Option Investor

Daily Newsletter, Tuesday, 1/17/2017

Table of Contents

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

Market Wrap

Storm Ahead

by Jim Brown

Click here to email Jim Brown

Normal storms do not bother the equity market but this storm could cause serious damage.

Market Statistics

The storm the market is afraid of is a Tweet Storm from the president elect. Several times over the last week, the tweets have caused significant fluctuations in equities. Some were good and some were bad. It appears Trump is trying commit suicide by tweet with some of the recent notes attacking his own party. If Trump is to be successful as president he needs to turn his Twitter account over to a rational and political savvy third person who could then change the password on the account to prevent those late night Twitter fights.

With worries growing on which of Trump's policy promises will actually come true the market is losing confidence and he has yet to actually be sworn in as president. Numerous policy divisions have appeared between Trump and his cabinet and now he is attacking the republican tax proposals. Analysts are starting to say the corporate tax cuts to 15% will never pass but maybe 20% or even 25% could be the eventual rate. While 25% is a lot lower than we have today it is far from the 15% rate Trump promised. Stocks with high tax rates that have rallied since the election, are starting to fade as the expected tax windfall shrinks.

The first 100 days could be a series of battles between Trump, congress and the Republican Party. Trump's tweets have been lightning bolts from the blue for many companies as his comments roil expectations. Last week retailers like PVH and Nike crashed after comments about raising import taxes. Today PVH spiked more than 6% and twice the Friday decline on Trump comments that the republican proposal, which would have taxed all imports, was "too complicated." Trump wants to charge a punitive tax on imports from companies that have left the U.S. but ship products back into the country. He tweeted over the weekend he wants to put a 35% tariff on German cars.

Some people claim this is the way Trump negotiates. He throws out an obscene number then negotiates to a lower rate. The problem with this strategy as president is that he is putting it out through tweets that rock the equities in that sector and that moves the markets. A private businessman can use that public strategy but a president needs to be more aware of the market impact and the impact of expectations around the world.

Several analysts have said that Trump's tweets could increase in quantity and severity this week before he is actually sworn into office. They claim he is trying to develop some momentum for his positions so he can hit the ground running next week. If he does not learn the art of subtlety very soon he may be running into a brick wall in the weeks ahead. While I commend his efforts, he could be his own worst enemy and that could produce some rocky markets after the inauguration.

Historically, the market is not kind to a president in the first 30 days after the inauguration. In the table below, which covers the last 11 presidents, the S&P-500 declined an average of -2.59% in the first 30 days of a presidency. This does not take into account any pre inauguration market gains and losses. Given our recent post election gains, it would suggest any decline could be intensified if it appears Trump's promises/policies are not going to be immediately implemented. There is a lot of risk that many of them will be blunted severely and/or face a tough uphill battle. That suggests future tweet storms against anything that stands in his way. Picking a twitter fight with Boeing over Air Force One is a lot different than picking a fight with China's President Xi over islands in the South China Sea, currency manipulation or tariffs on Chinese imports. There could be significant ramifications from Twitter wars with other foreign leaders.

Trump said over the weekend he might leave the inauguration day festivities early so he can get a head start on making changes. We are entering a new and uncharted world in presidential politics and that could be unsettling for the market.

Data from SPGMarketIntel

The only material economic report on Tuesday was the NY Empire State Manufacturing Survey for January. The headline declined from 9.0 to 6.5. However, the 9.0 from December was also revised lower to 7.6 so it was a double dose of bad news. December was still the highest level since April. Unfortunately, new orders declined from 10.4 to 3.1 but all other components improved. The backorder component rose from -10.4 to -1.7 and employment improved from -12.2 to -1.7 as well. Inventories improved from -13.9 to +2.5.

On the negative side the prices paid component rose from 22.6 to 36.1 indicating inflation is accelerating. That component was 15.5 in November. Manufacturers are passing on some of the price hikes with the prices received component rising from 3.5 to 17.6. With inflation accelerating it could limit expansion plans and reduce employment growth expectations.

The calendar for Wednesday has the Fed Beige Book as the most important report followed by the Housing Market Index and Consumer Price Index. If we start to see consumer prices rising as fast as the NY manufacturing report above, it could kick the Fed into high gear on their rate hike plan. That would obviously be market negative.

The Philly Fed Survey on Thursday is the next most important report but it will probably be ignored in the build up to the inauguration on Friday.

The Q4 earnings cycle was the focus of attention this morning as another group of companies confessed and issued guidance. Morgan Stanley (MS) posted earnings of 81 cents that beat estimates for 65 cents. Bond trading revenue more than doubled to $1.47 billion. Equity trading revenue rose 7.3% to $1.95 billion. Forecasts were for $1.0 billion and $1.84 billion respectively. Total revenue rose 17% to $9.02 billion, which also beat estimates for $8.48 billion. Shares fell -4% with the entire financial sector declining 2% on worries Trump's deregulation would not occur in the near future and tax rates would not decline as much as promised.

Dow component UnitedHealth (UNH) reported earnings of $2.11 compared to estimates for $2.07. Revenue of $47.5 billion beat estimates for $46.8 billion. Revenues from the UnitedHealthcare segment rose 15.5% to $38.9 billion. The Optum segment saw revenues rise 1.4% to $22.2 billion with a 23.7% rise for the full year to $83.6 billion. Total members rose from 46.4 million to 48.59 million. The company affirmed its guidance for 2017 for revenue of $197-$199 billion and earnings of $9.30-$9.60 per share on an adjusted basis. Shares gapped down from $162 to $157 at the open but rebounded to close at $160.62.

After the bell, CSX Corp (CSX) reported earnings of 49 cents and analysts expected 50 cents. Revenue rose 9% to $3.04 billion thanks to an extra week in the quarter. Overall volume declined -1% to 1.63 million units and coal volumes rose 3%. Dollar revenue from coal rose 16%. Automobile shipments were strong but commodity shipments continued to be weak. The company said headwinds from low commodity prices were impacting the number of shipments and that would continue. They are also suffering from the strong dollar which is impacting exports and it will take another six months for the impact to be fully felt by CSX. Shares fell $1.50 in afterhours to $36.50.

United Airlines (UAL) reported earnings of $1.78 compared to estimates for $1.73. Revenue of $9.05 billion matched estimates. Revenue per seat mile declined -1.6%. For the full year, United repurchased $2.6 billion in stock and has $1.8 billion left on the current authorization. They forecast Q1 revenues to be flat and analysts were expecting 41 cents and $8.28 billion. Shares declined $1 in afterhours.

Gigamon (GIMO) warned after the close that earnings would be in the 35-37 cent range compared to guidance for 36-38 cents. Revenue of $84.5-$85.0 million would be well below guidance of $91-$93 million. Shares fell -22% in afterhours. They said several major customers had deferred purchase decisions until 2017.

Walmart (WMT) tried to get on the good side of Trump by announcing it was going to add 10,000 new retail jobs as it opens new stores. The new construction would employ 24,000 workers over the next two years. The store plans had been previously announced but the announcement touting the new jobs was clearly an effort to stay out of the future Trump tweet storm. Amazon did the same thing last week when it said it was adding 100,000 workers over the next 18 months. The Walmart announcement did halt a two-week slide in the stock price.

GM announced a planned investment of $1 billion in U.S. factories and the addition of more than 1,000 jobs. GM has been under fire from Trump for manufacturing cars in Mexico. Shares were flat on the day.

Tiffany (TIF) said comparable same store sales declined -4% during the holiday shopping period. They blamed this in part to a 14% decline in sales at the Fifth Avenue store in New York because of traffic disruptions around Trump Tower after the election. The company said they do not anticipate a significant improvement in economic conditions in 2017.

JC Penny's (JCP) agreed to allow Nike (NKE) to open Nike Outlets in 600 of Penny's stores. The store within a store will occupy 500 sqft in the men's department and will feature "pumped up visual elements." They will feature an expanded assortment of performance and "athleisure" apparel and accessories. Nike shares gained slightly on the news.

Disney (DIS) was upgraded from neutral to buy at Goldman Sachs. The bank said the film offerings for 2018 were going to be the best slate ever. They also have a new park on the horizon and they will benefit from a lower tax rate and the ability to repatriate cash from overseas. Shares were flat for the day.

Nordstrom (JWN) was cut from buy to hold by Stifel Nicolaus on expectations for lower holiday sales. Shares actually gained 18 cents.

Reynolds American (RAI) finally agreed to a deal to be acquired by British American Tobacco for $29.44 per share plus half a BAT share. That was $2 billion over an initial offer made in October. Shares gained 3%.

Clayton Williams Energy (CWEI) agreed to be acquired by Noble Energy (NBL) for $3.2 billion. This greatly expands Noble's acreage positions in the Delaware Basin portion of the Permian. This provides Noble with 120,000 net acres and 4,200 drilling locations with more than 2 billion Boe of net unrisked resource according to Noble. The cash and stock deal was valued at $138.97 per CWEI share as of Friday's close. Shares spiked to $145 because Noble shares gained $2.66 on the announcement.


The major indexes were really mixed today with the Dow and S&P down only 0.29% while the Russell 2000 fell -1.43%. The small cap S&P-600 fell -1.36% and the Russell Microcap index was down -1.8% so the weakness was definitely in the smaller stocks. The big caps continue to be a storehouse of cash for fund managers but they are bailing from the low liquidity positions. The Russell 2000 closed at a five-week low.

Despite the weakness in the small caps, the rest of the market was choppy. The big cap indexes gapped down at the open on events in Europe and Asia but there was no panic. The indexes trades sideways most of the day with another dip at 2:PM to the lows for the day. Dip buyers were ready but the volume was weak as though conviction was fading.

The S&P did not close far from its highs and no harm was done. This was just a consolidation day for the big cap indexes. The S&P is not showing any weakness and without a drop below 2,250 the movements are just noise.

The Dow declined to 19,775 intraday and the bottom of its recent range. The 19,800 level is the psychological bottom but the intraday declines have penetrated that level several times since mid December only to rebound by day's end.

Goldman and JP Morgan were the biggest losers as the financial sector lost -2%. JP Morgan was downgraded by KBW from outperform to market perform. Shares fell -$3 on the downgrade to knock more than 20 points off the Dow.

Goldman's $8.56 loss knocked 56 points off the Dow. Goldman was due for a major bout of profit taking and this could be the start.

Note that the support on Goldman mimics the support on the Dow.

The Nasdaq dip was just a hiccup after a string of gains. The Nasdaq is now up 8 of the last 10 days so it is hard to say the selling was material. The big cap tech stocks were all on the wrong side of the winner/sinner graphic today. The biotech sector was also negative with a -2.31% decline on Trump fears. Despite the big caps and the biotechs declining the Nasdaq barely even stumbled.

The Dow transports have given up some of their gains from November thanks to worries about cross border taxes and the impact of the strong dollar. They are still holding the majority of their gains but the 9,000 level is in danger.

The rest of this week could be rocky but the rebound today suggests the dip buyers are still alive and well. Whether they will continue to buy the dips right up until the start of the inauguration process is unknown. There is event risk but there is almost no sign of that risk in the market. The VIX gained only 0.64 to 11.87 today despite the down market. Given the risk and the market weakness, we should have seen a more significant spike. Investors remain complacent as though Trump was going to touch the bleachers on Capitol Hill and turn them into gold.

When investors are the most complacent is when the biggest declines normally appear. Let's hope this is not one of those times.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Headline Warning

by Jim Brown

Click here to email Jim Brown
Editor's Note

The only guarantee for the rest of the week is a rapid increase in the number of headlines. We do not know how the market is going to react between now and the close of business on Friday. Anything is possible and the headline flow is only going to accelerate. With the Russell 2000 closing at a five-week low we could be seeing the early signs of a sell the news move.

There is no reason to put money to work in this market ahead of the event. I scanned what few companies there are that do not report earnings over the next three weeks and there were none that just screamed "buy me." There are only three days left in this week and next week could see an entirely different market. Let's wait and see that Friday brings before diving into the market. I will run my scans again on Wednesday and see if anything changed.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Event Risk Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell closed at a five-week low after losing 20 points. That was the weakest index and could be investors getting out of the way of the event risk on Friday. However, the Dow was down over 100 points intraday and recovered to close with a 60-point loss. The dip buyers were there but they seem to have lost some of their conviction.

This could be a rocky week and ANY further decline on the Russell could trigger selling on the other major indexes.

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

ENDP - Endo Pharma
The short stock position was entered at the open.

VXX - VIX Futures ETF
The short position remains unopened until a trade at $24.50.

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

ARWR - Arrowhead Pharmaceuticals - Company Profile


No specific news. Minor decline in a weak market. Biotechs and pharma hit hard.

Original Trade Description: January 12th.

Arrowhead Pharmaceuticals, Inc. develops novel drugs to treat intractable diseases in the United States. Its pre-clinical stage drug candidates include ARO-HBV to treat chronic hepatitis B virus infection; ARO-AAT to treat liver disease associated with alpha-1 antitrypsin deficiency; ARO-LPA to reduce production of apolipoprotein A; ARO-AMG1, which is developed against an undisclosed genetically validated cardiovascular target; and ARO-F12, a potential treatment for factor 12 mediated diseases, such as hereditary angioedema and thromboembolic disorders. The company also develops ARO-HIF2, a drug candidate for the treatment of clear cell renal cell carcinoma. Arrowhead Pharmaceuticals, Inc. has collaboration and license agreements with Amgen, Inc. The company was formerly known as Arrowhead Research Corporation and changed its name to Arrowhead Pharmaceuticals, Inc. in April 2016. Company description from FinViz.com.

Arrowhead shares were crushed back in November on bad news but have been rebounding since December 23rd. On Monday Silence Therapeutics announced it has acquired six million shares and an 8.4% stake in ARWR. Silence is developing its own RNA technology that could be a competitor to Arrowhead or synergistic to Arrowhead.

Arrowhead said it was not informed of the stake until just a few minutes before Silence made the public announcement. Arrowhead said there have been no discussions about a potential transaction. Now that Silence has an 8.4% stake and has proven it is serious, those discussions could begin.

There is no guarantee the stock will continue moving higher on this news but I am sure there are other investors also following the headlines and willing to bet a couple bucks a share that something will happen and there will be further headlines.

Earnings March 15th.

Position 1/13/17:

Long ARWR shares @ $2.27, see portfolio graphic for stop loss.

I am not recommending them but the March $3 calls are 25 cents.

BAK - Braskem S.A. - Company Profile


No specific news. Minor decline in a weak market.

Original Trade Description: January 11th.

Braskem S.A., together with its subsidiaries, produces and sells thermoplastic resins. Its Basic Petrochemicals segment offers olefins, such as ethylene, polymer and chemical grade propylene, butadiene, isoprene, and butene-1; BTX products comprising benzene, toluene, ortho-xylene, para-xylene, and mixed xylenes; fuels, including automotive gasoline and liquefied petroleum gas; intermediates, such as cumene; and other basic petrochemicals, which include ethyl tertiary butyl ether, solvent C9, and pyrolysis C9. This segment also supplies electric energy, steam, compressed air, and other products to second-generation producers. Its Polyolefins segment produces polyethylene, including LDPE, LLDPE, HDPE, ultra-high molecular weight polyethylene, and EVA; green polyethylene from renewable resources; and polypropylene. This segment's products are used in plastic films for food and industrial packaging; bottles, shopping bags, and other consumer goods containers; automotive parts; and household appliances. Its Vinyls segment produces polyvinyl chloride, caustic soda, chlorine, hydrogen, caustic soda flake, and sodium hypochlorite. The company's USA and Europe segment produces polypropylene in the United States and Germany. Its Chemical Distribution segment distributes solvents, including aliphatic, aromatic, synthetic, and ecologically-friendly solvents; engineering plastics; hydrocarbon solvents and isoparafins; and general purpose chemicals, such as process oils, chemical intermediates, blends, specialty chemicals, and pharmaceuticals. The company also imports and exports chemicals, petrochemicals, and fuels; produces, supplies, and sells utilities, such as water and industrial gases; and provides industrial services. The company was formerly known as Copene Petroquimica do Nordeste S.A. and changed its name to Braskem S.A. in 2002. Company description from FinViz.com.

In early December, Braskem announced a potential settlement in a probe that was started in 2014 when controlling shareholders Odebrecht and Petrobras (PBR) became a target in a corruption scandal. Between 2006-2014 the company had paid $250 million into an account created by Odebrecht to pay bribes to politicians and political parties in Brazil.

The potential settlement would allow those shareholders to eliminate their ownership and the money collected be divided between the USA, Switzerland and Brazil. The deal would formally erase any potential liabilities for Braskem. On December 14th Braskem said it was paying $920 million in fines over six years with half paid now and the rest paid in annual installments starting in 2018 Source

JP Morgan immediately upgraded the company from neutral to overweight.

Braskem is the largest petrochemical in South America.

Shares have been moving up steadily now that it is free from the probe that has weighed on shares for the last two years. The prior high was $32.

Earnings Feb 9th.

Position 1/12/17:

Long BAK shares @ $23.11, see portfolio graphic for stop loss.

No options recommended because of the wide spreads.

HZNP - Horizon Pharma - Company Profile


No specific news. Biotech sector was hammered again in a weak market.

Original Trade Description: January 7th.

Horizon Pharma plc, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; DUEXIS and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis; and PENNSAID for the treatment of pain of osteoarthritis of the knees. Its products also include MIGERGOT to treat vascular headache; RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus and multiple other indications; and KRYSTEXXA to treat chronic refractory gout. The company has a collaboration agreement with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer. Company description from FinViz.com.

Horizon recently received approval to sell the drug Quinsair in Canada. It was already approved in the EU. This is a drug for the management of chronic pulmonary infections in adults with cystic fibrosis. Only about 75,000 people around the world are candidates for the drug and 4,500 in Canada. They acquired the drug when they bought Raptor Pharmaceutical Corp in October.

The company also announced they had received a Notice of Allowance from the U.S. Patent office on the drug Ravicti. This will result in a patent being issued to Horizon that is good to 2030. Horizon has seven patented drugs and 11 drugs currently available for sale.

Shares of Horizon declined in early December after a late stage trial on another drug failed to achieve the desired result. Shares have been moving up steadily since that December drop. Friday's close was a 4-week high.

Horizon will present next week on the 10th at the JPM Healthcare Conference.

Earnings Feb 6th.

I am putting an entry trigger on the position just in case the market decides to roll over on Monday.

Position 1/9/17 with a HZNP trade at $17.75

Long HZNP shares @ $17.75, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

BEARISH Play Updates

ENDP - Endo International - Company Profile


No specific news. The decline in the biotech sector pulled ENDP to a new 14 year closing low.

Original Trade Description: January 14th

Endo International plc develops, manufactures, and distributes pharmaceutical products and devices worldwide. Its U.S. Branded Pharmaceuticals segment offers chronic pain management products, such as BELBUCA, OPANA ER, and Percocet; Lidoderm for opioid analgesics; and Voltaren gel for osteoarthritis pain, as well as XIAFLEX for treating Peyronie's and Dupuytren's contracture diseases. This segment also provides Supprelin LA for central precocious puberty treatment; testosterone replacement therapies, such as Aveed and TESTOPEL, as well as Fortesta and Testim gels; Frova and Sumavel DosePro for migraine headaches; Valstar, a sterile solution for intravesical instillation of valrubicin; and Vantas for the palliative treatment of prostate cancer. The company's U.S. Generic Pharmaceuticals segment provides tablets, capsules, powders, injectables, liquids, nasal sprays, ophthalmics, and transdermal patches for pain management, urology, central nervous system disorders, immunosuppression, oncology, women's health, and cardiovascular disease markets. Its International Pharmaceuticals segment offers specialty pharmaceutical products in various therapeutic areas, including attention deficit hyperactivity disorder, pain, women's health, and oncology; generic, branded generic, and over-the-counter products in the areas of dermatology and anti-infectives; injectables for the treatment of pain, anti-infectives, cardiovascular, and other therapeutics areas; and healthcare services, products, and solutions to hospitals, pharmacies, and practitioners, as well as for government healthcare programs. The company also provides Monarc subfascial hammock to treat female stress urinary incontinence; and Elevate transvaginal pelvic floor repair system for the treatment of pelvic organ prolapse. It sells its branded pharmaceuticals and generics directly, as well as through wholesale drug distributors. Company description from FinViz.com.

Endo is a small $3 billion market cap company but they have been around since 1920. They are headquartered in Dublin Ireland and could easily be impacted by an import tax. They do have some common products and they do have earnings.

Endo has been benefitting from raising drug prices and a study underway to determine how much companies have raised prices over the last ten years is bound to highlight Endo as a serial hiker. The company already warned that the pricing environment was going to remain challenging in 2017 with 30% year over year declines in generics. If the new replacement for Obamacare does require bidding for generic drugs as Trump has mentioned, Endo could be under a lot of pressure. Add in the import taxes and it could be ugly. Investors are anticipating these events and the stock is falling.

On Thursday somebody bought 4,000 February $12.50 put for 70 cents. That is a $280,000 bet they are going lower. If Trump repeats his desire for lower drug prices in the inauguration speech, the drugs companies are going to collapse again.

Earnings February 7th.

Position 1/17/17:

Short ENDP shares @ $13.22, see portfolio graphic for stop loss.

No options recommended because of price and spreads.

IWM - Russell 2000 ETF - ETF Profile


The Russell fell -20 points or -1.43% and was the biggest loser for the day. The IWM closed on uptrend support but a five-week closing low. This could be the start of the market breakdown.

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. Big spike at the open with the rest of the retailers but it quickly sold off.

Original Trade Description: January 9th

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 several times before. We were stopped out on Dec-30th when the CEO arranged a bridge loan to get them out of trouble temporarily. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is eventually expected to file bankruptcy.

In November, 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 will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Dec-28th and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in 2017 once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the sale of the Craftsman brand to Stanley Black & Decker for $900 million but they get less than half of that in cash. The rest is paid out over the next 3-5 years. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

With the Craftsman sale and the loan from the CEO and a new $500 million loan secured by real estate, they have developed about $1.5 billion in Liquidity. Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

When they announced the Craftsman sale at less than expected terms, the stock fell back from the early January gains. The outlook is grim despite the short-term cash inflows.

Update 1/11/17: In an OP-ED piece Forbes said the sale of Craftsman signaled the opening of the final chapter for Sears. They said the Craftsman sale and the potential sale of the Kenmore and Diehard brands represented a "going out of business" sale.

Position 1/10/17:

Short SHLD shares @ $8.97, see portfolio graphic for stop loss.

No options recommended because of price.

VXX - Volatility Index Futures - ETF Description


The VXX actually sold off despite the weak market. This is contrary to the direction it should be moving.

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 $24.50

Short VXX shares, currently $21.40, no initial stop loss.

No options recommended because of price.

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