Option Investor

Daily Newsletter, Wednesday, 12/28/2016

Table of Contents

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

Market Wrap

Selling the Winners

by Keene Little

Click here to email Keene Little
Portfolio rebalancing efforts have been evident in the market as rallies have been sold into as fund managers sell stock and move money into bonds. It's been just a small effort so far but today we saw some winners for the year getting sold harder as money managers take profits off the table into year-end.

Today's Market Stats

Between tax strategies and year-end portfolio rebalancing efforts, it's been a struggle for the market in the past week and today's selling looks to have caught some Santa Claus bulls by surprise. Today's selling was not severe although after the run we've seen since November 4th a 100-point decline for the Dow feels severe. While moves this week (with the low volume and not having everyone present) might not be telling us the real story behind what the market will do in January there are some things we need to watch carefully in order to get some clues for what to expect in the coming weeks.

The only economic report this morning was Pending Home sales for November, which declined -2.5% vs. +0.1% in October. Last week's report on New Home sales showed a +5.2% increase in November so the report was largely ignored. Today's selling was likely related more to end-of-year preparations than anything else.

As we head into the end of the year there is of course much speculation about what the new year will bring us. There's certainly plenty to worry about, especially all the financial difficulties so many countries are facing and the huge debt burdens that are becoming a greater drag on productivity growth. But there are plenty of opportunities to find growth areas and participate in the stocks in those areas.

It seems a majority of analysts have come to expect a pullback correction in January and from a contrarian perspective I have to wonder if too many are expecting a market decline in the beginning of the year. Might the market rally in the beginning of the year, get everyone bullish again and then start a bigger decline? One can only guess but it's something to think about.

Even if the stock market does suffer a big correction in January, maybe something worse than a correction, there are always niche markets that do well. The challenge of course is finding those stocks, especially knowing that the majority of stocks follow the broader market's moves. Think broader market, sector and then individual stock and you'll be able to keep yourself more aligned with a trend.

As we head into the new year we need to be able to identify when the current uptrend might be over and whether or not a new downtrend has started or instead if it will be just a correction within the existing uptrend. Identifying this for the broader indexes and then sectors of interest will then help you identify stock candidates for both long and short plays. I suspect 2017 is going to be a year for traders and not for those who prescribe to buy-and-hold. Once the Trump presidency moves into the "real" work of getting things done rather than just stating what could be done, the current rally could run into trouble.

I want to start off tonight's chart review with a top-down look at the Nasdaq as a way to provide a big-picture look at the techs (and in turn the broader market) and then show what to watch for in the short-term charts.

I'll start with a monthly view to show why I think it's very important here to recognize the downside risk in the coming year(s). I say risk but I also think it's important to recognize the huge money-making opportunity in front of us. I believe 2017 will be a return of the Bear but there's huge profit potential for traders. Bear market declines happen much faster than bull market rallies and that provides us with the potential for huge profits in a much shorter period of time.

Whether you short stocks, buy puts, buy inverse ETFs or any number of ways to play the short side, you will make more money in a shorter period of time than in a bull market. I believe you have a once-in-a-lifetime money making opportunity in the coming year(s). If you're a dyed-in-the-wool(hide?) bull and do not like playing the short side you'll at least want to know where your stops should be so that you don't ride the next bear market (if that's what's coming) all the way down only to have to wait for it to make it back up to where we are currently. But again, playing the short side in the coming year will be an amazing opportunity for traders.

Nasdaq Composite index, COMPQ, Monthly chart

Following the 2000-2002 decline the Nasdaq has fully recovered and finally climbed above its March 2000 high at 5132.52 with a monthly close at 5162 in July. Other than a dip back below that level in September and then a little deeper dip into the November 4th low (5034), it's been able to hold above 5132, which is obviously bullish.

The problem is that the new high above the 2015 high is showing bearish divergence against that high, and really since the end of 2013, and it's likely near the completion of the leg up from 2009. This is potentially important because the move up from 2002 is a 3-wave move and from a bearish perspective (I believe we're still inside a secular bear market) we could be close to the completion of an A-B-C bounce correction, albeit a big one, off the 2002 low. The secular bear says we are still due one more leg down for a larger (a)-(b)-(c) pullback from the 2000 high before we'll be ready for the start of the next secular bull.

This interpretation of the secular cycle calls the 2002-2007 and 2009-2016 rallies cyclical bull markets within the larger secular bear. The significance of this is that the next leg down to complete the secular bear will likely be more severe than the 2002-2202 decline and very likely will drop the Nasdaq to a new low below the 2002 low at 1108. Even a drop down to test that low would be an 80% decline from here and I don't think there are many of us who would like to hold through that decline just because "the market always comes back."

Nasdaq Composite index, COMPQ, Weekly chart

There are two points to make about the parallel up-channel for the move up from the May 2011 high, which is shown a little closer with the weekly chart below. First, the parallel channel helps identify the wave count and the EW technique is to draw a trend line from the top of wave-1 (May 2011 high) to the wave-3 high (July 2015). A parallel line is then attached to the wave-2 low (October 2011) and this line is where you watch to see if the 4th wave will find support there, which it did with its low in February 2016.

The second point is that the 5th wave, which is the rally from February, often stays in the lower section of the up-channel and as you can see it has not been able to climb above the midline (dotted line) of the channel since dropping below the line in January. It is currently testing the midline again for the 3rd time since the February low. A "3 drives to a high," which we have seen since February, is usually an ending pattern because it's the completion of a 5-wave move. This and the bearish divergences against the 2015 high and the August/September highs is what helps us confirm we're seeing the 5th wave of the move up from February, which in turn will complete the 5th wave of the move up from 2009. Once a 5-wave move completes we'll see at least a correction to the move (the rally from 2009) but the more bearish interpretation, as mentioned for the monthly chart, is that we could be looking for the beginning of the next leg down to complete the secular bear.

Nasdaq Composite index, COMPQ, Daily chart

The daily chart of the Naz shows a rising wedge pattern for the rally from February and the small bearish divergence since July, which again helps confirm we're probably seeing the 5th wave of the move up from February. The 5th wave, which is the leg up from November 3rd, might not be finished yet and as depicted on the chart below, we could get another rally to complete the move. An upside target is 5600-5625 to complete a small rising wedge for the rally from November.

A rising wedge to complete a larger rising wedge would be a very bearish setup in January if it completes as depicted. But one interpretation of the pattern suggests this week's high is the completion of the rally and therefore trying a long play from here is risky. Having said that, a long play with a stop just below the 20-dma, near 5410, is not a bad risk vs. reward play. Just be sure to honor your stop. A break of its uptrend line from November 3rd, currently near 5447 (log price scale), which was done with today's low close at 5438, and then the 20-dma would more strongly suggest a top is already in place. That makes it important for the bulls on Thursday to recover from today's decline.

Key Levels for COMPQ:
- bullish above 5625
- bearish below 5232

Semiconductor index, SOX, Daily chart

One sector negatively affecting the tech indexes today was the semiconductor sector. The SOX left a bearish engulfing candlestick for an outside down day (gapped up, made a new high, closed below yesterday's close). It almost engulfed last Friday's candle as well. Tuesday the SOX had closed above the top of a rising wedge for its rally from February but today it closed back below the line, currently near 928. That leaves a throw-over finish and now puts it on a sell signal and the only way to negate the signal is with a rally above this morning's high at 944.23. If the SOX has topped out it's going to make it more difficult for the techs and broader market to rally since a rally without the banks and semis is typically a warning sign. Later we'll see how the banks are looking.

S&P 500, SPX, Daily chart

SPX had been forming what looked like a sideways triangle consolidation pattern off its December 13th high but that was negated with today's decline. We either have an important high already in place or else today's decline was the completion of a simpler a-b-c pullback correction off the December 13th high. Two equal legs down for that kind of move is near 2245, only slightly lower than today's low at 2249. Its 20-dma will be near 2246 on Thursday so we have potential support at 2245-2246 to then launch another rally leg, which is what I'm depicting.

Another leg up would be the 5th wave of the move up from November 4th and an upside target for it would be near 2300. This is the kind of rally that would have many believing we won't get a decline in January but in fact it would give us an outstanding opportunity to play the short side. Now all the bulls need to do is prevent SPX from dropping below 2244 (on a closing basis) since that would point to the possibility that an important high is already in place.

I've recently discussed the importance of 2271-2273 on the Gann Square of 9 chart (aligned or square with the March 2009 low for price and date) and it's important to note how that resistance zone has held on a closing basis since first tested on December 13th. Based on this Gann relationship I'm very tempted to call a top already in place but I'll let the market determine that from here. Again, the bulls need to do something on Thursday to at least give them the chance for one more new high.

Key Levels for SPX:
- bullish above 2278
- bearish below 2244

S&P 500, SPX, 60-min chart

The 60-min chart below shows a parallel down-channel for the pullback from December 13th, the bottom of which is currently near the downside projection at 2244.93 for two equal legs down from the 13th. It's a bull flag until proven otherwise (with a breakdown below 2244). That makes it a decent play on the long side if support holds since you can keep your stop tight (near 2244 on a closing basis).

Dow Industrials, INDU, Daily chart

While SPX had been trading sideways in what looked like a pennant until today, the Dow had been trading in more of a rising wedge pattern and that had it looking more like an ending pattern. But the bottom of a parallel channel for its consolidation which is up-sloping as compared to the down-sloping channel for SPX, is currently near 19817, only 10 points below today's low. A drop below the bottom of its channel and more importantly a drop below its December 14th low at 19748 would signify the bulls are losing the battle and that could embolden the bears. The risk this week is that the week could simply be more volatile than usual because of the lower trading volume. As with the other indexes, there is still the potential for another rally leg, one which should leave a bearish divergence against the December 13th high.

Key Levels for DOW:
- bullish above 19,981
- bearish below 19,748

Russell-2000, RUT, Daily chart

The RUT also dropped below the bottom of a sideways triangle that it had been forming since its December 9th high. Currently near 1365, watch to see if it acts as resistance on a back-test on Thursday since that would obviously be bearish. But at the moment the drop below the bottom of the triangle can be considered just a throw-under completion to the triangle, which will now be followed by the next rally leg. As depicted on its chart, I see the potential for a rally to its trend line along the highs from 2007-2015 (the top of its big megaphone pattern that I've shown in the recent past on its weekly chart). Today the RUT held at its 20-dma, practically to the penny on a closing basis at 1360.82 and that makes it especially important for the buyers to return to the table on Thursday. A drop below the bottom of its sideways triangle and its 20-dma would be a bearish development.

Key Levels for RUT:
- bullish above 1405
- bearish below 1347

20+ Year Treasury ETF, TLT, Weekly chart

So far TLT is holding support at its uptrend line from 2011-2013, which was tested the week before last. The bounce pattern is not that impressive and has me wondering if we'll see another leg down to test its June 2015 low at 114.88 before setting up at least a stronger bounce. But if the bounce can get back above its 200-week MA, currently at 120.19, it would be a signal that an important low is in place. A rally in TLT would likely coincide with a decline in the stock market so it's an important symbol to watch. If we do get another rally leg out of the stock market into mid-January I suspect we'll see TLT drop lower and potentially to the 114.88 support level.

KBW Bank index, BKX, Daily chart

Like the SOX, the banks were relatively weak today as well and that certainly didn't help the bulls try to recover from today's selling. BKX also left a small bearish engulfing candlestick today and engulfed the previous 5 trading days (which were just small-bodied candles as BKX traded sideways in a tight range). From this perspective it looks like the bears could take over from here but a better result for the bears would be a break below its 20-dma, which will be near 92 on Thursday. A drop below that level would also be a drop below the bottom of a possible ascending triangle for its consolidation off the December 8th high so that would be more bearish. In the meantime, if BKX can hold above 92 there is still the potential for BKX to rally to at least the trend line along the highs from last March-April, which will be near 95.50 by mid-January. Above 96 would be even more bullish.

Transportation Index, TRAN, Daily chart

The TRAN is also now on a sell signal after failing to hold its breakout attempt into the December 9th high. It had broken out above the tops of two parallel up-channels, from January and June, which cross near 9245, as well as above its November 2014 high at 9310. But it has now dropped back below all of those levels, including its 20-dma at 9211, and that leaves a failed breakout attempt. A rally back above 9310 would at least have it neutral but at the moment the TRAN is bearish.

U.S. Dollar contract, DX, Weekly chart

Like the stock market, the US$ has been consolidating since mid-December and it's not clear whether this consolidation will lead higher or if it is instead a topping pattern. The dollar has stalled at Fib resistance at 103.20-103.33 with a high so far at 103.62 on December 20th. That high was tested with today's high at 103.57 but the highest closing prices since mid-month were 103.26 on December 20th and 103.23 today. If it can close above 103.50 and stay above that level we could see the dollar stair-step higher into January. But at the moment the dollar is looking vulnerable to at least a larger pullback and possible back down to the bottom of a megaphone pattern following its March 2015 high.

Gold continuous contract, GC, Weekly chart

As the dollar has consolidated since December 15th so too has gold. At its 1124.30 low on December 15th it came within $3 of the price projection at 1121 where the 2nd leg of its decline is 162% of the 1st leg down. If gold continues to consolidate the rest of this week and maybe into next week, the more it will look like a 4th wave correction in the decline from July, which would more strongly suggest another leg down is coming, one which could reach down to its December 2015 low at 1045 before setting up at least a larger bounce. When the gold bugs give up on buying this "dip" (I'm still getting daily newsletters suggesting I'm an idiot if I don't buy gold here) it will be a better time to try your hand at buying some gold. But gold is oversold on a weekly basis so it's certainly not a good time to chase it lower.

Oil continuous contract, CL, Daily chart

Oil has been working its way up toward a price projection at 54.94, with a high so far at 54.51 on December 12th and today's high at 54.37, for two equal legs up from August. Coinciding with that projection is the 127% extension of the previous decline (June-August), at 55.06, which gives us a 54.94-55.06 target zone. This target zone crosses the top of a parallel up-channel from August early next week and the setup continues to look good for a top near 55. Oil would be more bullish above 55 but if it does top out near 55 it remains to be seen what kind of pullback/decline will follow. The larger pattern suggests the corrective bounce off the February low could be completely retraced, which would knock oil back down towards its February low near 26.

Economic reports

Other than the Chicago PMI on Friday there are no other major economic reports the rest of this week.


Between tax selling this week and rebalancing of portfolios (selling stock and buying bonds to bring ratios back in line with fund mandates) it could be tough on the bulls the rest of this week. And if the stock market doesn't recover Thursday and into Friday it could be tough on the bulls well into January. The bulls need a recovery on Thursday to keep the bullish pattern in play, which calls for a rally to new highs into next week and potentially into mid-January. Most analysts are expecting a January pullback, which perversely is why we could see a rally.

Follow the charts and take it a day at a time from here. While there is upside potential for one more rally leg, the longer-term pattern suggests now is not a good time to be aggressive on the long side. It's too early to tell whether or not you should join the bears but it could soon be time to thank the bulls for the ride and shift over to the bear's camp. If I have the longer-term pattern correct, 2017 should be an exciting year to be a trader. There's a lot of money to be made in a fast moving bear market but we'll let the charts tell us when it's time to play with the bears. For now, and unless we see a strong decline on Thursday, stick with the uptrend.

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

No Fun for Christmas

by Jim Brown

Click here to email Jim Brown

Editors Note:

Surveys show sales in the toy sector declined -9% this holiday season. That is going to cause monster problems for Mattel.


No New Bullish Plays


MAT - Mattel - Company Profile

Mattel, Inc. designs, manufactures, and markets a range of toy products worldwide. The company operates in three segments: North America, International, and American Girl. It offers dolls and accessories, vehicles and play sets, and games and puzzles under the Mattel Girls & Boys brands, including Barbie, Monster High, Disney Classics, Ever After High, Little Mommy, Polly Pocket, Hot Wheels, Matchbox, CARS, Disney Planes, BOOMco, Radica, Toy Story, Max Steel, WWE Wrestling, and DC Comics. The company also provides its products under the Fisher-Price brands, such as Fisher-Price, Little People, BabyGear, Laugh & Learn, Imaginext, Thomas & Friends, Dora the Explorer, Mickey Mouse Clubhouse, Disney Jake, the Never Land Pirates, and Power Wheels. In addition, it offers its products under the American Girl brands comprising Truly Me, BeForever, and Bitty Baby; and construction, and arts and crafts brands, such as MEGA BLOKS, RoseArt, and Board Dudes, as well as publishes the American Girl magazine. Mattel, Inc. sells its products directly to consumers via its catalog, Website, and proprietary retail stores, as well as directly to retailers, including discount and free-standing toy stores, chain stores, department stores, and other retail outlets; to wholesalers; and through agents and distributors. Company description from FinViz.com.

Retail surveys showed a 9% decline in toy sales over the holiday shopping season. Several of the high profile toys that did sell, suffered serious glitches that have buyers burning up the phone lines wanting refunds and/or replacements.

Zacks downgraded Mattel to a sell saying earnings growth at Mattel, even before the holiday disaster, was only 3.1% compared to the industry average of 21.2%. For the current year Mattel is only expecting 1.2% growth and that was before the holiday news. The company has already projected sales for 2016 to decline -1.9% and that forecast is sure to be revised lower. Analyst earnings estimates were already moving lower and the holiday sales news should accelerate that trend.

Toymakers are facing something called "age compression." Previously the age range for Barbie toys was 3 to 9 years. Now that has compressed to 3 to 6 years. Electronic games are making kids smarter and taking up a large percentage of their playtime. Toys are being left in the toy box. This is good news for companies like ATVI and EA but bad news for Mattel.

The company is also vulnerable to the strong dollar because of sales overseas. The dollar is at 14 year highs and Q4 earnings are going to be impacted.

Earnings January 18th.

This is going to be a short play. With earnings on the 18th, we are going to use a February option and we will exit before the earnings report. The expected market decline in early January should accelerate any drop in Mattel shares.

Buy Feb $27 put, currently $1.35, no initial stop loss.

In Play Updates and Reviews

Beginning of the End

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes all rolled over as the end of 2016 approaches and the selling has begun. There was no specific news to roil the market although the housing index was weak. This is the preliminary setup for the pension fund selling on Thr/Fri. The Dow spiked to within 19 points of 20K but that target is not likely to be hit this year after the big decline. The Dow closed at a 7 day low.

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

UNH - UnitedHealth

The long call position was stopped out at $161.85.

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. Only a minor decline in a weak market.

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.

UNH - UnitedHealth - Company Profile


No specific news. Shares declined with the Dow and we exited the play ahead of an expected Dow correction.

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

Closed 12/28/16: Long Jan $165 call @ $2.58, exit $2.28, -.30 loss.

BEARISH Play Updates (Alpha by Symbol)

CAT - Caterpillar - Company Profile


No specific news. Declined with the Dow as we expected.

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. Dow resistance held and the January decline may have begun.

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. Just waiting on January correction.

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. Only a minor gain as portfolio managers window dress their winners hoping to keep them up until January.

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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