Option Investor

Daily Newsletter, Wednesday, 11/2/2016

Table of Contents

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

Market Wrap

Longest Losing Streak In Five Years

by Keene Little

Click here to email Keene Little
Everyone is making a big deal about the longest losing streak for the stock market in five years, down 7 days in a row after today's loss. Many argue it means nothing but concern over the uncertainty about the upcoming elections but there's some historical precedent for the losing streak and its importance in predicting what will happen next.

Today's Market Stats

A string of losses for 7 or more days in a row has only happened 3 times in the last 20 years and now we have the 4th time with today's loss. Each of the prior 3 times coincided with a major financial crisis for the market to deal with. The worst losing streak was an 8-day with the Lehman Brothers failure in October 2008. The next two times were 7-day losses when the U.S. debt was downgraded in July/August 2011 and then when the EU experienced its financial crisis in November 2011 (when the cost of insurance for EU debt climbed to a record level). The market sniffs out trouble in advance and the losing streak has been indicative of trouble ahead.

The interesting supposition here is that the current 7-day losing streak might be portending a Trump win, which most believe would cause a larger selloff in the stock market. Wall Street has made it abundantly clear it wants Clinton to win since it would keep the current power structure and influence in place.

Trump is a huge unknown and the market hates uncertainty, which is one reason why the market has been declining -- Trump is climbing in the polls and now the race is in many respects too close to call. Keep in mind that Brexit was not supposed to happen according to the elitists and mainstream media. The market will rally if Clinton wins but she's damaged goods following the latest email scandal and her presidency would hardly go smoothly. Many Republicans are out for blood. It's all reason enough to feel very uncertain about what's next.

The market is not paying much attention to anything else at the moment but this morning's ADP Employment report didn't help the market's mood. The report showed employment climbed 147K, which was below expectations for 165K and much less than 202K in September (revised up from 154K). The market has been expecting Friday's nonfarm Payrolls report to show an increase from 156K to 175K so there's the possibility for disappointment from that report.

This afternoon's FOMC announcement was a non-event since no one expected the Fed to change anything. They continue to jawbone the market into thinking it will be able to raise rates in December (their last chance to raise rates in 2016, something they've been attempting to do since last December) but their wording is basically "we think we can, we think we can, we think..." What they actually said was "The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives."

Before the FOMC announcement the odds for a rate hike stood near 70% and then after the announcement the odds increased to 80%. But the bond market is not showing any real concern about a rate increase since it has been rallying since November 1st, including today, and pulled back only a little after the announcement. A bond rally of course drops the yield and that's in defiance of the Fed wanting to raise rates.

The stock market has clearly been bearish, with a 7-day losing streak, but it's not been as bearish as previous losing streaks. Between the "losing less" and the choppy pattern we've been in since August, it's not hard to argue the bullish case here, especially if we continue to see a choppy consolidation into the election and Clinton wins. Look out above if that happens. Conversely, the choppy decline could be the beginning of a waterfall decline and if Trump wins we're going to see the waterfall decline accelerate to the downside. Both possibilities need to be respected and at the moment I could argue a case for either one. We'll have to let price action, with the help from charts, tell us which direction to trade.

S&P 500, SPX, Weekly chart

The descending triangle pattern for SPX that I had been tracking for the past several weeks, which is typically a bullish continuation pattern when it follows a rally, was broken this week with the decline below 2120. Failed patterns tend to fail hard and that leaves SPX vulnerable to a strong selloff from here. There is one other potentially bullish way to look at the pullback, which I discuss with the daily chart below, so I wouldn't say the bears have a slam-dunk setup here but if you're long you need to understand the risk here. The first thing the bulls need to do is recover SPX back above 2135, which would be a heads up that a new rally could be starting.

S&P 500, SPX, Daily chart

On the SPX daily chart I added a parallel down-channel for the move down from August, the bottom of which is currently near 2100 and SPX closed marginally below it today. This down-channel can be interpreted as a bull flag pattern, especially with the choppy price action we've seen since August. I would expect this down-channel to hold if it's to remain bullish so today's throw-under needs to turn right back up on Thursday if the bullish potential is to play out. But if the selling continues I would watch to see what happens near the price projection at 2089.54, which is where the move down from September 22nd would have two equal legs down and where it could complete a corrective wave pattern that will then lead to a new rally. But if SPX drops below its 200-dma, currently near 2081, I think it would be a strong statement that the market is in trouble and the 7-day loss we've seen would be predicting another strong market decline.

Key Levels for SPX:
- bullish above 2135
- bearish below 2081

Dow Industrials, INDU, Daily chart

The Dow has been holding up relatively well compared to the other indexes but it too is threatening to break down. It has had the "cleanest" descending triangle for the consolidation following the August high, and the expectation out of this pattern has been another rally leg. Breaking down below 18000 would leave it a failed pattern and that would signal strong selling ahead. But at the moment the breakdown is marginal and could still recover. It would have been better for the bulls if it recovered today instead of closing lower, but today is the first close below 18K and therefore it has another chance to recover. Similar to SPX, there is one other pattern that could be playing out, which is also a bullish one and I show it on the 120-min chart next.

Key Levels for DOW:
- bullish above 18,260
- bearish below 18,000

Dow Industrials, INDU, 120-min chart

Instead of a descending triangle for the Dow and instead of a parallel down-channel like for SPX, it's possible the Dow has been hammering out a bullish descending wedge for the pullback from August. The bottom of the wedge is the line along the lows from September 12 - October 13, which is currently near 17930, and it was tested with this afternoon's low. Much below 17925, on a closing basis, would tell us the descending wedge idea is not correct but for the moment it's a warning for bears not to get complacent here since the wedge tells us the entire pullback from August (18668) will be retraced and relatively quickly. The bullish interpretation portends a win for Clinton.

Nasdaq-100, NDX, Daily chart

On Monday NDX broke down from a bearish rising wedge but Tuesday's decline put an exclamation point on the breakdown. This pattern points to a fast decline to the beginning of the wedge, which is the September 12th low at 4656, before we'll see an appreciable bounce correction. But the market is short-term oversold (7 days down in a row) and could get at least a bounce at any time. There is of course the possibility that the big sideways consolidation since August is a bullish continuation pattern and will lead to another rally leg. A rally above 4840 would have me thinking a little more bullishly but for now it's looking more bearish.

Key Levels for NDX:
- bullish above 4840
- bearish below 4740

Russell-2000, RUT, Daily chart

The RUT has been the leader to the downside and while the blue chips were fighting gallantly to hold support the RUT was breaking down. The techs followed and finally the blue chips, which tells us risk-off has been the trade lately and that could continue at least into the elections. Risk-on will be the play if Clinton wins but right now there's too much worry about what could happen if Trump wins and investors have been bailing out of the riskier small caps. On Tuesday the RUT broke double support at the bottom of an up-channel from April and the bottom of a down-channel from September. Today's selling put an exclamation point on the breakdown and now we wait to see if price-level support near 1160 will hold. It's more bearish below that level, to at least its 200-dma near 1149, and potentially down to its uptrend line from March 2009 - October 2011, currently near 1114. If 1160 holds I see the potential for a big bounce in November before heading back down and if it gets back above 1215 I'd start thinking more bullish, such as a run to new highs.

Key Levels for RUT:
- bullish above 1215
- bearish below 1176

10-year Yield, TNX, Daily chart

Monday saw the 10-year gap up to 1.879, a little higher than I thought it would reach with this rally, but it was only a minor jump above the top of a parallel up-channel for the rally from July. Tuesday it gapped up again and tested the high before selling off sharply (with a bond rally). Today it broke below a short-term uptrend line from September 29th, currently near 1.819, and suggests yields could be starting back down (with a rally in bond prices).

High Yield Corporate Bond fund, HYG, Weekly chart

I've been suggesting recently to keep an eye on HYG since it's a good reflection of how much investors are willing to hold onto the riskier end of bonds. HYG has been underperforming the stock market for a long time and that's been a longer-term warning for stock market bulls. On October 26th it broke down from a rising wedge for the rally from February and the past two weeks have seen strong selling, which can be seen on its weekly chart below. As you can see on the chart, previous breaks of rising wedges have led to sharp selloffs and I expect to see more selling for HYG. Currently it's testing its broken downtrend line from June 2014 - April 2015, near 84.80 (today's low was 84.81) and it could get a bounce before heading lower (similar to the possibility for a stock market bounce).

Corporate High Yield Bonds A-D line vs. SPX, chart courtesy mcoscillator.com

Supporting a reason to feel more bearish than bullish HYG is shown on a chart done by Tom McClellan. The red line shows the advance-decline line for Corporate High Yield bonds and previously when it had made a lower high vs. a higher high for SPX it then led to a strong correction in the stock market. That's the current situation. Also, when the red line broke its uptrend line (gray dotted lines) it wasn't long before the stock market followed. The uptrend line from February has been broken and SPX broke its uptrend line from February last week.

Transportation Index, TRAN, Weekly chart

We have a potentially bullish signal from the Transports, which have not succumbed to the selling seen in the broader market. That's bullish divergence and it needs to be respected by the bears. The choppy consolidation since October 4th looks like a bull flag continuation pattern and a break above 8150 would signal a new rally leg. There is the potential for a decline to kick into gear and a drop below 7850 would be a bearish heads up. It might be good for only a drop down to the uptrend line from January-June, which will cross its uptrend line from March 2009 - October 2011 near 7625 at the end of the month. From there another bounce back up to the top of a possible ascending triangle, near 8150, would be a setup for stronger selling.

U.S. Dollar contract, DX, Daily chart

The US$ has pulled back from last week but still well within an up-channel from May. The uptrend line from May-August is currently near 95.65, a little below its 200-dma at 95.90, and I would not begin to turn bearish the dollar until it drops below 95.50. It could pull back a little further but I continue to look for higher prices for the dollar, probably near 100 before starting another pullback in its larger consolidation pattern.

Gold continuous contract, GC, Daily chart

Gold has returned to the scene of the crime, which was the breakdown on October 4th from what was a bullish descending triangle that ran from July through August. The bounce off the October 7th low has now made it back up to the breakdown level at 1308 (today's high was 1309.30 and it closed at 1297.80). This is a classic back-test of support-turned-resistance and the play here is to short gold. A tight stop just above today's high makes for a low-risk play.

Oil continuous contract, CL, Daily chart

Oil peaked out near the 51.97 projection, for two equal legs up from August 3rd, with the high at 51.93 on October 19th. From there it has dropped back down and today it closed below its uptrend line from August as well as back below its broken downtrend line from June, both of which crossed today near 46. The setup is for oil to continue lower, although a bounce correction first is a possibility, and it takes a rally above 52 to show us the bulls remain in control.

Economic reports

Tomorrow's two reports tomorrow at 10:00, Factory Orders and ISM Services, have the potential to be market moving, but the big report will be Friday's NFP report since it will affect how much the Fed thinks it can raise rates in December.


There are short-term bullish divergences showing up on the intraday charts when looking at today's lows vs. yesterday's. The market is short-term oversold and the bullish divergence could be pointing to at least a higher bounce in the coming days. There's been heavier-than-normal put buying in the past 3 days and that's usually a good indication the market is reaching an oversold condition. Whether or not a bounce, if we get it, develops into something impulsive to the upside or only a choppy consolidation instead will tell us more about what to expect after the bounce.

The big unknown of course is how the election will go and what kind of reaction we'll see from the market. The assumption at this point is that it will rally with a Clinton win, which means the pullback we've seen will be just a correction and will lead to a new rally leg into the end of the year. But if Trump wins then I think the choppy pullback we've seen so far will be followed by a waterfall decline. Looking at the shape of the decline from August you can see it steepening and that could be foretelling the waterfall. In either case, I think flat or a straddle/strangle position on election day (the 8th) would be the best way to deal with the market. A directional play could be a big win or big loss and that makes it a high-risk play.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

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New Option Plays

Lost its Spark

by Jim Brown

Click here to email Jim Brown

Editors Note:

YUM Brands spun off YUM China (YUMC) and there is no excitement left. The fast growth is gone and now it is a boring restaurant chain.


No New Bullish Plays


YUM - YUM Brands - Company Profile

YUM! Brands, Inc., operates quick service restaurants. It operates in three segments: the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items. As of April 21, 2016, it operated approximately 36,000 restaurants in approximately 130 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food categories. Company description from FinViz.com.

Yum China had 7,300 stores and adding 1,500 since 2012. Currently they are on a path to add 600 stores a year with a growth target of 20,000 stores. This was the growth engine for Yum Brands.

Now the parent company is going to focus on a dividend model and returning cash to shareholders. Yum is planning on reducing its owned store count in the U.S. from 3,200 to 1,000. In the U.S. the pace of new restaurants has slowed significantly and Yum will concentrate on generating and retaining cash of its existing portfolio.

While Yum may generate a great dividend in the years to come, the excitement has evaporated from the stock. There will be little growth and earnings are going to flat line.

Earnings Jan 4th.

Shares are at $60 and I think they have risk to $55 or even $45. There is support at $57.50 but the company has changed. I would not be surprised to see shares cut through that support very quickly.

The YUMC shares began trading on Tuesday and YUM shares have declined sharply on Tue/Wed. The option is cheap and we will have little risk.

Buy Dec $57.50 put, currently $1.11, no initial stop loss.

In Play Updates and Reviews

Small Caps Leading Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 is in full collapse and now almost 40 points below prior support at 1,200. The small caps are in collapse mode and moving fast. The index is now down -100 points or -8% from the 1,263 closing high in September. Portfolio managers are running scared and the volume is increasing.

With only four more trading days until the election is over, there is little time to raise cash and escape from potentially catastrophic positions. The biotech sector was down another -2.4% on worries Clinton could pull off a win.

I believe we need to remain on the sidelines until this volatility event is over.

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

DISH - Dish Networks

The long call position was stopped out at $56.85.

XBI - Biotech ETF

The long call recommendation remains unopened until $58.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

DISH - Dish Networks - Company Profile


No specific news. Dish crashed -4% to break below support and stop us out.

Original Trade Description: October 3rd.

DISH Network Corporation provides pay-TV services in the United States. The company operates through two segments, DISH and Wireless. The company provides video services under the DISH brand. It also offers programming packages that include programming through national broadcast networks, local broadcast networks, and national and regional cable networks, as well as regional and specialty sports channels, premium movie channels, and Latino and international programming. In addition, the company provides access to movies and TV shows via TV or Internet-connected tablets, smartphones, and computers; and dishanywhere.com and mobile applications for smartphones and tablets to view authorized content, search program listings, and remotely control certain features. Further, it offers Sling TV services that require an Internet connection and are available on streaming-capable devices, including TVs, tablets, computers, game consoles, and smart phones primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Additionally, the company operates Sling International that offers over 200 channels in 18 languages; and Sling domestic package that consists over 20 channels and tiers of programming, including sports, kids, movies, world news, lifestyle and Spanish language, and premium content, such as HBO. Further, it offers Sling Latino service; and satellite broadband services, wireline voice, and broadband services under the dishNET brand. Additionally, the company has wireless spectrum licenses and related assets. As of December 31, 2015, it had 13.897 million Pay-TV subscribers. Company description from FinViz.com.

Dish is gaining a significant number of views in the millennial generation that either have never had a cable subscription or cannot stand paying the monthly cable bills for what they believe should be free TV. They are also developing a large audience of Latino viewers with their various Spanish language channels. They also offer 18 other languages and more than 200 channels.

In early September, they gained the rights to about 800 sporting events offered by the six PAC 12 networks. Millennial's love to watch sports, especially when it is free or nearly free.

The online Sling TV offering is gaining market share with its skinny bundles including channel packages like HBO and Starz.

Over the last month, the consensus earnings estimates for the current quarter have risen from 63 cents to 68 cents. Full year estimates have risen from $2.92 to $3.05.

Earnings Nov 7th.

Since they signed the sports deal on September 12th the stock has been in rally mode. Shares are closing in on resistance from June at $56.50 and should easily break through. The next resistance is in the $65 range.

Position 10/4/16

Closed 11/2/16: Long Nov $57.50 call @ $2.43, exit $2.19, -.24 loss

HON - Honeywell - Company Profile


No specific news. Mario Gabelli commented on Honeywell saying the recent Elster acquisition should drive meaningful and sustained growth for HON spurred by global energy efficiency initiatives and natural resource management.

Original Trade Description: October 15th.

Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.

On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.

The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.

After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.

The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.

He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.

Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.

Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.

I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.

Update 10/21/16: Honeywell reported earnings of $1.67 that beat estimates for $1.60. Revenue of $9.8 billion also beat estimates for $9.77 billion. They guided for the current quarter to earnings in the range of $1.74-$1.78 and analysts were expecting $1.75.

Position 10/17/16:

Long Dec $110 call @ $2.51, see portfolio graphic for stop loss.

TREE - Lending Tree - Company Profile


No specific news. The company said it was adding more than 300 jobs in Charlotte headquarters expansion. Posted a minor gain in a weak market.

Original Trade Description: October 31st.

LendingTree, Inc., operates an online loan marketplace for consumers seeking loans and other credit-based offerings in the United States. The company offers tools and resources, including free credit scores that facilitate comparison shopping for these loans and other credit-based offerings. Its mortgage products comprise purchase and refinance products. The company also provides information, tools, and access to various conditional loan offers for non-mortgage products, including auto loans, credit cards, home equity loans, personal loans, reverse mortgages, small business loans, and student loans. In addition, it offers information, tools, and access to other products, including credit repair, through which consumers obtain assistance improving their credit profiles; debt relief services, through which consumers obtain assistance negotiating existing loans; home improvement services, through which consumers have the opportunity to research and find home improvement professional services; personal credit data, through which consumers gain insights into how prospective lenders and other third parties view their credit profiles; real estate brokerage services, through which consumers are matched with local realtors who assist them in their home purchase or sale efforts; and various consumer insurance products, including home and automobile, through which consumers are matched with insurance lead aggregators to obtain insurance offers. Company description from FinViz.com.

Lending Tree reported revenues that rose 35.5% to $94.6 million but missed estimates for $96.9 million. Earnings of 80 cents were in line with analyst estimates. The company lowered its revenue guidance for the full year from $380-$390 million to $370-$375 million. The stock was knocked for a $16 loss to $75.

Yes, they reported a 35.5% increase in revenue but missed estimates by $2 million and the stock was crushed. That is hardly worth a major decline.

That is not the entire story. Mortgage product revenues rose 21%. Total loan requests rose 68%. Small business lending has risen more than 200% from the year ago quarter. The MyLendingTree.com customer portal product now has more than 3.7 million members.

The CEO was not apologetic. He said in a quarter where mortgage rates were near a record low we optimized the business to expand margins and grow profits.

Earnings Jan 26th.

I see nothing wrong with Lending Tree. While they did miss revenue fractionally and guided fractionally lower for the full year, the business is booming. We should see a swift rebound because there are very few companies of any type growing this fast.

Position 11/1/16:

Long Dec $85 call @ $4.00, see portfolio graphic for stop loss.

XBI - Biotech ETF ETF Profile


Monday's positive gain was too good to last. Support broke at $56 and now the next target is $50. I am going to leave the recommendation active and I will lower the entry trigger as appropriate. If Clinton loses the election there will be a monster rebound.

This position remains unopened until a trade at $58. We will reset the entry point if the ETF continues lower.

Original Trade Description: October 29th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

The XBI traded up to $69 in late September and has since crashed back to support at $56 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls.

Comments from Clinton, Warren and Sanders about drug pricing concerns also caused investors to flee the biotech sector.

The biotechs may have ended their decline in fear of Hillary Clinton. After the news on Friday about the FBI reopening the criminal investigation on her emails, that should make it really tough to win the election. That means the biotech sector could begin to rebound even before the vote if the polls tighten even further or move into Trump's favor.

On Friday 10/28, the healthcare sector imploded on earnings and warnings from several companies including McKesson, AmerisourceBergen, Cardinal Health and others. The XBI failed to decline after hitting support at $56.

With the XBI now -18% off its September high, all of those factors above are baked into the market. This may be time to place a bet on a biotech rebound.

The ETF has support at $56 and the 200-day at $56.55. The dip on Friday penetrated to $55.80 but then rebounded $1 in a weak market.

I am recommending we buy a cheap December call ahead of the polls that will be out next week. If Clinton does win, we will exit on any weakness.

With a XBI trade at $58

Buy Dec $60 call, currently $2.07, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

BIG - Big Lots - Company Profile


No specific news. Down with the market. Big rebound on no news. Missed our stop loss by 5 cents.

Original Trade Description: October 26th.

Big Lots, Inc., operates as a non-traditional, discount retailer in the United States. The company offers products under various merchandising categories, such as food category that includes beverage and grocery, candy and snacks, and specialty foods departments; consumables category, which comprises health and beauty, plastics, paper, chemical, and pet departments; soft home category that consists of home decor, frames, fashion bedding, utility bedding, bath, window, decorative textile, and area rugs departments; hard home category, including small appliances, table top, food preparation, stationery, greeting cards, and home maintenance departments; and furniture category consisting of upholstery, mattress, ready-to-assemble, and case goods departments. It also provides merchandise under the seasonal category that includes lawn and garden, summer, Christmas, toys, and other holiday departments; and electronics and accessories category, including electronics, jewelry, hosiery, and infant accessories departments. The company operates 1,449 stores in 47 states. Company description from FinViz.com.

For Q2, the company reported earnings of 52 cents compared to estimates for 45 cents. Revenue of $1.2 billion missed estimates for $1.22 billion. For the current quarter they guided for a profit of 1 cent to a loss of 4 cents. That is not exactly a stellar performance.

Revenue growth in Q2 slowed from the 3% in Q1 quarter to a -0.5% decline in Q2. Same store sales only rose +0.3%. Big Lots warned Q4 comps would be "flattish" and leaving the door open for a decline. They revised down full year revenue guidance to only 1-2% growth. The admitted online sales were only about 4% of the total and there was limited inventory online. That is not what investors wanted to hear.

Earnings Dec 2nd.

Shares collapsed to plateau about $47 in September. In October that plateau declined to $44.50 and this week that level has now broken. With the market weakening there is less tolerance for companies that are not performing. Shares are near a 9-month low.

Position 10/27/16:

Long December $42.50 put @ $2.10, see portfolio graphic for stop loss.

VXX - VIX Futures ETF - Company Profile


Another dead stop at resistance at $36.

This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

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 down 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. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.

YHOO - Yahoo - Company Profile


No specific news. Secondary support broke intraday. There was a big spike at the open to $41.26 but missed our stop loss at $42.35. The selling was immediate and strong.

Original Trade Description: October 15th.

Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.

After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.

When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.

On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.

I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.

If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.

Update 10/18/16: Yahoo reported revenue that fell -14% to $857 million. This is the fourth consecutive quarter that revenue has fallen more than 10%. They beat on earnings with 17 cents compared to estimates for 11 cents but did it on major cost cutting with the termination of 2,200 employees or one-fifth of its workforce. Verizon signaled last week it was reconsidering the acquisition because of the damage from the cyber attack. The decision to complete the deal or back out should be made over the next 2-3 weeks. Yahoo did not hold a conference call in order to avoid having to answer questions that might stir up more objections by Verizon.

Update 10/26/126: Verizon executive, Marni Walden, said Verizon was taking an in-depth look at how the Yahoo cyber attack occurred and what risk Verizon would have from continuing the acquisition. They would have an answer within 60 days. She said the deal still makes sense strategically BUT we have to be careful about what we do not know. The deal was tentatively still on track but the impact of the breach was "material" and still a big unknown. Use of the word material refers to a possible "material adverse change" or MAC clause in the contract that would allow Verizon to walk from the deal. With 500 million accounts hacked, a $20 fine on each account would be $10 billion and more than twice the $4.8 billion sales price.

This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.

Position 10/17/16:

Long Jan $40 put @ $1.90. See portfolio graphic for stop loss.

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