Option Investor

Daily Newsletter, Thursday, 1/5/2017

Table of Contents

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

Market Wrap

Almost, But Not Quite

by Thomas Hughes

Click here to email Thomas Hughes


The Dow came within spitting distance of 20K yet again, and backed away, again, while a wave of Trump-Tweets washes over the market. The President-Elect took aim at Toyota and the proposed Time Warner/ATT merger today, tweeting that Toyota would face penalties if it moved ahead with its plans to build a facility in Baja, Mexico with the intention of shipping cars into the US. No comments from Toyota yet, I will not be surprised if the company changes its mind and builds in the US instead. Other news moving today's market is important employment data, and anticipation for tomorrow's release of NFP, Unemployment and Hourly Earnings.

International markets were pretty quiet. Asian indices closed flat and mixed with one exception. The Hang Send gained more than 1%. European indices were much the same, flat but mostly positive after a choppy session.

Market Statistics

Futures trading was fairly quiet this morning, indicating a relatively flat if slightly negative open for the indices. This held throughout the morning, with a little chop, with little to no movement around the release of today's data. The open was calm, the indices fell a tenth of a percent in the first few minutes, regained that, held near break even for the next hour and then proceeded to move down to test near term support. Support was found, within near term ranges and just below all time highs, just before lunch and sent the market drifting back up toward break even.

Economic Calendar

The Economy

It's the first week of a new month, new quarter and new year which means the last round of major monthly employment data for 2016. First up is the Challenger, Gray & Christmas report on planned layoffs. The number of layoffs planned in December jumped 25% month to month and 42% YOY but remains very low relative to recent trends. The December total is below the 2016 monthly average of 43,910, the 12/2015 figure was a 15 year low so a bounce back is not unexpected, the Q4 2016 total is the lowest quarter since Q2 2000 and the 2016 total is 12% below 2015. Layoffs this year were led by energy, computers and retail. The energy layoffs were mostly in the first half of the year and have fallen off to near 0 since then. Computer layoffs are due to restructuring and can be primarily attributed to Microsoft and Hewlett Packard. The retail layoffs have been due to restructuring but based on some other news today may accelerate in the first half of 2017.

ADP figures were released today instead of on Wednesday as is usual due to the Monday New Year Holiday. ADP says that non-farm payrolls increased by 153,000 in December, revising November lower by -1,000. Medium and large size businesses led, as did gains in the services sector. The good producing sector saw a decrease in jobs of -16,000. Within services Trade And Transportation led with a gain of 82,000 new jobs, followed by Financial, Education and Leisure which added a combined 71,000 new jobs.

Initial claims for unemployment benefits fell more than expected, -30,000 from last week's figure, while the previous week was revised lower. The 4 week moving average of claims fell -5,750 to 256,750. Both have moved back to levels just above long term 46 year lows and are consistent with labor market health. This the 96th week of claims below 300,000. On a not adjusted basis claims gained 3% versus and expected +15.2% and are down -14.2% YOY. The YOY spread has widened noticeably this week and shows a decoupling from seasonal trends. This may resolve itself in the next few weeks, or be a sign of further changes/improvements within the labor market.

Continuing claims rose by 16,000 to hit 2.112 million. Last week's figure was revised lower by -6,000 so not much change week to week. The 4 week moving average gained 26,250 to hit 2.067 million. Recent gains in 2nd week claims are slowing and may, if the initial claims are an indication, begin to fall as soon as next week. Regardless, claims remain low relative to long term trends and consistent with labor market health.

The total number of Americans claiming unemployment benefits crept higher in the week of 12/17, rising a mere 4,326 to hit 2.144 million. This gain is within expectations and seasonal trends. Based on those trends we can expect to see the total claims figure spike to a peak within the next 3 weeks, and then taper off into the spring and summer hiring season. Based on long term trends the peak should be near 2.75 million. This week's total claims is also consistent with long term labor market health and improvement.

ISM services was released at 10AM and is unchanged from the previous month at 57.2. This shows a services sector that is expanding at the same rate as the previous month and is the 83rd month of expansion within the sector. Within the report business activity came in at 61.4, New Orders at 61.6 and Employment at 53.8. All in all a decent report.

The Dollar Index

The Dollar Index fell today under pressure of what was seen by the market as lack-luster employment data. While I agree that the data is not spectacular it is still good, shows a labor market that continues to tighten even as the FOMC views it as near full-employment and supportive of economic health, inflation outlook and interest rate normalization. Today's move trimmed a little more than -1% off the index, creating a medium sized black candle. This move has broken the index out of the near term trading range and below the short term moving average but may be whipsaw and not a true break-out. The dollar, currencies, have seen a lot of volatility in the past week with the onset of the New Year, surprise EU inflation data and rapidly shifting sentiment toward Trumponomics.

The indicators are bearish and indicate that prices may continue to test support but there are some early signs of support at or just below today's low, about $101.50. A break below this level would be bearish in the near term with a target near $100.50. If the index is able to recover from today's sell-off resistance is at $102.50. A break above this is bullish in the near term with target near the recently set high. Tomorrow's NFP data could be the news that does it, or maybe CPI/PPI, or the next FOMC meeting which is only 4 week's away. At this time the CME Fedwatch Tool shows a near 100% chance that the FOMC won't hike rates at this meeting so it will be the rhetoric that moves the market.

The Gold Index

Gold prices got a big boost today on technical buying and the drop in the dollar. Spot prices gained roughly 1.35%, about $16.25, to trade above $1180 and at a 4 week high. The move looks like the short term down trend could be broken, the caveat is that there is likely to be at least a retest for support, possibly as low as the recent low, if not a further move lower before a full reversal, even to range bound from down, can be confirmed. Dollar outlook remains biased to the bull side if questionable; an overly aggressive FOMC, strong CPI/PPI data or a less hawkish than expected ECB/BOJ could easily put the bull back into the dollar and send gold back down to it's lows.

The gold miners got the expected boost form today's rebound in gold prices. The Gold Miners ETF GDX gained nearly 6% on the news, gapping up at the open and then creating a medium size white candle, breaking above the short term trend line and the 50% retracement level. This move is bullish in the near term and breaks the short term down trend, upside target is near $25. The caveat is that this move is more momentum than anything else, gold outlook is neutral at best so upside potential is limited. The indicators are bullish and support a move higher. Stochastic is still weak though and consistent with a down trending market. MACD is the one that needs to be watched now, it is making a near 1 year extreme peak that signifies a major shift in direction. Whether or not it means reversal or near term volatility is yet to be seen. If, and this is not improbable, sentiment towards the FOMC, rate hikes and the dollar shifts back the other way we could easily see this ETF slam back to support. Once again, tomorrow's NFP could be the data point to do it, or maybe PPI/CPI over the next two weeks.

The Oil Index

Oil prices were choppy today, conflicting news driving the market in different directions. First up was surprising US inventory data. WTI stockpiles fell more than 7 million barrels versus an expected decline of only about 1 million, this was offset by a build in gasoline and distillates that more than made up the difference. Gasoline stockpiles rose by 8.3 million barrels, we were only expecting about 1.8 million, while distillates rose by more than 10 million, 9 million more than expected. This news, as a whole, was seen as bearish. The bullish news is talk that Saudi Arabia is shopping around for places it can make cuts to deliveries in order to comply with the OPEC deal. WTI closed the day with a gain of 0.75% near $53.75.

The Oil Index made small gains as well, following a day of listless trading. The index created a very small doji spinning top near the middle of the near term consolidation range and may be gearing up for a move higher. The indicators are bearish but rolling over, consistent with support at current levels and continuation of near term trends. This move is not confirmed, resistance is at the top of the near term range near 1,300. A break above this level would be bullish with upside target near 1,350 in the near term. Volatility in oil prices may drive day to day volatility in the Oil Index, the longer term is bullish and dominated by earnings growth outlook. The risk is of course oil prices, so long as there is no major correction outlook should remain positive.

In The News, Story Stocks and Earnings

Today's sector news was dominated by the retailers. The first bit of news to hit the market came from Macy's. The department store says that December comps were well below expectations, full year earnings will be soft, forward outlook is soft and they will move forward with closing 68 of the planned 100 or so stores currently on the chopping block. Shares of the stock fell more than 11% in the pre-opening session and dragged the entire sector down with it.

Apparel maker PVH, owner of iconic brands like Hilfiger, IZOD, Arrow, Speedo, Calvin Klein and more, gave early guidance for the current quarter. The company reaffirmed guidance to the to end of the range for GAAP and adjusted earnings, contrary to indications from retailers like Macy's. This means that either PVH had tremendous foresight into how the quarter would turn out or that weaknesses in the industry are isolated. Shares of the stock gained 1% from a recent low, confirming support at this level.

Amazon is proof that the retail war is being fought, and won, online. The ironic thing is that the web-based company that is responsible for the decline and downfall of the US small and family-owned book store industry just announced that it is opening a book store in NYC. Go figure. Shares of this stock gained more than 3% in today's session to close near the top of its near term consolidation range.

The Indices

The indices, for the most part, made very small moves today. Action was a bit choppy and led by the Dow Jones Transportation Average. The transports fell -0.70% creating a small black bodied candle sitting on the short term moving average. The moving average is emerging as near term support, at 9,050, and this is confirmed by the indicators. The short and long term trends are up so with the indicators rolling over near term support looks strong enough to hold, at least for now. A break below this level would be bearish with downside target near 8,500. A bounce would be trend following with upside target near 9,500, near term, and 10,000, short to long term.

The Dow Jones Industrial Average made the 2nd largest decline, -0.21%, and created a small spinning top doji within a near term trading range. Today's action is indeterminate and shows a market waiting for something to happen. The short and long term trends are up and the indicators are rolling over into possible buy signals so it looks like there is a good chance we'll see the Trump Rally extend itself. Resistance is the psychological 18,000 level, a level that on my charts has little other significance, a break above here being bullish. Upside target on a break is 20,500 in the near term. Support, should the index fail to move higher, is 19,500 in the near term.

The SPX made the smallest decline in today's session, only -0.08%. The broad market made a small spinning top doji, within its near term trading range, but looks like it is set to move higher. The index is trading within a near term range, but is also bouncing up from a long term trend line and supported by the indicators. Both the indicators are rolling into trend following buy signals, led by stochastic which is already showing the early and weaker trend following crossover signal, the only thing now is for the index to break out to new highs. Resistance is at the current all time high, a break above here would be bullish with upside target near 2,300 in the near term, 2,500 in the short to long.

The NASDAQ Composite made the only gains in today's session, 0.20%, and set a new all time closing high. If the market is going to move higher this could be the leader. The index created a small white bodied candle, spinning top variety, within the near term trading range. It is bouncing up from a near/short term support level, confirmed by the short term moving average and the indicators. Both indicators are rolling into trend following buy signals with upside target near 5,750 once resistance at the all time intraday high.

The indices continue to consolidate. The market is waiting on something and what that something is could be tomorrow's NFP but is more likely a combination of the NFP, next week's data, the onset of earnings season (next week), the next FOMC meeting and the inauguration of Donald Trump. The signs are positive, the trends are bullish, I am hopeful and bullish yet remain cautious (fingers been burned too many times to go all in too soon now), looking to buy on the dips.

Until then, remember the trend!

Thomas Hughes

New Plays


by Jim Brown

Click here to email Jim Brown
Editor's Note

The indexes were mixed with the Nasdaq the only winner and the rest of the indexes losing ground. 2017 is only three days old and the markets are having trouble focusing on a direction. However, there was a slight bullish bias thanks to the new high on the Nasdaq Composite. The Nasdaq only exceeded the old high by 50 cents so it could also be seen as a dead stop at resistance. The rally was totally driven by the FANG stocks with Amazon gaining a whopping $24. Nasdaq decliners beat advancers 1,642 to 1,075 so the gains were definitely just in the big caps.

We still have the same setup we had last week with the indexes stalling right at resistance and not being able to push through to begin a new leg higher. Every day produces a new round of earnings warnings suggesting the Q4 earnings may not live up to expectations. Eventually that will matter to investors.

There was a definite souring of momentum on the Dow stocks. Financials weakened, Travelers, Home Depot, Exxon and some of the recent leaders began to lose ground.

I know it is boring not to have any new plays but we need to be patient for one more day. If the market does not pick a direction on Friday, I will be surprised. Shorts waiting for a January decline my get tired of waiting and decide to cover rather than face weekend event risk. Longs may feel the same way and get tired of waiting and decide the rally is over. Friday's tend to be decision day for traders. Let's wait one more day and even if we do not get a direction I will hold my nose and add some new plays in the weekend newsletter.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

That Was Quick

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 exploded higher by 31 points on Wednesday and lost -16 today. That was a 50% retracement of the gain or a two steps forward, one step backward day. With the Russell negative, the S&P making a lower high and the Dow finishing well off the lows but still with a minor loss, it would appear negative. However, the Nasdaq Composite closed at a new high by 50 cents. Was that a new high or a dead stop on resistance?

The market remains directionless with one day left in the week. The first week of the year can be relatively choppy and that is exactly what we are seeing but there is a slightly bullish bias.

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

VXX - VIX Futures ETF
The short position remains unopened until a trade at $29.50.

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BULLISH Play Updates

No Current Bullish Plays

BEARISH Play Updates

AKS - AK Steel - Company Profile


No specific news. Minor decline after failing at resistance. However, AKS is showing more potential as a breakout stock than a short. I am tightening the stop loss in case Friday produces a market rally.

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.

IWM - Russell 2000 ETF - ETF Profile


Resistance held and the Russell declined -1.2% after a 2.3% rally on Wednesday. This lack of direction is driving me crazy but it was not a very long drive to start with. The Russell closed almost exactly in the middle of its recent range between support and 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.

VXX - Volatility Index Futures - ETF Description


No material decline because of the mixed indexes. No harm, no foul because we are not yet in the position. We should get a market direction on Monday. The first week of the year can be choppy.

Original Trade Description: December 28th

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline began.

We exited the last short at $26.65 for a $7 gain back on December 13th. I am expecting the January volatility to lift the VXX back to $30. That will give us a great entry for the expected market rally in Feb/Jan where the VXX will crash again.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. We may have to rotate in and out a couple times but it will eventually go to $10. Once we are in the position and profitable I will put a trailing stop loss on it. If the stop is hit we will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

I am putting an entry trigger on the position at $29.50, a level we saw on December 1st. I would expect this to be hit in early January. The VXX could rise well over $30 if the market really corrects so I am not putting a stop loss on the position until the correction is over.

With a VXX trade at $29.50

Short VXX shares, currently $24.62, no initial stop loss.

No options recommended because of price.

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