Option Investor

Daily Newsletter, Saturday, 12/24/2016

Table of Contents

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

Market Wrap

T'was the Friday before Christmas

by Jim Brown

Click here to email Jim Brown

T'was the Friday before Christmas and all through the markets not a creature was stirring not even a mouse.

Weekly Statistics

Friday Statistics

Friday should have been a market holiday. Volume was minimal at 4.01 billion shares, down from the 7.6 billion average. The indexes started negative as the few remaining traders closed their positions and headed out for the holiday. The S&P traded in a very narrow 4-point range until just before the close when a minor uptick appeared to increase that range to 5 points. The Dow traded a narrow 28-point range until that final tick higher. The uptick at the close was probably short covering and positioning for Tuesday. The first trading day after Christmas is normally bullish and sometimes quite bullish.

Once the minor amount of economic news was over it was a very quiet day. The New Home Sales for November rose from an annualized rate of 563,000 to 592,000 and beat estimates for 575,000. That is a rise of 16.5% from November 2015. The Midwest region was the strongest with a 43.8% spike while the South was the only area that saw sales decline at -3.1%. The Northeast was flat and the West rose 7.7%.

The average price for a newly listed home was $250,000, up +1.6% from October. The median sales price was $305,400, a +0.9% gain.

Consumer sentiment for December rose from the initial reading of 98.0 to 98.2 and the highest level since January 2004. The internals keep improving with the number of respondents saying the economy will be better over the next year rising from 46% to 51% in just the last month. The present conditions component rose from 107.3 to 111.9 and the expectations component rose from 85.2 to 89.5.

Fewer people expect to lose their jobs and more people said they believe jobs are plentiful. Nearly two-thirds of respondents said their household finances have improved over the last several years and nearly half said they improved over the last year. Business owners who feel economic conditions are now favorable rose 11% to 42%. More than 79% of respondents feel like this is a good time to make a major purchase.

The post election honeymoon phase is about to come to a close. Once Trump takes office and his promises begin to bog down in Congress, the outlook by consumers will fade. Longer term the outlook will remain positive but the initial honeymoon bliss will fade with the arrival of reality.

One of those points of reality will be the GDP. Earlier in the week, the last revsion on the Q3 GDP came in at +3.5% growth. Trump has been talking about 4% to 5% growth. He may be able to generate that 2-3 years from now but the Atlanta Fed is only projecting 2.5% growth for Q4. When the actual Q4 GDP number is announced on January 27th, it could be a wake-up call for overly bullish investors. The economy is improving but not at the rate currently priced into the market.

The only important report for next week is the Richmond Fed Manufacturing Survey. The rest are just filler as the calendar year comes to a close.

In stock news, Deutsche Bank (DB) agreed to a $7.2 billion settlement with the U.S. Justice Dept over the sale of mortgage backed securities during the financial crisis. The starting price was $14 billion so the settlement represented nearly a 50% savings. The agreement is expected to be finalized in early January. This is just one of multiple problems facing Deutsche Bank. There is an ongoing probe for alleged manipulation of foreign exchange rates, another on a violation of sanctions with Iran and another for suspicious equities trades in Russia. Shares of DB are recovering after trading down to $11 in September.

Lockheed Martin (LMT) shares lost $3.20 after Trump said he asked Boeing to come up with a replacement for the F-35 fighter because of enormous cost overruns. Trump requested Boeing price out an equivalent F-18 fighter as an alternative to the F-35. Lockheed has nothing to worry about. Comparing the 5th generation F-35 to the 4th generation F-18 is comparing apples to oranges. The F-35 is a stealth fighter that relies on its invisibility to get close to opponents before they know they are there. It is a "penetrating" aircraft that can sneak behind a country's defenses. The F-18 is a great plane but it is a top of the line traditional fighter that does not have stealth capability. When matched against the new generations of Chinese and Russian stealth aircraft it would be a tough fight. In a recent exercise, a group of four F-35 planes entered a test range to practice evading ground to air missiles. The planes were so stealthy they were forced to turn on their transponders so the antiaircraft missile batteries could see them even though the ground controllers knew they were there.

The key is the price on the F-35 at roughly $120 million each today. Lockheed said it expected to drive down the price to $85 million by 2020 as volume production increased. More than 5,000 are expected to be built for the U.S. and 11 of its close allies. The U.S. will have 2,616 F-22s and F-35s when the final contracts are completed. I would be a dip buyer on Lockheed in January.

Portola Pharmaceuticals (PTLA) spiked 33% after they announced positive results for the oral drug anticoagulant betrixaban over the injectable drug Lovenox from Sanofi. The FDA and EMA sent an official acceptance notice to Portola along with a promise for a priority review. This drug is in the same class as the blockbuster $3.5 billion a year drugs Eliquis from Pfizer and Xarelto from JNJ.

Tesla (TSLA) rolled out an upgraded Autopilot system with a lot of new safety features and the stock gained $5 to a new three month high. The new features force speed limits on undivided roads but still allow up to 90 mph on divided highways. The Autopilot requires hands on the wheel when moving at medium to fast speeds. If the car senses the driver removing their hands more than three times in one hour the Autosteer feature will disconnect and will not resume unless the driver stops the car and restarts it. At speeds less than 8 mph drivers do not have to touch the wheel. They also revealed an Easter egg hidden in the Model X OS that will set off a light show to the tunes of Wizards in Winter by the Trans-Siberian Orchestra. There are other eggs that transport the user into a "Mars" experience. There is a new OS due out next week that will enable the car to go from 0-60 in 2.4 seconds. If you order a new Tesla by the end of December, Tesla will include free supercharging.

Amazon (AMZN) continues to dominate the holiday shopping season and I really mean dominate. Retail Metrics surveyed online purchases and said shoppers are transacting purchases from mobile devices in record numbers. Adobe Digital said Black Friday and Cyber Monday both saw more than $3 billion in online sales and "virtually every day since has been $1 billion or more."

Slice Intelligence surveyed 1.7 million online shopping receipts from Nov 1st through December 16th and found that Amazon was killing everyone else. Amazon raked in a 36.9% share of sales. Best Buy was number two at 3.9% so Amazon was selling 10 times what Best Buy was selling. Target was number three at 2.9%, Walmart at 2.7% and Macy's at 2.5%.

CNBC Chart

If you put off shopping for some items until after Christmas, now is the time. I had about a dozen items in an Amazon "saved for later list" and over the last week, prices for some of them have fallen more than 30%. The buying rush is over and the prices are dropping fast.

The winner in the package delivery business this season is the Post Office. At my house, we shop for a lot of kids, spouses, grand kids, nieces and nephews. As an Amazon Prime member with free shipping, my wife takes advantage of that to order several dozen $3, $5, $10 items for the kids. Last year UPS delivered at my house nearly every single day from Thanksgiving through Christmas Eve. This year, UPS only came once. The USPS came nearly every day and FedEx came about twice a week. The difference was amazing. I asked my UPS driver when he showed up this week if he was seeing the same pattern on everyone else. His truck was still full but it was mostly larger, heavier packages. There were very few of the small junk size packages. He was pleased saying he was actually getting done at a decent time every day instead of working late into the night.

For investors that suggests a potential problem. With UPS shipping fewer packages but those packages having a higher average weight, did that increase profits or decrease profits? UPS was expecting to ship between 700-750 million packages and FDX 350-400 million.

Also, a problem is the Amazon cargo service. Amazon is now operating 40 "Prime Air" cargo jets on daily runs from shipping centers to regional distribution centers. They still use UPS, FedEx and USPS for the last mile delivery but they are taking away the long haul business from those delivery services. Also, they are carrying the larger, lighter boxes on the planes to avoid the move by UPS and FDX to charge by volume instead of weight. A case of paper towels does not weight much but it takes up a lot of space so those services charge more. By carrying the lighter packages, there is also less wear and tear on the planes. FlightAware said analysis of cargo, capacity and landing data from four airports showed that Prime Air planes were carrying between 37% to 52% of their maximum loads by weight.

Analysts were upgrading FedEx last week and keeping UPS at a hold in some instances. Several analysts had tried to determine what impacts this was having on revenue for UPS and FDX but were unsuccessful. They did decide from the research that Amazon was going to need a lot more planes as they grow past the current learning curve and expand their flight base to more than the 10 cities they are currently serving. Analysts believe the investments that weighed on earnings will help FDX in 2017.

FedEx missed on earnings last week and fell $10 from its recent highs. UPS does not report earnings until January 31st. They are expected to report $1.68 per share.

While most stocks and indexes were dormant on Friday, the biotech stocks were surging. The Biotech Index ($BTK) rose +2.3% on no specific news. There were some positive drugs results throughout the week but the index closed at two-week lows on Thursday. That may be the reason for the rebound. Investors are probably looking for something that has already sold off in hopes the trend will reverse and biotechs rise in January. The Biotech ETF (XBI) rallied 3.5%.

Crude prices continue to hover in the $52-$53 range while we wait for any potential OPEC production cuts to occur in January. Libya announced the reopening of the pipelines from the Sharara and El Feel fields and their intention to add 270,000 bpd to production over the next three months. Libya and Nigeria are exempt from production cuts. U.S. inventories rose +2.5 million barrels and that was unexpected. Inventories do not normally rise in December because refiners have to pay taxes on the oil in inventory on December 31st. Imports rose +1.11 million bpd last week to 8.47 mbpd and that was a nine-week high.

Refiners are trying to push as much refined product into the system as possible with 21.41 mbpd supplied last week. That was a multi-month high. Refinery utilization rose to 91.5% and that was also a post summer high showing they were running as fast as possible to turn the oil into refined products and pushed into the pipelines.

Also weighing on future prices was the government decision to sell 190 million barrels from the Strategic Petroleum Reserve starting in January. This was part of a budget deal where lawmakers agreed to sell the oil to pay for some budget expenses.

Producers activated another 16 rigs with 13 new oil rigs and 3 new gas rigs. The offshore activity also increased by 3 rigs to 25. The higher OPEC pushes prices, the faster U.S. producers are going to activate rigs.

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High-frequency trading accounted for 57% of the December average trading volume of about 7.56 billion shares. That means on average only 3.63 billion shares were traded by retail and institutional traders every day. The peak for high-frequency trading came in 2009 when about 61% of the 9.8 billion share daily average was computers or 5.98 billion shares per day.

Overall trading volumes have slowed significantly as baby boomers drift out of the market and younger workers never got into the investing marketplace. Active mutual funds have declined to about 4,500 and less than half of their prior peak. Retail investing has shifted in a large part away from day trading or swing trading and back into a buy and hold mentality because the market has moved mostly higher for the last seven years. The current economic expansion is the third longest in history and on its way to be the second longest. Recessions have not been legislated away but investors have forgotten their regularity. More than likely, there will be one in the first four years of the Trump administration.

At the same time there are analysts calling for Dow 23,000 to 24,000 in the next couple of years. Since Dow 23K is only a 15% rally from here that is easily obtainable. The next major milestone we will face is Dow 25K or 25% from our current location.

Analysts are rapidly updating their 2017 forecasts in light of the recent rally. These are the highest estimates on the street today.

2,300 Bank of America
2,350 Credit Suisse
2,400 JPMorgan
2,400 Barclays
2,424 Piper Jaffray
2,500 RBC Capital Markets

If any of those targets come true, buying some January 2018 SPY calls on a dip to 2,200 on the S&P could be a profitable trade. Unfortunately, they are expensive.

The S&P closed at 2,263 and my target for a January decline is 2,190 to 2,200. We are likely to get another bump higher early this week but then a fade into Friday on the pension fund rebalance. January could be a challenge but there are a lot of buyers waiting for the dip. I do believe we will trade significantly higher in 2017 but not without a pause for profit taking ahead of the inauguration.

The S&P traded flat all day but spiked from 2,261 in the last several minutes of trading. This was more than likely short covering ahead of an expected rally on Tuesday.

The Dow traded negative most of the day on Friday but spiked 17 points in the last several minutes of trading to end with a 15-point gain. UnitedHealth was the motivating factor and the only stock to move more than $1 for the day.

I expect the 20,000 level to be hit on Tuesday. The animal spirits tend to run on the first trading day after Christmas. That could easily be a sell the news event because of the pension fund rebalance later in the week. (See the Random Thoughts section)

The Nasdaq has been moving sideways in a tight range for two weeks with short term support at 5,425. The index is more than likely going to break support at 5,400 and has risk to 5,240. All of the FANG stocks were negative on Friday until right at the close when NFLX rebounded slightly to close with a penny gain.

The Russell posted two large declines on Wed/Thr and only a minor rebound on Friday. A break of short-term support at 1,355 could quickly drop to 1,310 and even fall below 1,300. The small caps have the biggest risk because of their limited liquidity. If funds need to exit in a hurry, the volatility can be significant.

Despite the market holding near its recent highs, Lipper said investors pulled $21.6 billion out of equity funds over the last week. This was the 41st consecutive week of fund outflows from stock mutual funds. Even ETFs saw fund outflows as investors positioned their portfolios for the coming tax bill.

I expect a positive market on Tuesday and a negative market on Thr/Fri as pensions funds rebalance and short sellers position themselves for a potential January decline. Investors that have been holding off on selling for tax reasons will be free to liquidate. Funds that have been holding on to gains waiting for 2016 to end, will be free to sell. Investors worried about a potential terrorist event surrounding the inauguration will also be moving to cash. If there is an early January rally, it will be one of the most unexpected events in recent memory.

I do expect any correction to be limited because there are so many people waiting for a buying opportunity. We will be buying any dip in anticipation of a Feb/Mar rally.

I would refrain from being overly long into year-end and I would definitely keep my stop losses in place.




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Random Thoughts

When the market did not self-destruct last week, the bearish investors started to gravitate back to neutral. Bullish investors remain undeterred but nobody joined them. This survey ended on Wednesday.

Last week results

Pension Fund Rebalance

When bonds or equities suddenly surge an abnormal amount in a given quarter the pension funds typically rebalance their fund ratios at the end of the quarter because they are required to maintain certain ratios in the fund. With the market up very strongly since the election and bonds down an equal amount there is going to be a "near record" rebalance at the end of December.

Reuters surveyed 45 fund managers and CIOs and found that equity holdings rose to six-month highs as a result of the post election rally. Credit Suisse warned this imbalance could result in $38 billion in equity sales by month end and possibly as much as $58 billion.

Since the election, the value of global stocks has risen by about $3 trillion and bonds/treasuries have declined by a similar amount. Pension funds have strict asset allocation quotas and this sudden imbalance has to be corrected at the end of the quarter. Credit Suisse said pension funds could buy $22 billion in bonds as they take profits in equities. source

Another reason the U.S. markets are primed to move higher in 2017 is the capital flight out of the Eurozone. According to the Wall Street Journal, investors have withdrawn $550 billion from Europe in 2016 and the largest amount of capital outflows since the Eurozone was created 17 years ago. Investors are fleeing negative yields and the uncertainty of Brexit and the potential for other countries to follow Britain's lead. This has driven the Euro lower to near parity with the dollar and reduces Europe's buying power. Add in the banking crisis in Italy and a populist revolt against multiple European governments and that makes the U.S. a safe harbor for European investors. Most of that money has already been put to work in the U.S. but there are continued outflows from Europe that will boost the U.S. markets in 2017.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The market does not trade upon what everybody knows, but upon what those with the best information can foresee."

William Hamilton


New Plays

Making a List, Checking it Twice

by Jim Brown

Click here to email Jim Brown
Editor's Note

Everybody knows that famous Christmas song but it is also true in the market. I am making a long list of potential positions for a buying opportunity in January and definitely checking it more than twice. However, until that buying opportunity arises we should remain in cash on the sidelines. We already have four short plays to capitalize on any decline.

As traders, we should also remain dormant. There is no fundamental reason to try and force a new play when volatility next week could be very high as a result of the pension fund rebalancing.

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

Just Passing Time

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is just passing time while we wait for the holidays to be over. There was a small uptick in the indexes right at the close which was probably short covering. The first trading day after Christmas is normally bullish but the week is typically mixed with the last two days of the year impacted by short sellers positioning for January.

There is no reason to try and enter new positions in this market. 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

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BULLISH Play Updates

No Current Bullish Plays

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


Only as minor rebound from support.

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. Moody's and Fitch both believe Sears will eventually file bankruptcy. January is the biggest month for retailer bankruptcies.

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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