Option Investor

Daily Newsletter, Wednesday, 12/7/2016

Table of Contents

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

Market Wrap

To The Moon

by Keene Little

Click here to email Keene Little
The bulls are on a stampede and the bears have screamed "run away, run away" as the indexes rip to the upside following a steady rally that was looking tired. The rally into FOMC next week looks to be underway but with bearish divergences in a stretched market it's now getting a little dangerous to chase this higher.

Today's Market Stats

The rally off the November 4th lows has stretched most indicators into extreme overbought values but that sure didn't stop the bulls from stampeding the bears flat today. I think many bears tried to short what was looking like a top as the indexes struggled higher over the past week. They were shoved out of the market today and the short covering, along with some who are forced to chase the market higher this month (fund managers), and the result was a strong rally across the board and with strong advance-decline numbers.

Closing near the highs today has it looking like the market has further to go. A rally into next Wednesday's FOMC could be what we'll see but that would be particularly dangerous since it would be a buy the rumor, sell the news kind of setup. While there's clearly more upside potential after a day like today we do have to be concerned about the possibility of a blow-off top where the shorts are squeezed out and the last wannabe bulls were forced to chase the market higher. The vulnerability here is that the market could simply run out of buying power and then a pullback starts the covering of long positions and the selling triggers more stops and all of a sudden the talking heads on CNBC are looking for answers as to why the market is suddenly selling off hard. That's not a prediction from here but it is a risk for those chasing it higher and then not honoring your stops in a decline.

So why did the market rally so strong today after appearing to be tiring in the past week? Actually the more important question is does it matter why? Answering the why is like asking the market to be logical. But the rally clearly did catch more than a few leaning the wrong way and it could prompt more to chase it higher into next week. Many resistance levels and price targets were blown through today and we saw barely a dip today. That's actually one indication much of the rally was likely due to short covering.

Another warning sign came from the VIX, which had gapped down this morning but then started rallying even as the stock market continued its rally. The VIX finished the day above yesterday's close with a +3.6% rally. That's usually seen just before a market turn and while it's not a guarantee a top is just around the corner it does tell us there are likely some big players starting to buy some cheap insurance against the downside. It's wise not to be part of the retail crowd (which includes most fund managers) in a blow-off top (if that's what this is).

There was very little news today and regardless, the market is pretty much ignoring it all anyway. So I'm just going to jump into a review of the charts. Following the weekly and daily charts of SPX I'll explain a little about the Gann Square of 9 chart to show how the relationship between it and what's on the charts could provide some important clues here.

S&P 500, SPX, Weekly chart

Today's rally took SPX up through an important price level at 2223, which is the 127% of its previous decline (2015-2016). This is often a resistance/reversal level so the bulls would like to see a weekly close above this price. It's still within "throw-over" territory and with today's rally right up to its broken uptrend line from February there is the potential for the back-test to be followed by a bearish kiss goodbye. This follows an "almost" back-test on November 25th, which resulted in last week's pullback, and now we're getting another better back-test. The bulls and the bears each know what they need to see happen from here. A continued rally has upside potential to the middle of its up-channel from October 2011, which was last tested in April and again July-August. The line is currently near 2285, which is no longer that far away.

S&P 500, SPX, Daily chart

The SPX daily chart below shows the back-test of the broken uptrend line from February-June, currently near today's high at 2241. The bulls now need an overnight rally in the futures to get SPX to gap up over this resistance line. As mentioned above, a weekly close below 2223 would be potentially bearish but as long as SPX can stay above 2225 it will stay bullish.

Key Levels for SPX:
- Stay bullish above 2225
- bearish below 2194

Gann Square of 9 chart, middle top portion

A tool that I use and have shown periodically is the Gann Square of 9 chart, which I reproduced in Excel but is unfortunately too large to show here except in parts. In case it's useful, I show the middle top half and middle bottom half of the chart below. If this is getting too much into the weeds for you, just skip this section and pick it up with the Dow's chart that follows.

What I'm attempting to show is the relationship between time and price with the dates of the year around the outside of the chart (360 degrees almost equals the number of days in a year). The dates run counter-clockwise starting from March 21st at the 9:00 position (spring equinox, which was Gann's way of starting the new year). The prices in the boxes start at zero in the middle and then spiral out clockwise. The first circle around zero finishes with '9', hence the Square of 9 chart.

When prices line up with dates, or are 90 degrees or 180 degrees from each other, Gann believed they "vibrated" off one another and are important relationships to observe. The blue and green vectors are the ones potentially important at the moment since the blue one goes through the 666 low in March 2009 and the green one is 90 degrees from the date of March 6 (2009 low), which is off to the right side of the chart but not visible. Note the prices in the top row -- 2271 at the blue vector and 2273 at the green vector -- those are prices that "vibrate" off the March 2009 low and could be the upside target zone for SPX.

Another vector that I'm watching is the red one, which goes through 2261-2262 at the top. This goes through previous important levels, such as October 2007 price high, the April 2012 price high and the October 2002 price low. It's also square (90 degrees) to the April 2, 2012 high, which is off to the right side, as well as square to the October dates of the 2002 low, the 2007 high, the 2011 low and the 2012 high, which points off to the left side.

Gann Square of 9 chart, middle bottom portion

The blue vector that is 90 degrees to the right is also shown below (I couldn't get the whole chart in because I'd have to squish it too much and make it non-readable). It points to the October 2012 price high while to the left it points to the date of September 14, which was an important high in 2012. The blue vector to the left points to 2224. The blue vector pointing to the bottom is 180 degrees from the 666 low (in 2009) and it points to December 12th, which is this coming Monday. The green vector to the right (off the chart) points to March 6 (2009 low), which is 90 degrees from 667 (the actual low in March 2009 was 666.79, and off to the left it points to 2226. This is a reason I thought 2224-2226 would be an important level to watch if reached. It was not only reached but the rally blew through those levels so it remains to be seen if they were important. A drop back below them on Thursday would leave a one-day throw-over.

The green vector pointing at the bottom, which is 90 degrees from March 6 and 180 degrees from 667, points to December 8. That gives us a possible turn window between tomorrow and next Monday. If SPX rallies to 2271-2273 within this turn window it would be important to watch for a possible top within a potentially important price/time window. But SPX has already hit a potentially important price zone (2224-2226) and therefore a top inside the December 8-12 time window is possible.

For those who stuck with me through the above explanation of the potentially important time and price relationships, thanks for trying to understand it. It's not easy without a chart in front of you. If you'd like a copy of my Excel spreadsheet with the above chart, just email me to let me know. The bottom line from the above explanation, for those who skipped it, is that 2224-2226 is an important price/time window but an even more important price/time window is December 8-12 at SPX 2271-2273.

Dow Industrials, INDU, Daily chart

The Dow outshined them all today with its 300-point rally (+1.5%) but I can't help wondering if that was a defensive move by many -- better to be in the bluest of the blue chips in case a market decline is right around the corner. Many are going to start worrying about a sell-the-rumor reaction to the FOMC next week. There's no also a helluva profit for the year to protect. As a fund manager do you hold out for another 5% or do you protect against a 10% decline? The rise in the VIX today says some are thinking about the latter and could have been moving money into the relative safety of the Dow. Bonds also rallied and that's another potential safe-haven play.

The Dow's weekly chart shows RSI more overbought than it's been since May 2013. Going back before 2000 I can't find a time the daily RSI has been this overbought. This is a dangerous time for the market, especially with the bullish complacency that has come roaring back. The VIX dropped to 11.33 this morning, which is lower than it's been since August. Below 12 is a dangerous time to be long the market. But if this rally is going to continue at least into next week there are two levels to keep an eye on. The first is at 19670, which is where the rally from January would equal 162% of the August-November 2015 rally (as part of a larger 3-wave bounce off the August 2015 low). The second level to watch, if reached, is 19904, which is a projection for the leg up from November 18th. This leg followed the sideways triangle consolidation pattern off the November 14th high and might have marked the half-way point for the rally from November 4th). The Dow stays bullish above 19370 but be very careful if you're long and put in some stop protection.

Key Levels for DOW:
- bullish above 19,370
- bearish below 18,185

Nasdaq-100, NDX, Daily chart

The techs have struggled this week to keep up with the rally in the other indexes but they did some catching up today and beat out the RUT's weaker performance today. NDX now has a 3-wave bounce off last Friday's low and achieved two equal legs up with today's rally. That sets it up for a reversal back down but in reality its price pattern is a mess. It's been a choppy mess since August and it could continue to stay in a choppy sideways move for the rest of the year. It needs to get above 4900 to prove it's ready to break out otherwise we should be prepared for another reversal at any time.

Key Levels for NDX:
- bullish above 4900
- bearish below 4721

Russell-2000, RUT, Daily chart

The RUT appears to be heading for the top of a parallel up-channel for the rally from February, near 1372 on Thursday. Considering the bearish divergence at the current high vs. the November 25th high I think it would be risky to push your luck on the long side. There's no clear sign of an impending reversal yet but when it does start a pullback, considering the level of complacency in the market right now, we could see a fast drop back down. Adding to the bearish potential is a rising wedge pattern for the leg up from last Thursday, which suggests when it breaks it will likely quickly retrace this week's rally. Today's rally took it right up to the top of the rising wedge in what can be considered a completed 5-wave move. It could easily extend higher but again, its looks risky from here. But if the buyers keep this going, there's a large megaphone pattern that I've shown previously on the weekly chart and the top of the pattern is the trend line along the highs from 2014-2015, which is currently near 1397. That's the upside potential if the market is in a blow-off top heading into the FOMC announcement.

Key Levels for RUT:
- stay bullish above 1347
- bearish below 1308

KBW Bank index, BKX, Weekly chart

The banks have been on a tear to the upside and bullishly BKX made it above a trend line along the highs from April 2010 - July 2015, near 88. Further upside potential is to 97.07, which is where the 5th wave of the rally from March 2009 would equal the 1st wave. But at the moment BKX is now up near the top of a parallel up-channel from February, the top of which is the broken uptrend line from February-April-May. The weekly RSI and MACD are now more overbought than they've been since 1996. The rally is a wee bit stretched but of course that could continue at least into next week and potentially into the end of the month. It's just not a rally I'd chase higher from here.

Transportation Index, TRAN, Daily chart

Today's big deal is the TRAN getting above its November 2014 high at 9310, with today's high at 9383. The reason this is a big deal is because it finally matches the Dow's new all-time highs since 2014 and up until now we've had a bearish divergence between the two. With the TRAN's new all-time high we now have a DOW Theory bullish signal. In this environment of massively manipulated markets one could be excused for thinking the DOW Theory is no longer valid. The TRAN's rapid rise (in the face of slowing transportation numbers) might have been part of the manipulation so it's hard to judge whether or not this is meaningful anymore. But many still trust this theory buy signal and will be bullish based on it. That could add more bullish fervor to this market. The other bullish move today is the break above two parallel up-channels, one from January and the other from June, and if it pulls back to the top of the channels and holds as support it will keep the TRAN bullish. Now all the bulls need to do is prevent a one-day breakout whereas the bears want to see a drop from here back below the November 30th low at 8906.

U.S. Dollar contract, DX, Weekly chart

The US$ has pulled back from its November 25th high but it's trying to hold support at its March and November 2015 highs, near 100.60, and a shallow downtrend line from those highs, near 100.30. A failure to hold above 100 would tell us to expect at least a larger pullback correction, which could lead to a complete retracement of the rally from May and a drop to the bottom of a megaphone pattern, which will be near 91 in March.

Gold continuous contract, GC, Weekly chart

Gold has been struggling the past three weeks to hold price-level support near 1180 and I've been expecting a higher bounce, perhaps up to its broken 50-week and 200-week MAs, near 1260, before heading lower. But the longer it chops around 1180 the more bearish it will become and we could see another leg down sooner rather later.

Silver continuous contract, SI, Weekly chart

As many of you know, I like to keep an eye on silver to see if it's in agreement with gold. When they give me similar signals it adds confidence to my interpretation. On November 23rd and 25th silver bounced off price-level support near 16 and should be able to make it up to at least its broken 50-dma, near 17.54, and maybe its 200-dma near 17.69. Today's rally had silver popping above its broken 50-week MA at 17.17 and if the bounce has some life left (it's short-term overbought) we could see silver make it up to its downtrend line from July, currently near 18. It needs to break its longer-term downtrend line from 2013-2014, near 19.50, before it can be declared bullish so for now silver's pattern backs my belief that we're going to get just a bounce correction before dropping lower.

Oil continuous contract, CL, Daily chart

Oil's choppy move up from August has me leaning bearish, especially as it struggles with its previous highs in June and October. A parallel up-channel from August, the top of which is currently near 53.60, could be reached but the move up from November 14th achieved two equal legs up at 51.82 and it's looking like it could turn back down from here. It might stay trapped inside the bear flag pattern but would turn more immediately bearish below the November 14th low at 42.20.

Economic reports

There are essentially no economic reports for the rest of the week that will move the market, not that it's paying attention anyway.


The rally from November 4th is now going parabolic and it fits as the 5th wave of the rally from February. Both are reason enough to remain cautious about the long side. The rally in the VIX today offers another reason to be careful. A parabolic rally is often a sign of a blow-off top as the last of the shorts throw in the towel and the wannabe longs finally capitulate and buy into the last part of the rally. That's not to say this rally is toast here or in the next day or two but that's the risk for those chasing it higher and for those who remain complacent about it. Parabolic rallies never end well, never.

It's possible we'll see the rally continue into next week in front of the FOMC meeting. Whether the Fed will surprise us with something (such as nothing or a 1/2% increase instead of the expected +1/4%) or if it will simply be a sell-the-news reaction is hard to say. I see plenty of reasons to expect at least a little higher, especially if all we see are choppy consolidations near the highs. But if we see a sharp reversal back down it could be the start of a reversal of this week's rally and potentially the rally from November 4th and then much more. The longer-term pattern suggests we could be putting in a long-term top but that obviously is something we can only see in hindsight. There will be clues along the way but for now, while shorting this market is dangerous, buying this market now could be just as dangerous.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying



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New Plays

Giant Killer

by Jim Brown

Click here to email Jim Brown
Editor's Note

In every sector there is a giant and a host of would be giant killers. The computer business is no different. Dell and Hewlett Packard are the giants and there are dozens of smaller niche players that would love to knock one of those giants off the throne. Super Micro Computer is a company that might do it.


SMCI - Super Micro Computer - Company Profile

Super Micro Computer, Inc., together with its subsidiaries, develops and provides high performance server solutions based on modular and open architecture. It offers a range of server, storage, blade, workstation, and full rack solutions, as well as networking devices, server management software, and technology support and services. The company also provides a range of application optimized server solutions, including rackmount and blade server systems; and server subsystems and accessories comprising server boards, and chassis and power supplies, as well as other system accessories, including microprocessors, and memory and disc drives. In addition, it provides customer support services and hardware enhanced services. The company offers its products to data center, cloud computing, enterprise IT, big data, high performance computing, and Internet of Things/embedded markets. It sells its server systems, and server subsystems and accessories through direct sales force, as well as through distributors that comprise value added resellers and system integrators, and OEMs. Company description from FinViz.com.

Supermicro makes the best and most versatile computer servers, in my opinion. I have a tech background starting in 1967 and have been around servers and mainframes all my adult life. When I started Option Investor in 1997 we started with Super Micro servers and we have upgraded multiple times over the last 20 years and it has always been with Super Micro.

While they make great servers they have had some "public company" problems since coming public in 2007. Over the last four years they have traded as low as $7 and as high as $41. Back in July shares were crushed after they slashed guidance in half for a multitude of reasons including restructuring, component shipping delays and weaker than expected orders from several large accounts. Shares fell to $19 from $26. After three months they reported good earnings in late October and shares have been in rally mode since the election.

Earnings Jan 26th.

Shares are approaching resistance at $29 but I do expect them to break through given their recent guidance. It may not happen on the first test, but I expect it to happen.

With a SMCI trade at $29.25

Buy SMCI shares, currently $28.45, initial stop loss $26.85.

Optional: Buy Jan $30 call, currently 95 cents. Initial stop loss $26.85.


No New Bearish Plays

In Play Updates and Reviews

Futures Spike

by Jim Brown

Click here to email Jim Brown

Editors Note:

Strong buying in the S&P futures intraday sent the markets to new highs. Someone placed an order for roughly $6 billion in S&P futures around lunchtime and the market exploded higher. That 50,000 contract order was the first of several big lots with total volume 1.4 million contracts. Portfolio managers unsure about what to buy ahead of year end apparently dove into the deep end of the futures pool.

The problem with that volume of futures is that it can reverse just as quickly as it rallied, if not quicker. The markets have gone from overbought to extremely overbought in just one day. That means any new long positions are going to be at risk for immediate profit taking.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

BOJA - Bojangles Inc - Company Profile


No specific news. Minor gain. Sellers still hitting every spike. I am recommending we close the position. It is not moving fast enough and we have risk of a return to support.

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.

Position 12/2/16 with a BOJA trade at $18.65

Long BOJA shares @ $18.65, see portfolio graphic for stop loss.

TRN - Trinity Industries - Company Profile


No specific news. New 52-week high close.

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. New 52-week high.

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


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.

YRCW - YRC Worldwide - Company Profile


No specific news. Closed at new 11-month high.

Original Trade Description: December 5th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2015, this segment had a fleet of approximately 8,500 tractors comprising approximately 7,300 owned and 1,200 leased; and approximately 32,000 trailers consisting of approximately 27,300 owned and 4,700 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, and other specialized offerings; expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates my.yrcregional.com and NewPenn.com, which are e-commerce Websites offering online resources to manage transportation activities. As of December 31, 2015, this segment had a fleet of approximately 6,600 tractors, including approximately 5,500 owned and 1,100 leased; and approximately 13,000 trailers comprising approximately 11,300 owned and 2,000 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. Company description from FinViz.com.

YRCW shares were crushed in early November after they reported earnings of 42 cents compared to estimates for 53 cents. Revenue of $1.22 billion missed estimates for $1.23 billion. The CEO said the results were impacted by a soft industrial backdrop and lower fuel surcharge revenue compared to the prior year. Who would have thought that low fuel prices would hurt earnings for a trucking company. Apparently, they have engineered their fuel charge program to profit from the fluctuations in the rates. Many companies do this since fuel prices are very volatile. Instead of changing the rates monthly and confusing customers, they project a quarterly rate. If they guess right they make a few cents on the fluctuations. If they guess wrong they lose a few cents but the customer rate is fixed for the quarter. With fuel rates relatively low and stable over the last couple quarters, the rate fixers probably assumed too low a base.

The CEO also said the less than truckload (LTL) sector remained steady despite the recent economic headwinds. With the economy ticking up for late Q3 and Q4, and this being a holiday shipping quarter, the Q4 earnings should be significantly better.

Earnings Jan 26th.

The transportation sector as evidenced by the Dow Transports ($TRAN) is on the verge of breaking out to a new high. Trucking is leading the charge.

Position With a YRCW trade at $14.05

Long YRCW shares @ $14.05, see portfolio graphic for stop loss.

Optional: Long Jan $15 call @ 53 cents. No initial stop loss.

BEARISH Play Updates

FIT - FitBit - Company Profile


Fitbit completed the acquisition of "certain" software assets from Pebble. They did not buy Pebble's watches and Pebble is now shutting down.

Shares of FIT were down in a wildly positive market.

Original Trade Description: December 3rd.

Fitbit, Inc. provides wearable health and fitness tracking devices. It offers various products, including Fitbit Zip, an entry-level wireless tracker that allows users to track daily activity statistics, such as steps, distance, calories burned, and active minutes; Fitbit One, a clippable wireless tracker, which tracks floors climbed and sleep, as well as daily steps, distance, calories burned, and active minutes; Fitbit Flex, a wristband-style tracker that tracks steps, distance, calories burned, active minutes, and sleep; and Fitbit Charge, an activity and sleep wristband, which tracks steps, distance, calories burned, active minutes, floors climbed, and sleep. The company also provides Fitbit Alta, a customizable wristband that offers call, text, and calendar notifications when paired with the user's phone and SmartTrack automatic exercise recognition; and Fitbit Charge HR, a wireless heart rate and activity wristband. In addition, it offers Fitbit Blaze, a smart fitness watch that provides multi-sport functionality, tracks outdoor cycling activity, and provides run cues; Fitbit Surge, a fitness watch that features a GPS watch, heart rate tracker, activity tracker, and smartwatch; Aria, a Wi-Fi connected scale that tracks weight, body fat percentage, and body mass index; and Fitbit accessories that include bands and frames for Fitbit Blaze, bands for Fitbit Alta, colored bands for Fitbit Flex, colored clips for Fitbit One and Fitbit Zip, device charging cables, wireless sync dongles, band clasps, sleep bands, and Fitbit apparel. The company offers its products through consumer electronics and specialty retailers, e-Commerce retailers, sporting goods and outdoors retailers, and wireless carriers; and corporate wellness channels, as well as directly worldwide. Company description from FinViz.com.

FitBit is finding it is hard to move from the "nice to have" category to the "have to have" category. Quite a few of the millennial generation already have a FitBit but the majority are stuck in the back of a dresser drawer never to be worn again. The fitness watch is a fad. How many of us have bought a treadmill, stair climber, "insert your device name here" and it is either gathering dust in the corner or was eventually sold off in a yard sale to make room in the house?

The fitness watch is a great device if you are really into fitness. Since America is the most obese population on the planet, apparently the fitness crowd is in the minority.

When FitBit reported earnings, they guided for a bleak Q4 shopping season. There are too many competitors and not enough buyers. Last week FitBit offered between $34 and $40 million for Pebble, a smartwatch pioneer that has also fallen on hard times. Considering Pebble turned down an offer for $750 million in 2015, that shows you how tough the sector has become. Pebble has been laying off workers and trimming the product line. FitBit wants Pebble because of their unique operating system.

FitBit revenue rose at triple digit percentages in the prior three years. Over the last three quarters revenue has risen 50%, 47% and 23% in Q3. FitBit is only expecting 5% growth in Q4. Net income has posted double digit percentage declines in each of the last three quarters.

FitBit is in trouble. Some of the major watchmakers are now offering fitness watches and Apple is also chipping away at that market segment. FitBit closed at a historic low on Friday at $8 and it is almost a sure bet they will hit $5 without a surprise acquisition announcement by somebody else.

Earnings Feb 1st.

Position 12/5/16:

Short FIT shares @ $8.18, see portfolio graphic for stop loss.

Optional: Long Feb $7 put @ 50 cents.

VXX - Volatility Index Futures - ETF Description


New historic intraday low but put buying at the close lifted the ETF.

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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