Option Investor

Daily Newsletter, Monday, 1/23/2017

Table of Contents

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

Market Wrap

The Age Of Trump

by Thomas Hughes

Click here to email Thomas Hughes


A cautious market hangs tough, if cautious, as President Trump gets down to business. Today the newly minted President held a meeting with some of the nations top manufacturers, reinstated the controversial Mexico City Rule, put a halt to Federal hiring, began the process to renegotiate NAFTA and officially flushed the TPP. The meeting with manufacturers was a seeming success, they all left in good spirits with the task of coming back in 30 days with a list of actionable items to help improve the ailing US manufacturing sector. The withdrawal from TPP slamming home belief in Trump's plan to improve US trade relations.

International markets were just as cautious as traders wait to see which way the geo-political wind will blow. Asian markets were mixed as Japanese shares fell under a stronger yen, falling more than -1.25%, while those in China were supported by a government pledge to "lead' the world through this new, Western, crisis. In Europe trading was less mixed and more negative with all indices closing with losses. Average declines were in the range of -0.50%, led by the German DAX.

Market Statistics

Futures trading was quiet, there was not much news to chew on aside from speculations of what President Trump might do. The indices were indicated to open flat to negative all morning and that held into the open of trading. At the open the indices began trading with small losses, made a quick dash to test break-even and then moved down to the lows of the day. The lows were hit just before noon, about -12 points for the SPX, then the index made a nice double bottom and then began to creep back up. The remainder of the day saw the indices trend within the early range and close near the mid-point of that range.

Economic Calendar

The Economy

There was no economic data today and there is very little this week. Tomorrow we'll get Existing Home Sales, Thursday we'll get Leading Indicators, jobless claims and New Home Sales, Friday wraps up the week with the first read on 4th quarter GDP, Durable Goods and Michigan Sentiment. Next week is another data dump as the we enter February, along with a BOJ and an FOMC meeting.

The Moody's Survey of Business Confidence fell nearly -3 points over the past two weeks, -1.6 points in the past week alone, as global business sentiment cools. Despite the fall the index remains high relative to the summer bottom and consistent with an economy in expansion. Mr. Zandi says that sentiment remains firm, the US is strongest and outlook is positive.

Earnings season is well underway, at this point a little more than 12% of the S&P 500 has reported. Of those who have reported 61% have beaten EPS estimates and 47% have beaten revenue estimates, both a little below recent averages. The blended rate for earnings growth is now 3.4%, up 0.2% from a the start of the reporting season, and will likely move higher. Based on the average we can expect it to come in near 7.5% by the end of the reporting season. Full year 2016 expectation held steady at 0.2%. This week there are another 70, 14%, S&P 500 companies scheduled to report.

Forward outlook remains robust, the forward all-index 12 month EPS projection continues to rise and hit another new high in the last week. For the 1st quarter 2017 earnings growth is expected to expand to 10.9%, down a tenth in the last week, and 2nd quarter 2017 growth is expected to expand at 10.6%, up a tenth in the last week. Full year 2017 outlook is also strong, 11.4%, and implies further expansion to growth in the 2nd half of the year.

The Dollar Index

The dollar took another hit today as Trump's protectionist agenda begins to unfold. The index is under pressure from uncertainty over Trump's agenda and how he may negatively impact the economy. The Dollar Index fell a little more than -0.50% to close below the $100.50 support target and just above the $100 level. This move brings the index down to a critical support level ahead of the FOMC meeting next week. The indicators are bearish and stochastic in particular looks weak, suggesting that support could be tested further or broken in the near term. If broken next support target is near $99 and the 150 day moving average.

I'll be honest, the chart is ominous but I am not quite ready to give up my bullish stance on the dollar, for a number of reasons. For one, Trump could swing sentiment back to the upside at any moment, that's a reality. Second, the US economy is on track for expansion this year, next week's data could be strong and support the dollar. Third, FOMC meeting is next week, any move in the dollar is suspect until then, regardless of direction. Fourth, the BOJ is also next week and could move the yen with their policy as Abenomics continues to flounder. For some reason expectations for rate hikes in the first half of the year have come down in the last week, I wouldn't be too sure about that.

The Gold Index

Gold prices continue to rise on a weaker dollar and economic uncertainty. This may continue into the near term if there is no clarity from the Oval office on economic policy. Spot price gained nearly 1% in today's action to touch a two month high but was capped at resistance. Resistance is just shy of $1,220. The metal looks like it might be forming a flag pattern, indicative of continuation, but I am leery of that ahead of next week's data dump, BOJ and FOMC meeting. Of course, the Trump Factor may have taken control of gold for the near term, uncertainty could drive it higher. A break above $1,220 would be bullish with upside target near $1,280 in the near term.

The gold miners got another lift today as higher spot prices lifts forward earnings outlook. The miners ETF GDX gained nearly 3%, moving above the 150 day moving average and setting a 2.5 month high. The indicators are bullish, momentum is to the upside, so this move may continue into the near term. The caveat is that major divergence is present in MACD while stochastic shows signs of resistance. Upside target is near the 50% retracement level, $23.80, with a possible move to $26.

The Oil Index

Oil prices fell today as signs of rising US production offset hopes and signs the OPEC cuts are taking hold. Today's news, a meeting of OPEC ministers over the weekend confirmed the cartel is on track to meet its 1.8 million barrels per day production cut and US rig counts made their largest one week gain in nearly 4 years, the 8th month of increases. WTI fell nearly -1.0% to trade near $52.75 and the mid-point of the one month range. Price may remain volatile as higher prices are capped by rising US output and lower prices are supported by OPEC.

The Oil Index fell nearly -1.0% as well, creating a very small black candle and setting a new 1 month low. The index fell below the short term moving average with today's action and looks like it may move lower. The indicators are bearish and stochastic is showing weakness with a cross of the lower signal line. If the index does move lower next support is near 1,235. Longer term outlook remains positive for the sector, earnings growth projections have not fallen, 350% for full year 2017, so any dip is a likely buying opportunity.

In The News, Story Stocks and Earnings

McDonald's reported earnings before the bell and wowed a market expecting a miss. The world's largest fast food chain beat on both the top and bottom lines on strength in Asia. Global comps increased 2.7%, more than double expectations and led by China and Japan, while those in the US fell. US comps were hurt however due to comparison with the launch of all-day break-fast so results are still decent. Of note, profitability in China is improving and US comps will be impacted by all-day breakfast the rest of the year. Management says that the move to all-day breakfast was the right thing to do, but at the cost of lower menu mix. Shares of the stock fell more than -2% intraday to test support at $120 and the short term moving average.

Haliburton reported earnings before the bell with mixed results. The company reported a 5% increase in revenue, revenue that fell short, a wider than expected loss but a better than expected adjusted profit. The company says it has managed itself well through the downturn, has gained marketshare, been able to improve margins and is positioned for growth during the upswing. Shares of the stock fell more than -2.5% on the news, falling from resistance at the short and long term moving averages.

The VIX rose today but the candle is not bullish. The fear index made a small gap higher to open at the short term moving average, moved up to test resistance at $12.00 and then fell back below the moving average. The index appears to be trending sideways, near long term lows, and indicative of calm markets. The indicators are pointing higher at this time but the indications are weak and more consistent with a sell signal within a downtrend than a reversal or buy signal. The chance of increasing fear remains, there are plenty of things to be worried about right now, but those chances will subside as earnings season unfolds, we move past next week's data, the FOMC meeting comes and goes and President Trump gets his administration running.

The Indices

The indices fell today but price action was more sideways than not, and within recent ranges. Basically, there was no inauguration inspired break-out and the market continues to move sideways. Today's action was led by the Dow Jones Transportation Average which lost -0.94%. The index has created a medium sized black candle, near the mid-point of the near term range, falling from resistance at the previous all time high and supported by the short term moving average. The index has reached a point of equilibrium and ripe to make a move. The indicators have moved to a point of equilibrium as well, MACD momentum is very near to zero and stochastic has moved to the middle of its range, and at a point where the market could go either way. A fall from this level confirms resistance, downside target near 8,550, a move up confirms support with upside targets at the current all-time and above.

The S&P 500 made the next largest decline, -0.27%, and created a small spinning top candle. This is the 15th spinning top since the start of the year and the 31st day of trading within the near term range. The prevailing trend is up, the index is in consolidation above support and the indicators are consistent with that. Support is a long term up trend line, confirmed by the short term moving average, and faces only the resistance of current all-time highs. Today's action confirms support at 2,260, a break below this level would be bearish in the near to short term with downside target near 2,220. A move up from here is bullish and trend following with upside targets in new all-time-high-territory.

The Dow Jones Industrial Average made the third largest decline, -0.14%, and created a very small spinning top doji. This candle confirms the bottom of the 1 month trading range, at the short term moving average, but is not a strong indication of future movement. The indicators are moving lower at this time, consistent with a test of support within the prevailing up trend. Support is near 19,800, a break below this level would be bearish in the near to short term with downside target near 18,900. A bounce from this level would be bullish and trend following with upside targets in all-time-high-territory.

The NASDAQ Composite made the smallest decline today, only -0.04%. The tech heavy index created a very small doji spinning top candle, the 15th of near perfect sideways trading since the first of the year. The indicators are bullish at this time but over the past month are consistent with range bound trading within a tight and narrowing range. Support is just below today's close, near 5,500, a break below which would be bearish. A confirmation of support or move to new all time highs would be bullish and trend following.

The indices continue to wind up within tight and narrow ranges. Not surprisingly, this wind up is focused on the next FOMC meeting with volatility driven by earnings, economics and the shift in Presidential powers. The way it looks now, the indices could go either way but based on the prevailing trends, forward economic outlook, forward earnings outlook and Trumponomics I am bullish and see them breaking out to the upside. The caveat is that the break out has not happened, there is a chance of correction, so caution is still the word of the day. If a correction does unfold I'll be buying on the dip.

Until then, remember the trend!

Thomas Hughes

New Plays

Merger in Trouble

by Jim Brown

Click here to email Jim Brown
Editor's Note

The FTC is taking a dim view of a merger affecting Fred's and the outlook is negative. The FTC could spoil the party for Rite-Aid (RAD) and Walgreens (WBA) and that is negative for Fred's.


No New Bullish Plays


FRED - Freds Inc - Company Profile

Fred's, Inc., together with its subsidiaries, sells general merchandise through its retail discount stores and full service pharmacies. The company, through its stores, offers household cleaning supplies, health and beauty aids, disposable diapers, pet foods, paper products, various food and beverage products, and pharmaceuticals to low, middle, and fixed income families in small- to medium- sized towns. It also sells general merchandise to franchised Fred's stores. As of January 30, 2016, the company operated 641 company-owned stores, which included 60 express stores in 15 states and 18 franchised stores under the Fred's name, as well as 372 pharmacies and 3 specialty pharmacy facilities primarily in the southeastern United States. It also operates 18 franchised stores under the Fred's name. Company description from FinViz.com.

Freds has been in retail trouble for over a year. Their same store sales continue to decline since every grocery store, Walmart and Target in America has added a pharmacy. Shares had been in decline until Walgreens/Rite Aid agreed to sell Fred's 865 Rite Aid stores in an effort to get FTC approval for the WBA/RAD merger. That would make Fred's the third largest drugstore chain in the U.S. and shares doubled on the news.

A funny thing happened on the way to the merger. The FTC said last week they did not believe that was enough of a consideration to approve the merger. Walgreens has 8,200 stores and Rite Aid has 5,000 stores. Selling Fred's 865 Rite Aid stores was not enough. The combined WBA/RAD would have more than 12,500 stores to Fred's 1,500. CVS would become number two at 9,655 stores. The FTC believes the post merger environment would create two heavyweights that would dominate their respective areas.

Shares of Fred's have been in decline for a week on the worry the FTC will either block the merger OR they will be forced to sell a much larger block of WBA/RAD stores to Fred's and the company will not be able to complete the transaction or they will become too big too fast and begin losing money like crazy as they try to ramp up distribution and management to handle the suddenly increased store count.

Fred's announced a secondary offering on Friday to raise money for the acquisition. If the deal changes that causes additional problems. If the deal were to triple in size, Fred's would have to do another secondary to raise the additional cash and it could be a whopper of an offering.

Earnings March 9th.

I believe Fred's will continue to give back those monster gains from the December headline. If the WAG/RAD merger approval gets extended that creates more indecision for Fred's.

Short FRED shares, currently $15.00, initial stop loss $16.75

In Play Updates and Reviews

No Direction

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes rebounded from their opening lows but failed to return to positive territory. The Nasdaq 100 was the only index to post a gain and it was minor at 2 points. Dip buyers appeared immediately but they were lacking in conviction as the day progressed. Weak oil prices also weighed on the market.

The market remains confused with the Dow and Russell near their lows and the S&P and Nasdaq near their highs. We need a consensus to form that moves all the indexes in the same direction. That will give investors some relief.

The biotech sector was weak again with a -1.3% decline after reporters quizzed Spicer in the White House press conference when the president would do something about drug prices. This decline knocked us out of ARWR and HZNP.

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

BOX - Box Inc
The long position was opened with a trade at $17.10.

ARWR - Arrowhead Pharma
The long position was stopped with a trade at $1.75.

HZNP - Horizon Pharma
The long position was stopped with a trade at $16.45.

VXX - VIX Futures ETF
The short position remains unopened until a trade at $22.35.

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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. Biotech sector was down sharply once again and we were stopped out.

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:

Closed 1/23/17: Long ARWR shares @ $2.27, exit $1.75, -.52 loss.

BOX - Box Inc - Company Profile


No specific news. Minor gain in a weak market to start the position.

Original Trade Description: January 21st.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

Box is rapidly growing its customer for document management for companies with a global workforce. They are competing with other companies for cloud collaboration and access. More than 69,000 companies worldwide now use Box. They have broken into the media sector and now many production companies use Box for storing and distributing their production content. This has given Box a new niche in the market. Box has partnered with Salesforce.com, IBM and Microsoft in the cloud space. Their goal is to partner and grow with them rather than compete with those giants.

The company reported a smaller than expected loss for Q3 and expect to post an even narrower loss for Q4. Their guidance for Q4 is a loss of 13 cents on revenue of $109 million. That is better than the 26 cents loss in Q4-2015.

Earnings March 1st.

Shares broke out to a new 52-week high on January 12th before pulling back slightly with the market. They closed 5 cents below a new 52-week high on Friday.

Position 1/23/17 with a BOX trade at $17.10

Long BOX shares @ $17.10, see portfolio graphic for stop loss.

HZNP - Horizon Pharma - Company Profile


No specific news. Biotech sector was down sharply again to stop us out of the position.

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

Closed 1/23/17: Long HZNP shares @ $17.75, exit $16.45, -1.30 loss.

BEARISH Play Updates

ENDP - Endo International - Company Profile


Endo said it had reached an agreement with the FTC to settle an investigation and litigation. Endo will not admit any wrong doing and no monetary payments will be assessed. This was a good headline for Endo but shares still declined 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 2000 posted only declined -4 points but the IWM only missed a new 6-week closing low by 18 cents. The IWM is declining but it needs to move faster.

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 and surprisingly no decline.

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.

Update 1/19/17: 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.

Update 1/21/17: Moody's downgraded Sears credit rating from Caa1 to Caa2. Moody's said Sears is running out of stuff it can sell for cash. They only have 211 properties that are unencumbered and worth about $2.5 billion. With the company burning cash at the rate of $1.5 billion they are rapidly approaching the end of the line. Moody's said they could raise cash with the sale of the Kenmore and Diehard brands but after that they are done. There is nothing left to sell that will produce a large inflow of cash.

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


Another decline on the VXX after the market rebounded from its lows. I will leave the recommendation open until we see what next week brings then make a decision on how to proceed. I am changing the entry trigger to $22.35.

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 $22.35

Short VXX shares, no initial stop loss.

No options recommended because of price.

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