Option Investor

Daily Newsletter, Thursday, 12/22/2016

Table of Contents

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

Market Wrap

Santa Stalls Out

by Thomas Hughes

Click here to email Thomas Hughes


The Santa Rally may still be on, but not today. Today the indices retreat from yesterday's close to continue consolidating at all-time highs for the 10th day in a row; price action today was not bullish, price action over the past 2 weeks is looking more like continuation every day.

The day started quietly, global indices holding more flat than not in thin holiday trading. Asian indices closed mix, one up and one down, although moves were less than a tenth of a percent in most cases. The one standout was the Hang Send which lost a little more than -0.80%. In Europe action was much the same although yesterday's news from the Italian banking sector added a bit of volatility. The good news, at least in the short term, is that the Italian government is set to bail out ailing bank Monte dei Paschi di Sienna.

Market Statistics

Futures trading was muted, action light as volumes begin to dry up ahead of the holiday. A raft of economic data, a bit weak in most cases, was not able to move the needle during the pre-opening session. Action at the opening was mildly bearish. The indices opened with small losses, dipped a bit lower, and then proceeded to trend sideways for the first half of the day, bouncing off the early low just after 12 noon. Afternoon trading saw the indices move within the early range, closing off of the lows and just below current all time highs.

Economic Calendar

The Economy

Lots of data today starting off with the final revision of 3rd quarter GDP. GDP was revised higher, more than expected, to 3.5%. This is the fastest level of growth for the US since the 3rd quarter of 2014. Some economists have already begun to say it is a peak and that the growth spurt is already petering out. This may be true in the near term, 4th quarter and/or 1st quarter GDP may not be as strong but the outlook for next year is on the rise. The Conference Board upped their 2017 target by 30 basis points simply based on positive outlook tied to Trumponomics.

Initial claims for unemployment gained 15,000 this week, well ahead of expectations, to hit 275,000. This is the highest level of first time claims in nearly 8 months but more likely due to seasonal volatility in the market rather than a change in labor fundamentals. The four week moving average of claims rose by 6,000 to 263,750. Last week's data was not revised, this is the 94th week of claims below 300,000. On a not adjusted basis claims rose by 3.4% versus an expected decline of -4.6%. Despite the miss not adjusted claims are down -1.2% over last year and remain consistent with ongoing labor market improvement.

Continuing claims for unemployment rose by 15,000, on top of an upward revision of 3,000, to hit 2.036 million. The 4 week moving average of claims fell, counter to this weeks gain continuing claims, to hit 2.037 million. Despite the mixed numbers, continuing claims remains near the long term low and consistent with ongoing labor market health and improvement.

The total number of claims fell, as expected, by 78,930 to hit 2.038 million. On a year over year basis total claims are down -9.6%. These declines are in line with seasonal trends and long term improvement with the labor market. All in all, this week's labor data is consistent with both seasonal hiring/firing trends as well as long term labor market recovery. Looking forward we can expect to see initial, continuing and total claims all spike to seasonal highs in the next few weeks, peaking in early to mid January, and then fall off into the spring time hiring season.

Durable Goods orders fell -4.6% in November, slightly more than expected. The drop reverses the 4.8% gain seen in October, all October data points having been revised higher. The November decline is also the first drop in orders in the last 5. Within the report data shows that shipments increased by 0.1%, unfilled orders fell by -0.2% and inventories rose by 0.1%. Ex-transportation durable orders rose 0.5%, transportation itself falling more than -13%. Ex-defense durables rose 6.6%. Picking this apart, it looks as the core portion of the economy saw an increase in orders while autos/transportation and defense spending both fell. While a bit weak, this report does have a silver lining. The transportation figures are seasonal and Trump is going to increase defense spending so there is a good chance we'll see the durables figures rise in the coming year, so long as the core economy remains healthy.

The Conference Board's Index Of Leading Indicators was unchanged in November. This follows a 0.1% gain in October and a 0.2% gain in September. The Coincident Index rose by 0.1%, the Lagging Index rose by 0.3%, both consistent with positive momentum in the underlying economy. Conference Board economists say that the readings are consistent with an expending economy and one that will continue to grow into the first half of 2017, although an acceleration of growth is expected at this time.

Personal Income was basically flat in November, rising less than 0.1%. Disposable Personal Income fell by less than -0.1%. The PCE came in at 0.2%, showing modest growth in spending. On a year over year basis PCE prices are running at a rate 1.4% above last year, 1.6% ex-food & energy, well below the Fed's target rate for inflation but the 5th month of rise and up a full half percent over the last 5 months. Inflation is still tame but if it begins to front run the FOMC we could see them get more aggressive with interest rate hikes.

The Dollar Index

The Dollar Index held it's ground today. The data dump did little to boost dollar bullishness but also did little to dampen it. Near term, economic growth may have slackened, longer term growth is still in the cards and by many accounts likely to be stronger than current estimates. The question is just how strong and we won't know that until the data comes out. Until then the dollar is still in uptrend and supported by economic outlook and FOMC expectations. Today the index created a small doji hammer, reconfirming near term support at the $102.50 level. The indicators are mixed, MACD is showing a peak in momentum that could turn into divergence while stochastic is indicating strength with a crossing of the upper signal line. Together these signals are consistent with consolidation that could lead to a continuation of near term trends. A drop below near term support could take the index down to stronger support, near $101 or $100.50, a break to new highs could carry the index on up to my target of $105.

The Oil Index

Oil prices moved higher today but did not make new highs. The price was supported by today's data which, along with the OPEC price fixing deal, helped to improve supply/demand outlook into next year. WTI settled with a gain near 1%, just shy of $53, and may remain at these levels into the indefinite future. Also supporting prices is the onset of cold weather, a development which should lead to increased consumption of fuel oils, kerosene and natural gas.

The Oil Index made small gains in today's session, 0.34%, but the candle is the 5th small bodied candle in a row at this level. Price action over the past 2 to 3 weeks has been consistent with consolidation at/near new highs with support in the range of 1,275 to 1,280. The indicators are both bearish in the near term, consistent with consolidation and/or a peaking market, while bullish in the short to long term. Both indicators are convergent with the current long term high which suggests that the market is strong and that prices will move higher from here, or at least retest current highs if a sell-off were to take place. Long term outlook for the sector, robust earnings growth in 2016 and that I think will lead to a cycle of dividend increases that together will drive this sector higher. My upside target is 1,350 near to short term, 1,450 to 1,500 short to long term.

The Gold Index

Gold prices wavered a bit but held steady near $1,130 while the dollar tested it's support in today's session. Gold is under the pressure of a rising dollar and while inflation remains tame is not attracting much support. I am bearish on gold until something changes including but not limited to a rise in inflation, a change in central bank policy from the ECB, BOJ, both or a combination of all three. Downside target is $1,100 with a possibility of moving down to a full retracement of the 2016 bull market in gold.

The Gold Miners ETF GDX is echoing the moves of the underlying commodity. The ETF held flat in today's session, the 6th day at this level and below the 61.8% retracement level, with a definite bearish bias. The indicators are bearish and suggesting a continuation of the 5 month down trend. Next target is near $16.50 and the 78.6% retracement level with a chance of full retracement to $12.25. Resistance is at $20 should the ETF make move higher.

In The News, Story Stocks and Earnings

Conagra reported earnings before the bell and they were good. The company, which has been in the process of divesting weaker brands, was able to beat top and bottom line expectations, expand margins, and grow EPS over the same quarter last year even without the inclusion of brands sold over the past 12 months. At the same time the company was able to reaffirm guidance to a range around the consensus. Shares of the stock jumped 3.3%, creating a tall white bodied candle with shaven top, to close at a new all time high.

Rite Aid reported earnings before the bell and missed on the top and bottom lines. The company, which is being acquired by the Walgreen's Boots Alliance, saw EBITDA fall more than 33% to $274 million. The main reason cited for the decline is a difficult operating environment due to the extended duration of the merger process. The company says performance was solid despite the headwinds. Investors did not agree, shares of the stock fell more than -1% in the pre-opening session.

Cintas reported earnings after the bell and surprisingly did not meet expectations. The caveat is that expectations were quite high and results were strong with top line growth of 6.4% over last year, 5.7% organic. Along with growth comes an improvement of gross margins of nearly a full percent, EPS nearly 10% to $1.13 including a $0.02 impairment charge related to a recent acquisition. The only thing bad about the report is that EPS and revenue did not grow quite as much as expected, which in the end is providing a cheaper entry to a solid growth name and dividend payer. Shares fell more than -3% on the news to trade near potential support of $115.

The Indices

The indices continue to churn at levels just below current all time highs. Today's action is consistent with holiday trading, low volumes and meandering price action, and yet also fits into a pattern of consolidation within the current rally that suggests continuation is on the way. All indices closed with a loss today, the Dow Jones Transportation Average is the leader with a decline near 0.80%. The transports created a small bodied black candle and set a new 3 week low, if barely. Even with the new low today's close is above 9,148 and the bottom of the long white candle which formed with the break to new all time highs. With that in mind action over the past few weeks looks like a flag pattern in formation, a sign of continuing near term trends. The indicators are still bearish so further testing of support, near 9,150, could happen. A break below support would be bearish, next target near 9,000. A move higher would confirm the flag pattern, with upside target near 10,000 in the near to short term.

The NASDAQ Composite made the next largest decline, about -0.50%, and created a small to medium sized black candle. Today's action is well within the range set over the past few weeks, just below the current all time high. The indicators are consistent with a peak within an uptrend and may be signaling a pull back to stronger support or deeper correction through divergence, MACD, and bearish crossover, stochastic. Current support is near 5,400, a break below here would be bearish in the near term. Resistance is the all time high, a break above here would be bullish in the near term and a continuation of short term trends.

The S&P 500 made the third largest decline, about -0.30%, and created a small spinning top candle. Today's action was neutral and the 10th day of consolidation above 2,250, the longer the index stays above this level the better. Price action is forming a small flag pattern, a sign of continuation, although the indicators have yet to roll over. At this time the indicators are consistent with a peak within an uptrend and suggest that support will be tested. Support is 2,250, a break below here would be bearish in the near term with a target near the short term 30 day moving average. A move higher would be bullish and a continuation of the near term trend with upside target of 2,300 near term and 2,500 near to short term.

The Dow Jones Industrial Average posted the smallest loss in the session, only -0.12%. Today's candle is a small white bodied candle, within the 3 week consolidation range, with upper shadow capped by the current all time high. Price action indicates near term support near 19,700 and resistance just shy of the elusive 20,000 level with indicators consistent with a strong rally, but one that is running out of steam. Current indications are consistent with a pull back to support, a break below 19,700 would be bearish in the near term, a move up to 20,000 and beyond bullish.

The indicators are in consolidation and winding up for their next move. The signs are not definitive but are certainly biased toward the bullish case, all we need now is for the move to occur. Tomorrow, with the onset of the holiday and the three day weekend, we may see near term support get tested and maybe even broken. The real moves won't come until next week, and more likely the week after that when the new year starts, so any weaknesses that occur now or over the holiday week are likely buying times for investors looking to get long for 2017. I'm bullish in the near and long term, still a bit cautious for the short, and getting more and more exited for 2017. The way things are looking for next year, earnings growth and economic growth, I just don't see any reason to sell and every reason to expect a continuation of the long term secular bull market. The risk of course is that there is a reason to sell, and I just don't see it.

Until then, remember the trend!

Thomas Hughes



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New Plays

Holiday Volume

by Jim Brown

Click here to email Jim Brown
Editor's Note

Today was the last day for decent volume. Friday will be a graveyard.

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.

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. We should not trade unless there is a decent chance of a longer-term move. Be patient. There is a buying opportunity ahead in January.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Small Caps Leading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap stocks led during the rally and now they are leading on the decline. The Russell 2000 posted nearly a 1% decline while the other major indexes were falling only fractions of a percent. The Dow declined only -0.1%. The reason is clear. When we hit January, if portfolio managers all bail out of positions at the same time, those holding low volume small caps would see big losses. They are more than likely trying to ease out of some small cap positions this week in order to beat the rush.

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

HOV - Hovnanian Enterprises
The long call was stopped at $2.79.

SMCI - Super Micro Computer
The long position was stopped at $28.25.

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

Short term Calls and Puts on equities = Option Investor Newsletter

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. I kept raising the stop loss in order to take us out before a potential January decline and we were finally hit on today's drop. The rally in HOV has been too strong to go much longer without profit taking.

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

Closed 12/22/16: Long February $2 call @ 20 cents. Exit .75, +.55 gain.

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

SMCI - Super Micro Computer - Company Profile


No specific news. A 3% decline in a weak Nasdaq hit our super tight stop. When SMCI could not break through that resistance at $29 I kept raising the stop loss to take us out on the next dip.

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

Closed 12/22/16: Long SMCI shares @ $29.25, exit $28.25, -1.00.

Closed 12/22/16: Long Jan $30 call @ 80 cents, exit .50, -.30

BEARISH Play Updates

AKS - AK Steel - Company Profile


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

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.

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.

Update 12/21/16: ;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.

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


Dead stop at support and closed near 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. Rumors circulating that Sears will announce the closing of a large number of stores in January.

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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