Option Investor

Daily Newsletter, Thursday, 12/8/2016

Table of Contents

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

Market Wrap

Taking A Breather

by Thomas Hughes

Click here to email Thomas Hughes


The bulls took a rest day today but were still able to set new intraday and closing highs for all major indices. In terms of today's news, decent labor data and the latest policy statement from the ECB. The EU central bank and Mario Draghi have had their say, the FOMC is next at bat with a dollar set up to be knocked out of the park. The ECB? They extended the duration of their asset purchase program, increasing QE, but capped it with plans to taper beginning April and ending December 2017.

International markets were mixed, driven both by euphoria over the rally in US indices (that's what I call follow through) as well as local news. In Asia markets were mixed though largely higher, led by the Nikkei's 1.45%. The move left the index near the 1 year high despite a downgrade for GDP over the next two years. Chinese indices were more flat than not, if positive, despite an improvement in, and better than expected, trade data that gives evidence there is some pick up in global demand. European indices were first flat, then down sharply, then back up on the realization that 1) QE was extended and 2) the taper means that the ECB expects the EU to exit economic distress over the next year. Mario Draghi, at the press conference and in support of this sentiment, said that inflation is expected to rise in 2017 and 2018.

Market Statistics

Futures trading was a bit choppy throughout the morning but held near break-even and within a very tight range. Economic data gave a little lift, the ECB policy release a little drag and then the Draghi press conference a little lift leaving the trade very near the 0.00% line as the opening bell was sounding. Action on the SPX was flat and choppy the first half of the day, the index bobbed up and down over the break even line until after noon. At that time there was a small surge, up to new all time highs, that was met with a bit of selling. The index fell back to just above break even, about 2:30PM, bounced and began to move sideways within the daily range, where it remained until the close of the day.

Economic Calendar

The Economy

Very little economic data today or tomorrow, quite a lot next week. Today's bit is the weekly jobless claims, initial claims falling by a slightly largely than expected 10,000 to hit 258,000. This is the 92nd week of claims below 300K. The four week moving average of claims rose by 1,000 to hit 252,000. On a not adjusted basis claims rose by a whopping 41.3% (seasonally expected) versus the expected 46.6% On a year over year basis not adjusted claims are -8.2% lower than last year, which is the salient detail of this data point. In terms of labor markets and labor trends, the data remains consistent with long term labor market improvement and trending near the long term lows.

Continuing claims fell by a fairly large amount, -79,000, to hit 2.005 million from last weeks revised figure. Last week's figure was revised upward by 3,000. The four week moving average of continuing claims fell by -9,500 to hit 2.028 million. Both the headline continuing claims and moving average have returned to long term historically low levels and are consistent with improvement within the labor market.

The total number of Americans claiming unemployment fell by -117,950, a number that at first surprised me, to hit 1.785 million. This drop is unusually large, but expected based on past seasonal trends. Based on those same trends we can expect to see the number rebound by nearly 500,000 next week. Despite the rise the total claims remains below last years figures, down -7.7% this week, and consistent with long term labor market recovery.

Tomorrow on the economic calendar, Michigan Sentiment and Wholesale Inventories. Next week: The FOMC on Wednesday along with Retail Sales and PPI. Thursday is CPI, Philly Fed, Empire Manufacturing and jobless claims. Friday is Housing Starts and Building Permits.

The Dollar Index

The dollar, it had a bit of a wild ride today too but the underlying fundamentals remain skewed in it's favor; the ECB is still loose and will be for another 13 months, the FOMC is tightening and will be over the next 13 months. The question now is how hawkish will the Fed be? Will they tighten in line with expectations or do more? Will they surprise with something else? Will they indicate when the next hike will possibly come and will that be sooner or later than expected? All questions that could send the dollar shooting up to retest recent highs if the answers favor a stronger dollar. Today's action, a quick dip down to test support at $100 and confirm, then bounce back to a 1 week high above the previous long term high and resistance level of $100.49. Next upside target is $102 with a chance of going higher.

The Oil Index

Oil prices are on shaky ground, as is the OPEC deal, the very ground that oil prices are standing on. The deal has yet to be fully ratified, another meeting takes place this weekend to hammer out more details, but nonetheless fails to reduce output to levels that will effectively rebalance the market. At the same time non-OPEC members such as Russia are also required to agree to cuts and total OPEC production reached a new all-time high, both casting a shadow of doubt on an already dubious deal. I remain skeptical. WTI hovered around $50, closing with a gain near 2% at $50.84.

The oil sector continues to move higher, I think regardless of an OPEC deal. Earnings outlook for the sector is good, great, even outrageously fantastic (full year 2017 earnings growth projection is +340%) and based on oil at or near current prices. Even if oil prices hover in the $45 range earnings growth will be huge. The Oil Index gained a little more than 0.5% in today's action to tickle one year high. The indicators are bullish and on the rise, beginning to show some strength. A break above 1265 would be bullish.

The Gold Index

Gold prices fell on a stronger dollar, after a bit of a choppy morning, to trade near $1172. The metal remains under pressure and is likely to fall back to retest recent lows given dollar outlook. Support targets are near $1150 and $1160, a break below $1150 being bearish and likely to lead to even lower prices. The only thing going for gold now is the possibility of an increase in physical demand now that prices are lower, and the onset of serious inflation and gold as a hedge.

The gold miners continue to consolidated near their recent lows. The Gold Miners ETF GDX falling about -0.25% in today's action. The ETF is consolidating within a narrow range, creating a bit of a pennant pattern within a down trend, while it winds its way over to the short term moving average. The moving average has provided resistance and sparked downward movement at least 6 times over the past 4 months and likely to do so again. The fact that the moving average is now coincident with the 50% retracement line is only another nail in the coffin. Support is near $20, a break below here could go as low as $16.50 in the near term.

In The News, Story Stocks and Earnings

Sears reported earnings in the wee hours of the morning, beating on the top and bottom lines. That being said, the bottom line was net loss for shareholders but a significantly smaller loss than last year. Another thing to take note of, revenues are shrinking due to both a reduction in the number of Kmart and Sears stores as well as a -7.4% decline in same store sales across the group. What I can say about Sears is that when I went in there a few weeks ago just about the whole place was at least 50% off, I bought a nice new jacket. Shares of the stock climbed nearly 5% on the news.

Costco reported after the closing bell yesterday, did not quite meet analyst expectations for revenue but was still able to please the market. The wholesale club reported a 3% increase in revenue and a 13.5% increase in profit. Today's action saw prices gap up, shoot higher during the session, and hit resistance to create a wicked looking pinbar. The indicators are bullish if a bit mixed and the stock is trading just below resistance of $160.

Hovnanian Enterprises reported earnings before the bell. Revenue and profit both rose from the same quarter last year, fiscal 4th, but full year earnings and revenue fell short. The fourth quarter however saw a 16% increase in revenues, driven by housing trends, that is expected to continue into next year. Shares of the stock jumped 2% in the pre-market, traded just shy of a new intraday 15 month high, and then sold off on profit taking to close with a loss. Despite the sell off the indicators bullish and showing strength, there may be a pull-back in prices from here but I would expect to see them at least retest the current high.

The Indices

The indices took a bit of a breather today but were still able to move higher and set new all time highes across the board. Starting with the SPX, which made the smallest gain, the index moved up by 0.22% to set a new all time high. Today's move is leftover momentum from yesterday's rally and a good sign for us bulls. The indicators are bullish and confirm the move to new highs, if they are divergent at this time. The divergence is not confirmed yet and even if it were, based on the extreme nature of the preceding MACD peak we can expect to see up to 4 successive peaks (three more including the current peak) before the move is fully exhausted. Upside target is near 2,300.

The Dow Jones Industrial Average made the next largest gain, 0.33%, creating a small bodied white candle. The index is drifting higher on momentum, following yesterday's push higher, and likely to keep rising. The indicators are both confirming the move and strength within an ongoing up trend. This move could continue into the near to short term before becoming exhausted with Dow 20,000 well within reach.

The NASDAQ Composite made the 2nd largest gain in today's session, just shy of 0.45%. The tech heavy index created a small bodied white candle and set a new all time high. The indicators are a bit weaker on this chart but nonetheless consistent with a trend following bounce and move higher. Divergences present are a red flag and bear watching but, for now, are unconfirmed. Next upside target is near 5,500.

The Dow Jones Transportation Average made the largest gain, just over 0.5%, and put the transports back in the lead with another new all time high. The index ability to creep higher for a 2nd day following the break-out to the first new highs in almost 2 years is a good sign. The indicators are bullish and confirm the break-out as well, although there are also unconfirmed divergences here. Upside targets are 9,500 in the near term and 10,000 and 10,500 in the short to long terms.

The continuation of the long term secular bull market that had been building on positive earnings growth outlook, unleashed by post-election relief and supported by economic trends is still underway. The indices are making new highs, the transports are participating, earnings growth is back, economic outlook is good and the only negatives are concerns that the Trump economy won't be as good as we think. That could be true but remember this; outlook was positive before Trump won the election and has only improved since, even if the Trump economy isn't as good as we think right now it will still be better than what we were expecting before. I am bullish, still cautious, but bullish with an eye on Dow 20,000. The next big catalyst will be next Wednesday when the FOMC releases their policy statement, I can't wait.

Until then, remember the trend!

Thomas Hughes



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New Plays

Overbought Again

by Jim Brown

Click here to email Jim Brown
Editor's Note

We are moving from oversold to overbought with frightening speed. The Russell 2000 rocketed higher with a 1.6% gain to extreme overbought status once again. Afte four days of minimal declines the index has added nearly 80 points in only four days. This cannot continue.

Despite all the indexes finishing positive today, there was some choppy trading and with the markets up so big for the week, we could see some profit taking on Friday. I scanned over 300 small cap stocks and the ones we would like to play are up obscene amounts and the ones with no gains for the week we do not want to play. I am passing on adding a new play tonight and maybe after some profit taking on Friday, there will be some new candidates.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Rocket Power

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 has turned into a rocket-powered dragster accelerating to new highs. The Russell gained 1.6% on Thursday to close at the high of the day at 1,386, which is also a new record high. The Russell is stretching its limits after only 4 days of profit taking. This will eventually end badly.

The portfolio is very green at present but that could change in a heartbeat if Yellen comes down with a bad case of foot in mouth disease next Wednesday. I am going to hold off on adding new plays tonight because we are already in extremely overbought territory again and Friday could see some 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

BOJA - Bojangles
The long stock position was closed at the open.

SMCI - Super Micro Computer
The long stock position remains unopened until a trade at $29.25.

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

Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

BOJA - Bojangles Inc - Company Profile


No specific news. The play was closed at the open because of lack of movement.

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

Closed 12/8/16: Long BOJA shares @ $18.65, exit $18.85, +.20 gain.

SMCI - Super Micro Computer - Company Profile


No specific news. Shares were up nearly 2% and maybe we should have bought the open but I want the stock to get through that resistance at $29 before we are at risk.

The position remains unopened until a trade at $29.25.

Original Trade Description: December 7th

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.

TRN - Trinity Industries - Company Profile


Minor decline from the 52-week high on Wednesday. After the close, they declared a dividend of 11 cents payable Jan 31st to holders on January 13th. Shares did not move in afterhours.

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. I am adding a profit target of $18 for an exit.

Exit with trade at $18.

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


Deutsche Bank downgraded FIT from buy to hold. New historic low.

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


Put buying provided a fractional gain. Many investors do not believe the rally will hold.

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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