Option Investor

Daily Newsletter, Wednesday, 1/18/2017

Table of Contents

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

Market Wrap

Waiting for Inauguration Day

by Keene Little

Click here to email Keene Little
The stock market has been hold for several weeks following the initial "Trump" rally. That hope-filled rally is now facing the reality that all the changes that would help the stock market might struggle to become reality. Now it's waiting for some additional information that will support a continuation of the rally and many are expecting disappointment instead.

Today's Market Stats

Following the election of Trump we had a surprisingly strong rally that lasted about 6 weeks, into the December 13th highs for the blue chips, but it's been basically a choppy 5 weeks of consolidation since then. The tech indexes were able to continue higher into last week before hitting some potentially strong resistance and now they too have gone on hold while waiting to get through Inauguration Day (Friday). Assuming nothing bad happens to disrupt the inauguration and/or parties after it (from international terrorists or domestic terrorists, some of whom are disgruntled Hollywood types), there's a good chance the market will continue its rally.

Many are expecting the market to reverse the Trump-inspired rally, which is reflected in some of the options trading as well as sentiment, but we have to wonder if the market will surprise the majority just as it did after Trump was elected.

Before moving to tonight's charts I wanted to look at one chart that shows why it's a good time to worry about additional upside, even though I believe there is additional upside at least for the short term. We know the market depends on liquidity to continue to move prices higher. Without liquidity to add to the purchasing power we'd see natural selling begin to overwhelm the buyers (selling is often a requirement, to free up cash for expenses and purchases whereas buying is almost always an option). And a big liquidity provider over the years has been the Fed. Whether it's through money printing or abnormally low interest rates (cheaper loans) the Fed has been a huge primer for the financial markets. That's been quietly changing and could soon have a negative impact.

With all the talk in the past year about the Fed's desire to raise interest rates and take a less accommodative stance, it's interesting to note how much they've been draining liquidity since late 2014. For about two years we've seen a decline in the reserve balances held at Federal Reserve banks, as can be seen in the chart below (blue line). The red line shows the S&P 500 index by comparison

Reserve Balances with Federal Reserve Banks vs. S&P 500, 2008-Jan 2017, fred.stlouisfed.org

There are a couple takeaways from this chart, the first being the huge spike in the balances from a virtual flat line into the fall of 2008 (seasonally as well as the stock market). As a comparison between where we were and where we went to, the data series goes back to 1985 and the peak in 1988 was around $40B (a rounding error in today's numbers). The balances ranged between about $5B and $20B from 2000 through 2008 (you can barely see a couple of small spikes before September 2008). Following the scary banking crisis in 2008 the Fed came charging in for the rescue and between September 2008 and January 2009 the balances spiked to a little more than $800B and then $1200B ($1.2T) by the end of February 2010. With each QE program following that you can see a further spike in the balances until it reached a high near $2.8T by the fall of 2014. Six years of unrelenting money printing.

Coinciding with money growth were of course abnormally low interest rates. The combination of new money coming into the financial markets and nearly free borrowing by corporations to enable them to buy back their shares, we saw a very steady rise in the stock market into the end of 2014, coinciding with the end of the Fed's money growth. After a bit of a wobble/consolidation in the stock market through 2015 the corporate buybacks continued as companies were able to continue borrowing the funds at nearly no cost. Borrowed funds and earnings were used to buy back stock because they saw little reason to invest in their own business. That alone is a worrisome sign.

While corporate profits were in decline it was hidden by the fact that earnings per share were improving, or at least holding up, because the numbers of shares outstanding were declining. The problem for the market since the end of 2014 has been a battle between the continuation of corporate buybacks and the removal of some of the excess liquidity from the financial markets. But at least the buybacks were helped by the Fed keeping rates so low. That's now changing.

One of the reasons we're seeing bearish divergences on the weekly and monthly stock charts is because the buying momentum has been slowing as corporate buybacks have become the primary source of buying (something like 70-80%). The rest has been a battle between sellers and buyers in a trading battle, especially with all the HFTs hitting the market whichever way the wind is blowing at the time. Combatting the corporate buybacks has been the decline in Federal Reserves and of course that begs the question about what will happen in the stock market when companies are forced to curtail their buy-back programs.

With interest rates ticking higher, and the Fed promising to continue raising them, how much longer will corporate buybacks continue to support the market? And if buybacks start to drop off, as I strongly suspect they will this year, and the Fed continues to withdraw liquidity (they won't implement another QE program while simultaneously raising rates) and reduce its balance sheet, how much more upside potential will there be for the market? Could the Trump rally be the last hurrah, even if there's to be one more leg up following the inauguration? I think these are very important questions, which highlight the risk for the market right now. I strongly believe in Caveat Emptor right now.

As for the stock market, as mentioned at the beginning, so little has happened in the past two weeks (it's been quieter than the currency and commodity markets) that there's not much to add that's different from last week's commentary. Until we get through Friday's inauguration I suspect not much is going to happen, but what happens next week could be very different from what I know many market pundits are predicting (I see so many similar predictions in a lot of newsletters). So many are now looking for a market pullback following the inauguration, which is based on the idea that the majority of investors will realize the "Trump" trade was built more on hope than substance. I firmly believe that's true but as always, it's the timing of that realization that's important.

This week there has been heavy buying in VIX call options and stock put options, both of which are big bets the stock market is going to decline from here. With so many now expecting a reversal of the Trump trade I have to wonder if the market is once again going to disappoint the majority, just as it did following the Trump election. As usual, we'll just have to let the charts lead the way, even as confused as they currently appear to be.

S&P 500, SPX, Weekly chart

Since peaking near 2277 and closing near 2273 on December 13th it's been a choppy sideways consolidation since that time. Only a couple of days has it been able to close above 2273, which keeps the Gann Square of 9 zone at 2271-2273 in play (this is where the March 2009 low aligns in both time and price, just as the October 2007 high aligned with the October 2002 low). Today's close, at 2271.89, was again inside this potential topping zone. But because of the consolidation pattern I expect to see further upside and as depicted, I'm expecting to see a run up to the trend line along the highs from April-August 2016, which will be near 2315 by the end of the month. The first warning sign for the bulls would be a drop below the December 30th low near 2233 but until then the pattern remains bullish. The real question is whether upside potential is worth the downside risk.

S&P 500, SPX, Daily chart

Assuming the bulls don't drop the ball in the coming week and we get at least one more push higher, there are two upside target areas I'd watch for. The first is a price projections zone at roughly 2286-2293, which are based off wave relationships in the rally. As can be seen on the weekly chart above, there are two projections, at 2285.53 and 2290.44, which are based on equal moves in the rally legs since the January 2016 low. The daily chart below shows the same two projections and a short-term trend line along the highs from December 13 - January 6 (gray line), which crosses the lower projection on Friday. A broken uptrend line from November-December also crosses the lower projection on Friday.

Based on these coinciding price projections and trend lines I'll want to see the bulls get SPX above 2290 before thinking we'll see higher prices. But if SPX does make it above 2290, and holds above that level, there's another price projection at 2313.69 where the 5th wave of the rally from November would be 62% of the 1st wave. That projection crosses the trend line along the highs from April-July-August 2016 a week from today. Keep a close eye on price action around there if reached. SPX would be more bullish above 2315.

Key Levels for SPX:
- bullish above 2315
- bearish below 2233

S&P 500, SPX, 60-min chart

There's one more price projection that shows why the 2315 area could be trouble for the bulls (if reached). The price pattern for the rally from December 30th could produce two equal legs up (for a 3-wave move to complete a rising wedge pattern), which points to 2316 if the sideways consolidation completes as depicted (green wave-b near 2268 midday Friday). The first thing the bulls need to do is get SPX above 2277 whereas the bears would be looking stronger if they drive SPX below the January 12th low near 2254, although I'd be watchful for just a quick move down to complete a possible larger 3-wave pullback from January 6th before reversing back up. The bottom line is that we have a choppy mess here and predicting the move out of this mess is challenging, to say the least. Wait for the log jam to break before playing one direction or the other and keep in mind that a move out of this range might not have any staying power.

Dow Industrials, INDU, Daily chart

The Dow has developed a small megaphone pattern for its consolidation (or it could be considered just a flat channel) and as such it could be considered a topping pattern. But for the moment I'm giving the bulls the nod with an expectation we'll see one more leg up, potentially up to the trend line along the highs from August-December 2016, which will be near 20500 by the end of the month. As noted on the chart, that would be about a 700-point rally from here, and even more if we first see the Dow drop a little lower heading into Friday. The first thing the bulls need to do is break out of the megaphone pattern with a convincing rally above 20,040. The bears need to drop the Dow below the bottom of the pattern, near 19650, and then watch out for possible support at the rising 50-dma, currently near 19430.

Key Levels for DOW:
- bullish above 20,040
- bearish below 19,650

Nasdaq Composite index, COMPQ, Daily chart

The tech indexes were the place to be for the bulls following the pullback into December 30th. They powered to new highs and looked ready to drag the other indexes higher. But they haven't been able to drag the rest of the market with them and now they look dangerously close to a reversal. As can be seen on the Nasdaq's daily chart below, last week it ran into the top of a rising wedge pattern and then poked above it on Friday but closed on the line. This week it's back below the line and it looks like a little throw-over completion to the pattern, which means it's now on a sell signal by this pattern. Confirmation would be a drop below the January 12th low at 5496.82, as well as below its 20-dma and uptrend line from November-December, which will be near the same level next Monday. But if the bulls can hang on and push the techs higher, watch the top of the rising wedge, which will be near 5596 by Friday and then maybe up to the trend line along the highs from April-September 2016, near 5670 by the end of the month.

Key Levels for COMPQ:
- bullish above 5585
- bearish below 5496

Russell-2000, RUT, Daily chart

The RUT is in the same position as the blue chips with a larger choppy consolidation pattern following its December 9th high. In fact it fits well as a bull flag and the expectation therefore is for another rally leg out of this. Assuming it will break out to the upside, with a rally above the top of the parallel down-channel, currently near 1385, there might not be that much additional upside since it's likely to be stopped by the trend line along the highs from 2007-2015, near 1410. A drop below the bottom of the down-channel, currently near 1348, especially if a breakdown is followed by a back-test and then a further selloff, would leave a failed bullish pattern and that would likely mean strong selling to follow.

Key Levels for RUT:
- bullish above 1410
- bearish below 1346

10-year Yield, TNX, Weekly chart

Treasury yields have been retreating since their December 15th highs, which indicate bond prices have been getting a bounce while stocks traded sideways. Going back to the first chart I showed above, the one showing liquidity is in decline, a bond rally without a stock market selloff could exacerbate any liquidity problems that the market is currently struggling with. A lack of liquidity is what exposes the markets to the potential for a downside disconnect (flash crash). None of this can be predicted but I think we're at the point in the rally where it must be considered and positions carefully managed.

As for the 10-year yield, it dropped to support at its broken downtrend line from 2007-2013 (purple line) and the shorter-term pattern supports the idea for at least a bounce correction before heading lower. Not shown on the weekly chart is an uptrend line from September 30 - November 4, which today crosses the downtrend line from 2007-2013. So that's another reason for support here, which also makes it important for support to hold at yesterday's low at 2.313. Below that level would spell more trouble for the yield and support for bond prices.

KBW Bank index, BKX, Daily chart

Yesterday's strong selloff in the banking index looked bearish but in fact it could have been the completion of its consolidation pattern off its December 8th high. For a similar pattern take a look at the SPX daily chart and what happened following the sharp little selloff into the December 30th low. The potential is for a rally to a price projection at 100.44, which is where the 2nd leg of the rally from February (the leg up from June) would be twice the size of the 1st leg up. That price projection crosses the top of a parallel up-channel for the rally from February 2016 this coming February 15th. That's more upside potential than I'm seeing in the other indexes but it does show how much upside potential we could be looking at. As for the bearish side of this pattern, since it's very possible last Friday's high completed its rally, a decline below this morning's low at 89.17 and its 50-dma near 89 should be considered more bearish.

U.S. Dollar contract, DX, Daily chart

Yesterday the US$ made it down to support at its broken downtrend line from March-December 2015 (the top of a previous parallel down-channel for its consolidation off the March 2015 high. In addition to this downtrend line there is the bottom of a parallel up-channel for the rally off the August 2016 low and a broken trend line along the highs from July-October 2016, all of which were tested yesterday. A successful back-test followed by a bullish kiss goodbye would be bullish, especially since the pullback from January 3rd is just a 3-wave move (correction) so far. Today's strong bounce off support is the start of what turn into the next rally leg for the dollar (despite Trump's call for a weaker dollar). A rally above 103 would leave a confirmed 3-wave pullback, which would point higher. But a drop below yesterday's low at 100.23 would help confirm we're likely in the early part of a larger pullback, which could extend all the way back down to the 92 area before setting up another rally leg.

Gold continuous contract, GC, Daily chart

Gold has rallied as far as it should if it's just a bounce correction within a larger move back down. That's not to say it can't work its way higher in some kind of larger 3-wave bounce pattern, maybe even back up to its 200-dma, near 1268, or its downtrend line from 2011-2012, near 1300, but the current (bearish) wave count suggests the bounce off the December 15th low is just a correction to the decline from July and that it will be followed by another leg down.

The 2nd leg of the decline from July came within $3 of hitting the price projection at 1121, where the 2nd leg is 162% of the 1st leg. The typical bounce correction following that kind of move is back up to the 100% projection, which is at 1204, before continuing lower. Between that projection and price-level S/R near 1205 I figured gold would have a tough time rallying through it without at least a pullback first (shake lose the weak holders) and then power through resistance. Yesterday's strong rally did power through resistance but it was not able to hold it today and closed at 1203.70. If it's able to continue above yesterday's high at 1218.90 it would be a bullish statement but a drop back below 1192 and then price-level S/R near 1180 would indicate we'll see at least a larger pullback, if not down to a new low for the decline from last July.

Oil continuous contract, CL, Daily chart

On January 10th oil had found support at its October 2015 high at 50.92. The back-test followed by a bullish kiss goodbye the next day looked bullish for oil. But the 2-day rally stalled and today it lost support at the trend line along the highs from October 2015 - June 2016, near 52.35, and dropped back down to 50.92 support (with a low at 50.91. It's trying to bounce again but the failed bullish bounce off 50.92 last week is not a good sign for the bulls and it's looking more likely that support will break. Unless oil can get above Tuesday's high at 53.52 I think the odds favor the bears here.

Economic reports

Today's economic reports, including the Fed's Beige Book this afternoon, were largely ignored. Tomorrow's economic reports, which include housing starts and permits and the Philly Fed index, will be largely ignored. Next week's reports will be largely ignored. I'm not sure when the market will get back to any kind of fundamental concerns, unless you now consider the Fed as THE fundamental concern.


The market has once again entered a holding pattern while it awaits clearance to proceed to the next check point, which is presumably higher. But we have many mixed messages between the indexes and various sectors and it's a tough call on market direction when I see the tech indexes calling for a reversal back down from here while the blue chips, RUT and many other sectors point higher once we get through Friday's inauguration. At the moment, with most of the indexes suggesting higher prices, I lean long while acknowledging the need to keep the exit door propped open with my foot. The techs are telling me to be very afraid of the long side and while it's only a warning at the moment it's enough to keep me very cautious (and flat through the rest of this week).

Sentiment seems pretty heavily in favor of a reversal of the Trump trade and that also makes me think they'll be proven wrong by a market that loves proving as many wrong as possible. A strong short-covering rally could follow the inauguration and then, just as everyone becomes convinced the risk of a pullback/decline has passed, the market will surprise with a downside disconnect. Keep in mind the liquidity concerns that I discussed in the beginning of tonight's report. It's just one reason to be afraid of the long side, even though I think there's a good chance we'll see higher prices this month before reversing back down. Trade very carefully in the coming week.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

New Plays

Patiently Waiting

by Jim Brown

Click here to email Jim Brown
Editor's Note

The markets traded sideways again today as worries increased over what will happen on Friday. The Dow closed at a two week low and the Russell only posted a minor rebound from Tuesday's 20-point decline. The futures opened the evening session positive after Netflix gained $10 in afterhours after beating on earnings. The S&P and Nasdaq futures have now turned negative as tensions rise ahead of the inauguration. The VIX actually rose despite the mostly negative market. That is a sign somebody is buying puts.

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 nothing changed from Tuesday's scan. Let's wait and see that Friday brings before diving into the market.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

No Material Change

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow was negative and the Nasdaq positive but the numbers were very small. The market traded sideways on light volume ahead of Friday's event risk. There was no conviction. Tech stocks traded higher ahead of the Netflix earnings but the Nasdaq futures are flat tonight despite a 10 point gain by Netflix in afterhours. The S&P futures are also flat after a minor post close gain.

There is still no conviction by either side and the Dow closed at a two-week low. The doom and gloom analysts were putting out their final market calls for a post inauguration decline but the market does not appear to be listening. If investors believed the analysts they would be taking money off the table before Friday.

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 $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 rebound in biotech stocks.

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


The company announced the start-up of a new UTEC plant in La Porte Texas. Braskem sells high-performance UHMWPE under the trade name UTEC, developed and produced through Braskem's proprietary technologies. This is the sixth plant in the USA and the fourth in Texas. UTEC is eight times lighter than steel and lasts ten times longer than High-Density Polyethylene (HDPE). The product is utilized in a vast array of applications in the following industries: automotive and transportation, electronics, fibers and textiles, industrial and heavy equipment, material handling, oil and gas, pipe and mining, porous plastics, and recreation and consumer. It is a self-lubricating, high-strength, lightweight machinable product used for semi-finished goods.

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. Minor rebound in the biotech sector. HZNP needs to get back over $17.50 to attract new buyers.

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. Shares hit a new 14 year intraday low but rebounded slightly at the close.

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 IWM rebounded only 44 cents from support and remains at the bottom of its recent range.

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. In related news Wells Fargo won the bid for a 1.1 million square foot Galleria at Pittsburg Mills mall for $100. Yes, $100. The mall was once appraised at $190 million. Over the last few months it was appraised for $11 million. Wells Fargo holds a $143 million mortgage that was in default. Given the weak holiday sales and the lack of mall customers, WFC is likely to own that mall for a long time.

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 only declines 8 cents so apparently there was some put buying today. The VIX rose 61 cents.

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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