Option Investor

Daily Newsletter, Saturday, 1/14/2017

Table of Contents

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

Market Wrap

Five Week Pattern

by Jim Brown

Click here to email Jim Brown

For the last five weeks, the Dow has traded in a narrow 250-point range and still has not hit 20,000.

Weekly Statistics

Friday Statistics

Despite the downgrade of nearly a third of the Dow stocks last week the index managed to maintain its sideways pattern. Volatility increased slightly as the intraday moves became sharper but every dip was bought and every spike was sold. Eventually this will end with an explosive breakout or breakdown but as of today there is no indication on the Dow.

The move will probably come on a series of headlines that change market sentiment. That could be an earnings miss by Goldman Sachs or a tweet from Trump. We will not know until it happens.

Conventional wisdom seems to be predicting a "sell the inauguration" trade but everybody has been wrong for the last five weeks so it will be interesting to see if analysts get it right this time. We know there is a correction in our future but it could be next week, next month or next summer. Nobody can predict it in advance.

Friday was active in the economic arena. The anxiously awaited retail sales for December rose +0.6% compared to +0.1% in November. However, that was below the consensus estimates for 0.7% and the Moody's forecast for 0.8%. On the surface, that was a good number but we know there is always a fly in the soup if you look at the internals.

Gasoline sales rose +2.0% thanks to rising oil prices. That is never a good number to report. Motor vehicles and parts rose +2.4% as winter kicked in and sales of things like antifreeze, window scrapers and 4WD vehicles kicked into high gear. For the bad news electronics and appliance sales fell -0.5%, food and beverage -0.3%, general merchandise -0.5% and food service and drinking establishments -0.8%. I am having a hard time understanding why bars and restaurants saw sales decline during the holiday season when it is normally standing room only. Building materials rose +0.5%, furniture +0.5%, sporting goods +0.2% and nonstore retailers +1.3%.

If it were not for autos and gasoline, the headline number would have been a lot different. Actually if you exclude autos and gas the headline number would have been zero change and that was for the holiday shopping season. Retail stocks of all flavors sank on this news.

The Producer Price Index for December rose +0.3% after a +0.4% rise in November. Analysts were expecting a +0.3% gain. The report has been showing a slight increase in inflation for 3 of the last 4 months. The price of goods rose +0.7% and service costs rose +0.1%. If you annualize the prior three months the inflation rate would be 2.6% and the strongest since July.

Food prices rose +0.7% to account for 80% of the headline gain. Energy prices rose 2.6% and have risen by at least 2.5% in 3 of the last 4 months. The PPI for personal consumption items rose only 0.2% and half the rate from November. This report would suggest the Fed will hike rates in March but not n February.

Inflation could take flight if there is a border tax. Every item that is taxed by 10% will see that retail price rise by 10%. This could spike inflation very quickly.

Business inventories exploded higher in November with a 0.7% spike compared to the -0.2% decline in October. That is the biggest one-month gain since January 2013. Sales rose only +0.1%. Inventories rose 1% at both wholesalers and retailers. Given the weak holiday shopping season these inventories could linger for months. However, autos and parts were a big weighting once again with a 1.9% gain.

Consumer sentiment surprised analysts with a minor decline after two months of post election gains. The headline number fell from 98.2 to 98.1 so it was a miniscule move but analysts were expecting a rise to 98.7. This is the first reading for January so there is still a good chance it will move higher later in the month.

The present conditions component rose from 111.9 to 112.5 and the expectations component slipped from 89.5 to 88.9.

The headline number has risen more than 10 points since the 87.2 reading in October and indicating consumers were excited about the election outcome or maybe just excited to get the election behind us.

The weak retail sales caused the Atlanta Fed real time GDPNow forecast for Q4 to tick down one tenth to 2.8% growth. The forecast has been reasonably steady between 2.5% and 2.9% since early December.

The market is closed on Monday for Martin Luther King Day and Tuesday's lone report is not going to move the market. The Beige Book on Wednesday and the Philly Fed Manufacturing Survey on Thursday are the most important for the week.

This could be a holiday week atmosphere with some states recognizing Friday as an actual holiday because of the inauguration. The economics are not going to be as important as the earnings and the Friday event. Those will be the market movers.

The earnings calendar is heaviest on Wednesday and Thursday. There are five Dow components reporting including UNH, GS, IBM, AXP and GE. The Goldman/Citigroup earnings on Wednesday morning will be a high point as will the Netflix earnings after the close. IBM is always a market mover on Thursday after the close and they are likely to have some serious issues with the strong dollar.

Friday was bank earnings day. Bank of America (BAC) reported earnings of 42 cents compared to estimates for 38 cents. That was a 47% increase in earnings. Revenue of $19.99 billion missed estimates for $20.62 billion. They said the spike in trading after the election helped increase profits. Trading revenues rose 11% to $2.9 billion. Non-interest expenses fell 6% thanks to an aggressive cost-cutting program. They expect to cut $5 billion from annual expenses by 2018. The bank said they would earn an extra $600 million in Q1 thanks to the recent Fed rate hike in December. Shares closed only fractionally positive due in part to the large post election gain in anticipation of good earnings.

JP Morgan Chase (JPM) said earnings rose 24% to $1.71 per share ($6.73 billion) and that beat estimates for $1.43 per share. The bank said trading volume rose 15% after the election. Revenue rose 2% to $24.3 billion and just barely beating estimates for $24.2 billion. Expenses declined -3% to $13.8 billion. Fixed income trading revenue rose 31% to $3.37 billion. Equities trading revenue rose 8.1% to $1.15 billion and slightly below estimates for $1.29 billion. CEO Jamie Dimon said conditions were very positive for a good 2017. He cited rising business confidence, increased capex spending, rising consumer sentiment, higher energy prices, increased home construction and household formation, rising interest rates and the potential for decreasing regulation and lower taxes. He said the fixed income market was heating up and the strong dollar meant there was more activity in the currency markets as companies hedged against that risk.

Wells Fargo (WFC) reported earnings of 96 cents ($4.87 billion) that missed estimates for $1.00. Revenue of $21.6 billion missed estimates for $22.4 billion. Non-interest expenses rose 4.9% to $13.22 billion due to high legal costs from the account opening disaster.

Wells Fargo is moving to a cardless ATM system for their 18.8 million users. The customer would have to use the app in their smart phone. It would give them a secondary 8-digit code that they input into the ATM along with their PIN. This would prevent stolen cards and skimmers attached to ATMs. They will be the first bank to implement this across their entire network.

Wells Fargo shares gained the most of the banks reporting earnings and yet they had the biggest miss. Investor expectations were not as high.

Blackrock (BLK) reported earnings of $5.14 ($851 million) compared to estimates for $5.02. Revenue of $2.89 billion missed estimates for $2.94 billion. Assets under management rose 11% to $5.1 trillion. The iShares ETF portfolio saw $49.3 billion of net inflows into equities. The company boosted its quarterly dividend from $2.29 to $2.50.

The CEO said the market is about to enter a new phase where president-elect Trump's promises are about to hit the reality of implementation and congressional roadblocks. The market has been bullish on the expectations but that is likely to fade once he is in office.

It was a good day for the FANG stocks and they helped power the Nasdaq to a new high. Netflix was upgraded from sell to hold by Deutsche Bank. Shares gained $4.52 to$133.70 despite the DB price target only being raised to $110. The DB analyst said the subscriber trajectory internationally would enable the company to beat Q4 guidance. Helping push the stock higher was comments by Mott Capital that Netflix was involved in a major paradigm shift in the video market. Mott said Netflix was creating the "on-demand generation" which watches what they want, when they want it. Mott said Netflix was only owned by 55% of funds at year end and there was plenty of room for new investments.

Hotel in-room entertainment integrator Enseo said Netflix was 40 times more popular than porn in hotel rooms. Only 1% of occupied hotel rooms order a paid on-demand movie compared to 40% that stream Netflix videos through the Enseo service. Previously hotels generated about 90% of their on-demand revenue with porn titles. Enseo also said Netflix always ranks in the top three networks in any hotel room where it is available.

RBC Capital expects the company to report 1.46 million new U.S. subscribers and 3.75 million new international subscribers. Clearly, the bar has been set high but that is not high enough for Deutsche Bank. They expect 4.35 million new international subs.

Facebook (FB) was upgraded by Raymond James from outperform to strong buy with a price target of $160. Shares closed at $128. The average analyst price target is $155. The consensus estimate for ad growth is 35% compared to 55% in 2015. The analyst said even though Facebook had said they plan to invest aggressively in 2017, the street is forecasting 41% and the average guidance for the last three years has been 8.5% higher than the actual spending. Raymond James is expecting only 34% expense growth. In a recent survey, Facebook had an 81% usage rate in the core age groups compared to 47% for Messenger and 32% for Instagram. In the 18-29 age group usage was even higher at 90%, 64% for Messenger and 62% for Instagram. Facebook was also ranked as the "most important" social app in the 18-29 group. In another survey user engagement was robust in December after a soft start to the quarter, leading RJ to forecast strong revenue. They expect revenue of $8.25 billion or 46% year over year growth. The analyst said their surveys did not show a migration to SnapChat as others had feared. Shares gained $1.72 on the news. Earnings are Wednesday after the close.

Alphabet (GOOGL) finally confirmed it has shutdown another moonshot project called Titan. The project was testing highflying drones to beam internet service to areas not currently serviced by fiber. The drone project was cancelled in early 2016 but was just confirmed this week. They acquired Titan in 2014. The company they acquired was working on a project to create highflying drones that could stay aloft nonstop for years. Facebook bid against Alphabet for Titan in 2014. When they lost the bid they paid $20 million for Ascenta, a UK based drone company and their efforts are still underway. Alphabet's Department X, which is responsible for moonshot projects, said they are still working on delivering remote access through Project Loon, which uses high altitude balloons.

The company is also scaling back on its fiber optic cable project, robotics and modular smartphones. They are also attempting to sell their satellite business to Planet Labs.

Boeing (BA) confirmed a deal with India's SpiceJet for 205 planes worth $22 billion at list prices. The deal includes 100 new 727 Max 8s plus 55 already on tentative order and an option for 50 more. SpiceJet operates an all Boeing fleet. The 737 is Boeings most popular plane ever. Analysts believe Boeing will add more rows of seating to the planned 737 Max 10X plane that could launch in 2020. They are currently talking to customers about interest in that version before actually announcing it. They will also announce a new midsized plane that will compete with the Airbus A321neo. Just last week Boeing announced an order from GE's aircraft leasing division for (75) 737 Max 8s. That raises GE on order total to (170) 737s. On Wednesday a Czeck airline ordered five 737 Max 8s. Boeing sold more than 500 of the 737 models in 2016 and they are already off to a strong start for 2017. They have an order backlog that will take them 8 years to deliver. Earnings are January 25th. Shares are currently stuck at the 2015 historic high and a break over $160 could be strong. However, given the post election ramp, any weakness in the earnings could be a temporary disaster.

With only 30 of the S&P-500 companies having reported earnings for Q4 the blended growth rate is at +3.2% but that could change dramatically as the cycle progresses. For the Q4 cycle, 78 companies have issued negative guidance and 34 have issued positive guidance. The forward S&P-500 PE is 17.0 based on expected earnings of $133.49. Factset believes with the average upside surprise we could see final earnings growth of 6% or better for Q4. Over the past five years, the average reported earnings have exceeded early quarter estimates by 4.5%. On average, 67% of S&P companies report better than expected results with the rest of the companies either meeting or missing estimates.

Crude prices produced a drag on the Dow last week with a $3.50 decline over two days. The rebound on Wed/Thr helped but the longer-term outlook is still down as reports are likely to show fewer production cuts than previously announced.

However, the rebound in crude prices from the February lows of $26 will be a boost to earnings for the energy sector. That will support the S&P even if crude prices are soft. If they really tank on production cut realities those better earnings will not help.

There was a shocking drop in active rigs last week with oil rigs declining -7 to 522. Analysts theorize this was hangover from the holidays where rigs were slow to reactivate as they moved from one well location to another. Producers may have given workers some extra time off or possibly the harsh weather kept some from being moved. The mountain states and West Texas has some very cold and snowy weather over the last ten days. The key will be how many are active next week. We could have a strong post holiday rebound.




Sellers tried and failed to push the markets lower. They tried on Wednesday and the afternoon rebound was strong and lifted the Dow back into positive territory. They tried hard on Thursday and managed a new intraday low for the week but once again the rebound was strong and the -181 point low for the day turned into only a 63-point loss. With that kind of dip buying the sellers will eventually run out of conviction and/or stock to sell.

It is hard to pick a direction for next week because of the inauguration on Friday and the number of analysts claiming it will be a sell the news event even if there are no terror attacks or civil disobedience headlines. It is hard to side with the bearish forecasts because of the strong dip buying. Personally, I worry about the potential for an attack but the market has shaken off every mass casualty event in the last year. Getting close enough to harm the presidents would be practically impossible and that is the only thing that could really shake up the market.

If the event comes off without any major disaster, I would expect that to be positive for all the investors that are worried about a disruption. Anyone selling the event could see a rush of dip buyers eagerly buying their stock.

We would go crazy trying to second-guess what the market might do surrounding the event. The best course of action would be to follow the trend until the trend changes. Unfortunately, the trend has been flat for five weeks except for the Nasdaq. Inside that flat trend, the S&P is actually ticking slightly higher. That suggests we are more than likely going to have a break out than a break down. We cannot go by the Dow because of its narrow 30 stock composition. Nearly one-third of those stocks were downgraded last week and the index only lost 78-points for the week. The S&P lost 2 points. That is hardly bearish in the midst of all those downgrades. Note that the candles for last week are all clustered near the top at that 2,275 resistance.

The Dow traded more in the middle of its range but on Wednesday, there was a real effort to reach 20,000 that failed at 19,973. On Thursday, the Dow traded down to the bottom of its range at 19,770. That was a 200-point swing only to end up right back in the middle of the range on Friday. There is no trend other than sideways.

The bank earnings on Friday did not impact the Dow materially because the outlooks were good despite some random misses in the numbers. Jamie Dimon was responsible for some bullish sentiment in the afternoon after his positive view of the economy and the financial sector.

There are five Dow components reporting earnings next week and Goldman Sachs and IBM will have the most impact on the Dow. IBM did not warn. I do not know if that is good or bad. They could be saving some bad news on the dollar and lower revenue in order to be offset by better than expected earnings. Goldman should report blowout numbers because of the increased trading in Nov/Dec but the market is expecting blowout numbers so there could be a sell the news event there.

There is no conviction by either the buyers or sellers so we are likely to continue moving sideways until we get a headline that alters the status quo.

The Nasdaq Composite has been up for 8 of the last 9 days. The index closed at a new high on Friday thanks to the big cap stocks with strong gains in PCLN, TSLA, NFLX, FB and AMZN along with a resurgence of some of the biotech names that were crushed on Wednesday.

With earnings for those same stocks fast approaching there should be some concerns about post earnings volatility and that could/should blunt any further gains next week. Netflix reports on Wednesday and IBM on Thursday. I know IBM is not a Nasdaq stock but as a giant tech stock it does impact the sector.

The small cap Russell 2000 is normally our market sentiment indicator and leads the big caps both up and down. I guess you could say it has done a good job of leading the Dow since it had the same sideways pattern for the last five weeks. Support was broken intraday on Thursday but the dip buyers rushed in and lifted the index back to the middle of its recent range.

Unlike the S&P, which is clustering at resistance, the Russell candles are clustering at support. Whether that means the S&P is about to lead us higher or the Russell is about to lead us lower is for fortune tellers to determine because there are no technical clues.

Touching 20,000 on the Dow is no longer the key. Surviving the volatility in a shortened, low volume week with numerous headline events will be the challenge. I know the urge to trade is hard to resist. However, I seriously doubt anyone's financial future will be ruined by waiting until next Monday to enter the market.

I made a mistake last week when I said the EOY special would close at midnight Sunday. I forgot this was a three-day weekend. The special will close at midnight on Monday. That will give all the procrastinators plenty of time to get their tax-deductible subscription for 2017.

Random Thoughts

The volatility from last week shook the confidence of the bulls and there was a slight movement back to the cautious side of sentiment. However, the decline was minimal and at 43.6% that is still well over the average. This survey ended on Wednesday.

Last week results

Russell Investments CIO Jeff Hussey is predicting the S&P will end 2017 at 2,100. That is an 8% decline from Friday's close and the lowest forecast on the street that I have seen. He blames the high valuations with the Russell 2000 at a PE of 23. He said profit margins are very high and they tend to revert. He warned that wage growth, inflation, strong dollar and interest rates would be a challenge. He also said the Fed was emptying the punchbowl and there was no tsunami of cash flowing into the market from the Fed as in the last several years. Hussey is definitely in the minority in the analyst community.

Parents spend an average of $233,610 raising a child until they become an adult. That is old news. A new survey by the Dept of Agriculture found that grandparents are also subject to large cash outlays. Grandparents reported they spend on average $2,383 per child to benefit their grandkids. That includes gifts, extra-curricular sports or tutoring, clothes, school supplies, outings, etc. Grandparents routinely help with childcare, carpool, house cleaning, babysitting, homework help, etc. Parents in the survey valued the contribution to these efforts at about $300 per week or $15,600 a year.

Millennials waited longer to have kids because of high school loans but low wages and full time jobs mean more expenses for childcare. More than 25% report receiving physical support from parents and 18% report receiving regular financial support. More than 43% of grandparents said the children did not ask for the support but it makes the grandparents feel "happy" to be able to help. However, more than 25% have dipped into their retirement savings to supply the support, 15% say they spend less time enjoying their own life and 8% have had to postpone retirement because of the financial support. Source

The chart below is from TD Ameritrade.

ISIS is calling Inauguration Day, "Bloody Friday" and calling on followers to attack the proceedings in any way possible. Officials are preparing for a massive security presence to protect against everything from high-speed truck attacks to attacks by bomb or biotech laden drones. Officials are expecting as many as 750,000 demonstrators but organizers are hoping for 1.2 to 1.5 million.

Attendees to the inauguration are not expected to reach the 1.9 million that attended President Obama's event in 2009 but they do expect more than one million people at the capital. More than 1,200 busses bringing in attendees have received parking permits.

There are three-dozen law enforcement agencies plus more than 7,500 Guardsmen from around the country along with more than 3,000 police officers from other states. There are two main problem areas. The first is the capital ceremony and the second is the 2.5 mile parade route.

The DisruptJ20 group claims they will target everything from the parade to the balls and plan to use blockades and protestors to stop traffic, public transit and parties.



Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Be decisive. Right or wrong, make a decision. The road of life is paved with flat squirrels who could not make a decision."



Index Wrap

Pivotal Week Ahead

by Jim Brown

Click here to email Jim Brown
I hope this is the last time I warn of a pivotal week for quite a while.

Everybody knows the markets, with the exception of the Nasdaq, have been passing time for the last five weeks. There has been plenty of day-to-day volatility but the +50, -50, repeat, cycle has kept us locked in a roughly 200 point trading range on the Dow. The S&P has been in a 25-point range except for a one-day drop on December 30th.

Markets go sideways for two reasons. They are either consolidating large gains or waiting for some critical event to pick a direction. Over the last five weeks, both reasons have been in play.

The nearly 200 point post election rally on the S&P needed to be consolidated and new money does not want to buy the top until after the event risk surrounding the inauguration had passed.

We now have three trading days until the event. Volume is expected to be low because everyone has already staked out their positions. However, if the negative headlines begin to increase in the coming week we could see some traders begin to get nervous and move to the sidelines.

Once the event has passed successfully, I believe we will see a relief rally but quite a few analysts are expecting a sell the news event as the rubber meets the road when the president elect promises begin to run into opposition in congress.

Rather than flip a coin and try to predict market direction about the only guaranteed outcome would be a market crash if there were a disaster at the event. How far the market crashes depends on how big the disaster. We have seen market dips on mass casualty events in recent years but investors have grown somewhat immune and now regard them as buying opportunities.

This is going to be a short commentary because nothing has changed from last week. Actually, nothing has changed in five weeks with the exception the S&P closes are clustering closer to resistance, suggesting we could see a breakout rather than a break down.

The problem is timing. I am not sure there is enough sideline money unafraid of Friday's events to power a breakout. Every attempt in the past has been met with instant selling but after five weeks, the sellers may be exhausted.

The chart really tells us nothing except the indicators are also moving sideways although still negative. Volume has declined as we head into next week and that is a sign of caution.

The S&P A/D line is about to break out to a new high and that correlates to the S&P closes clustering near the highs of the recent range. This should suggest a potential upside breakout.

The Dow chart is slightly more negative. The inability to hit 20,000 after five-weeks of trying is a major bruise to sentiment. The indicators are slightly more negative than the S&P and the 2,100-point rally has not seen any material profit taking.

The -181 point intraday dip on Thursday was a perfect spot for sellers to take control and they could not do it. The dip buyers arrived in volume but once they lifted the index back to 19,900, it was a dead stop. There are still sellers at the higher numbers but plenty of buyers under 19,900.

Nearly one-third of the Dow components were downgraded last week and the Dow only lost 78 points for the week. That is far from bearish and should be a sign the bulls are not afraid of the future.

The Dow A/D line is declining like the Dow indicators. This suggests the Dow is weakening more than the actual index is showing.

The Nasdaq Composite traded higher on 8 of the last 9 days and is showing no weakness. However, with any string of gains, there is always the eventual retracement. We saw it in early December and again in late December. After nine days of gains, the Nasdaq is due to rest. With the event risk for Friday and Netflix earnings on Wednesday and IBM on Thursday, this would be a good spot for some profit taking. The index did punch through uptrend resistance last week and the stutter step when it hit that level was minimal.

The Nasdaq A/D line is breaking out to a new high to confirm the breakout on the index itself. This is bullish because the rising A/D line is not possible with just the top ten big caps lifting the index. This means there is support from the rest of the tech sector.

The Russell 2000 has an interesting chart pattern. With only a couple deviations the flag at the top is being well respected. In theory, this is a continuation pattern that should breakout to the upside. However, that assumes an uneventful calendar. Next week is hardly uneventful.

The cumulative advance/decline line for the small caps is weakening slightly and the MACD is extending its decline. This suggests the next move on the Russell could be to the downside.

The broadest index is the Russell 3000 and the candles have been clustering at resistance just like the S&P. This also suggests the next move could be a breakout to the upside.

All things being equal, the market appears poised to move higher assuming an absence of negative headlines next week. I would want to be a buyer of index ETFs on any decline and I personally want to be long an ETF on Friday morning but fully aware a disaster could be costly. Limit your exposure and be prepared for a major market move.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Angels Lost Their Wings

by Jim Brown

Click here to email Jim Brown

Editors Note:

If you name was not Amazon the retail sector was painful in December. Amazon's market share was 37% of online sales over the holiday period. Unfortunately for brick and mortar retailers all the buying is moving online.


No New Bullish Plays


LB - L Brands - ETF Profile

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Buy Feb $60 put, currently $2.10, stop loss $62.85.

In Play Updates and Reviews

Sellers Evaporating

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow almost returned to positive territory and the Nasdaq sprinted to another new high. Volume was only 5.8 billion shares but the Nasdaq made its 8th new high over the last nine days. The S&P chart looks like a breakout is imminent and the Dow refuses to decline despite downgrades to nearly one-third of its components.

The conventional wisdom appears to be growing for a "sell the inauguration" move but you could not tell it from the indexes. The sellers are evaporating and stocks continue to rise.

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

PVH - PVH Corp

Long call position was stopped at $89.25.

SPY - S&P-500 ETF

Long call recommendation remains unopened until $223.25.

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

PVH - PVH Corp - Company Profile


PVH shares were crushed after comments by analyst Dana Telsey claiming holiday shopping was weak for name brand retailers. There was also concern that Trump was going to apply import tariffs and 97% of clothes are made overseas. The CEO of LVMH met with Trump on Monday and said afterwards the company may have to manufacture more goods in America. This produced a drag on all clothing manufacturers.

Shares of PVH fell -$4 to stop us out.

Original Trade Description: Jan 9th

PVH Corp. operates as an apparel company in the United States and internationally. The company operates through six segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. It designs, markets, and retails men's and women's apparel and accessories, branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, hosiery, socks, jewelry, watches, outerwear, small leather goods, and home furnishings, as well as other related products. The company offers its products under its own brands, such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner's, Olga, and Eagle; and licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection, and Chaps, as well as various other licensed and private label brands. Company description from FinViz.com.

In November, PVH guided lower for the full year because of a $1.65 per share negative impact from foreign currency exchange issues and some other problems. Shares fell from $119 to $90 where they spent most of December.

They guided for Q4 earnings in a range of $1.13 to $1.18 after a 23-cent impact for currency issues. On January 5th, the company updated guidance saying, "earnings would be at least at the top end of its guidance ranges for both Q4 and full year." That suggests a positive holiday shopping season. As of late last week 11 retail companies had reported sales for holiday shopping and 8 of them reported declines. It was a rough quarter and PVH raised guidance.

Earnings are March 1st.

I am playing PVH for multiple reasons, one of which is that they already lost $30 in the December guidance crash. The $90 support level has held and once a positive market returns, they should be favored by longer-term investors. Since they have already seen a steep decline, a market drop over the next couple weeks should not impact them materially.

I am reaching out to the March expirations so there will be some earnings expectations built into the premium when we exit before they report. If you want to use the February cycle the premiums are about $1 cheaper.

Position 1/10/17:

Closed 1/13/17: Long Mar $95 call @ $3.90, exit $2.50, -$1.40 loss.

SPY - S&P-500 ETF - ETF Profile


No material decline despite the weakness in the Dow. It will be interesting to see what happens next week.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short term position using February options just in case any potential dip turns into a crash. The estimated option premium should be less than $2.

With a SPY trade at $223.25

Buy Feb $225 call, estimated to be $2.00 or less, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile


The Dow struggled all day but nearly recovered to close positive. The five-week range is still intact and we could still go either way.

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.

FINL - Finish Line - Company Profile


No specific news, no movement despite the retail funk.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.

GATX - GATX Corporation - Company Profile


No specific news. Big rebound at the open but faded all day to close just off the lows. We have to close the position on Tuesday because this is a January option.

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.

Update 1/12/17: GATX was downgraded from hold to sell by Stifel Nicholas with a $49 price target.

Position 12/16/15:

Long Jan $60 put @ $2.35, see portfolio graphic for stop loss.

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