Option Investor

Daily Newsletter, Thursday, 12/1/2016

Table of Contents

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

Market Wrap

The First Day Of Christmas

by Thomas Hughes

Click here to email Thomas Hughes


The Trump Rally takes a breather on the first day of December. Market action in the major indices was to the downside as the market begins testing support at the new highs. Tomorrow's NFP report could also have had an affect, giving traders reason to pause, another reason to pause, while we wait for the ol' December FOMC meeting and a much expected rate hike. Today's economic data was consistent with ongoing trends, supports the idea of higher interest rates and helped send the CME's Fed Watch Tool up to the highest reading I've seen, 98.6% chance of December hike.

Asia traded higher in the Thursday session, gaining more than 1% in most cases, as data from China and Japan was better than expected. Official PMI readings in both countries, 51.7 and 51.3 respectively, shows expansion in the manufacturing sector above expectations. European indices were not buoyed by the news, falling about -0.5% on average, as concern over Italian referendum begins to grow.

Market Statistics

Futures trading indicated a flat to negative opening for most of the early hours of the electronic session. Trading was moderate and began to lift as we approached the opening hour. Economic data at 8:30AM helped lift futures into positive territory, where they remained into the opening bell. The open was flat, the SPX trading without impetus, leading to an hour of sidewinding just above break even levels. By 11AM the the broad market had fallen into negative territory, barely, and begun another hour or so of sideways trading. By 1PM the market had dipped slightly lower once again, and once again entered into a narrow consolidation range. By late afternoon the indices had set another intraday low and closed near the lows of the session.

Economic Calendar

The Economy

Lots of data today, beginning with the Challenger Grey&Christmas report on planned layoffs. The number of planned layoffs fell -12% month to month, -13% year over year, to 23,936. This is the lowest level for 2016 and the 2nd lowest level in 16 years. Year to date there have been 493,288 layoffs,-5.5% below this same time last year. Retail led with new layoffs, but the losses were offset by gains in seasonal hiring by other firms within the sector. To date, retail remains the number 3 sector in terms of layoffs this year, behind energy and computer. Regardless, layoffs are trending lower from last year, noticeably so in the past few months, and are consistent with labor market health.

Initial claims for unemployment jumped 17,000 to 268,000, the highest level in a month. Despite the jump claims remain below 300,000, the 91st week in a row and the longest streak since 1970. The four week moving average of claims rose to 251,000. Both last week's headline and moving average were not revised. On a not adjusted basis claims fell by -13% versus an expected drop of -18%. Despite the miss claims are down -4.6% over this same time last year. Although there has been some volatility in claims over the past few weeks, due to seasonal shifts in hiring, claims remain near long term lows and consistent with labor market health.

Continuing claims rose by 38,000 to 2.081 from last week's not revised figures. The four week moving average also rose, gaining 12,750 to hit 2.037 million. Continuing claims has seen volatility similar to that in the initial claims figures but is also bouncing from long term, historic, generational, low levels and consistent with ongoing labor market health.

Total claims surged by 123,175 to 1.903 million, consistent with seasonal trends. On a year over year basis claims are down by -7.5%, consistent with long term labor market improvement. The seasonal upswing in total claims will likely continue for the next 6 to 8 weeks, with some noticeable spikes in the next few weeks. So long as the peaks remain consistent with the down trend there will be no reason to think labor market improvement won't continue into next year. Based on the ADP figures tomorrow's NFP could be a little hotter than expected, possibly above 220,000. Regardless, so long as job creation remains consistent, wages show growth and unemployment is steady the report will be a good one.

Construction Spending data was released at 10AM and was also better than expected. Spending increased by 0.5% from the previous month and 3.8% year over year to hit a new 2016 high. Residential spending leads with an increase of 1.8% month to month, 4.6% year over year, while non-residential saw a month to month decline of -0.3%. Non-residential is still up year over year, 2.6%. These figures are not strong but nonetheless show a continuation of positive trends within the housing sector.

ISM Manufacturing data was also better than expected, rising to 53.2% from last months 51.9%. New Orders, 53, Production, 56, and Employment, 52.3, are all on the rise and expansionary. Inventories and deliveries are both below 50 although inventories rose 1.5% to 49. Prices paid are unchanged.

Auto sales data was released late afternoon. Monthly auto sales came in at an annualized pace of 17.8 million units, down 0.3 million from last month but ahead of estimates.

The Dollar Index

The dollar was supported by the data although the Dollar Index lost a little ground in today's trading. The index fell -0.45% in a move continuing the 2 week consolidation above the $100.50 level continues. The index is supported by economic trends and FOMC outlook but may have reached a plateau unless the Fed comes across more hawkish than currently expected. The indicators are consistent with the peak and suggest through convergence that the recent high will be retested again. Another factor in play is the ECB meeting which is next week, no change is expected but you never know what Draghi may do or say, so the index may remain range bound in the near term. Support is at the recently broken high, near $100.50, with resistance at the current high near $102.

The Oil Index

Oil prices continue to surge on the OPEC deal. All I have to say about that is that they didn't cut very much, their new production cap is measly 1.2 million barrels below record production levels which leaves it above the level they proposed to cap production at earlier this year. And the deal hinges on cooperation from Russia and other non-OPEC countries. I'll believe it when the data show it and not a moment before. In any event WTI gained more than4.20% (can we say short covering?), to trade above $51.50 for the first time in over a month. This move may continue higher but I am very leery of it, and more inclined to fade it than get on board.

The Oil Index gapped higher at the open to trade above potential resistance at 1,235. The index tried to move higher from there but eventually fell during the day to create a small bodied black candle. The candle, along with the gap higher and weak indications from both MACD and stochastic, lead me to suspect that the rally may not be able to sustain current levels. Today's candle could easily turn out to be a shooting star/abandoned baby, all it would take is for OPEC-deal crazed traders to settle back down to reality.

The Gold Index

Gold prices retreat back to test the recent lows, and set new ones not seen in 10 months. Weighing on the metal; economic trends FOMC outlook dollar strength and Trumponomics. Prices were able to recover most of the loss before settlement but near term outlook remains bearish. My target for strong support is near $1,150.

The gold miners remain under pressure. The miners ETF GDX opened with a small loss, moved slightly lower, and then regained the loss to close with a small gain although today's action is nothing more than another day moving sideways within a short term triangle pattern. The ETF has been in downtrend for 4 months, making a series of three lower lows so far, and the indicators are somewhat consistent with this. Stochastic is trending near the bottom of the range over the past 4 months and is set up for a trend following bearish crossover at this time, MACD is less decisive in its indication but at least bearish at this time. Support is near $20 and has so far held, a break below here would be bearish with target near $16.50.

In The News, Story Stocks and Earnings

The VIX has begun to creep up again, gaining a little more than 7% in today's session. The fear index created a medium sized white candle that was halted at the short term moving average. The moving average may act as resistance and cap further movement, a break above indicating a possible correction in the SPX. The indicators are rolling into a buy signal so it is likely that resistance will be tested at least, a break above the moving average could go as a high as $17.50 or $20.

Auto sales for November were reported throughout the day. Ford reported a 5.2% increase in November sales, above estimates, although other data within the report is not so rosy. First, there were 2 extra selling days this year so 5.2% doesn't seem like such a big deal, on top of that sales of cars were down nearly -10%. Strength was seen in trucks, +5%, and SUVs, +19%. Year to date sales are flat over last year, leaving full year guidance in question. Shares of the stock responded well though, gaining more than 8% intraday to hit resistance at $12.50.

Starbucks CEO Howard Shultz announced he was stepping down from his position. Speculation abounds, one theory is that he wants to run for public office. Shares of the stock fell more than -5% on the news.

The Indices

Action across the major indices was mixed, led by the Dow Jones Transportation Index. The transpots posted a gain of 0.62%, creating a small white bodied candle and setting another new high in its march up to test the current all time high. The indicators remain consistent with a bullish wave higher although momentum is waning and has nearly reached zero. This leg of the rally may be nearing its peak if it has not already reached it, a pull back or correction of some sort may be brewing and could begin before a touch to the all time high. Until then, upside target remain the all time high.

The Dow Jones Industrial Average also closed with gains in today's session, about 0.36%. The blue chips created a small white bodied candle and set a new all time closing high. The index is drifting higher on the last legs of the election rally and may be setting up for a consolidation or correction in the near term. Both indicators remain bullish so upside momentum is likely to continue carrying the index higher with a target near 19,500. First target for support should the index begin to correct is 19,000, next is near 18,600 and the short term moving average.

The broad market S&P 500 posted the smallest loss in today's session, about -0.35%. This index has already begun a consolidation/correction and today's action has brought it down to a 1 week low to test support at the recently broken previous all time high. The indicators are consistent with a peak within an uptrend and test of support, how deep the test will go is yet to be seen. Support is so far at the previous all time high, a break below here could go as low as 2,175 or 2,120 in the near term.

The NASDAQ Composite made the largest decline in today's session, about -1.36%, and is deep in the throes of profit taking following the post-election rally. The tech heavy index created the second of two long black candles in today's session, price action coming to rest just above support target at the 5,250 level. This level is a previous all time high and potentially strong level of support. The indicators are consistent with a test of support within an uptrend so this level could be tested further, possibly with strength. A break below 5,250 would be bearish in the near term and could go as low as 5,000 and the long term up trend line.

The post-election Trump Rally is losing momentum. The indices are all showing signs of impending correction or the early signs of a correction, the only thing left is to see just how deep it goes. So far, it doesn't look like it will be too deep as economic data and earnings outlook are positive and support the idea of further rally. So, what I think we have brewing is the proverbial dip for which savvy traders await.

In the near term we have data to watch out for and central bank activity to be wary of; there isn't too much in the way of earnings, not for a few more weeks yet. The next big hurdle for the market will be the FOMC meeting which is in just under two weeks. Next week the ECB meeting may induce some volatility, same with tomorrow's NFP report. I'm bullish, still cautious because I don't want to get caught with my pants down, and anticipating a sustained bull market rally driven by economic tailwinds and positive earnings growth.

Until then, remember the trend!

Thomas Hughes



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New Plays

Rally Reversal

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Nasdaq is leading the broader market lower with small caps and biotechs selling heavily. With the market confusion increasing daily there is no reason to try and launch new plays. We need to have at least a general idea of direction before putting money at risk.

The Nasdaq has fallen -152 points since Tuesday's high but the Dow closed at a record high. The S&P crashed back to initial support at 2,190, which should be a safety zone but only managed to close 1 point above that level. The Russell 2000 lost 8 points to close at a two-week low at 1,314 with support well below at 1,290. Friday's do not make good rebound days because of the weekend event risk. Be patient, the rally will resume soon.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Nasdaq Crash

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq has declined -152 points since the Tuesday high at 5,403. That is a major decline with critical support still 51 points lower at 5,200. That level could easily be tested with the Nasdaq closing near the lows for the day. The big cap techs were all in decline and showing no signs of a rebound.

The Biotech Index lost another 2% after a 3% decline on Wednesday. The Dow managed to post a gain thanks to Goldman Sachs adding more than 50 Dow points with help by UNH, TRV and BA. We definitely have a mixed market and Friday could be another down day. Friday's are rarely rebound days after a negative week.

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

BOJA - Bojangles
The long stock position remains unopened until a trade at $18.65.

TRN - Trinity Industries
The long stock position was opened with a trade at $28.25.

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BULLISH Play Updates

BOJA - Bojangles Inc - Company Profile


The company announced the pricing of the secondary offering at $17.25 and shares closed at $17.80. The offering will close on December 6th. Shares only declined 10 cents on the news and in a weak market.

Original Trade Description: November 30th.

Bojangles', Inc. operates and franchises limited service restaurants in the United States. Its restaurants serve chicken items, made-from-scratch buttermilk biscuits, flavorful fixin's, and iced tea. As of September 25, 2016, the company had 699 system-wide restaurants, including 301 company-operated and 398 franchised restaurants primarily located in the Southeastern United States. Bojangles', Inc. was founded in 1977. Company description from FinViz.com.

In early November they reported earnings of 25 cents that beat estimates for 21 cents. Revenue of $133.2 million missed estimates by only $200,000. They guided for the full year to earnings of 92-95 cents and revenue of $530.5-$533.5 million.

Earnings February 2nd.

Shares spiked $1.50 on the earnings and continued to make solid progress until today's minor bout of profit taking. However, after the bell they announced that certain existing shareholders had filed to sell six million shares in an underwritten public offering. Nearly every broker on the street is participating in the offering so there will not be a problem selling the shares. The company will receive none of the proceeds with everything going to the shareholders.

Shares fell to $18.30 in afterhours after closing at $19.70. Typically, when a company gets hit on a secondary, it rebounds almost immediately to the original price unless the shares are sold significantly under the market, which is not expected in this case.

On Wednesday 11/30 shares dropped with the market to stop us out of the initial position. I still believe the company will set a new high once the secondary is priced.

With a BOJA trade at $18.65

Buy BOJA shares, initial stop loss $17.45

No options recommended because of wide spreads.

TRN - Trinity Industries - Company Profile


No specific news. Shares gained 27 cents in a weak market but still fighting resistance at $28.25.

Original Trade Description: November 30th.

Trinity Industries, Inc. provides various products and services for the energy, transportation, chemical, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and couplers, axles, and other equipment, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2015, this segment had a fleet of 76,765 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other protective barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Company description from FinViz.com.

Trinity reported earnings of 56 cents that beat estimates for 52 cents. Revenue was $1.11 billion. They guided for full year earnings of $2.10-$2.20 per share. They currently have a trailing PE of only 8.94. Liquidity is currently over $2 billion.

They booked orders for 1,260 railcars in the quarter. Their order backlog is $3.7 billion representing orders for 34,870 railcars. The inland barge segment has an order backlog of $177.3 million. The order backlog for wind towers was over $1.0 billion.

Earnings Jan 25th.

Trinity has a good business. They have received fewer orders because of the energy slowdown but they have plenty of backorders to work through as the energy sector rebounds.

Shares rose nearly $1 today in a weak market and are holding right at 52-week resistance at $28. A breakout here could run to $35.

Position 12/1/16 with a TRN trade at $28.25

Long TRN shares @$28.25, see portfolio graphic for stop loss.

Optional: Long Jan $30 call @ 60 cents, see portfolio graphic for stop loss.

UIS - Unisys Corp - Company Profile


No specific news. Only a minor decline in a weak market.

Original Trade Description: November 26th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. Company description from FinViz.com.

The information technology sector is undergoing a transformation and older companies are becoming renewed as they change focus to the new cloud services offerings. Unisys was founded in 1886 making it 130 years old. You can imagine how many times they have changed products and focus over that period.

The company is focusing on cloud-based products and software as a service. They also offer physical security for data centers both physical security and software security. They offer a broad range of outsourcing services for building managers and clients. They have been selling their noncore assets and focusing their skills to build specialized capabilities to win industry specific projects.

They reported adjusted earnings of 41 cents compared to estimates for 29 cents. Revenue of $683.3 million beat estimates for $664 million.

Earnings Jan 24th.

Looking at a daily chart is scary since shares have risen from $10 to $15 since the election. However, the rise has been calm and without any material volatility on the days the market was weak.

On the weekly chart, resistance at $14.50 was broken on Thursday and there is nothing else to slow it down until $20.

Just in case the market tanks on Monday morning, I am putting an entry trigger on the position.

Position 11/30/16 with a UIS trade at $15.25:

Long UIS shares @ $15.25, see portfolio graphic for stop loss.

No options recommended because of price and spreads.

XLF - Financial SPDR ETF - ETF Profile


It was another strong day for financials and a new 8-year high for the XLF.

Original Trade Description: November 16th.

The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.

The ETF is comprised of 44% banks, 20% capital markets, 19% insurance, 11% diversified financial services and 6% consumer finance.

All of those sectors will do better as rates rise. As of today the CME FedWatch Tool shows a 91% chance of a rate hike in December as well as a 91% chance for the February meeting and 92% for March. If they do hike in December the odds will decline for February but depending on their commentary the March meeting will still be on the table. Multiple Fedwatchers have speculated there could be 3-4 rate hikes in 2017 if the economy continues to improve.

The Fed has to hike rates in 2017 in order to have some room to maneuver if the business cycle rolls over and a recession appears. We are in the third longest expansion in history and we are due for another recession soon.

The banks rallied on the rise in treasury yields and the expectations for the December rate hike as well as the potential for decreased regulation. President elect Trump has said he would kill regulations harming the banking industry. There is even talk of modifying Dodd-Frank.

Banks have rallied significantly and I would not suggest buying the actual ETF after the big gain. However, I do not believe the gains are over. The gains last week spiked the ETF to a 7-year high but the 2007 highs were over $30.

On Tuesday, somebody bought 300,000 contracts of the March $23 call at an average of 55 cents. That was $16.5 million in option premiums. That takes some serious conviction. I am recommending we follow them and buy the same call option. That way our risk is limited to $50 per contract. I am willing to bet $50 that the ETF will be over $23 by March. This is a long term position and there will not be a stop loss.

Position 11/17/16:

Long March $23 call @ 29 cents. No stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


The VXX posted a weak gain since the Nasdaq was down -75 points. I would have expected a bigger spike. This is just another example that long term the product is flawed and will always decline.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.

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