Option Investor

Daily Newsletter, Thursday, 1/19/2017

Table of Contents

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

Market Wrap

Inauguration Eve

by Thomas Hughes

Click here to email Thomas Hughes


Market drift continues on the eve of Donald Trump's inauguration. Meanwhile, earnings, economic data and central bank activity help drive volatility.

The latest shot in the currency-war-that-wasn't was fired by the ECB just this morning. The bank held rates steady and stood pat on its tapering timeline but comments made by Mario Draghi leave the door open for renewed stimulus saying a "very substantial degree" of policy stimulus was still needed. At the press conference Mr. Draghi made further comments to the effect that there weren't signs yet of long term sustained increases in inflation and that downside risk remains. The news caused some volatility in the market, sending the euro first up on the statement and then down on the comments. The next major central bank meetings are in two weeks when the FOMC and BOJ meet simultaneously.

Asian indices were mixed and mostly flat although the Nikkei was able to post a gain of nearly 1%. There was little news from the region aside from a market anxiously waiting to see what happens when Trump is inaugurated tomorrow. European indices were much the same, in the early portion of the day, and then ECB made their announcement and volatility stepped in. At that time the indices moved higher, hit resistance, moved lower and closed near to flat for the day.

Market Statistics

Futures trading was quiet most of the early morning. The ECB news, the press conference, earnings and a round of economic data did not move it. The open was quiet as well, the indices opened near flat to yesterday's close and held near that level all day. The SPX began with a small gain, a few points, but by 10:30AM was near the low of the day, just below break even. The rest of the day was no different, the indices trending sideways within the early range into late afternoon. Downward pressure intensified just after 2PM, pushing the indices to new lows. The SPX bottomed just before 2:30PM at which time it began to drift back up but not enough to recover the day's losses.

Economic Calendar

The Economy

Lots of data today starting with the weekly jobless claims. Initial claims fell a surprising -15,000 to hit 234,000, just a hair above the long term 46 year low. Last week's figure was revised higher by 2,000. The 4 week moving average of claims fell -10,250 to hit 246,750 and a new 46 year low. On a not adjusted basis claims -16% in the last week and are down -8.6% over last year. The spread between last year and this year has narrowed from last week's remarkable -18.4% but remains stout at -8.6%. Based on these numbers it looks like the labor market is making further progress in its 8 year recovery.

The continuing claims figures also fell this week, -47,000 to hit 2.046 million. The four week moving average of claims also fell, -1,750, to hit 2.090 million. Continuing claims remains elevated from its long term lows but looks like it is heading back to retest them, if the initial claims figures are any kind of indication it is likely to happen in the next couple of weeks.

Building permits and housing starts data was released at 8:30AM alongside the claims data. Permits fell -0.2% from the previous month but are up 0.7% over December of last year. Full year 2016 building permits are up 0.4%. In December permits for single family homes led with an increase of 4.7% and is the silver lining to this data, showing a pick up in residential construction. Housing starts data was much better, jumping 11.3% to reverse the previous month's declines. The December data is up 5.7% from the previous year and full year 2016 starts are up 4.9% over 2015. completions are also up in 2016, nearly 9.75% over 2015.

The Philadelphia Federal Reserves Manufacturing Business Outlook Survey was also released this morning. The diffusion index jumped 3.9 points, ahead of expectations, to hit 23.6 and a new high dating back to 2014. The 6 month forward outlook also jumped this month to a new high. Within the report new orders remains positive and gained 11 points, shipments fell 1 point but remains positive, deliveries, unfilled orders were positive for the third month and employment/hours worked but expanded as well.

The Dollar Index

The Dollar Index got a double shot of good news today, if you are bullish on the dollar. First the ECB/Draghi comments pulled the rug out from under the euro, second the data supports rising interest rates. This, along with Yellen's comments yesterday, seem to point to at least 2 if not 3 rate hikes this year, maybe more if inflation picks up any more. The index jumped nearly a full percent on the news, closing with a gain near 0.4% creating a medium sized black bodied candle with long upper shadow.The indicators are consistent with a pull back to support, support is at the recently broken multi-year high of $100.50, and now set up for a shift in momentum. Stochastic is already forming a weak bullish crossover, in line with the prevailing trend, which could lead the index higher although there is some resistance ahead. Today's gains were capped by the short term moving average, near $101.50, a break above which would be bullish with targets near 103.50.

The Gold Index

Gold prices came under pressure today as the dollar and rate hike outlook gained strength. Spot gold fell a little more than -1% to trade just below $1,200. The metal is hitting resistance, coincident with a revival in bullish dollar outlook, and may continue to fall in the near term. The next two weeks are a bit light on data so it will be FOMC outlook and ultimately the FOMC meeting that drives this trade. The risk, or potential catalyst, is tomorrow's inauguration and whatever it is that soon-to-be President Trump has to say about policy and the economy between now and then.

The Gold Miners ETF GDX fell nearly -1% today as well, creating a small spinning top candle. The ETF is falling back from the resistance of the 150 day moving average and continues to show signs of topping. The indicators are consistent with a relief rally within a down trend and have begun to signal a trend following sell. MACD is still in bull territory but falling back quickly from its peak, stochastic has peaked and rolled over at the upper signal line with a bearish crossover and both suggestive that support will be tested at least. Support is the short term moving average, near $22.00 and the 50% retracement level, a break below here would be bearish.

The Oil Index

Oil prices continue to churn above the $50 market. Today WTI gained a little more than 0.5% to trade above $51.25 on remarks from the IEA that the energy market was tightening. In the report they say it still far to soon to be sure but there were signs of tightening even before the OPEC deal was agreed upon. The risk is that US production is also on the rise which is expected to offset or match supply cuts attributable to OPEC. I expect volatility to continue at or near current levels until more definitive evidence is presented.

The Oil Index fell despite the rise in oil prices, shedding a little more than -0.70%. The index created a small black bodied candle testing support at the short term moving average and may continue test that support into the near term. MACD momentum is not strong but it is holding steady in bear territory while stochastic continues to move lower. Support is at 1,250 in the near term, a break below here may find additional support at 1,235. The long term outlook for earnings growth in the sector remains strongly bullish so any pullbacks are likely entry points for bullish positions.

In The News, Story Stocks and Earnings

CSX Corporation jumped after a report that it was being targeted by activist investors. The former head of Canadian Pacific is expected to partner with investors to acquire CSX. This, along with signs among the rail carriers that demand was picking up, helped to send the stock up more than 20% to trade at a new all time high.

Netflix also hit a new all time high in today's session. The company reported earnings yesterday and wowed the market with results, in particular subscriber growth. Shares jumped in the pre-market session and extended those gains intraday although sellers stepped in before the close to create a black bodied candle. All the same NFLX closed with a gain of more than 4% and likely to go higher in the short to long term.

American Express reported after the bell, beating expectations for revenue but falling short on the earnings end. Full year guidance was reaffirmed in-line with consensus. Shares of the stock moved higher immediately after the release but gave up the gains and a little more before it was all said and done.

IBM reported after the bell and beat expectations. Results are driven by a 35% increase in cloud revenue that led to an increase in full year 2017 guidance. Shares of the stock responded well to the news, hitting a new all time high in the after market session.

The Indices

The action today was mixed. The indices began the day in positive territory for the most part but a lack of interest, or simply a market in wait, allowed them to drift down to support. Even at the low of the day the indices were above support and within their recent ranges so in the end nothing more than more churn as we wait for the next catalyst. Today's move was led by the Dow Jones Transportation Average which was the only index to close with a gain, near to 0.30%. Despite the gain today's candle is black, moving down from resistance after gapping higher at the open. Resistance is the recently broken all time high but does not appear to be too strong at this time. The indicators are mixed but consistent with a retest of the recent highs if not new highs. MACD is retreating from a bearish peak and consistent with a trend following swing in momentum, stochastic has already fired the weak trend following signal and is set up to confirm with a stronger. A break above resistance would be bullish. A drop from here could be bearish but would find support at the bottom of the near term range, near 9,000.

The Dow Jones Industrial Average was today's loss leader with a decline of -0.49%. The blue chips created a small bodied black candle testing support along the bottom end of the near term trading range. This support is confirmed by the short term moving average, near 19,730, and may be tested further. The indicators are a bit mixed, both pointing lower in the near term but consistent with support within an uptrend. A break below support would be bearish in the near term with targets near 19,500 and 19,000. A confirmation of support at this level would be bullish and trend following with targets of 20,000 and higher.

The SPX made the second largest decline today, -0.36%. The broad market index created a small black bodied candle, above the mid point of the near term trading range, testing support at the long term up trend line. Support at this level, 2,260, is confirmed by the short term moving average and gaining strength every day. The indicators are mixed, both pointing lower in the near term but consistent with a support at this level in the short term and a rising market in the long. A break below support would be bearish in the near to short term with targets near 2,240 and 2,200. A confirmation of support at this level would be trend following and bullish with upside targets near 2,300 in the near term.

The NASDAQ Composite made the smallest decline today, -0.28%. The tech heavy index made a small bodied black candle and may have hit a near term peak. The indicators are bullish and consistent with the underlying trend but showing near term weakness, consistent with a test of support. Support is likely along the short term moving average, near 5,500, but deeper correction is a possibility. Long term outlook for earnings growth remains positive so any correction that may unfold is a likely entry point for bullish positions.

The markets have been winding up, getting ready to make their next move, and that move may begin tomorrow. Trump's inauguration, coincidentally the same day as OPEX, is a likely catalyst that, depending on how you view the market, could unleash the next leg of the long term secular rally or cause the next correction. It just depends on how you look at it; is the market looking to sell the reality of Trump and Trumponomics or not? In either event the long term outlook for earnings growth is positive, economic trends are expansionary and Trump is going to boost the economy so I am bullish and looking to buy on the dip, if it comes, or the break to new highs, when it comes.

Until then, remember the trend!

Thomas Hughes

New Plays

Event Risk Friday

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market will be ignored on Friday until a headline appears to cause a volatility event. The Dow and Russell closed at 5-week lows. Those are the two sentiment indexes for the market. Typically the market trades down on the day of an inauguration and the S&P loses 2.6% over the next four weeks. Nothing about this election cycle has been typical but we need to avoid opening new positions without a market direction other than sideways.

There is no reason to put money to work in this market ahead of the event. 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

Weakness Accelerating

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and Russell both closed at new five-week lows. The S&P and Nasdaq closed negative but the two market leaders are suggesting there are lower lows to come. You have a big cap index and a small cap index accelerating to the downside and both are seen as market sentiment indicators.

We do not know what will happen around the inauguration events on Friday but typically the market trades lower. In the four weeks that follow the S&P averages a 2.6% decline.

There is no reason to add new plays ahead of a volatility event. We are primarily short and ready for a decent drop.

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

BAK - Braskem
The long position was stopped out with a trade at $21.50.

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. Weak market and weak sector. I raised the stop loss.

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. Shares dipped below support in the weak market to stop us out.

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:

Closed 1/19/17: Long BAK shares @ $23.11, exit $21.50, -1.61 loss.

No options recommended because of the wide spreads.

HZNP - Horizon Pharma - Company Profile


No specific news. Weak market and weak sector.

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 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 IWM closed below support at a five week low on a 13 point drop in the Russell 2000.

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


Sears announced it was ending its decades old employee discount program. They are going to allow employees to earn points on purchases that will be good for future discounts. Currently they get a discount on items at the time of purchase. By scrapping that plan, the company gets the money up front and maybe the employee will use their points on future purchases. The point values differ on different types of merchandise. If Sears eventually files bankruptcy, the points would disappear. This is another sign the company is in trouble.

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 rebounded slightly but it will take a couple days of triple digit Dow declines to hit our entry target.

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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