Option Investor

Daily Newsletter, Wednesday, 12/21/2016

Table of Contents

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

Market Wrap

Bullish Seasonal Pattern Fighting a Tired Market

by Keene Little

Click here to email Keene Little
The stock market's indexes haven't been able to add many, if any, points to the board since peaking on December 13th but the choppy pullback/consolidation keeps things potentially bullish if the bulls step back in quickly. Otherwise we have some warning signs that tell us the seasonally bullish time ahead could run into trouble this year.

Today's Market Stats

Trading volume continues to wither as the week progresses and today's volume was near the level seen on previous slowest days of the year and it's now approaching what we saw during the week leading into the Christmas holiday last year. Volume will likely continue to slow but that often helps the bulls this time of year as the sellers leave and wait until after the holidays before they launch their attack. I think some short sellers are licking their chops in anticipation of a correction to the Trump rally, which has been built mostly on hope.

The stock market usually rallies in the final 5 days of the month, between Christmas and New Year's Day and then a couple of days into January, which has earned the nickname the "Santa Claus" rally. The risk this time is that we've had such a strong rally preceding this period and the market could suffer the problem of running out of buyers. But that's only conjecture and at the moment we have a seasonally bullish period in front of us and a bullish price pattern that hasn't turned bearish yet.

The past is never a guarantee how the future will unfold but according to Stock Trader's Almanac, the S&P 500 has averaged a gain of +1.4% during the Santa Claus rally since 1950. Going back further, the Dow has rallied during this 7-day period 75% of the time for an average gain of +1% since 1986. According to MarketWatch, the average 7-day gain in all other periods, going back 120 years, is +0.1% so the Santa Claus rally is a 10x improvement over the average of 7-day periods. For the Dow, a +1.0%-1.4% rally would kick it up to about 20200-20300. But the short-term price pattern since last week is starting to show some signs of trouble if the buyers don't step back in quickly. And as I'll show for the Dow, there is a possible short-term ending pattern since last week that could shoot Santa out of the sky (hopefully not before he unloads his sleigh).

One problem for the market is the extreme levels of bullishness that quickly climbed from extreme fear only 6 weeks ago. Too much too fast comes to mind. Last week I showed the Fear & Greed index and pointed out the sharp rise in bullish sentiment (the greed factor) since the November low. Since last week the index has backed off from a high at 88 to the current reading of 75 and the significance of this is that the market might have run out of buyers. The reason this indicator is used as a contrarian signal is because at the extremes the market trend is well recognized and most traders have joined the trend. That means buying in a rally and selling in a decline. Once the market runs out of buyers/sellers the trend completes and reverses. It doesn't always take an "event" to trigger a reversal but instead it could simply result from running out of traders to support the move.

CNN Fear & Greed index, 2014-December 20, 2016

While the price pattern for the index supports the idea for another rally leg, the falloff in bullish sentiment shows us there is the risk that the market could be in the early stages of a reversal. At the moment the Fear & Greed index is showing us a reason to be cautious about the upside while the price pattern and the bullish season says the rally is not done yet. That could change quickly if the indexes start to drop in a sharp move down.

S&P 500, SPX, Weekly chart

There are enough differences between the indexes to warn us that the interpretation of one is not necessarily correct. But typically trend lines do a good job showing us where to watch for support and resistance and the top of a rising wedge for the rally from February for SPX was tested with last week's high at 2277. If can press a little higher into next week, the top of the rising wedge will be near 2290. There are two price projections coinciding with that level, one for two equal legs up from February, at 2292.63, and the other for two equal legs up from June, at 2285.92. Between the price projections and the top of the rising wedge we have an upside target zone at roughly 2286-2293. But at the moment SPX has stalled at a potentially important target zone at 2271-2273, which is derived from the Gann Square of 9 chart (alignment with the March 2009 price low and date). SPX could certainly rally well above 2300 but at the moment it's looking like a risky bet.

S&P 500, SPX, Daily chart

The consolidation since December 13th has brought SPX over to its uptrend line from November 4 - December 2, which would be tested with a little lower Thursday morning at 2262. Near the same level is its previously broken, and then recovered (on December 7th), uptrend line from February-June (gray line on the daily chart below). Note the rising wedge pattern for the rally from November 4th, which fits well as the final wave in the larger rising wedge for the rally from last February. Keep in mind that rising wedges are typically retraced much faster than it took to build them. Hanging on complacently to a long position has the potential to be a very painful experience.

Key Levels for SPX:
- bullish above 2278
- bearish below 2243

S&P 500, SPX, 60-min chart

The 60-min chart below shows a sideways triangle for the consolidation off the December 13th high and this fits as a bullish continuation pattern. The expectation is for another rally leg and assuming we'll get it, the bigger question is then how high it will go. It should be the last leg of the rally from November 4th and potentially the last one for the rally from February. It could be that significant. I would say the minimum expectation is for a rally to the 2286-2293 area to meet the price projections discussed with the weekly chart. The next upside target would be a price projection at 2314, where the 5th wave of the rally from November would be 62% of the 3rd wave. That projection crosses the top of the rising wedge for the rally from November on Friday, which seems a little more than aggressive considering how much the trading volume has slowed down. Where's the buying pressure going to come from. But until proven otherwise, bears need to consider the upside potential. And now all the bulls need is to prevent a break below some important trend lines near 2261. A drop below 2260 would be a bearish heads up. Below 2243 would be even more bearish since that's the projection for two equal legs down from December 13th for a possible a-b-c pullback correction.

Dow Industrials, INDU, Daily chart

As for SPX, the Dow could have the same bullish sideways consolidation off last week's high and is now setting up for the next rally leg. It has steeper rising wedge off its November 4th low, the top of which will be near 20500 by the end of the month. That would be an impressive (+2.5%) rally and I'm having trouble seeing that potential but it remains a possibility. But there's also the possibility that it is forming a small rising wedge off the December 14th low, which calls for just one more minor new high, near 20030 by Friday. Because of this potentially bearish pattern (a small rising wedge to complete the rising wedge off the November low) I want to see the Dow above 20050 before believing we'll see the Santa Claus rally. If the Dow drops below Monday afternoon's low at 19870 it would point to the possibility of a drop to 19650 before maybe starting another rally leg. Below 19650 would tell us a top is very likely already in place.

Key Levels for DOW:
- bullish above 20,050
- bearish below 19,650

Nasdaq-100, NDX, Daily chart

NDX has a similar ending pattern as the Dow, if that's how it's to be interpreted. Only one more minor new high could finish off its rally but a move above 4975 would turn it more bullish and we'd likely see 5000 as the next stop.

Key Levels for NDX:
- bullish above 4975
- bearish below 4870

Russell-2000, RUT, Daily chart

The RUT is struggling with its uptrend lines from November 3rd -- one through the December 2nd low was broken December 13th, and the other through the December 14th low was broken on December 16th. The latter has been acting as resistance on multiple back-tests since Monday and is not acting bullishly. There's still upside potential to the trend line along the highs from 2007-2015, near 1403, but its price action has me wondering if the RUT is going to break down sooner rather than later. Below its December 14th low at 1354, as well as its 20-dma, would trigger a sell signal and then I'd be watching for 1346 (two equal legs down from December 9th) and then 1322 (2nd leg of its decline equal to 162% of the 1st leg down).

Key Levels for RUT:
- bullish above 1400
- bearish below 1300

30-year Yield, TYX, Weekly chart

Last week I showed a weekly chart of TLT, the 20+ year bond ETF, and how it was testing its uptrend line from February 2011 - December 2013. This week's bounce has it looking like support is going to hold, although I can't say I'm impressed with the bounce pattern and it remains possible we'll see at least a test of last week's low and maybe a little lower before setting up for a larger bounce. Moving over to the 30-year Bond, TYX, its weekly chart shows a little more upside potential to reach the same but opposite trend line. Its downtrend line from February 2011 - December 2013 is currently near 3.27% and its high so far is its December 12th high at 3.196%. Since that high it has pulled back slightly in a choppy consolidation pattern and supports the idea we'll at least a little higher before reversing back down (which keeps yields in alignment with the expectation for the stock market this month). A rally above the downtrend line, with a break above 3.28%, would obviously be more bullish, especially if the trend line acts as support on a pullback.

KBW Bank index, BKX, Weekly chart

The banks have been a significant driver behind the rally from November and so far it's looking like it's not over. The consolidation following the high on December 8th looks like a bullish continuation pattern, which might need just one more pullback within the consolidation range before starting another leg up. For the moment, assuming we'll see another rally leg, I like an upside target at 97.07, which is where the leg up from February would equal the first rally leg off the March 2009 low (into the April 2010 high). That projection crosses the top of a parallel up-channel from February around mid-January. The first sign of trouble for the bulls would be a decline below the trend line along the highs from April 2010 - July 2015, near 87.

Transportation Index, TRAN, Daily chart

On December 7th the TRAN popped above its November 2014 high at 9310 and then topped out at 9490 on December 9th. It then pulled back below 9310 two days later and has been struggling to get back above this important level. At the moment we have a failed breakout attempt and yesterday's close near 9310 followed by today's small pullback is not helping the bullish cause. The TRAN would be more bullish above a price projection near 9534 and at least short-term bearish below last Friday's low at 9159, which would also be break of its rising 20-dma.

U.S. Dollar contract, DX, Weekly chart

The US$ has reached an important level where we could soon find out if its rally will continue or if instead we'll see a sharp reversal into 2017 before starting the next rally leg later in 2017. Looking at the March 2015 - May 2016 pullback, a 127% extension of that move is at 103.20 (the red projection on the chart). The leg up from May 2016 is a 3-wave move and the 2nd leg of the rally is 162% of the 1st leg at 103.33 (the blue projection). Last Thursday's high was 103.56 and yesterday's high was 103.62, both of which are showing bearish divergence against the November highs. The close correlation of the two projections points to the potential for a reversal from here and the intermediate-term possibility is for a relatively sharp decline to its 200-week MA, near 90-91. But the dollar would remain bullish if it climbs above 103.50 and stays above that level.

Gold continuous contract, GC, Weekly chart

Gold has remained under pressure the past several weeks but it's looking like it could get at least a bounce. Last week's low at 1124.30 came within 3.30 of a price projection at 1121 for the 3rd wave of the decline from July. At the moment I'm calling the leg down from November 9th the 3rd wave of the decline because I'm expecting gold to continue lower following a 4th wave bounce/consolidation. But I also recognize the potential for a much stronger rally to kick off following what is so far a 3-wave pullback from July. It will be the form of the bounce/consolidation over the next few weeks that will provide the clues needed to help figure out the next move. Many gold analysts are calling this a "golden" buying opportunity but I think it's too early to make that call.

Silver continuous contract, SI, Weekly chart

Keeping an eye on silver to see if it's providing clues for gold, it's been trying to hold support near 16. A stronger break below it would not be a good sign but at the moment it's a setup for at least a bounce back up to its broken 50-week MA (which acted as resistance on a back-test the prior two weeks), near 17.25.

Oil continuous contract, CL, Weekly chart

The stronger dollar hasn't hurt oil but nor has oil been able to rally much more after the strong spike up at the end of November/early December. All of the price action since August looks corrective and continues to point lower but it would be at least short-term bullish if it can rally above 55, in which case we would likely see price-level S/R near 58.50 tested. Oil could continue to chop its way higher but at the moment it's looking vulnerable to breaking down instead.

Economic reports

The market is not paying much attention to economic reports but Thursday will see many reports that could move the market. We'll get the GDP 3rd estimate, unemployment claims data, Durable Goods Orders, Leading Indicators, Personal Income and Spending and the Core PCE Price index (a measure of inflation). These are all reports that will tell us how well the economy is doing and supply further information for the Fed and their rate-increase plan. Friday we'll get the final Michigan Sentiment numbers and New Home sales.


The seasonal Santa Claus rally looks like it could happen again this year (between Christmas and New Year's and first two days of January) but there are a few things that are warning us to not get complacent about that expectation. The falloff in bullish sentiment, as shown with the Fear & Greed index, is a warning sign that the market has run out of buyers. The strong rally since November might have already sucked in all the buyers (and spit out the shorts) that we're going to see.

Some indexes, as shown on the Dow's chart, are indicating a possible ending pattern (small rising wedge), while others, such as SPX, show a bullish sideways triangle bullish continuation pattern. There are mixed signals between the indexes and the message at this time is to be very careful about expecting further upside while at the same time there are no clear signals for bears to start getting short.

The VIX is dangerously low, having dropped to a low of 10.93 this morning before bounce back up for most the day. That had it dropping below the August 9th low at 11.02 and that was very near the top for the stock market prior to the current highs. The August high led to a decline into the November low. No fear with still relatively high bullish sentiment is a dangerous combination.

The bottom line is that we are heading into a bullish seasonal pattern but with weak trading volume (and therefore higher risk for some volatile moves) and potentially no more buyers after the strong rally, it could be a challenge getting much more of a rally out of this market. Some price patterns and sentiment are also telling us to be careful about expecting much, if any, further upside. Combining all of it together creates a potentially tough trading environment for both sides. Sitting tight and keeping your powder dry could be your best trade for the rest of the year. If long, tighten up your stops, and if you're itching to get short, wait for further evidence of a top since it remains possible, especially with low volume, that this blow-off rally could continue to go much higher than we think possible.

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

Dull Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow traded in a very narrow 37-point range until a closing dip raised that to 45 points. That was the narrowest range in 4 years. The reason was no volume. Even the sellers have closed up shop for the week.

There could always be a random program trade or somebody pulling the rip cord because of an internal headline but without some external force the market should remain dormant for the rest of the week.

As traders we should also remain dormant. There is no fundamental reason to try and force a new play when volume is only going to decline even further. Today's volume was 4.78 billion shares and tomorrow may be around 4.0 billion. Friday will be even less.

Tuesday is now my bet for Dow 20K.

If you are just dying for something to play, buy February calls on the $VIX. The $15 call is $2.20 and a spike to the $20 level would be a decent payday. I am not recommending it because we already have four shorts in anticipation of a January decline.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Frozen in Place

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Polar Vortex struck Wall Street on Wednesday and froze the markets in place. The Dow traded in a very narrow 37-point range most of the day but extended that by 10 points right at the close to end at the low for the day. There was no volume with only 4.7 billion shares traded and most of that on the open.

This is only going to get worse over the next two days. Volume is a weapon for the bulls and it appears they all headed to the barn. Dow 20K has yet to be touched with the Dow missing by 14 points at the open and closing 57 points below that level. With the expected low volume the rest of the week that makes next Tuesday the most likely date for the 20K event.

I would strongly recommend investors remain very flat with your account in cash until we get to January.

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

DRI - Darden Restaurants

The long put position was entered at the open.

VRTX - Vertex Pharma

The long call position was stopped at $75.25.

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

ADP - Automatic Data Processing - Company Profile


No specific news. New 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.

Position 12/6/16:

Long Feb $97.50 call @ $2.10, see portfolio graphic for stop loss.

FFIV - F5Networks - Company Profile


No specific news. Minor decline in a 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.

UNH - UnitedHealth - Company Profile


No specific news. Shares still weak after WellCare (WCG) guided below analyst estimates for 2017 on Monday.

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.

VRTX - Vertex Pharmaceuticals - Company Profile


No specific news. Shares fell -$4 or -5% on no news specific to VRTX. Fortunately the stop was relatively tight and we exited at $75.25.

Original Trade Description: December 14th.

Vertex Pharmaceuticals Incorporated engages in discovering, developing, manufacturing, and commercializing medicines for serious diseases. The company focuses on developing and commercializing therapies for the treatment of cystic fibrosis (CF) and advancing its research and development programs. It markets ORKAMBI for the treatment of patients with CF 12 years of age and older who have two copies (homozygous) of the F508del mutation in their CFTR gene; and KALYDECO (ivacaftor) for the treatment of patients with CF 6 years of age and older who have the G551D mutation in their CFTR gene. The company also develops VX-661, a corrector compound that is in a Phase III development stage in combination with ivacaftor in multiple CF patients; VX-371, an investigational epithelial sodium channel, which is in a Phase II development stage; and VX-152 and VX-440 that are CFTR corrector compounds in Phase I clinical trial. In addition, it engages in the research and mid-and early-stage development programs in the areas of oncology, pain, and neurology. Company description from FinViz.com.

Vertex missed earnings by 2 cents with a 17 cent loss that was significantly better than the 39 cent loss in the year ago quarter. Sales of Kalydeco rose 6% to $176 million and revenue for Orkambi jumped 79% to $243 million. The problem is that the drugs have a very limited patient population in the U.S. of about 11,000 for this version of cystic fibrosis. They are close to receiving approval in the EU for these drugs. They have expanded their testing into other population groups to see if the drugs will continue to perform in other versions. There are 2,000 known mutations of the disease.

Shares declined in late November when one of the trials on a specific mutation failed to produce any additional results.

Shares have bottomed at the early November lows and have begun to rebound. If the market rolls over, Vertex could become a favorite oversold opportunity for institutional investors looking to put some profits back to work in a beaten down stock.

Earnings January 26th.

We cannot buy a post earnings option because there is no February strike and March is grossly expensive. That means the January expiration is our only option.

Position 12/15/16:

Closed 12/21/16: Long Jan $82.50 call @ $2.70, exit $1.40, -1.30 loss.

BEARISH Play Updates (Alpha by Symbol)

CAT - Caterpillar - Company Profile


No specific news. Tuesday's short covering spike began to fade.

Original Trade Description: December 17th

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company's Construction Industries segment offers backhoe, small wheel, skid steer, multi-terrain, compact track, medium and compact wheel, and track-type loaders; mini, wheel, and track excavators; track-type tractors; and select work tools, motor graders, telehandlers, soil compactors, and pipelayers, as well as its related parts for the heavy and general construction, rental, mining and quarry, and aggregates markets. Its Resource Industries segment provides electric rope and hydraulic shovels; draglines; drills; highwall and longwall miners; hard rock vehicles; articulated, large mining, and off-highway trucks; large wheel loaders; wheel tractor scrapers; wheel dozers; machinery components; hard rock continuous mining systems; electronics and control systems; and select work tools for use in mining and quarry applications. The company's Energy & Transportation segment offers reciprocating engines, generator sets, marine propulsion systems, gas turbines and turbine-related services, diesel-electric locomotives, and other rail-related products and services. Its Financial Products segment provides retail and wholesale financing for Caterpillar equipment, machinery, and engines; offers property, casualty, life, accident, and health insurance; insurance brokerage services; and purchases short-term trade receivables. The company's All Other segments remanufactures Cat engines and components, and provides remanufacturing services for other companies; offers business strategy, and development, management, manufacturing, marketing, and support primarily for paving, forestry, industrial, waste, and Cat products. Company description from FinViz.com.

Caterpillar's business has been in decline for several years as the energy sector went into hibernation and Asia's economic growth appeared to slow. For some reason, the stock bottomed on January at $58 and rallied to almost $100 despite a weak outlook in every earnings cycle. The $18 post election bounce was just another example of irrational exuberance. The election did not sell more tractors overnight and a pickup in their business could be several quarters away.

The best thing Caterpillar has in its favor is OPEC's decision to cut production. That means a year from now oil prices may have recovered slightly and energy companies may begin to buy more tractors. That is a long time off for an $18 spike.

Earnings in 2014 were $6.38, 2015 $4.64, 2016 they are estimated to be $3.26 and for 2018 analysts expect $3.15. However, CAT said last week that the estimates were overly optimistic. While Asian sales may have quit declining there is no material rebound at present.

Earnings Jan 24th.

This is a play on the retracement of that $18 bounce. When the company says analyst expectations are overly optimistic you can bet analysts will begin to lower their numbers. That should produce an extra weight on the stock in addition to any normal decline with the Dow in January.

The earnings are Jan 24th and the February options are expensive. Since this is a short-term position, I am recommending the January options. I believe any material decline will happen in the first two weeks of January.

Position 12/19/16:

Long Jan $90 put @ $1.89, see portfolio graphic for stop loss.

DIA Dow ETF - ETF Profile


No material news. The Dow traded in a very narrow 45 point range and closed at the lows. The clock is ticking.

Original Trade Description: December 7th

The SPDR Dow Jones® 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.

Position 12/12/16:

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.

DRI - Darden Restaurants - Company Profile


No specific news and no movement.

Original Trade Description: December 20th

Darden Restaurants, Inc., through its subsidiaries, owns and operates full-service restaurants in the United States and Canada. As of May 29, 2016, it owned and operated 1,536 restaurants, which included 843 Olive Garden, 481 LongHorn Steakhouse, 54 The Capital Grille, 65 Yard House, 40 Seasons 52, 37 Bahama Breeze, and 16 Eddie V's restaurants. Company description from FinViz.com.

Darden Restaurants (DRI) reported earnings on Tuesday of 64 cents that beat estimates by a penny. Revenue of $1.64 billion missed estimates for $1.65 billion. They guided for the full year 2017 to earnings of $3.87-$3.97 per share. Same store sales growth was choppy. Olive Garden saw +2.6%, Longhorn Steakhouse +0.1%, Capital Grille+1.2%, Eddie V's +2.7%, Yard House +0.7%, Seasons 52 -0.3% and Bahama Breeze +2.6%. Shares spiked $2 on the news but faded in the afternoon to close negative. Darden had rallied 23% since the election.

The idea behind the rally was the end of the push for a $15 per hour minimum wage. When Clinton lost, that effort turned into wishful thinking because republicans have held the view that a lower wage offers entry level workers an opportunity and they can move up in the organization if they are qualified and work hard. Was that worth a 23% rally in Darden shares? I find it hard to believe.

Now that Darden earnings are over, we should expect a couple weeks of post earnigns depression and given the recent rally and the chance for a market decline in early January, the Darden drop could be significant.

Position 12/21/16:

Long Feb $72.50 put @ $1.55, see portfolio graphic for stop loss.

GATX - GATX Corporation - Company Profile


No specific news. Shares gave back half of Tuesday's gain.

Original Trade Description: December 15th

GATX Corporation leases, operates, manages, and remarkets assets in the rail and marine markets in North America and internationally. The company operates in four segments: Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. The Rail North America segment primarily leases railcars and locomotive, as well as other ancillary services. This segment also offers repair, maintenance, modification, and regulatory compliance services on the railcar fleet. The Rail International segment leases railcars, as well as offers repair, regulatory compliance, and modernization work for railcars. The ASC segment operates a fleet of vessels that provide waterborne transportation of dry bulk commodities, such as iron ore, coal, limestone aggregates, and metallurgical limestone for steel makers, automobile manufacturing, electricity generation, and non-residential construction markets. The Portfolio Management segment is involved in leasing, asset remarketing, and marine operations, as well as manages portfolios of assets for third parties. As of December 31, 2015, it operated a fleet of 17 vessels; a fleet of approximately 106,100 cars; a fleet of 18,400 boxcars; and a fleet of 611 older four-axle and 26 six-axle locomotives. Company description from FinViz.com.

There has been no news since the company announced a 40 cent dividend on Oct 28th. The dividend is payable on Dec 31st to holders on Dec 15th. That is today. That means nobody else is going to be buying the shares to get the dividend.

Earnings Jan 19th.

GATX has rallied 69% since the election. I can only assume it was because of the rally in the Dow Transports in anticipation of a better economy in 2017. There is no current fundamental reason for a 69% rally and odds are good once the stock begins to roll over with the market it could fall very hard. Apparently other investors believe the same way since the only put strike with any volume is the January 60 puts. There is more volume in that one strike than all the other strikes combined.

Position 12/16/15:

Long Jan $60 put @ $2.35, no initial stop loss to avoid any volatility spikes.

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