians and other health care professionals, as well as approximately 6,000 hospitals and other facilities. Its OptumHealth segment offers health management services, including care delivery and management, wellness and consumer engagement, distribution, and health financial services. This segment serves individuals through programs offered by employers, payers, government entities, and directly with the care delivery systems. The company's OptumInsight segment provides software and information products, advisory consulting services, and business process outsourcing and support services to hospitals, physicians, commercial health plans, government agencies, life sciences companies, and other organizations. Its OptumRx segment offers pharmacy care services and programs, including retail pharmacy network management, home delivery and specialty pharmacy, manufacturer rebate contracting and administration, benefit plan design and consultation, claims processing, and clinical program services, such as formulary management and compliance, drug utilization review, and disease and drug therapy management. Company description from FinViz.com.
UNH will have about $184 billion in revenue in 2016 to put it at number six on the Fortune 500 list. With its broadening of scope using its various Optum programs it is maximizing profits by widening the service component of its business. Here is an excellent article on why UNH will be the most profitable. Amazon of Healthcare
I am not going to go into an in depth explanation of UNH. That article I referenced has plenty of information why UNH should be a long term holding of any investor.
Earnings January 17th.
I wanted to play UNH last week when it was at $152 but it had resistance at $153 and I decided to wait another day to see if that resistance was broken. Shares gapped up to $158 at the open the next day and ran to $162.50 over the next four days. Now that big gain has been digested and shares pulled back to $156 before adding a couple dollars on Wednesday. I believe the UNH rally will continue for the reasons listed in that article above. I am willing to take a shot here that the market rally also continues even if Wednesday's futures related spike fades in the days ahead. We have 16 trading days until 2017 and we should close the year at higher levels.
Position 12/13/16 with a UNH trade at $160.25
Long Jan $165 call @ $2.58, see portfolio graphic for stop loss.
BEARISH Play Updates (Alpha by Symbol)
DIA Dow ETF - ETF Profile
Finally a decent decline but far too early to know if it was a direction change. I suspect it was just a sell the news move on the Fed announcement and we will see some more
Choppy trading over the next two weeks before a material decline in January.
Original Trade Description: December 7th
The SPDR Dow JonesÂ® Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.
Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.
Now 13 years later we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.
However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.
I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.
Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.
12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.
12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.
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