Option Investor

Daily Newsletter, Saturday, 1/7/2017

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

The Dow came very close to the 20,000 level only to miss it by 0.37 of a point.

Weekly Statistics

Friday Statistics

If only one Dow stock had gained 5.6 cents at exactly the top in the market, the Dow would have hit 20,000. The total dollar value of all 30 Dow stocks at 12:43 PM on Friday was $3,021.80. That was 5.6 cents away from the $3,021.86 that would have equaled Dow 20,000. That is about as close as you can get without actually winning the prize. The prior resistance at 19,950 moved up to 19,975 during the week and then stepped up again to 19,990 but it was rock solid.

The initial effort lost momentum when the headlines broke about the airport shooting in Florida and then fear of the weekend increased in late afternoon. While there was $900 million in market on close buy orders, it was not enough to overcome the weekend worries. Retail investors were not going to buy a market top just before a Friday close. The potential for an overseas or geopolitical event was too strong to take the risk.

The morning began with a sharp market drop after the Nonfarm Payrolls for December came in at +156,000. That was down from 204,000 in November and less than the 175,000 analysts expected. The economy needs job growth of 150,000 per month to keep pace with the number of new job seekers fresh out of school or newly immigrated.

The November number was revised up from 178,000 to 204,000. The October number was revised down from 142,000 to 135,000. The three-month moving average is now 165,000, down from 182,000.

Manufacturing payrolls gained 17,000 and service industries gained 144,000 jobs. Government jobs rose 12,000. The unemployment rate ticked up slightly from 4.6% to 4.7% because the labor force rose 184,000. That pushed the labor force participation rate up one tenth to 62.7%. The broader U6 unemployment rate declined slightly to 9.2% and a post recession low.

Average hourly wages rose 4 cents but is now up 2.9% year over year and that is a big plus. However, it is the result of new laws lifting the minimum wage rather than steady earnings growth.

The report was neutral and everyone was focused on the Dow rather than the economics. In the February report for January, the government will release the benchmark revisions for all of 2016 and they are normally a major event.

On Thursday, the ADP Employment report also missed estimates. The report showed a gain of 153,000 jobs, down from 216,000 in November. Analysts expected 172,000.

Factory Orders for November declined -2.4% after a +2.7% gain in October. Durable goods orders fell -4.5%. Core capital goods orders rose +0.9%. The report was ignored.

The trade deficit increased to -$45.2 billion for November after a -$42.6 billion deficit in October. This was the largest deficit over the last 12 months and the third largest since 2012. Analysts expected -$42.5 billion. Imports increased from $228.6 billion to $231.1 billion and exports declined from $186.3 billion to $184.8 billion. Petroleum imports rose 5.9% by volume and 6.5% by value. Exports are being depressed by the strong dollar. The report was ignored.

The calendar for next week is tame compared to last week. The Producer Price Index on Friday is the most important report but it will not move the market.

The Fed heads are back in action with eight speeches including Yellen's on Thursday evening. Now that we are in a new year, the focus will be on determining how many rate hikes we should expect in 2017. The market has priced in two hikes but the Fed suggested there could be three. Some analysts believe a hyperactive administration that actually gets some things done early in the year could potentially allow for four hikes.

The big news for next week is the start of the Q4 earnings cycle. There are just a few brand name companies reporting early in the week but Friday is the key day. With several of the big banks reporting on the same day, we have the potential for a major market move. They are expected to beat current estimates but there is always the potential for a sell the news event since that expectation is widespread. The big dog in the Dow, Goldman Sachs, does not report until the following Wednesday along with Citigroup. These bank earnings will set the stage for expectations for the financial sector for the rest of the year. Analysts will try to factor in the earnings forecasts along with the Fed rate hike forecast to predict their own earnings revisions for 2017. Citigroup stands to earn an extra $3 billion a year if the Fed hikes rates four times. That is how important those rate hike forecasts are to bank earnings.

In stock news, Sears Holdings (SHLD) sold the Craftsman brand to Stanley Black & Decker (SWK) for roughly $900 million. Sears had hoped to get $1.5 to $2.0 billion for the brand. This shows how desperate they were to raise the cash. Sears acquired the brand for $500 in 1927.

The problem with the deal is twofold. Sears only gets $525 million at closing and then $250 million at the end of three years. They also get 2.5% of Craftsman sales through 2020 and 3% through Jan 2023 and 3.5% thereafter. After 15 years they have to pay a royalty of 3% on all future sales.

The problem for SWK is that 90% of Craftsman sales are made through Sears and Sears-related retail stores. That breaks down to 65% from Sears, 20% from Sears Hometown and 5% from Kmart. All of the Sears stores are on deathwatch. Sears announced the closing of 150 stores earlier in the week. That was 109 Kmart stores and 41 Sears stores. The company is raising $1 billion, $500 million in a secured loan against real estate and $500 million in a standby letter of credit facility guaranteed by the CEO, Eddie Lampert and his company ESL Investments. They need the money because they are losing about $800 million a year. Analysts claim they need to raise $1.5 billion to make it through 2017. Their pension obligations are underfunded by more than $2 billion. Same store sales were down more than 12% in the first two months of Q4. Sears is also considering selling the Kenmore and Diehard brands.

Stanley is not going to get much from the declining sales at Sears. They are going to have to remarket the brand at every outlet they can find like Home Depot, Lowes, etc.

Amgen (AMGN) won a permanent injunction against Sanofi and Regeneron selling drugs related to the cholesterol drug Repatha (evolocumab) in the USA. Amgen won a jury trial on the patent case back in March. The injunction begins in 30 days so the two companies can seek an expedited review. Repatha is already approved in 40 countries. Shares of Amgen rallied $4 on the news.

Illumina (ILMN) announced plans to spin off its joint venture named Grail. Ilumina currently owns more than 50% and will reduce its ownership to 20%. Grail also intends to raise $1 billion in a series B financing handled by Goldman Sachs. By reducing its ownership, it will be able to remove about 30 cents per share in costs, which will greatly improve Illumina's earnings post spin. Grail will also become a major customer of Illumina. Grail is developing a blood test to screen for cancer using Illumina's gene-sequencing process. When Illumina's former CEO announced the creation of Grail a year ago, he called it "The single largest opportunity for sequencing today." Apparently, either the thought process has changed or they have decided they will be more profitable selling their services to Grail rather than owning Grail. Shares of ILMN spiked $7 on the news.

Boeing (BA) reported deliveries of 185 passenger jets in Q4 and 748 deliveries for the year. They also delivered 40 military planes/satellites in Q4 and 185 for the full year. Those included F-18s, F15s, AH-64 and CH-47 helicopters C-17 Globemasters and other aircraft.

They also received orders for 668 aircraft worth $94 billion at list prices. Boeing had guided for 745-750 planes. The company booked 198 new orders since December 20th suggesting they were pressing hard and increasing discounts. Boeing was at a disadvantage to Airbus in aircraft sales because of the strong dollar. Wide body sales have slowed but sales of narrow body aircraft like the 737 have increased. The totals do not include any aircraft for Iran. Boeing has an order backlog of 5,715 commercial jets, with the majority various 737 models.

Disney (DIS) scored another upgrade with RBC Capital Markets raising them from sector perform to outperform and hiking the price target from $101 to $130. Evercore upgraded them earlier in the week saying the current trends will extend well past 2017. RBC said Disney would sign a new round of affiliate deals in 2017 that will see revenue growth accelerate.

Teva Pharmaceutical (TEVA) warned on guidance for 2017. The company now expects earnings of $4.90 to $5.30 and analysts were expecting $5.40. Revenue is now forecast in a range from $23.8 to $24.5 billion. Analysts were looking for $24.8 billion. Teva said currency fluctuations (strong dollar) would reduce revenue by $800 million. Shares declined -8%.

It was not a good week for retailers. Macy's (M) announced it was closing 68 stores and cutting 10,000 workers as the online retail trend is killing in store shopping. JC Penny's (JCP) joined the club of those reporting a decline in holiday sales with a -0.8% decline compared to analyst estimates for 3.0% growth. Of the 11 retailers that have reported holiday sales, eight of them saw sales declines. Only PVH and The Gap showed positive sales although Gap sales were weaker than expected. The Limited said they are closing all 250 of their stores as of Saturday. Chalk up another market share gain for Amazon.

Kohl's (KSS) warned full year earnings were now expected to be $2.92-$2.97 compared to prior guidance of $3.12-$3.32. Same store sales were down -2.1% in the holiday period.

However, MasterCard SpendingPulse said holiday sales at brick and mortar stores rose 4%. The International Council of Shopping Centers polled 1,000 consumers and they claimed they spent an average of 16% more than last season.

The problem is the increased promotions to maintain market share. Stores are selling more items but at a cheaper price, so total sales dollars tend to decline. The only stores that seemed to do well were the extreme discounters like T.J.Maxx and Ross Stores and the high-end stores like Nordstroms (JWN). Stores with a niche market like Ulta beauty and brands like Lululemon and Adidas did well. Costco (COST) had a good season with a 3% rise in same store sales.

Once all the numbers are tallied e-commerce sales are expected to have risen between 16%-19% for the holiday season. Desktop spending rose 12% but mobile sales have not yet been released.

The FANG stocks were responsible for most of the market gains last week. Netflix (NFLX) rallied to a new high close on Thursday at $131.81 on solid analyst chatter. Facebook shares rallied to a two-month high with an $8 gain for the week. The last four analyst price targets have averaged $152. The company hired former NBC anchor Campbell Brown to lead a news partnership team. She will "help news organizations and journalists work more closely and more effectively with Facebook." Facebook has been under fire lately for publishing fake news that got more impressions than the real news.

Amazon (AMZN) rallied $47 for the week to a two-month high after news broke at CES that Chinese firm Huawei Technologies, which makes Android phones, said its flagship phones will come with an app that gives users access to Alexa, the intelligence behind Amazon's Echo device. Since the Android OS is a Google product that suggests Alexa is extending her lead over the competing Google Assistant product. However, the Assistant is still expanding. Nvidia announced a major upgrade to Shield TV and it will feature the Google Assistant app.

According to Nvidia, "Shield TV is a 4K HDR Android open-platform media streamer built on bleeding-edge visual computing technology that delivers unmatched experiences in streaming, gaming and AI." The TV also supports Netflix, YouTube, Google Play Movies, Amazon Video and VUDU. "The SmartThings Hub Technology integration can turn Shield into a smart home hub that can connect to hundreds of smart home devices." To do this they have created the Nvidia Spot. This is a golf ball sized microphone that you put in every room of your house to allow your entire house to be connected. This video of a piece of the CEO's keynote address at CES is well worth watching. Nvidia AI Video Explanation or Complete CES Keynote

If you only buy one stock to hold for several years, Nvidia is that one stock.

Crude prices were somewhat responsible for the Dow failing to hit 20,000. Crude prices rallied to $54.32 at the open but then declined to $53.32 and that caused Dow components Chevron and Exxon to dip into negative territory. That produced a drag on the Dow. That could also be a challenge for next week if crude prices begin to fade.

Oil prices have stalled at the $54 level because of the lack of new headlines out of OPEC. The next focal point will be the meeting of the monitoring committee on the 21st. Theoretically, they are monitoring the production of the producing countries and will know if they are following through on their commitments. What we do not know is whether they will report on their findings OR whether their findings will match reality or merely be wishful thinking.

Last week was still a holiday week so rig activations were slow. Only 4 oil rigs were added with an addition of 3 active gas rigs. Over the next three weeks, we should see activations increase as long as oil holds over $50.




We may have reached a tipping point in the market. With the Nasdaq and S&P breaking out to new highs and the Dow more than likely going to hit 20K next week, we may have escaped the anticipated early January sell cycle. Of course as soon as I begin to focus on a breakout over 20K that will be the day the correction appears.

Everything appears bullish except for the Russell 2000 with two days of declines to push the index back towards support. The Russell has been trading almost perfectly sideways for the last three weeks between 1350-1390. There is no immediate indication of a potential breakdown except for the oscillators. The MACD and RSI are both negative. The Russell normally functions as the market sentiment indicator and it is suggesting all is not well. The index is not declining but except for the big rally on Wednesday, it is not moving up either.

Market breadth has been negative the last two days with decliners 4:3 over advancers. Even on Friday with the Nasdaq and S&P positive at new highs, the down volume of 3.4 billion shares was higher than the up volume of 2.8 billion.

The rally is being powered by the big cap tech stocks. Those are the same stocks that were unloved during most of December. This appears to be rotation back into the techs and out of the stocks that produced the November rally. On Friday, Nasdaq decliners of 1,427 beat advancers of 1,201. There were only 91 new highs and the second lowest day since the election. The lowest was 83 on Friday before New Years. The highest was 551 on December 8th with an average of about 175 per day for December. Despite the new index high the breadth is shrinking.

The winners list is all the well-known big cap names. Since the FANG stocks plus Apple make up more than 25% of the Nasdaq weighting, the big gains in those few stocks drive the index.

The Composite index closed over 5,500 for the first time in what would appear to be a valid and convincing breakout.

The Dow has moved sideways for three weeks with every attempt to move to 20,000 thwarted by resistance above 19,950. After three weeks of distribution selling at this level, those that wanted to sell have had their chance and every dip was bought. Markets do not have to drop 5% to consolidate gains. They can consolidate in place with a sideways movement, which is what we have been seeing since December 13th. Calls for a January correction have now faded and it would appear the next move could be higher.

Goldman Sachs never dipped below support at $235 despite multiple attempts to sell the stock. Goldman closed at a new high at $245 on Friday and a new breakout appears imminent. That $3.58 gain on Friday was worth about 27 Dow points. Any breakout from here could easily drag the Dow over the 20K level.

The S&P pushed through resistance at 2,275 to close at 2,277 and a new high. Two points is hardly a breakout but it is a step in the right direction. The big cap tech stocks were pushing the S&P higher. Advancers were 287 to 184 decliners so the tech support tilted the scales into positive territory for the S&P.

With the failure to see a big sell off in early January the worry now is the potential for pre inauguration selling in order to avoid a potential terror attack and hit to the market. That would seem to suggest a successful inauguration would be the all clear signal for additional buying. However, there is also an analyst contingent that is warning to expect a sell the news event because all the excitement will be over and the hard work will begin.

If we continue to worry about what might happen, we could miss out on what will happen and that could be a continued rally. I know there is never any certainty but the markets failed to decline last week when they had the perfect chance and plenty of reasons. It is entirely possible the promised hope and change could continue to entice investors into the market until there is a policy setback in congress.

There is also the risk that a weak earnings cycle could derail that hope. We have seen numerous earnings warnings over the last couple weeks and that could increase as companies get closer to reporting. I view this as a limited risk because the "strong dollar" excuse is already known and companies are no longer being punished for that excuse.

Markets making new highs tend to continue making new highs. Breakouts bring additional buying because nobody wants to miss out on the potential gains of a new bull phase in the market.

Touching 20,000 on the Dow is no longer the key. With the Nasdaq and S&P making new highs, the Dow needs to bust through 20,000 and close significantly higher to really fire up investors. If we see that this week, the rally could ignore any potential inauguration fears.

The end of the year is behind us but we are holding the EOY Subscription Special open for another week. Don't let these savings get away!

Don't Miss Out in 2016!

Recent reader comment:

I think Jim Brown, Keene Little and Thomas Hughes are the best in the business!! I am a representative with a large financial firm and have recommended your service to many of my associates. Quite frankly, your reporting is better than anything else I've ever used, and feel free to quote me of this. Heck, I don't even bother to read my company's head guru since I think Jim's, et al reporting is much better. Signed: Stephen, CFA, CFP.


2016 IS OVER!

Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day

Random Thoughts

No material change to sentiment last week. Apparently, everyone was just watching and waiting. This survey ended on Wednesday.

Last week results

Even the big CEOs have problems. Apple CEO Tim Cook saw his compensation package take a hit after Apple missed sales and earnings targets. His salary rose by $1 million to $8.75 million in total compensation but that was down from the $10.28 million he earned in 2015. The reason was a lowered incentive bonus. Apple executives received only 89.5% of their targeted annual incentive bonus because of the sales declines. I am sure they cried all the way to the bank.

The company took a hit when they removed the earphone jack from the iPhone 7 and then could not ship the AirPods because of technical problems. The new MacBook Pro was not well received and Consumer Reports failed to give it their seal of approval. That was a first for Apple.

Sales fell -4% to $215.6 billion, well below their target of $223.6 billion. Operating income declined -0.5%. Net sales were down -7.7% and earnings were down -15.7% from 2015 levels.

Apple shares are nearing a breakout to a 52-week high at $120.

There is some mind-blowing stuff being announced at CES this year. More than 200,000 people attend and analysts claim more than 200,000 new products will be announced.

LG was showing off their new 77 inch OLED TV that is an unbelievably thin 3.85 mm including the wall mount. The actual panel is only 2.57 mm thick. That is like hanging a piece of poster board on the wall. It also offers Active HDR and 4K resolution. The W7 model will begin shipping in March. No price was disclosed for what I would assume were obvious reasons. If you have to ask, you cannot afford it.

Dell announced its first 8K monitor. That is four times the pixels of a 4K monitor. The Dell UltraSharp 32 inch Ultra HD 8K Monitor starts at $4,999 and will be available on March 23rd on Dell.com

Microsoft demonstrated their Windows 10 Virtual Reality headsets that will be available from Dell, HP and Acer. The entry-level product will start around $300.

Remember Polaroid? Their back! The 80-year old company demonstrated their Polaroid Pop instant digital camera that produces classic 3x4 inch prints.

Qualcomm displayed its new 10-nanometer Snapdragon 835 processor for mobile phones. It is 35% smaller and uses 25% less power in order to extend battery life. The processor has (8) 64 bit CPU cores. It has an X16 LTE modem that is 10 times faster than 4G LTE with 1 Gb per second speeds. It supports a 32-megapixel camera with zero shutter lag and can record in 4K Ultra HD. It obviously supports a 4K Ultra HD display as well. The included Adreno GPU delivers graphics 25% faster and with 60 times more display colors. This processor is so far ahead of 2015 technology it is like comparing a Tesla Model X to a 1999 Buick.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"One Day you will wake up and there will not be any more time to do the things you always wanted to do. Do it now!"



Index Wrap

Missed It

by Jim Brown

Click here to email Jim Brown
If you blinked you missed the buying opportunities last week.

I was expecting a lot more negativity as we moved through the first week in 2017. The -160 point intraday decline in the Dow on Tuesday and the -140 point intraday drop on Thursday were brief and insufficient. In the last newsletter, I said to be prepared for a buying opportunity but I was thinking more in the 3% to 5% range, not an intraday dip.

The market is not cooperating with those investors who do not want to buy a market top. For three weeks the Dow, S&P and Russell 2000 have been moving sideways. That is an alternate method of consolidation instead of a sharp 5-7 day decline.

Sellers get to unload their shares at a casual pace as new buyers appear when the market is rising. There is no panic and eventually the sellers run out of stock and the market moves higher.

While the indexes, with the exception of the Russell 2000, have turned bullish, we have to remember we only had a four-day week where two of the days were heavy cash inflow days from end of year retirement contributions. Just because the market survived the first week without a decline does not mean it is bullet proof.

The Nasdaq was the most bullish with a solid breakout on both the Composite Index and the Nasdaq 100 Index. The Nasdaq closed over 5,500 for the first time and the $NDX closed over 5,000 for the first time. Note that both are highly visible round numbers.

However, the vast majority of the gains were produced by only a few large cap tech stocks. The market breath was poor. For example, Facebook gained $8 for the week. Amazon gained nearly $50. Netflix gained nearly $9. A large cap only rally is unsustainable. We need more of the mid cap and small cap stocks to follow the generals up the hill into battle.

Until those generals take fire and begin to retreat the general public could view the breakout as a signal to charge into the market. However, everything will depend on the Dow next week.

The Dow missed hitting 20,000 by 0.37 of a point. It would have only taken an additional 6-cent move by any Dow stock to lift the index to that 20,000 level. However, resistance from 19,950 through 19,990 remains strong. We probably could have tagged 20K if it were not for the Florida airport shooting headlines. That caused cautious investors to pull back ahead of the weekend until the facts became clear. Was it a terrorist event? Would there be more?

Assuming there is not a geopolitical event this weekend and no overseas markets go into meltdown, I would expect Dow 20K to be hit on Monday.

Originally, I was concerned it would turn into a sell the news event. However, after three weeks of consolidation, I no longer believe we will sell off materially once it happens. Touching 20K is not the key point. The Dow needs to power through 20K and close significantly higher to trigger what could be significant short covering.

Unlike the NASDAQ the few big cap techs were unable to power the S&P significantly past resistance at 2,275. There were sellers but the surge in those big cap names overcame the weak volume to close the S&P at a new high.

The traditional link between the Nasdaq and the semiconductor stocks diverged last week with the semis lagging and the Nasdaq surging. This is the big cap impact again. AMZN, NFLX, FB, AAPL, GOOGL are not chip stocks and they accounted for more than 25% of the Nasdaq move.

Several months ago I presented the following chart explaining how far an eventual break out or break down could run. For most of 2015-2016 the S&P was stuck in a 324 point range between 1820 and 2134. Technically, when that range finally breaks we should see a 324 point move in the breakout direction. We have clearly broken out to the upside and the target is now 2,458.

Also, after a brief bearish cross the 10 month average is now breaking away from the 21 month average and that suggests the gains should accelerate. This is a very long-term chart and movement happens in slow motion.

I have mentioned several times that the market breadth is shrinking. The small caps have been the weakest index over the last couple weeks but they have not yet broken down. The cumulative A/D line is nearing a five-week low. The MACD roll over three weeks ago. Note that the A/D line on the S&P is about to reach new highs. This is identical to the chart of the Dow. However, despite the Nasdaq breakout to a new high, the A/D line is showing the same indecision as the small caps. This is another confirmation the Nasdaq is being pulled higher by only a few stocks.

The Bullish Percent Index on the S&P finally showed a slight uptick last week. It had been stuck on 70% for two weeks and threatening a decline. This is the percentage of stocks on the S&P that have a buy signal on a point and figure chart. The minor improvement suggests the S&P internals are still struggling.

I do not show this chart very often but this week it illustrates the big cap strength. This is the S&P-100 ($OEX) or the 100 largest cap stocks in the market. Note that the percentage of stocks over their 200-day average has risen to 81% or 81 stocks in the case of this index. This is approaching a three-month high. This particular chart and indicators is known as the Carlucci Indicator.

In theory Carlucci said enter the market if the percentage was over 65% and two of the following exist.

RSI rises over 50
MACD black line over the red line
Slo Sto black line is over 50.

Based on his rules, this is a buying opportunity. The MACD has not yet crossed but the other two indicators are strongly over their thresholds.

Lastly, the Wilshire 5000 index is at a new high and the RSI and MACD is positive on a quarterly basis. This is a long-term chart and tends to ignore the day to day noise in the market. This is more for investors that hold stocks rather than options but it is good confirmation of the current long-term trend.

With only four trading days behind us for January, it is impossible to form any real opinion about the rest of the month. There are so many conflicting views about selling before the inauguration, selling after the inauguration, weak earnings, tax selling, etc that you could go crazy trying to build a case for any market direction. With the S&P and Nasdaq at new highs and the Dow likely to hit 20K this week, the only fly in the soup is the weakness in the Russell 2000. However, the Russell has not broken down. It is just not breaking out.

I am moving more into the bullish camp this weekend and that means we must be near a correction. The market always moves contrary to what the most analysts expect. However, we need to trade in the direction of the trend until that trend changes. I would just use small positions and a small number of positions until we are past the inauguration and have a better idea what the earnings look like.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Holiday Winner

by Jim Brown

Click here to email Jim Brown

Editors Note:

There were very few winners this holiday season but FedEx was one of them. The company posted disappointing results for Q3 in the middle of December but Q4 should be a blowout quarter.

I wanted to add a couple long positions this weekend but the impending earnings cycle knocked out about 85% of the potential plays. Nearly every stock reports between now and Feb-15th. The rest had crummy charts.


FDX - FedEx - Company Profile

FedEx Corporation provides transportation, e-commerce, and business services in the United States and internationally. The company's FedEx Express segment provides various shipping services for the delivery of packages and freight; international trade services specializing in customs brokerage, and ocean and air freight forwarding services; assistance with the customs-trade partnership against terrorism program; and customs clearance services, as well as an information tool that allows customers to track and manage imports. This segment also publishes customs duty and tax information; and offers critical inventory logistics, transportation management, and temperature-controlled transportation services, as well as international express transportation, small-package ground delivery, and freight transportation services. Its FedEx Ground segment provides business and residential money-back guaranteed ground package delivery services; and consolidates and delivers low-weight and less time-sensitive business-to-consumer packages, as well as offers third-party logistics services. The company's FedEx Freight segment offers less-than-truckload freight, and freight-shipping services. As of May 31, 2016, this segment operated approximately 65,000 vehicles and trailers from a network of approximately 370 service centers. Its FedEx Services segment provides sale, marketing, information technology, communication, customer, technical support, billing and collection, and other back-office support services; FedEx Mobile, a suite of solutions to track packages, create shipping labels, view account-specific rate quotes, and access drop-off location information; access to copying and digital printing through retail and Web-based platforms, signs and graphics, professional finishing, computer rentals, and ground shipping and time-definite express shipping services; and packing services, supplies, and boxes. Company description from FinViz.com.

On December 21st, FDX reported earnings of $2.80 that missed estimates for $2.91. Revenue rose 20% to $14.93 billion and beat estimates for $14.91 billion. The problem with the earnings was a large amount of spending to build new distribution hubs and improve others ahead of the holiday season.

FedEx said they were in the midst of a record-breaking holiday shipping season and package volume was expected to rise 10% or more over 2015. They raised full year guidance from $10.85-$11.35 to $10.95-$11.45. The CEO said the recent improvements would allow them to ship more packages at a lower cost with improved delivery.

During the holiday shopping season my family spends a lot of money on Amazon for gifts for our extended family. Because I am a Prime member, others in the family use my account to make purchases and everything comes to my house. In the 2015 season UPS delivered to my house almost every single day from Amazon. I might get a box from USPS once a week and FedEx maybe once a week.

This year UPS only came twice between Thanksgiving and Christmas. Fedex came 3-4 days a week and USPS 3-4 days a week. That suggests FedEx gained a significant amount of market share from Amazon and moved a lot more packages than UPS. Hopefully this added to their profits on the improved shipping network.

Earnings are March 21st.

Because their earnings are expected to be good, the March option prices are out of sight at $7.50 for a $195 call with FDX at $190. We have to use the February options to get a reasonable price. Given the potential for market volatility between now and expiration, we do not want to spend a lot of money on premium.

I am putting an entry trigger on the position just in case the market decides to turn negative on Monday.

With a FDX trade at $191.85

Buy Feb $195 call, currently $3.25, initial stop loss $186.65


No New Bearish Plays

In Play Updates and Reviews

Sector Rotation

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow failed to hit 20,000 again but the FANG stocks were on fire for the week. It looks a lot like a breakout with the Nasdaq and S&P at new highs but the Dow has yet to break 20K. The Russell 2000 was down again and that is our leading market sentiment indicator. The Nasdaq made new highs on the strength in the FANG stocks and they are showing no signs of slowing.

At this point, a significant break over Dow 20K could set the markets on fire. Resistance has been firm but every test weakens that resistance since it eliminates more sellers every time.

I know as soon as I revert to a bullish bias that will be the kiss of death for the markets.

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

No Changes

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

No Current Bullish Plays

BEARISH Play Updates (Alpha by Symbol)

CAT - Caterpillar - Company Profile


No specific news and CAT did not participate in the Dow rally. There is still hope for the position but the decline needs to come next week.

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


The Dow failed again to tag that 20K level by the smallest of margins despite an entire day of trying. There is still solid resistance just under 20K but with the other indexes breaking out, I expect the Dow to finally break 20K next week. Whether that brings a new round of buying or selling is unknown.

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. Thursday's upgrade bounce did not last long and DRI closed at a 7-week low.

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. Threatening a support break at $59.75.

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, see portfolio graphic for stop loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now