Option Investor

Daily Newsletter, Tuesday, 12/27/2016

Table of Contents

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

Market Wrap

Dow Resistance Held

by Jim Brown

Click here to email Jim Brown

The Dow traded to within 20 points of 20,000 but failed again to reach that level.

Market Statistics

Close only counts in horseshoes and hand grenades but the Dow has been close to 20K multiple times over the last two weeks. Each time that distribution resistance from 19,950 to 19,975 was hit we saw volume increase immediately and the index was unable to sustain its momentum.

There is an interesting pattern forming where the Dow continues to post higher lows. If this were a normal market without an imminent change in the calendar, I would be predicting a strong breakout ahead. The higher lows means traders are buying the dips at a higher level each time. It may also be a function of portfolio managers continuing to window dress their winning stocks in hopes of ending the year at the highs. This higher low pattern is making it more likely a touch of 20K could be the final buying climax for 2016.

The economic reports were bullish with the Consumer Confidence for December surging more than 4 points from 107.1 to 113.7 and the highest level since August 2001. Analysts were only expecting a rise to 108.5. After a 9-point spike in November to 132.0 the present conditions component declined to 126.1. The expectations component rose from 94.4 to 105.5 and the highest level since December 2003. Those respondents expecting business conditions to improve shot up from 16.4% to 23.6%. Those expecting more jobs rose from 16.1% to 21.0%.

The percentage of respondents planning on buying a car rose from 12.8% to 14.3%. Potential homebuyers declined from 6.8% to 6.5%. Appliance buyers rose from 51.0% to 52.3%.

The Richmond Fed Manufacturing Survey for December rose from 4.0 to 8.0 and well above the -11.0 low back in August. The index has only posted back-to-back positive numbers twice in 2016. New orders rose for the second month and backorders ended a four-month string of declines. Manufacturing in the U.S. is facing a short-term headwind with the dollar at 14-year highs. This is going to pressure revenue and earnings in the months ahead.

In the separate services survey the headline number barely improved from 3 to 4 and remains well below the September high at 13. Excluding retail the number fell to -1. Retail employment fell from +10 to -6 for December.

The Texas Manufacturing Outlook Survey for December improved from 10.2 to 15.5 and the highest level in more than a year. New orders rose from -1.4 to +7.3 but backorders declined slightly from -2.5 to -2.9. Employment also declined from 4.5 to -2.9.

The calendar for the rest of the week is lackluster and after Wednesday, there will be no traders around to pay attention to the reports. The street is already working with a skeleton staff after setting up their positions for yearend over the last couple of weeks. Anyone left on a trading desk is just trying to avoid any disasters for three more days.

The Santa Clause rally is running out of steam. The Santa rally has fallen on its face despite the new record on the Nasdaq today. The Santa rally is the last five trading days of the year and the first two days of next year. Santa may be down but he may not be out. I expected the Dow to tag 20K on Tuesday but it fell 20 points short. There were no Dow components with a change of more than $1 either positive or negative. Apple, Goldman, IBM, United Technology and Caterpillar were the biggest gainers and the keyword there was gainer. The components are continuing to tick up slightly with 21 closing positive for the day. We still have a possibility of hitting 20K on Wednesday but a failure tomorrow should end the possibility for 2016.

The pension fund rebalance for the end of December could see between $38 and $58 billion in equities sold according to Credit Suisse. Stocks have rallied so much since the election the pension funds have to sell stocks and buy bonds to bring their mandatory ratios back into balance. That suggests Thr/Fri should have a negative bias. Normal volume will be very low so that means even $38 billion in fund selling could have a significant impact.

Stock news today was negligible because of the holiday impact. After the bell, Delta said it had reached an agreement with Boeing to cancel a $4 billion order for 18 model 787 Dreamliners. The airline had assumed that 2005 dated order when it merged with Northwest in 2008. Delta said it would continue to take deliveries of 737-900ER aircraft through 2019 as they complete two orders for 120 aircraft. No agreement terms were released. Boeing still has almost 1,200 orders for the 787 aircraft with a list price of $225 million each. Boeing shares did not move in afterhours and Delta shares rose about 50 cents.

Iran was making headlines this morning after it said it had negotiated to pay only half of the announced $16.6 billion price. Boeing is selling (50) 737 Max 8s, (15) 777-300 ER and (15) 777-9s to Iran Air. Iran's official news agency, IRNA, had a quote from the country's deputy transport minister saying "given the nature of the order and its options, the purchase price for the 80 jets was approximately 50% of the list prices. Boeing typically discounts from the list price for large orders but numbers are never revealed. Airbus will supply 100 jets for a value of $18-$20 billion but the head of Iran Air said the contract value would not exceed $10 billion. Boeing said the Iran deal would support more than 100,000 jobs in the USA. It still has to pass Congress and gain presidential approval.

The biggest gainer on the Nasdaq for 2016 remains Nvidia. This mammoth gainer has risen from $33 to $117 in 2016 for a +255% gain for the year. The stock shot up another $7.50 today after being added to Goldman's "Conviction Buy" list last week. Shares continued to rally another $1.20 after the close to $118.50. Most people do not understand how Nvidia is revolutionizing the chip sector. This is the Intel of this decade. There will be a dip in January and everyone should buy it.

Tesla (TSLA) and Panasonic announced the completion of an agreement to begin manufacture of solar cells and modules at Tesla's factory in Buffalo, New York. The agreement will create 1,400 jobs. Production will begin in 2017 and rise to 1 gigawatt of panels per year by 2019. Panasonic will invest $256 million on the acquisition and installation of production equipment. The two companies are already building a $5 billion gigafactory to manufacture batteries in Nevada.

It was not a good holiday for the toy companies. One research report showed toy sales were down -9% for the six-week shopping period before Christmas. Not only were toy sales lousy, a couple of big sales winners turned into big disappointments. Mattel's Hello Barbie Dreamhouse is an application and voice controlled version of the regular Barbie Dreamhouse. Unfortunately, there were numerous communication problems using WiFi and Mattel was deluged with complaints.

The biggest disappointment was the Hatchimals from Spin Master. Animals are supposed to hatch from a plastic egg and the toy was in very high demand during the shopping season. The $59 retail item sold for as much as $250 on Ebay. However, many of the toys had defects and refused to hatch and batteries ran down almost immediately. The company was not answering the phone because of the volume of complaints. The "all agents are busy" greeting never went away. Twitter users were bombarding social media with complaints.

Seattle Genetics (SGEN) shares fell -15% after the FDA placed a hold on several early stage cancer drugs after six patients developed liver toxicity and four patients died. One trial was placed on full clinical hold and two-phase one trials were placed on partial clinical hold. No new trials can be started until the existing holds are removed.

Disney (DIS) shares were flat after news that Carrie Fisher, age 60, had died of a heart attack. Her Princes Leia character had just been rebooted in the latest episode of Star Wars. Fortunately, for Disney the filming for the 2017 release of Episode VIII had already been completed. That means the character will continue at least through 2017. She was also slated to be in the next episode due out in 2019 but filming had not begun. Under a 1985 California law a studio must get permission from the actor's estate to use their image for up to 70 years after a death. Fans are already discussing whether she should be given a glorious on screen death at the end of the 2017 episode or as some have suggested singer Stevie Nicks could take her place. The two have a similar appearance.

Carrie Fisher

Stevie Nicks

The Amazon Echo device has revolutionized many areas in the lives of users. However, after the death of one user, law enforcement agencies are demanding the voice records of the conversations held in the room of the deceased user. The Echo is always listening just in case someone wants to play a song, change the thermostat temperature or reorder some item from Amazon. This amounts to a voice recorder in the room that is always on. Amazon has already released some data and the users purchase history but they are refusing to release the voice transcript without a "valid and binding legal demand properly served on us." Amazon routinely rejects "overboard or otherwise inappropriate demands as a matter of course." The Echo device was so popular they sold out well before Christmas and are not available again until late January. Amazon helped power the Nasdaq to a new high on Tuesday.

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The Nasdaq made a new record high and briefly punched through the 5,500 level. However, all the indexes finished well off their intraday highs. Volume was very light at only 4.1 billion shares and that is likely to decline except for the potential increase from the pension fund rebalance selling on Thr/Fri. Wednesday is a tossup because the news of the pension selling is so widespread we could see traders begin to short into that move on Wednesday.

The futures are mildly positive tonight but there is a lot of darkness before morning. If the Dow were to spike again at the open and tag that 20K level, I really believe it would be ringing the bell at the market top. If it does not happen on Tuesday, it could be many weeks before we get another chance.

The S&P hit resistance at 2,270 once again. That is the fifth time in the last two weeks and each time resulted in selling. Support is 2,250 and then a long drop to 2,190.

The current Dow pattern over the last two weeks is bullish in a normal market. The Dow is wedging up to resistance at 19,975 with a pattern of higher lows. However, even if we did get a breakout at this level, it is likely to be short lived once the calendar rolls over. The top seven Dow gainers since the election, GS (+65), JPM (+19), UNH (+25), TRV (+17), HD (+15), BA (+15) and IBM (+15) have accounted for 1,171 of the Dow's 2,062 points. Goldman alone has added 445 Dow points. Most of those stocks are very overextended and should correct significantly once we hit January. With only 7 stocks accounting for 57% of the Dow's post election gain, the odds are very good those same 7 stocks are going to account for a lot of the potential loss in January.

I know it is hard for anyone to believe the market is going to roll over soon since it is not showing any material signs of weakness other than distribution at the recent highs. If the Dow does not give back 1,000 points, I will be shocked. However, I have been shocked before and I am sure it will happen many more times.

The Nasdaq Composite and the Nasdaq 100 both broke out to new highs on the strength of big cap techs. Apparently, there is some money already rotating back into the tech stocks and they had been the laggards. The Composite index collapsed back -25 points from the intraday high to close right on that prior resistance level at 5,485. The Nasdaq 100 surged to almost 5,000 before falling back -27 points to close at 4,965. It was a good day for the tech indexes.

The Russell 2000 had a decent day but failed at downtrend resistance at 1,380. The small cap index is lagging to some extent and a break below 1,350 could trigger a strong sell cycle.

I hate to sound like a broken record but the market is at a key pivot point. Volume is weak, resistance is strong and time is running out on the calendar. Wednesday could be our last chance to hit Dow 20K before the pension fund selling appears. I would continue to recommend not initiating new long positions until January. There is no compelling need to be long the market. There is always another buying opportunity in the future.



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New Plays

Nothing Changed

by Jim Brown

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Editor's Note

The indexes closed positive and the Nasdaq at a new high but nothing changed. The market is still headed for a significant volatility event at some point over the next ten days and there is no reason for us to be entering new positions today. We already have three short plays to capitalize on any decline.

This is not a trading newsletter. There is nothing I can recommend today that we buy for a potential 2-3 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

Dow Compressing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow failed at resistance again but now has a strong pattern of higher lows. In any normal market without a calendar change ahead, this would be a bullish formation suggesting a major breakout ahead. In this market it shows that resistance is still strong and portfolio managers are still window dressing their positions in hopes of exiting 2016 at the highs.

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

FIT - FitBit
The short position was stopped out at $7.75.

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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


FitBit withdrew a suit against rival Jawbone saying the company was fading fast and there was no reason to continue spending money on a suit against Jawbone. FIT said "Jawbone no longer offers any of its wearable activity trackers nor any of its other products." FIT said from Jawbone filings it appears to be in default and pending bankruptcy. The news caused a 7% spike in FIT shares to stop us out for a minor gain at $7.75.

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:

Closed 12/27/16: Short FIT shares @ $8.18, exit $7.75, +.43 gain.

Closed 12/27/16: Long Feb $7 put @ 50 cents, exit .45, -.05 loss.

IWM - Russell 2000 ETF - ETF Profile


Only a minor rebound and still well below resistance.

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 -2,150 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 14-year low. Volume of 2 million shares was twice the normal 900,000 shares.

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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