Option Investor

Daily Newsletter, Wednesday, 12/21/2016

Table of Contents

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

Market Wrap

Bullish Seasonal Pattern Fighting a Tired Market

by Keene Little

Click here to email Keene Little
The stock market's indexes haven't been able to add many, if any, points to the board since peaking on December 13th but the choppy pullback/consolidation keeps things potentially bullish if the bulls step back in quickly. Otherwise we have some warning signs that tell us the seasonally bullish time ahead could run into trouble this year.

Today's Market Stats

Trading volume continues to wither as the week progresses and today's volume was near the level seen on previous slowest days of the year and it's now approaching what we saw during the week leading into the Christmas holiday last year. Volume will likely continue to slow but that often helps the bulls this time of year as the sellers leave and wait until after the holidays before they launch their attack. I think some short sellers are licking their chops in anticipation of a correction to the Trump rally, which has been built mostly on hope.

The stock market usually rallies in the final 5 days of the month, between Christmas and New Year's Day and then a couple of days into January, which has earned the nickname the "Santa Claus" rally. The risk this time is that we've had such a strong rally preceding this period and the market could suffer the problem of running out of buyers. But that's only conjecture and at the moment we have a seasonally bullish period in front of us and a bullish price pattern that hasn't turned bearish yet.

The past is never a guarantee how the future will unfold but according to Stock Trader's Almanac, the S&P 500 has averaged a gain of +1.4% during the Santa Claus rally since 1950. Going back further, the Dow has rallied during this 7-day period 75% of the time for an average gain of +1% since 1986. According to MarketWatch, the average 7-day gain in all other periods, going back 120 years, is +0.1% so the Santa Claus rally is a 10x improvement over the average of 7-day periods. For the Dow, a +1.0%-1.4% rally would kick it up to about 20200-20300. But the short-term price pattern since last week is starting to show some signs of trouble if the buyers don't step back in quickly. And as I'll show for the Dow, there is a possible short-term ending pattern since last week that could shoot Santa out of the sky (hopefully not before he unloads his sleigh).

One problem for the market is the extreme levels of bullishness that quickly climbed from extreme fear only 6 weeks ago. Too much too fast comes to mind. Last week I showed the Fear & Greed index and pointed out the sharp rise in bullish sentiment (the greed factor) since the November low. Since last week the index has backed off from a high at 88 to the current reading of 75 and the significance of this is that the market might have run out of buyers. The reason this indicator is used as a contrarian signal is because at the extremes the market trend is well recognized and most traders have joined the trend. That means buying in a rally and selling in a decline. Once the market runs out of buyers/sellers the trend completes and reverses. It doesn't always take an "event" to trigger a reversal but instead it could simply result from running out of traders to support the move.

CNN Fear & Greed index, 2014-December 20, 2016

While the price pattern for the index supports the idea for another rally leg, the falloff in bullish sentiment shows us there is the risk that the market could be in the early stages of a reversal. At the moment the Fear & Greed index is showing us a reason to be cautious about the upside while the price pattern and the bullish season says the rally is not done yet. That could change quickly if the indexes start to drop in a sharp move down.

S&P 500, SPX, Weekly chart

There are enough differences between the indexes to warn us that the interpretation of one is not necessarily correct. But typically trend lines do a good job showing us where to watch for support and resistance and the top of a rising wedge for the rally from February for SPX was tested with last week's high at 2277. If can press a little higher into next week, the top of the rising wedge will be near 2290. There are two price projections coinciding with that level, one for two equal legs up from February, at 2292.63, and the other for two equal legs up from June, at 2285.92. Between the price projections and the top of the rising wedge we have an upside target zone at roughly 2286-2293. But at the moment SPX has stalled at a potentially important target zone at 2271-2273, which is derived from the Gann Square of 9 chart (alignment with the March 2009 price low and date). SPX could certainly rally well above 2300 but at the moment it's looking like a risky bet.

S&P 500, SPX, Daily chart

The consolidation since December 13th has brought SPX over to its uptrend line from November 4 - December 2, which would be tested with a little lower Thursday morning at 2262. Near the same level is its previously broken, and then recovered (on December 7th), uptrend line from February-June (gray line on the daily chart below). Note the rising wedge pattern for the rally from November 4th, which fits well as the final wave in the larger rising wedge for the rally from last February. Keep in mind that rising wedges are typically retraced much faster than it took to build them. Hanging on complacently to a long position has the potential to be a very painful experience.

Key Levels for SPX:
- bullish above 2278
- bearish below 2243

S&P 500, SPX, 60-min chart

The 60-min chart below shows a sideways triangle for the consolidation off the December 13th high and this fits as a bullish continuation pattern. The expectation is for another rally leg and assuming we'll get it, the bigger question is then how high it will go. It should be the last leg of the rally from November 4th and potentially the last one for the rally from February. It could be that significant. I would say the minimum expectation is for a rally to the 2286-2293 area to meet the price projections discussed with the weekly chart. The next upside target would be a price projection at 2314, where the 5th wave of the rally from November would be 62% of the 3rd wave. That projection crosses the top of the rising wedge for the rally from November on Friday, which seems a little more than aggressive considering how much the trading volume has slowed down. Where's the buying pressure going to come from. But until proven otherwise, bears need to consider the upside potential. And now all the bulls need is to prevent a break below some important trend lines near 2261. A drop below 2260 would be a bearish heads up. Below 2243 would be even more bearish since that's the projection for two equal legs down from December 13th for a possible a-b-c pullback correction.

Dow Industrials, INDU, Daily chart

As for SPX, the Dow could have the same bullish sideways consolidation off last week's high and is now setting up for the next rally leg. It has steeper rising wedge off its November 4th low, the top of which will be near 20500 by the end of the month. That would be an impressive (+2.5%) rally and I'm having trouble seeing that potential but it remains a possibility. But there's also the possibility that it is forming a small rising wedge off the December 14th low, which calls for just one more minor new high, near 20030 by Friday. Because of this potentially bearish pattern (a small rising wedge to complete the rising wedge off the November low) I want to see the Dow above 20050 before believing we'll see the Santa Claus rally. If the Dow drops below Monday afternoon's low at 19870 it would point to the possibility of a drop to 19650 before maybe starting another rally leg. Below 19650 would tell us a top is very likely already in place.

Key Levels for DOW:
- bullish above 20,050
- bearish below 19,650

Nasdaq-100, NDX, Daily chart

NDX has a similar ending pattern as the Dow, if that's how it's to be interpreted. Only one more minor new high could finish off its rally but a move above 4975 would turn it more bullish and we'd likely see 5000 as the next stop.

Key Levels for NDX:
- bullish above 4975
- bearish below 4870

Russell-2000, RUT, Daily chart

The RUT is struggling with its uptrend lines from November 3rd -- one through the December 2nd low was broken December 13th, and the other through the December 14th low was broken on December 16th. The latter has been acting as resistance on multiple back-tests since Monday and is not acting bullishly. There's still upside potential to the trend line along the highs from 2007-2015, near 1403, but its price action has me wondering if the RUT is going to break down sooner rather than later. Below its December 14th low at 1354, as well as its 20-dma, would trigger a sell signal and then I'd be watching for 1346 (two equal legs down from December 9th) and then 1322 (2nd leg of its decline equal to 162% of the 1st leg down).

Key Levels for RUT:
- bullish above 1400
- bearish below 1300

30-year Yield, TYX, Weekly chart

Last week I showed a weekly chart of TLT, the 20+ year bond ETF, and how it was testing its uptrend line from February 2011 - December 2013. This week's bounce has it looking like support is going to hold, although I can't say I'm impressed with the bounce pattern and it remains possible we'll see at least a test of last week's low and maybe a little lower before setting up for a larger bounce. Moving over to the 30-year Bond, TYX, its weekly chart shows a little more upside potential to reach the same but opposite trend line. Its downtrend line from February 2011 - December 2013 is currently near 3.27% and its high so far is its December 12th high at 3.196%. Since that high it has pulled back slightly in a choppy consolidation pattern and supports the idea we'll at least a little higher before reversing back down (which keeps yields in alignment with the expectation for the stock market this month). A rally above the downtrend line, with a break above 3.28%, would obviously be more bullish, especially if the trend line acts as support on a pullback.

KBW Bank index, BKX, Weekly chart

The banks have been a significant driver behind the rally from November and so far it's looking like it's not over. The consolidation following the high on December 8th looks like a bullish continuation pattern, which might need just one more pullback within the consolidation range before starting another leg up. For the moment, assuming we'll see another rally leg, I like an upside target at 97.07, which is where the leg up from February would equal the first rally leg off the March 2009 low (into the April 2010 high). That projection crosses the top of a parallel up-channel from February around mid-January. The first sign of trouble for the bulls would be a decline below the trend line along the highs from April 2010 - July 2015, near 87.

Transportation Index, TRAN, Daily chart

On December 7th the TRAN popped above its November 2014 high at 9310 and then topped out at 9490 on December 9th. It then pulled back below 9310 two days later and has been struggling to get back above this important level. At the moment we have a failed breakout attempt and yesterday's close near 9310 followed by today's small pullback is not helping the bullish cause. The TRAN would be more bullish above a price projection near 9534 and at least short-term bearish below last Friday's low at 9159, which would also be break of its rising 20-dma.

U.S. Dollar contract, DX, Weekly chart

The US$ has reached an important level where we could soon find out if its rally will continue or if instead we'll see a sharp reversal into 2017 before starting the next rally leg later in 2017. Looking at the March 2015 - May 2016 pullback, a 127% extension of that move is at 103.20 (the red projection on the chart). The leg up from May 2016 is a 3-wave move and the 2nd leg of the rally is 162% of the 1st leg at 103.33 (the blue projection). Last Thursday's high was 103.56 and yesterday's high was 103.62, both of which are showing bearish divergence against the November highs. The close correlation of the two projections points to the potential for a reversal from here and the intermediate-term possibility is for a relatively sharp decline to its 200-week MA, near 90-91. But the dollar would remain bullish if it climbs above 103.50 and stays above that level.

Gold continuous contract, GC, Weekly chart

Gold has remained under pressure the past several weeks but it's looking like it could get at least a bounce. Last week's low at 1124.30 came within 3.30 of a price projection at 1121 for the 3rd wave of the decline from July. At the moment I'm calling the leg down from November 9th the 3rd wave of the decline because I'm expecting gold to continue lower following a 4th wave bounce/consolidation. But I also recognize the potential for a much stronger rally to kick off following what is so far a 3-wave pullback from July. It will be the form of the bounce/consolidation over the next few weeks that will provide the clues needed to help figure out the next move. Many gold analysts are calling this a "golden" buying opportunity but I think it's too early to make that call.

Silver continuous contract, SI, Weekly chart

Keeping an eye on silver to see if it's providing clues for gold, it's been trying to hold support near 16. A stronger break below it would not be a good sign but at the moment it's a setup for at least a bounce back up to its broken 50-week MA (which acted as resistance on a back-test the prior two weeks), near 17.25.

Oil continuous contract, CL, Weekly chart

The stronger dollar hasn't hurt oil but nor has oil been able to rally much more after the strong spike up at the end of November/early December. All of the price action since August looks corrective and continues to point lower but it would be at least short-term bullish if it can rally above 55, in which case we would likely see price-level S/R near 58.50 tested. Oil could continue to chop its way higher but at the moment it's looking vulnerable to breaking down instead.

Economic reports

The market is not paying much attention to economic reports but Thursday will see many reports that could move the market. We'll get the GDP 3rd estimate, unemployment claims data, Durable Goods Orders, Leading Indicators, Personal Income and Spending and the Core PCE Price index (a measure of inflation). These are all reports that will tell us how well the economy is doing and supply further information for the Fed and their rate-increase plan. Friday we'll get the final Michigan Sentiment numbers and New Home sales.


The seasonal Santa Claus rally looks like it could happen again this year (between Christmas and New Year's and first two days of January) but there are a few things that are warning us to not get complacent about that expectation. The falloff in bullish sentiment, as shown with the Fear & Greed index, is a warning sign that the market has run out of buyers. The strong rally since November might have already sucked in all the buyers (and spit out the shorts) that we're going to see.

Some indexes, as shown on the Dow's chart, are indicating a possible ending pattern (small rising wedge), while others, such as SPX, show a bullish sideways triangle bullish continuation pattern. There are mixed signals between the indexes and the message at this time is to be very careful about expecting further upside while at the same time there are no clear signals for bears to start getting short.

The VIX is dangerously low, having dropped to a low of 10.93 this morning before bounce back up for most the day. That had it dropping below the August 9th low at 11.02 and that was very near the top for the stock market prior to the current highs. The August high led to a decline into the November low. No fear with still relatively high bullish sentiment is a dangerous combination.

The bottom line is that we are heading into a bullish seasonal pattern but with weak trading volume (and therefore higher risk for some volatile moves) and potentially no more buyers after the strong rally, it could be a challenge getting much more of a rally out of this market. Some price patterns and sentiment are also telling us to be careful about expecting much, if any, further upside. Combining all of it together creates a potentially tough trading environment for both sides. Sitting tight and keeping your powder dry could be your best trade for the rest of the year. If long, tighten up your stops, and if you're itching to get short, wait for further evidence of a top since it remains possible, especially with low volume, that this blow-off rally could continue to go much higher than we think possible.

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

Holidays Have Begun

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Dow traded in a very narrow 37-point range until a closing dip raised that to 45 points. That was the narrowest range in 4 years. The reason was no volume. Even the sellers have closed up shop for the week.

There could always be a random program trade or somebody pulling the rip cord because of an internal headline but without some external force the market should remain dormant for the rest of the week.

As traders we should also remain dormant. There is no fundamental reason to try and force a new play when volume is only going to decline even further. Today's volume was 4.78 billion shares and tomorrow may be around 4.0 billion. Friday will be even less.

Tuesday is now my bet for Dow 20K.

This is not a trading newsletter. There is nothing I can recommend today that we buy for a potential 3-4 day gain and then exit. The odds of a gain the rest of the week are now a tossup. We should not trade unless there is a better chance of a longer-term move. Be patient. There is a buying opportunity ahead.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Going Nowhere Slowly

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets traded sideways nearly all day with the Dow in the narrowest range in 4 years until just before the close. The 37 point range lasted all day until a dip right at the close raised it to 45 points. The resistance at 19,965 held all day and there was not enough volume to push through. Only 4.7 billion shares traded.

There is no reason to try and enter new positions in this market with rapidly declining volume. We should avoid additional risk and limit our exposure until January.

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

HOV - Hovnanian Enterprises - Company Profile


No specific news. No movement.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Update 9/9/16: HOV reported Q2 earnings of zero compared to estimates for 6 cents. Revenue rose +32.6% to $716.9 million. For the full year the company guided to revenue of $2.7 to $2.9 billion and analysts were expecting $2.75 billion. The sold or joint ventured 21 communities to reduce their active selling communities from 214 to 193. This impacted revenue as the older communities were culled from the active business. They sold 1,467 homes in Q2 and slightly less than the 1,658 in the same period in 2015, also the result of selling some communities. Their order backlog rose 7.7% to $1.48 billion. There are 3,232 homes currently contracted to be built. They delivered 1,574 homes in the quarter, a +11.8% rise. After paying off $320 million in debt their cash position was $187.7 million. They acquired about 900 lots in the quarter in 20 different communities. They guided for a solid profit in the current quarter of $32-$42 million before some expenses including land acquisitions.

Update 12/9/16: HOV reported adjusted earnings of 20 cents on revenue of $805.1 million. Analysts were expecting 13 cents and $847 million. They paid off $320 million in debt in 2016 and raised their liquidity at the end of the quarter to $346.6 million. The CEO said we are now looking at opportunities for "expansion that will result in community growth and higher levels of profitability."

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long February $2 call @ 20 cents. See portfolio graphic for stop loss.

Previously Closed 10/17/16: Long HOV shares @ $1.86, closed $1.61, -.25 loss.

SMCI - Super Micro Computer - Company Profile


No specific news. No material move.

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.

BEARISH Play Updates

AKS - AK Steel - Company Profile


No specific news on AKS. The stock is now up +136% since the election.

Original Trade Description: December 17th.

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

The steel sector rallied on expectations for Trump to place additional tariffs on imported steel and make American steel more competitive. While I am all for fair trade changes, that is likely to take many months if not a year or more to implement any changes what will help the U.S. steel companies. It will be months or quarters after that before the changes actually begin to show up in the earnings of these companies.

Earnings January 24th.

AKS rallied from $4.93 before the election to $11.39 for a +131% gain. Shares faded somewhat last week but still closed at $10.38 on Friday. When the post election balloon bursts, this stock could decline significantly. I would expect that to happen in the first week in January. I definitely do not expect the stock to be making higher highs.

Position 12/19/16:

Short AKS shares @ $10.17. See portfolio graphic for stop loss.


Long Jan $10 put @ .69 cents. No initial stop loss.

FIT - FitBit - Company Profile


No specific news. New closing low. Research firm eMarketer said FitBit is in trouble because of rising inventory levels as sales growth in the sector continues to decline. The company is now predicting only 39.5 million users in the US compared to prior estimates for 63.7 million based on their latest survey.

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


Desd stop at resistance and closed at the low for the day.

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.

SHLD - Sears Holdings - Company Profile


No specific news. New closing low.

Original Trade Description: December 15th

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short before and excitement about the coming holiday shopping helped lift shares in early November. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is closer to bankruptcy today than they have ever been.

Last week they posted a GAAP loss of $748 million and an adjusted loss of $333 million. Gross margins fell to 19.2% compared to JC Penny at 37.2%. Sears is forced to severely discount items to attract what few shoppers they have. Same store sales at Kmart fell -4.4% and -10% at Sears. Revenue fell -12.5% to $5.0 billion.

Earnings March 9th.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand as planned will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Thursday and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in January once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

Update 12/19/16: Sears is desperate. They are offering a 20% discount on Sears.com this week if you pick up the merchandise at a store. The offer applies to apparel, jewelry, luggage, furniture, bed & bath, home decor and air mattresses.

Starting 12/21 coats are 60% off, up to 60% off women's boots, up to 75% off jewelry.

Starting 12/23 sleepwear is 60% off, watches 30%, Craftsman's tool sets 50% off.

Position 12/16/16:

Short SHLD shares @ $10.17, see portfolio graphic for stop loss.

No options recommended because of price.

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