Option Investor

Daily Newsletter, Monday, 12/12/2016

Table of Contents

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

Market Wrap

FOMC Week, That Say's It All

by Thomas Hughes

Click here to email Thomas Hughes


The FOMC meets this week, odds for a rate hike are running near 100%, the only thing now is to see if they do what we think they will; and the market is waiting. Today's action was primarily driven by Trump; his one China policy comments, China's response and a Tweet about the F-35 program only the latest. The S&P 500 and Dow Jones Industrial Average both set new intraday highs, the Dow at least was able to hold them. Other indices saw small pull backs, nothing major, ahead of the two day FOMC meeting and much anticipated 2nd rate hike, coincidentally 1 year after the first since the historic Global Financial Crisis (if they do it).

Global indices were a bit mixed today. In Asia Japanese stocks moved up to leave the Nikkei at a new 1 year high while new regulations in China caused indices there to sell off by roughly -2%. The Chinese national insurance regulator says it will curb "barbaric stock purchases" by the countries insurance carriers. European indices were also mixed but flat on the day as traders wait on the FOMC. As of last look the CME's FedWatch Tool is still showing a 95% chance of rate hike at this meeting. The question now is, how high will they raise rates, what else might they do and what will they say about the timing of the next rate hike?

Market Statistics

Futures trading indicated a flat market all day today. The trade was flattish, bobbing along just above break even, and held that into the opening bell. There was no economic data released today and no earnings report of note in the early hours to move the market. Trading at the open was a little wild, the indices first moved a hair lower to touch support, then bounced higher to hit new all time highs for the SPX and DJI and then fell back to the early low, and then a little lower, to trade sideways for the rest of the afternoon.

Economic Calendar

The Economy

No data today but several important bits of the puzzle will be delivered this week. Most important is the two day Fed meeting which begins tomorrow. The FOMC is expected to raise rates by 25 basis points and possibly give an indication of when the next will come. There has been no change to their rhetoric, that the pace will be gradual, but if that means it will be another year before the next hike we don't know it yet. The CME's FedWatch tool shows a roughly 50% chance for the third post-Financial Crisis rate hike by next summer. Also on tap this week; Retail Sales, CPI, PPI, Business Inventory, Industrial Production, Philly Fed, Empire Manufacturing and Housing Starts/Building Permits.

Moody's Survey Of Business Confidence fell -1.1% in the last week to hit 28.5. this is the lowest level in just over a month but still off the summer bottoms. Mr. Zandi says that sentiment is less upbeat than it was but is still positive and shows an economy expanding at its potential. Current and future outlook have both diminished a bit but are positive.

The third quarter earnings cycle has come to a close, the final rate of earnings growth is 3.1%, snapping the 6 quarter earnings recession. Looking forward, 3 companies have reported for the 4th quarter and 5 are due to report this week. Of those who have reported 2 have beaten on earnings expectations and 1 has beaten revenue expectations. The blended rate for the 4th quarter is now 3.0%. If the trends run true this quarter the final rate of earnings growth will be in the range of 7% to 8%. Full year 2016 outlook is holding steady at 0.1% but likely to rise by the end of the 4th quarter season.

Looking to next year outlook remains positive. Full year 2017 earnings growth is expected to come in around 11.4%, likely higher, with 11.3% in the 1st quarter and 10.5% growth in the 2nd.

The Dollar Index

The Dollar Index pulled back a bit today, retreating from just below the current long term high. The index fell about -0.60% to trade near the middle of the November/December range as the market awaits the Fed. The expectation for a rate hike is huge, if they don't deliver or don't sound hawkish enough it could send the index plunging. First target for support in such a situation is near 100.50, maybe as low as 100, a break below this level would be bearish and could take the index down to 98.65 or lower. However, the prevailing expectation is not only for the hike, but also for more hikes in the future which is overall bullish for the dollar. Resistance is near 102, a break above this level would be bullish and could take the index up to $103.50 or higher.

The Oil Index

Oil prices got another OPEC induced boost today as Russia and the Non-OPEC OPEC bloc came on board the historic, and largely ineffective, deal to support prices. Russia's agreement is a bit smaller than what was originally proposed and with the 1.2 million BPD cut by OPEC itself doesn't even hit the 2 million BPD mark. In any event, I expect this news to support prices in the near term but leave them vulnerable to correction in the short to long. Negative factors overshadowing the deal: oversupply still reigns, demand growth is still tepid, US rig counts are rising and we have to trust that those in agreement with the deal will actually cut production.

The Oil Index jumped nearly 3% at the open, gapping up to a near 18 month high, only to sell off throughout the day. Despite the selling the index was able to close with a gain, near 0.35%, but the candle signal looks pretty ominous, at least for the short term. The candle is long and black and comes at a possible peak/top of a rally driven more by talk and hope than anything else. The index may continue to rise, and probably will based on earnings growth outlook for next year, but in the short term it looks like there will be some profit taking, consolidation and maybe correction before more new highs are set. Resistance is just shy of 1,300, first target for support is 1,250.

The Gold Index

Gold prices were flat if a bit choppy, trading around the $1160 level. Spot prices are down on FOMC outlook and dollar value and could go lower. At this time the risk is that the FOMC won't deliver and the dollar will fall. Support for gold is in the $1150 to $1160 range, a break below here would be bearish. Resistance may be found at $1175 but more likely at $1200.

The gold miners rose in today's session but I think it more a lack of sellers than a presence of buyers. The Gold Miners ETF GDX gained nearly 0.75% at the close, creating a small doji candle in the lower half of the previous days black candle. The ETF is still in consolidation, trading sideways within a range bound by support near $20 and resistance near $22. The indicators remain mixed and consistent with a range bound asset. Where the ETF goes next is entirely dependent on the FOMC, the dollar and gold prices; a break to the upside may find resistance at $25, a break to the downside may find support near $16.50.

In The News, Story Stocks and Earnings

Today's Trump Tweet victim is Lockheed Martin, maker of the ill fated and over budget F-35 program. In today's Tweet Trump says the program is way over budget, out of control and it, along with other costs, will be trimmed come January. The news shook the stock, as well as the entire defense complex, but is likely setting up buying opportunities as Trump is also on track to increase defense spending overall. Shares fell -2.5% in the premarket, doubled the loss during the open session, recovered half of the total loss and closed with a small white bodied doji candle, hammer-like, which found support, not coincidentally, at the $250 level and the top of a gap opened a month ago. The stock is now trading about -7% off of the recently set all time high.

Chipotle Mexican Grill got a boost today when it announced that there would no longer be two CEO's. Monty Moran will step down as CEO and from the board, retiring completely from the company in 2017, and will be replaced by co-CEO Steve Ells. Ells will stay on as chairman of the board. The move is expected to help remove unnecessary "complexity" from company operations, both in the E suite and in the stores, and facilitate recovery following the e-coli outbreak earlier this year. Shares of the stock responded well to the news, gaining 3.5%.

The VIX gained 7.25% today but remains low relative to the past month, the short and the long term. The index is hovering 12.50 and below the moving average, consistent with periods of upward trend, but may be bottoming. The indicators are both diverging from recent lows and the stochastic is firing a weak buy. The caveat is that this set-up could also precede another push to test support, it just depends on which way sentiment turns. The indices are set up for a pull-back, with the FOMC this week I wouldn't be surprise to see it happen, and this could result in a test of the short term moving average for the the VIX, near 13.50, with a chance for a move up to 15.

The Indices

The indices are set up for a test of support, pull-back and possible correction. Today led by the Dow Jones Transportation Index. The transports fell -0.90%, creating a smallish black bodied candle sitting on the previous and recently broken all time high. This action is not unexpected following a break out, the question now is will support hold at this level or will the test be deeper. The indicators are divergent from the current high, consistent with a test, but give no indication of how deep it may be. The upshot is that the indicators are also consistent with a strong uptrend so any pull back that does occur is a buying opportunity, more likely than not. Support is at current levels, near 9320, a move below here could go as low as 9,000, about 3.5%, before hitting the next target for solid support.

The tech heavy NASDAQ Composite made the next largest decline today, about -0.60%. The index created a small black candle sitting on support at the previous all time high (the one set last week). The indicators are showing some wicked divergence here and suggest that we will see some more testing of support, if not a move lower. A break below current levels would have a target near 5,300 or 5,250, about -2.7%, with a possible move down to 5,100, about -5%.

The S&P 500 made the third largest decline, about -0.11%, and created a small spinning top doji. The index created a new all time intra-day high today, 2264.03, and looks poised to do one of two things; extend the rally or pull back to test support. First target for support is near 2,225 and a long term up trend line, the next is the recently broken previous all time high. The indicator are a bit weak but over all bullish, there are however divergences present which support the idea a pull back to is on the way.

The Dow Jones Industrial Average managed to eke out a gain today and close with a new all time high, 19,796.43. The index created a small white bodied spinning top, at the all time high, and appears to be drifting higher on unspent momentum. The indicators are both bullish if weakening over time and on the rise, suggesting that there is some room left to run. The caveat is that there are divergences present that suggest the rally is losing strength and susceptible to correction. Targets for support should the index begin to correct are 19,000, -4%, and 18,500, -6.5%.

The indices are trading at or near all time highs after a rally lasting a little more than 1 month. It is no surprise to see them poised for consolidation/correction and also no surprise to see them this way ahead of the FOMC meeting. Where they go from here, in the near term, will be heavily dependent on the FOMC meeting and policy statement. Where they go in the longer term is more dependent on the economic outlook, positive, and the earnings growth outlook, also positive and expanding over the next 5 quarters. If there is a pull back to support I think there is a high likelihood it will be the entry point for a long term index position I have been waiting oh so long for, fingers crossed.

Until then, remember the trend!

Thomas Hughes



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New Plays

Follow the Signs

by Jim Brown

Click here to email Jim Brown
Editor's Note

With market instability showing up in multiple areas there are signs the market could be fading. As I pointed out in the prior newsletter, the Russell 2000 was up 20.1% since the election as of Friday. Many other small cap stocks are up 30% or even 40% since the election. There is going to be a price to pay and it is not going to be pretty.

Most of the desirable small cap stocks in my research universe have charts that look like this. Buying these charts today would be suicide. At the same time we cannot afford to short them either because there are 13 trading days left in 2016 and they could still go up. We successfully entered the put position on the IWM at the open this morning and that will be our play on a declining market.

There is no reason to enter new positions just because this is a newsletter day. I scanned about 350 stocks today and there was nothing with a risk-reward ratio that warranted adding them as a new position. We do not know which way the market is going but the odds are good it will decline sharply over the next four weeks. I fully expect to be stopped out of more positions in the days ahead as the market turns choppy ahead of the holidays. I do not want to keep adding positions just so we can be stopped out. I will continue to do my scans and it something pops up worth playing I will definitely add it. Today is not one of those days.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Was That a Signal?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 posted a significant decline after a gain of only a point on Friday. Is this a signal the rally is fading? The Dow was the only index to post a gain and that was sparked by gains in only a couple stocks. While it is too early to tell if the market is about to roll over, I do expect some choppy trading over the next two weeks.

With the tax rates likely to change in 2018 there is a good reason to hold profits over into January if you have a taxable account. Portfolio managers are likely to maintain existing positions through year-end in order to compete with their peers and secure their bonuses. This does not mean we will not have some market weakness but I still expect the dips to be bought. There are 13 trading days left in 2016. Now is not the time to be adding new positions.

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

YRCW - YRC Worldwide
The long call option position was closed at the open.

IWM - Russell 2000 ETF
The long put option position was entered with a trade at $137.

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

SMCI - Super Micro Computer - Company Profile


No specific news. The Nasdaq decline at the open knocked SMCI back to $27.40 but it recovered most of the loss by the close.

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.

Position 12/9/16 with a SMCI trade at $29.25

Long SMCI shares @ $29.25, see portfolio graphic for stop loss.

Optional: Long Jan $30 call @ 80 cents, see portfolio graphic for stop loss.

TRN - Trinity Industries - Company Profile


Minor decline with the Dow Transports losing 85 points. No specific news.

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. Minor decline from Thursday's 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


Minor profit taking after the new 8-year high for the XLF on Friday. Oppenheimer warned not to take profits on the banks because they had a long way to go. Wed/Thr will be critical depending on what the Fed says about 2017 rate hikes.

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. We exited the call option at the open for a nice gain but the long stock position is still open.

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.

Closed 12/12/16: Long Jan $15 call @ 53 cents. Exit $2.30, +$1.77 gain.

BEARISH Play Updates

FIT - FitBit - Company Profile


No specific news. New historic low. Moving at a snail's pace.

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.

Update 12/8/16: Deutsche Bank downgraded FIT from buy to hold.

Position 12/5/16:

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

Optional: Long Feb $7 put @ 50 cents.

IWM - Russell 2000 ETF - ETF Profile


The Russell 2000 fell -15 points on Monday and closed right near the low for the day. The long put position on the IWM was triggered with a trade at $137.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -1,850 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


I decided instead of closing the position ahead of a potential markte sell off that I would just tighten up the stop loss and keep it tight. Eventually we will be knocked out by the first big dip. The reason I decided to remain in the position was the very minor gain today when all the indexes except for the Dow were negative. The VXX is not showing any indications of a bounce and we know from experience, one good bullish day can cause a big decline on the ETF. The market still has 13 trading days in 2016 and I do not expect the big decline until January.

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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