Option Investor

Daily Newsletter, Saturday, 1/16/2016

Table of Contents

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

Market Wrap

Major Support

by Jim Brown

Click here to email Jim Brown

The major indexes declined to major support levels from the August/September decline and held at those levels into the close ahead of the three-day weekend. Assuming China does not implode over the weekend this could be a potential rebound point.

Market Statistics

Friday Statistics

The market had multiple major headwinds on Friday. First, the Asian and European markets closed down again with the Shanghai Composite losing -3.5% for the day and -8.96% for the week for a -22.6% decline from the December high of 3,684 to put it back into a bear market. The SSEC is now -44% off its June 2015 high at 5,166. The chart suggests the decline will continue.

The European markets were down more than -2% and that was also a negative for the U.S. open.

Also weighing on the U.S. markets was falling oil prices. WTI collapsed and lost more than 10% for the week to close at $29.44 and the lowest close since November 2003. The market typically trades in tandem with oil prices but twice in the last year, the S&P resisted the downward pull for several weeks but eventually caught up when the decline in crude prices accelerated.

Last week I elaborated on why crude prices were going to continue lower and I will not go through it again but I do expect to see $25 tested, if not lower. That should have a negative impact on the S&P. However, when crude prices begin to firm in April/May it will have a huge impact to the upside on the S&P.

Adding to the downdraft was an implosion in the financial stocks. JPM, Citi and Wells Fargo all beat earnings but their shares crashed. Morgan Stanley (MS) lost -4.3%, Citi -6.4%, Wells Fargo -3.6% and JP Morgan -2% to name a few. The financial ETF (XLF) declined -2.2%. The financial sector now has twice the weighting in the S&P than the energy sector.

Financials were falling on weak economic reports and the potential for the next rate hike to be postponed to July or later. According to the CME futures the chance of a March rate hike have fallen from 50% to 35% with June the first month with a better than 50% chance at 54%. The chances of a hike had been pushed out to July or later until NY Fed President, William Dudley said in a speech that he still sees rates on a steady trajectory higher. This was contrary to St Louis Fed President James Bullard on Thursday when he said the fall in oil prices were messing up the inflation expectations and could delay the rate hike decision process.

Hampering the Fed's decision process was the unexpected decline in retail sales for December. Sales fell -0.1% with holiday buying of apparel, electronics and general merchandise showing declines. Restaurants showed a gain thanks to the falling gasoline prices. Building material stores and furniture also posted minor gains.

Retail sales have risen only once in the last five months despite the very low gasoline prices. Consumers are keeping the money in their pocket or using it to pay down debt. There has only been one instance of two consecutive months of decent gains since late 2014.

The NY Empire State Manufacturing Survey for January fell from -4.6 to -19.4 and the biggest decline since 2009. The internal components were terrible. New orders fell from -6.2 to -23.5 while backorders improved only slightly from -16.2 to -11.0. Employment also improved slightly from -16.2 to -13. The gap between new orders and production fell from +5.9 to -17.5. There is no way to interpret this chart in a bullish manner.

Industrial Production for December declined -0.4% compared to -0.6% in November. Analysts were expecting only a -0.1% decline. Capacity utilization fell from 76.9 to 76.5% and the lowest level in more than a year.

Business inventories for November declined -0.2% after zero gain in October. Total business sales declined -0.2%, wholesalers fell -0.3% and manufacturers dropped -0.2%.

The Producer Price Index (PPI) for December declined -0.2% after a +0.3% gain in November. Analysts had expected a -0.1% decline. Goods prices fell -0.7% with core unprocessed goods falling -6.5%. On a year over year basis prices are down -1.1% with goods prices down -3.9%. That is the biggest decline in more than five years.

Consumer Sentiment for January rose slightly from 92.6 to 93.3. This is probably due to the falling fuel prices and the left over holiday cheer. Apparently, the people interviewed for the sentiment survey were not investors in the equity market.

The present conditions component declined from 108.1 to 105.1 and the expectations component rose from 82.7 to 85.7.

The surplus of negative economic numbers caused the Atlanta Fed to lower their real time GDPNow forecast from 0.8% to 0.6% GDP growth in Q4. That forecast is moving ever closer to zero or even negative growth for the quarter. There are only two more updates before the government releases its first estimate of the Q4-GDP on Jan 29th. You can see in the table below how the forecast has declined as each economic report showed progressively more negative numbers.

The yield on the ten-year treasury fell under 2% at the open on Friday but recovered slightly by the close. The buying in treasuries is definitely not projecting another rate hike in the near future. This is a flight to quality because of the falling economics and weakness in the Asian markets.

The economic calendar for next week is weighted to the housing sector with three major reports. Unless there is a major miss of expectations, I do not expect them to move the market. The Philly Fed Manufacturing Survey on Wednesday is the most important report for the week. The report has been in contraction for four consecutive months with December the worst reading at -10.2. To expect the report to suddenly show expansion at +2.0 is delusional.

The big news for the week may be the grouping of Chinese economics on Monday evening. This is like winning the Chinese lottery to have all of these reports on a day when our markets are closed. This is a major reason for the sharp selloff in equities on Friday. Nobody wanted to be long over a three-day weekend when Chinese data is likely to be negative and the possibility of their markets going into free fall.

There were no new splits announced last week.

For the full split calendar click here.

Sarepta Therapeutics (SRPT) saw its stock cut in half by the FDA without the benefit of a stock split. The FDA regulators posted a negative review of the company's experimental muscular dystrophy treatment ahead of a high profile meeting next week. Sarepta has been seeking approval of the drug eteplirsen to treat the debilitating disease. The agency posted a negative review ahead of next week's meeting suggesting the approval is not going to be forthcoming. Shares fell from $31.63 to $14.25 a -55% decline.

Chipotle Mexican Grill (CMG) rose +12% for the week after the company's presentation at the ICR Conference in Orlando. Analysts met with the company and received the details on how they are planning to avoid future occurrences of food borne illnesses and win back customers. The FDA is expected to pronounce the company free of E.coli soon since there have not been any new outbreaks since late November. The company said it was going to close all 1,900 stores on February 8th for a companywide training session via satellite. CEO and founder Steve Ells will "thank and encourage" employees and discuss upcoming changes to the food processing methods. Shares hit $402 on Tuesday and closed at $475 on Friday. That is a lot of fire in those burritos.

Electronic Arts (EA) was upgraded by Bank of America to buy from neutral. The analyst said EA was attractive again after a 15% pullback. They reiterated their $81 price target and the stock closed at $66. The bank sees strong potential in the video game lineup for 2016. The NPD group said Call of Duty: Black Ops 3 was the top-selling video game at U.S. retailers in December. Unit sales have surpassed 20.5 million in 2015 and more than the 18 million in the prior version "CoD: Advanced Warfare." December sales also saw the EA hit "Star Wars Battlefront" and "Fallout 4" was in third place.

Wynn Resorts (WYNN) shares spiked +13% on a bad tape after Wynn reported preliminary results for Q4 that beat analyst estimates. Adjusted earnings will be $156-$164 million for Macau and in line with estimates. However, earnings from Las Vegas will be in the range of $123-$131 million and analysts were expecting $111 million.

Disney (DIS) was downgraded to underperform or the equivalent of a sell rating by Barclays. The analyst said Netflix is becoming increasingly competitive and Disney will be fighting the cord cutting at ESPN for another quarter until we get closer to the Olympics. Analysts have really been raining on the Disney parade for the last quarter and shares are nearly $30 off the November high of $120. There is strong support at $90 and I would expect the decline to end there. The company has too much happening in 2016 to ignore it. Earnings are Feb 9th.

After six years of construction, Shanghai Disney will open in June. It will be the second largest Disney park and have six themed lands. The park will cover nearly 1,000 acres or 3 times the size of the Hong Kong Disneyland Park and cost $5.5 billion. They are expecting millions of visitors. More than 330 million people live within 3 hours of the park. That is equal to the population of the entre USA. Annual visitations are expected to be 60-75 million people. Disney World in the USA has 45 million visitors annually.

Walmart (WMT) announced it was closing 269 stores (3%) with 154 of those in the USA. More than 10,000 U.S. workers will be eliminated. In 2011, they started the Walmart Express concept of smaller stores and they never caught on. One of the big draws for Walmart is the "everything under one roof" concept and consumers were disappointed with the small store concept. They are closing all 102 of the Express stores and 23 neighborhood markets. They will also close 12 supercenters, 6 discount stores, 4 Sam's Clubs and 7 stores in Puerto Rico. They are also closing 60 stores in Brazil because of economic conditions in that country. This is a good move for Walmart and shares would have been higher except for the negative market.

They are closing the Walmart closest to me. They will close forever at 7:PM on Sunday. I asked the manager on Saturday when she was notified and she said Friday morning. That is some seriously fast movement to come in on Friday morning and find out the store is closing in two days. They discounted all the perishable items by up to 50% but everything else is going back to the warehouse.

Intel reported earnings on Thursday after the bell and the stock was crushed on Friday. Intel reported earnings of 74 cents compared to estimates for 63 cents. Revenue of $14.91 billion posted a minor beat. Operating income was $4.3 billion. That would appear to be a good report. However, analysts and investors found multiple reasons to complain. Revenue only rose +1%. Earnings declined -$200 million from the year ago quarter. The datacenter segment had revenue of $4.3 billion that missed estimates for 4.4 billion. The PC division saw revenue of $8.8 billion that beat estimates but grew only 1%. Gross margins declined -1.1%.

Intel posted great earnings and the CEO was very positive but investors wanted more growth not just more earnings. Shares declined -9% on the news.

Citigroup (C) reported adjusted earnings of $1.06 compared to estimates for $1.05. Lower legal and regulatory costs helped fuel the earnings. They earned $3.34 billion for the quarter compared to $344 million in the year ago quarter when they suffered $3.6 billion in legal costs. Citi was also able to sell $32 billion in assets from Citi Holdings. That is the "bad bank" entity that was formed to hold all the toxic assets from the financial crisis. Total revenues were $18.46 billion, up from $17.9 billion. Expenses declined -23% but most of that was a reduction in legal costs.

Citi had to set aside $250 million to cover potential losses from its energy portfolio. If oil declined to $25, they will have to more than double the reserve to $600 million for the first half of 2016. Citi has more than $58 billion in energy loans. Shares declined because of the energy exposure.

US Bank (USB) reported earnings of 79 cents that were in line with analyst estimates. Revenue of $5.16 billion exceeded estimates for $5.11 billion. Provisions for loan losses rose +5.9% to $305 million due to concerns over energy defaults. Total allowance for doubtful loans was $4.3 billion. Nonperforming loans declined -16.7% to $1.5 billion. Total loans increased 4.2% to $256.7 billion. Deposits rose +6.9% to $294.5 billion. The earnings were solid but unexciting.

Wells Fargo (WFC) reported earnings of $1.03 compared to estimates for $1.02. Revenue was $21.59 billion and slightly less than the $21.7 billion estimate. Wells earned $5.71 billion for the quarter. The bank reported losses of $118 million on loans to energy companies and has $114 million in existing commercial loans that are more than 90 days past due. That compares to $47 million in the year ago quarter. Mortgage originations slowed to $47 billion but that was mostly a seasonal slowdown. Total loans rose +7% to $912.3 billion. Total deposits rose +6% to $1.2 trillion. The CEO said there was no recession in sight, yet.

Earnings will increase next week with the calendar starting to fill up. However, the number of high profile companies is still small. Netflix, Starbucks, Goldman Sachs, IBM and GE will be the most watched next week. The Nasdaq is not going to get much help from the hand full of tech companies reporting. The Dow will have the most to gain or lose with UNH, GS, AXP, TRV, VZ, IBM and GE reporting.

The two stocks I will be watching the most will be Netflix and Starbucks.

Crude oil declined to $29.13 intraday on expectations for the Iranian sanctions to be lifted any day now. The IAEA was expected to issue its report this weekend on Iran's compliance with the rules of the agreement. That happened on Saturday and sanctions are being removed. Iran's exports were on pace to hit a nine-month high in January at 1.10 mbpd even before the sanctions are lifted. They have 30.0 million barrels in tankers anchored in the Persian Gulf and they claim they are going to increases production by 500,000 bpd immediately and by another 500,000 bpd by the end of March and 500,000 bpd more by the end of 2016. This tsunami of oil flowing into a market that is already dealing with a 1.2 mbpd surplus is going to push prices lower.

Brent prices fell to $28.82 intraday on the worries over Iran's oil. The Brent contract represents "water borne" crude in Europe and that is where Iran's volumes will be going in addition to India and China. That is the lowest price since February 2004.

Most analysts believe we will see $25 per barrel for WTI in the days ahead. However, the pendulum always over swings on both the upside and downside so there is no way we can accurately predict the bottom. We could see prices under $25 but only briefly. At least that is my opinion.

Active rigs declined -14 last week but only one of those was an oil rig. The rest were gas rigs. U.S. production rose to a new four-month high at 9.227 mbpd despite the rapid decline in active rigs. The lack of a decline in the U.S. is going to pressure prices even more.

As long as oil prices continue to decline, the equity market is likely to follow.

The Baltic Dry Shipping Index ($BDI) sank to another record low at 373. For the period January 8-9th there were ZERO ships moving between the U.S. and Europe. All ships in the Atlantic were parked in harbors or moored offshore. I cannot remember when that has happened before.

The Commodity Index ($CRB) hit another 44 year low on Friday. This only happens in periods of global recession.

The Bureau of Transportation Statistics said "Freight volumes in the U.S. have fallen year on year for the first time since 2012 and before that the recession of 2009." Also, "The total volume of freight moved by road, rail, pipeline, inland waterways and air cargo in November was 1.1% lower than the corresponding month a year earlier." Commodity prices are so low that farmers have delayed shipping some grains, especially corn and soybeans, in hopes the prices will rise.

The Dow Delivery Index and Dow Railroad Index are at two-year lows and dropping fast. If you want to know what the economy looks like when it is heading into a recession this is it.


There is very little I can say positive about the markets last week. Multiple support levels were broken and the average index decline was about -2.5%. That puts the Dow down about -8.25% for the year and -9.9% from the high at 17,750 on December 29th. That is a 10% correction in only 13 trading days.

The S&P collapsed back to the August lows at 1,867 and then dipped another ten points to 1,857 before rebounding on Friday afternoon. In theory, 1,867 should have been a good retest point that triggers a rebound. There was no material rebound.

However, with a flood of Chinese economic data coming out on Monday and the U.S. markets closed there were very few traders that wanted to be long ahead of that event. Discretion is the better part of valor. Translated that means it is good to be brave but it is also good to be careful. Investors were careful on Friday and exited positions rather than risk being caught in a market meltdown on Tuesday.

It was also option expiration Friday. Volume was huge at 10.8 billion shares and 9:1 declining volume over advancing volume. Declining stocks were 6:1 over advancers. The most telling statistic was the 2,127 new 52-week lows. That is the most I can remember since the financial crisis.

Note in the graphic below the steady increase in the number of new 52-week lows and the number of declining stocks. The market is getting worse, not better, but we should be getting close to an oversold capitulation day.

The percentage of S&P stocks still above their short-term 50-day average has fallen to 11.4%. Only 21.4% are still above their long-term 200-day average. We are clearly extremely oversold although not yet at the same levels we saw in August.

The worry over the energy sector and the potential for up to 30% of the producers and service companies to file bankruptcy has caused the High Yield market to continue its decline. The chart below shows the correlation between the HYG bond fund in red and the S&P in black. Note that the high yield ETF ALWAYS leads the SPX and it is currently leading it down. Add to that the correlation between oil prices and the SPX and they are also leading it down. It is tough to argue market direction when there are major factors leading the S&P lower.

The S&P "should" attempt to hold the support at 1,867 but it will likely lose the battle because of all the factors I listed above.

Since 1995 if you had exited/shorted the markets whenever the 10-month moving average crossed under the 21-month on the S&P and gone long the markets when the average crossed back over the 21-month line you would have profited from nearly all of the big moves both up and down. This is a VERY long-term indicator and it has not failed in more than 20 years.

The 10-month average is now 2,033 and the 21-month is 2,020. They are right on the verge of a bearish cross. These are monthly averages so it may take another month for them to actually cross even though the S&P is already down to 1,880. That is the beauty of this indicator. It smoothes out all the week-to-week volatility. The big money funds and investors do follow these long-term strategies. This appears to be warning of a long-term decline ahead if those averages cross. However, NO indicator or strategy is foolproof.

The Dow broke below support at 16,000 and slowed when it reached the October 2014 support low at 15,855. However, unless those Dow components reporting next week all have blowout earnings there is a good chance we will retest the August low at 15,370. There is also the January 2014 support low at 15,350. If we return to that level, we will have erased two years of gains.

The July 2015 closing high was 18,312. A dip to 15,350 would be a -16.2% decline. The financial stocks are crashing with Goldman at a two-year low, Citi at a three-year low and Wells Fargo on the verge of a two-year low. Exxon is only about $7 above a five-year low with Chevron only $10 above a similar level. If oil prices continue to decline as expected to $25 or even lower, those stocks are going to make those new lows and drag the Dow lower.

For most of last year, we continually warned that the market was being supported by the ten largest tech stocks and once those stocks failed the market would quickly correct. Those stocks have failed.

The chart of the Nasdaq advance/decline line for the last three years supports the fact that breadth was very slim. For most of 2015, the A/D line declined rather than rose as fewer stocks took part in the rise to the July market top. The A/D line is approaching the lows seen in October 2012. On the positive side, that was the low point just ahead of a strong 15-month rally in the tech sector. We can expect the Nasdaq to continue declining until the A/D line reverses to the upside.

Friday was a bad day for the Nasdaq with a -126 point, -2.74% loss. All the prior momentum favorites are still in the losing column as funds continue to take profits in very high volume. Eventually they are going to run out of stock but the market can still move lower while we wait. Many of the tech stocks have reached what most analysts call bargain levels but nobody is bargain shopping just yet. Netflix at $102, Facebook at $93, Starbucks at $57, Amazon $565, Priceline under $1,100, etc.

The Nasdaq dipped under the September low of 4,487 and nearly reached 4,400. This is still well above the August flash crash low of 4,292. The index has erased all the gains from 2015 and is now down -10.4% for the year. Any further declines would probably target the 4,300 level.

Resistance is well above at 4,700 where it failed three times in the last six days.

The Nasdaq 100 ($NDX) came to a dead stop right on support at 4,085 from Jan 2015. That would be the perfect rebound point in a perfect world. A breakdown there could test the August flash crash low at 3,787.

The Russell 2000 small caps are down -11.28% for the year but -22% from their June highs at 1,295. The drop has been dramatic and the index dipped under 1,000 intraday on Friday.

The small cap A/D line is crashing and the normal strength in December/January was nonexistent.

The Russell is our fund manager sentiment indicator and clearly, sentiment is ugly. I am not expecting the Russell to rebound as long as there is any weakness in China. The low volume small caps are dangerous for funds because they cannot exit positions in a hurry without taking large losses.

Real support on the Russell is well below at 800. Let's hope the 1,000 level tries to hold.

The NYSE Composite is still in free fall because of all the financials and energy stocks listed on the NYSE. The index has declined -17.3% from the May closing high of 11,239.

To recap, falling oil prices, the potential for bankruptcies of up to 30% of the energy sector causing higher loan loss reserves at banks, the declining high yield sector, weakness in China, a projected decline of 5.5% in S&P earnings and weakening economics in the U.S. are all contributing to the market decline.

As an offshoot of those items above, there are numerous rumors of massive liquidation by sovereign wealth funds. With oil revenues down -70% from two years ago and those revenues responsible for the budgets of most oil producing countries, those countries are being forced to liquidate their sovereign wealth funds to pay the bills and fund the governments. Saudi Arabia has enough excess production capacity and more than $500 billion in currency reserves and they are still in serious trouble. They are losing more than $600 million a day in oil revenues at the current prices. The short-term solution is to sell the stocks in your funds.

At some point, something will change and provide a pause point for the markets. Friday's Dow drop at -537 points intraday was due to those factors above plus option expiration and the worry over the Chinese economic numbers due out on Monday while the U.S. markets are closed.

Assuming those numbers are not a disaster and the Chinese markets do not implode on Sunday/Monday nights, we could see a relief rally next week. However, we had a huge up day on Thursday and it was erased in a matter of minutes on Friday. That volatility may have convinced traders to wait on the sidelines until events calm.

Remember, in every prolonged decline we will always get sporadic rebounds fueled by dip buyers and short squeezes. Until those rebounds become progressively higher and longer lasting, we should be careful about plunging our hard-earned money into a lottery ticket on the market.

I would continue to be a watcher not a trader. Be patient. Be cautious. There is always another day to trade as long as you have capital to invest.


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Random Thoughts

The global equity markets added $30 trillion in market cap since the low in 2011. Since June, they have lost $14 trillion. In the U.S., index ETFs like the SPY, DIA and QQQ have seen more than $1 billion in outflows every day in 2016.

Market Volatility Makes Us Nervous
By Mohamed A. El-Erian

Stock market swings do not matter to most investors, precipitous drops in prices are acceptable if they are followed by sharp rises, and this remains true no matter how long the phase of heightened volatility.

If the above is your investing credo, you can ignore another roller-coaster week in markets, in which the major indices fluctuated wildly, including intraday. On Thursday, for example, the Dow closed 227 points higher after falling more than 360 points on Wednesday. And the sessions were wild on both days.

But volatility does matter to investor positioning, risk appetite and the formation of price expectations. And the longer it lasts, and especially if it is the "volatile volatility" of recent weeks, the more likely it is to be accompanied by a durable decline in markets overall.

Consider this thought exercise: You are driving on a road that has an increasing number of potholes, resulting in quite a bumpy ride. Wouldn't you start worrying about the increasing probability of damage to the car, and slow down?

A similar process is likely to unfold in markets. Some of the greater risk aversion occurs automatically, including among traders and investors who pursue approaches that condition portfolio construction on measures of overall market risk based on volatility (such as VAR, or value at risk). Some of the slowdown will be due to unfavorable revisions in the "risk-adjusted returns" that are critical inputs for asset allocation models. In addition, investors, even though they enjoy the up days, are likely to increasingly worry that the downward phase increases the probability of a more damaging air pocket.

The recent volatility also has undermined the conventional wisdom that investors should "buy on dips" and this week, at least one brokerage house advised clients to "sell the rallies" in this period of heightened market volatility.

Partial indicators suggest that portfolio risk already has been reduced, notably among hedge funds and broker-dealers. There has been some reduction by longer-term institutional and retail investors as well, but it has been limited so far.

This period of heightened volatility is likely to persist given that investors can no longer rely as much on monetary measures to calm the markets, especially now that the systemically important central banks now are pursuing divergent policies. That makes it more likely there will be more durable declines in asset prices as a whole. And, if a comprehensive policy response continues to be delayed, the declines could be quite large given the extent to which market prices have been decoupled from fundamentals.

Bloomberg Article

Iran's nuclear agreement was implemented on Saturday and the process to remove sanctions has begun. Iran will receive more than $100 billion in frozen assets that have been held for years by western nations.

In preparation for the removal of sanctions, Iran has been drilling as fast as possible in an effort to convert some of their 167 billion barrels of proven reserves into production. They have the fourth largest reserves on the planet. Oil minister Bijan Zanganeh said the drilling has been successful and they are prepared to put even more oil on the market than previously thought. As soon as the sanctions are lifted they plan on upping exports by 500,000 bpd. By the end of March, they plan to add another 500,000 bpd. By the end of 2016, they plan on adding another 500,000 bpd. That is 1.5 million barrels per day in an already flooded market. They expect to ramp production to 6.0 mbpd by 2020. They currently sell about 1.0 mbpd. Plus they have more than 30 million barrels stored in tankers in the Persian Gulf. That oil will be for sale immediately.

Iran is preparing to unveil 50 oil and gas projects worth more than $185 billion next week. They will be accepting bids from outside energy companies to develop those projects. Contracts will be up to 25 years and include generous production sharing provisions. The first of these contracts is expected to be signed by the middle of 2016.

Shares of Tyson Foods, Pilgrim's Pride and Cal-Maine Foods fell on Friday after a highly contagious form of bird flu was found in a flock of 60,000 birds in Dubois County, Indiana. The Dept of Agriculture said the H7N8 strain is different from the one that caused the destruction of 50 million birds in 2015. The prior outbreak cost the industry $3.3 billion. Last year the USDA stockpiled millions of doses of vaccine designed to fight the 2015 strain. They will be ineffective against the current outbreak. More than 65 egg and turkey farms are within 6 miles of the affected flock. The area is home to more than 4.5 million egg layers and up to 2 million turkeys. Bird Flu Returns

Earnings are fading fast. Last week analyst downgrades to earnings expectations outnumbered upgrades by the most since 2009 according to Citigroup. Jeffery Gundlach said global growth would slow to 1.9% in 2016 and the weakest since 2009. S&P Capital IQ is predicting a -5.5% decline in S&P earnings. JP Morgan is predicting a -6.7% drop. Bloomberg Article

The bears are gaining. Both bullish and neutral sentiment declined for the week with bearish sentiment approaching 50%. This survey closes on Wednesday so the results do not include the Thursday rebound or the Friday crash.

It just dawned on me why Mayberry was so peaceful and quiet...nobody was married. The single people included Andy, Aunt Bea, Barney, Floyd, Howard, Goober, Sam, Ernest T Bass, the Darling family, Helen, Thelma Lou and Clara. In fact the only one married was Otis and he stayed drunk and in jail.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"No one can go back and make a brand new start but anyone can start from now and make a brand new ending."

Carl Bard


New Plays

The Correction Is Over

by James Brown

Click here to email James Brown


Universal Forest Products Inc. - UFPI - close: 66.65 change: +0.95

Stop Loss: 61.90
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 16, 2016
Time Frame: Exit PRIOR to earnings on February 17th
Average Daily Volume = 163 thousand
New Positions: Yes, see below

Company Description

Trade Description:
UFPI recently experienced a -20% pullback from its December 2015 highs but shares are still trading at levels not seen for almost ten years. More importantly it appears that the correction is over.

UFPI is in the industrial goods sector. According to the company, "Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America and in Australia that supply wood, wood composite and other products to three robust markets: retail, construction and industrial. The Company is headquartered in Grand Rapids, Mich., and is celebrating its 60th year in business."

The big surge in the stock in mid October was a reaction to the company's Q3 earnings report. It was a record-breaking quarter for UFPI in spite of a -17% drop in the lumber market. Here is an excerpt from the company's earnings press release:

"UFPI announced record-breaking 2015 third-quarter results. The Company posted the best third-quarter earnings in its history with net earnings attributable to controlling interests of $25.6 million, an increase of 32.9 percent over the same period of 2014. It also posted the highest year-to-date net earnings in its history, at $61.7 million. Earnings per diluted share were $1.26 in the third quarter of 2015, up from $0.96 in the third quarter of 2014. Net sales of $762.3 million for the third quarter were up 6.8 percent over the same period of 2014."
The stock has been trading very technically with investors keying in on support and resistance levels. Shares of UFPI did see a rough December after a downgrade on December 8th. However, after a -20% pullback investors started buying UFPI last week. That is noteworthy since the broader market was crashing lower last week. You'll notice on the daily chart that UFPI found support at its simple 200-dma and delivered a pretty good gain for the week.

We think this bounce continues and want to hop on board. There is very short-term resistance at $67.00. Tonight we are listing a trigger to launch bullish positions at $67.15. Investors may want to limit their position size to reduce risk since UFPI has proven itself to be somewhat volatile.

FYI: UFPI does have options but the spreads are too wide to trade them.

Trigger @ $67.15 *small positions to limit risk*

- Suggested Positions -

Buy UFPI stock @ 67.15

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Market Meltdown Continues

by James Brown

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Editor's Note:
The S&P 500 plunged to new 52-week lows while the small cap Russell 2000 tagged new two-year lows before trying to pare their declines before the close. The market looks very oversold.

We have adjusted our entry on the CHUY trade. We have also tightened stops on CF and HOG.

Current Portfolio:

BULLISH Play Updates

Chuy's Holdings, Inc. - CHUY - close: 35.14 change: -0.62

Stop Loss: 33.40
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 14, 2016
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 286 thousand
New Positions: Yes, see below

01/16/16: The market's crash on Friday briefly pushed CHUY below support near $34.00. The stock bounced at $33.52 and pared its loss to -1.7% by the closing bell.

We see the dip on Friday as an opportunity. Adjust the entry trigger from $36.65 to $36.15. We will move our stop loss down from $33.90 to $33.40, just under Friday's intraday low.

Trade Description: January 14, 2016:
Small cap stocks underperformed last year with the small cap Russell 2000 index falling -5.9% in 2015. CHUY is one small cap that bucked the trend with shares surging +59% in 2015. That relative strength continues in 2016. The Russell 2000 index is already down -9.7% this year. Meanwhile CHUY is up +14% year to date and looks poised to hit new highs.

CHUY is in the services sector. According to the company, "Founded in Austin, Texas in 1982, Chuy's owns and operates 69 full-service restaurants across fourteen states serving a distinct menu of authentic, made from scratch Tex Mex inspired dishes. Chuy's highly flavorful and freshly prepared fare is served in a fun, eclectic and irreverent atmosphere, while each location offers a unique, 'unchained' look and feel, as expressed by the concept's motto 'If you've seen one Chuy's, you've seen one Chuy's!'."

CHUY's earnings and revenues have been hotter than a jalapeno. The company has beaten Wall Street's earnings estimates the last four quarters in a row. They have beaten analysts' revenue estimates in three of the last four quarters. Management has raised guidance three quarters in a row. Check out their revenue growth: Q4 2014 revenues +21.7%, Q1 2015 +19%, Q2 2015 +19%, and Q3 2015 saw revenues +15%. That's on top of a tough comparison to Q3 2014 where revenues rose +20%.

Technically shares appear to be in breakout mode. The surge on January 12th lifted CHUY out of a five-month consolidation and on big volume. Traders bought the dip today exactly where they should have near $34.00, which as prior resistance is now new support. If this rally continues CHUY could see a short squeeze. The most recent data listed short interest at 21% of its small 16.0 million share float. The point & figure chart is bullish and forecasting at $44.00 target.

Today's intraday rebound lifted CHUY back to the $36.00 level. Tonight we are suggesting a trigger to launch bullish positions at $36.65.

Trigger @ $36.15

- Suggested Positions -

Buy CHUY stock @ $36.15

- (or for more adventurous traders, try this option) -

Buy the APR $37.50 CALL (CHUY160415C37.5)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

01/16/16 Adjust entry strategy: move the trigger from $36.65 down to $36.15. Also adjust the stop loss from $33.90 to $33.40
Option Format: symbol-year-month-day-call-strike


SPDR S&P Regional Banking ETF - KRE - close: 36.66 change: -0.70

Stop Loss: 34.40
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 13, 2016
Time Frame: 3 or 4 weeks
Average Daily Volume = 4.9 million
New Positions: Yes, see below

01/16/16: The KRE fell -1.8% on Friday and set a new 11-month closing low. There is no change from my previous comments. The $35.00 area is major support. Our suggested entry point is to buy a dip at $35.50.

Trade Description: January 13, 2016:
Many people thought banks would be winners after the Federal Reserve hiked rates in December. While the Fed did raise rates (barely) the financial stocks didn't see much progress.

The Fed is still talking about raising rates multiple times in 2016. There is a growing camp of market watchers who believe the Fed will be forced to back track. Deteriorating economic conditions both in the U.S. and abroad may force the Fed to pause their rate hike plans or even cut rates again.

Even if the Fed does try to raise rates the yield curve, where many banks make their money, could struggle. If the stock market remains sour throughout 2016 it will drive money into the perceived safety of U.S. bonds and that will keep yields on the 10-year low. So now that I have painted a rather unappetizing picture for the banks I'm adding a new bullish play.

All of the issues above are long-term troubles that could plague financials throughout 2016. On a short-term basis the banks are oversold and due for a bounce. Tonight's trade is a short-term technical one. The KRE is nearing major support and should rebound.

If you are not familiar with the KRE it is an ETF that tracks the S&P regional banks select industry index. The top ten holdings in this ETF are: PNC, BBT, KEY, STI, HBAN, CIWV, RF, FITB, MTB, ZION,

You can see on the daily chart below the KRE is plunging. On the weekly chart I have highlighted long-term support at the $35.00 level. Odds are good that if the KRE is going to bounce that is the spot to watch. Tonight I am listing a buy-the-dip trigger at $35.50. We will start this trade, if triggered, with a stop loss at $34.40. Remember, this is a short-term trade. We want to get in, catch a bounce, and get out.

Buy-the-dip Trigger @ $35.50

- Suggested Positions -

Buy the KRE (etf) @ $35.50

- (or for more adventurous traders, try this option) -

Buy the MAR $39 CALL (KRE160318C39)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

01/14/16 adjusted the option strike from March $35 calls to the March $39 calls
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

CF Industries - CF - close: 31.57 change: -1.05

Stop Loss: 33.25
Target(s): To Be Determined
Current Gain/Loss: +18.3%
Entry on January 06 at $38.65
Listed on January 05, 2016
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 2.7 million
New Positions: see below

01/16/16: The downward momentum in shares of CF seems to be slowing but the stock is still sinking. CF ended the week at new multi-year lows. Tonight we are adjusting our stop loss down to $33.25. More conservative investors may want to take some money off the table early, especially if you're trading the option.

No new positions at this time.

Trade Description: January 5, 2016:
CF underperformed the broader market and its sector in 2015. The S&P 500 lost -0.7% for the year while the IYM basic materials ETF lost -14.4%. Shares of CF returned a -25% loss last year. Momentum remains to the downside.

According to the company, "CF Industries Holdings, Inc., headquartered in Deerfield, Illinois, through its subsidiaries is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States, and distributes plant nutrients through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States. The company also owns a 50 percent interest in an ammonia facility in The Republic of Trinidad and Tobago."

It is important to note that CF is currently in the process of merging with OCI. Here's a brief description, "OCI N.V. is a global producer and distributor of natural gas-based fertilizers and industrial chemicals based in the Netherlands. The company produces nitrogen fertilizers, methanol and other natural gas based products, serving agricultural and industrial customers from the Americas to Asia. The company ranks among the world's largest nitrogen fertilizer producers, and can produce more than 8.4 million metric tons of nitrogen fertilizers and industrial chemicals at production facilities in the Netherlands, the United States, Egypt and Algeria."

Once the merger is completed they plan to move the new company's headquarters to the Netherlands to reduce their tax burden. Last year some U.S. government officials voiced their displeasure at these tax-inversion mergers to avoid paying U.S. taxes. There is a chance (albeit a small one) that the U.S. tries to stop this merger before it's completed.

Meanwhile the company continues to struggle with weak prices for nitrogen fertilizer. Looking at CF's last four quarterly earnings reports they have missed Wall Street's earnings estimates three of the last four quarters (and two quarters in a row). Revenues were down -8.3%, -15.8%, -10.9%, and -0.7% in the most recently reported quarter.

CF faces tough competition from fertilizer producers in China and in Russia and the Ukraine. It is worth noting that Bank of America just recently came out with a bullish call on CF. The BoA analyst suggested that fertilizer prices are too low and will bounce and CF's stock price should bounce with it. CF claims demand remains strong but that doesn't help if prices keep falling (obviously demand isn't strong enough or prices would rise).

Technically the path of least resistance is down and CF just broke support near $40.00. These are new two-year lows. Tonight we are suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to CF's earnings report in mid February.

- Suggested Positions -

Short CF stock @ $38.65

- (or for more adventurous traders, try this option) -

Long FEB $35 PUT (CF160219P35) entry $1.20

01/16/16 new stop @ 33.25
01/13/16 new stop @ 33.60
01/11/16 new stop @ 34.15
01/09/16 new stop @ 35.75
01/07/16 new stop @ 37.05
01/06/16 new stop loss @ 38.75
01/06/16 triggered on gap down at $38.65, suggested entry was $38.85
Option Format: symbol-year-month-day-call-strike


Eaton Corp. - ETN - close: 47.86 change: -0.46

Stop Loss: 50.75
Target(s): To Be Determined
Current Gain/Loss: +2.0%
Entry on January 11 at $48.85
Listed on January 09, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 3.9 million
New Positions: see below

01/16/16: ETN gapped down on Friday morning but the sell-off did not see much follow through. Shares barely dipped past Thursday's intraday low before bouncing. ETN managed to pare its loss to -0.9% by the close on Friday, which was better than the S&P 500's -2.1% loss.

I would be cautious here. Readers may want to lower their stop loss again. The $49.50-50.00 zone should be overhead resistance. No new positions at this time.

Trade Description: January 9, 2016:
Industrial stocks did not have a good 2015. The XLI industrials ETF and the Dow Jones Industrial Average both fell more than -6% last year. ETN significantly underperformed its peers with a -23% decline for 2015. Part of the problem is weak demand overseas compounded by a stronger dollar. Plus, the manufacturing sector in the U.S. is in recession.

ETN is in the industrial goods sector. According to the company, "Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."

Earnings and revenue growth for ETN was challenging last year. The company lowered guidance four times in 2015. Their most recent earnings report (Q3 results) from October 30th showed revenues were down -9.2% from a year ago. Earnings were down -25%.

ETN management is trying to be proactive. They plan to expand their restructuring efforts into 2016. Hopefully they will be able to cut costs by another $190 million if all goes as planned. The one positive side of ETN's slide has been the surge in its dividend. The stock just closed at three-year lows, which as boosted the dividend yield to 4.2%. Although I don't know why you'd buy ETN for the dividend if you are in jeopardy of losing more than 4% in the stock. The point & figure chart is forecasting a $42.00 target.

The ISM index measures manufacturing activity in the United States. December's ISM reading was negative for the second month in a row and marked the sixth monthly decline in a row. Numbers under 50.0 on the ISM index represent contraction. November's was 48.6. December's slipped to 48.2. Odds are it will be under the 50.0 again this month.

With the industrial sector in recession, revenues and earnings falling, the bearish momentum in ETN should continue. Last week's market decline has pushed ETN below round-number, psychological support at the $50.00 level. Now shares are poised to accelerate lower. Tonight we are suggesting a trigger to launch bearish positions at $48.85. My only caution is our time frame. ETN has earnings coming up in early February (no confirmed date yet). This could be a short-term three-four week play.

- Suggested Positions -

Short ETN stock @ $48.85

- (or for more adventurous traders, try this option) -

Long FEB $47.50 PUT (ETN160219P47.5) entry $1.55

01/13/16 new stop @ 50.75
01/11/16 triggered @ $48.85
Option Format: symbol-year-month-day-call-strike


Harley-Davidson, Inc. - HOG - close: 40.44 change: -1.53

Stop Loss: 41.25
Target(s): To Be Determined
Current Gain/Loss: +11.6%
Entry on December 11 at $45.75
Listed on December 09, 2015
Time Frame: Exit prior to earnings in late January
Average Daily Volume = 3.15 million
New Positions: see below

01/16/16: I am suggesting caution our HOG trade. Shares are down three weeks in a row and the sell-off accelerated on Friday. HOG hit $39.38 before bouncing back to close above $40.00. The $40.00 level has been support in the past so this might be a short-term bottom in the stock. Tonight we are adjusting our stop loss down to $41.25 in an effort to protect a potential profit.

No new positions at this time.

Trade Description: December 9, 2015:
HOG was a big winner during the market's rally off the 2009 bear-market low. Shares surged from about $8 in early 2009 to over $74.00 in 2014. Unfortunately that bullish momentum is long gone.

HOG is in the consumer goods sector. According to the company, "Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson Financial Services. Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom with custom, cruiser and touring motorcycles, riding experiences and events and a complete line of Harley-Davidson motorcycle parts, accessories, general merchandise, riding gear and apparel. Harley-Davidson Financial Services provides wholesale and retail financing, insurance, extended service and other protection plans and credit card programs to Harley-Davidson dealers and riders in the U.S., Canada and other select international markets."

The company has seen sales slow down. Their most recent earnings report was October 20th. Q3 earnings growth was flat (+0%) from a year ago at $0.69 a share. That missed estimates by 8 cents. Revenues only rose +0.9% to $1.14 billion, which also missed estimates. The company said their dealer new motorcycle sales were down -1.4% worldwide from a year ago. Their U.S. sales fell -2.5%. Shipments came in below guidance.

Matt Levatich, President and Chief Executive Officer, said, "We expect a heightened competitive environment to continue for the foreseeable future." The company lowered their shipment guidance for 2015. They also lowered their margin guidance. The stock reacted with a big drop on the earnings miss and lowered guidance. Multiple analyst firms downgraded the stock in response to the news.

Technically HOG is in a bear market. Shares have a bearish trend of lower highs and lower lows. HOG spent most of November struggling with resistance at $50.00. The recent weakness has pushed shares to new two-year lows. The next drop could push HOG toward $40 or lower. Tonight we are suggesting a trigger to launch bearish positions at $45.75.

My biggest concern is some analyst deciding that HOG looks "cheap" on valuation. At this point HOG could be a value trap. Cheap stocks can always get cheaper.

- Suggested Positions -

Short HOG stock @ $45.75

- (or for more adventurous traders, try this option) -

Long FEB $45 PUT (HOG160219P45) entry $2.59

01/16/16 new stop @ 41.25
01/11/16 new stop @ 44.15
01/06/16 new stop @ 44.55
12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 26.70 change: +2.41

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: -22.4%
2nd position Gain/Loss: + 8.0%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: to be determined
Average Daily Volume = 50 million
New Positions: see below

01/16/16: The brutal two-week sell-off in stocks has driven the VXX from 20 to almost 27. We suspect that the market decline might be near a short-term bottom and stocks could bounce, which would deflate this rally in the VXX.

No new positions at this time.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike