Option Investor

Daily Newsletter, Thursday, 2/9/2017

Table of Contents

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

Market Wrap

Tax Reform!

by Thomas Hughes

Click here to email Thomas Hughes


Trump announced his tax reform plan is a mere weeks away, and the market set new all time highs. The news came during a meeting with airline executives and put a decidedly different spin on today's trading. During the early portion of the session it looked as if the market would continue to drift sideways within tight narrow ranges, after the announcement it looks as if the market will keep moving up into all-time-high territory.

Global indices were higher in the overnight session. Asian indices drift higher on rising oil and gold prices, aided by a letter from President Trump. President Trump sent a letter to China's supreme leader and received glowing praise for his efforts at establishing positive and constructive dialogue. This news helped support European markets which were further aided by positive earnings news that helped them gain about 1% on average. Asian indices were closed well before the Trump tax news, the European shortly after.

Market Statistics

Futures trading, like the global indices, was listless in the early hours. The indices were indicated to open flat to slightly positive, about 4 or 5 points for the SPX, and there was little change in that throughout the early session. There was a lot of earnings activity pre-open, and some positive labor data, but still no move in the futures. The open was positive and orderly. The indices began the day with marginal gains, quickly moved up to near term resistance, simmered for a half hour or so, heard the Trump news and then moved up to set new all time highs. The SPX topped out the first time before 11:30AM just shy of 2,310, +15 points, but held the days gains. A brief pullback led to consolidation that lasted well into the afternoon and eventually retested the early high. The test did not last long, the market blew right threw it and marched right on up to make another new high, where it remained until the close of the day.

Economic Calendar

The Economy

There was not a lot of data today but what there was is good. First up, initial jobless claims. Initial claims fell -12,000 to 234,000 versus expectations for a small gain. The previous week's figures was not revised. The four week moving average of claims fell -3,750 to hit 244,250, a new low dating back 43 years to November 3rd, 1973. On a not adjusted basis claims fell -6.9% versus the -2.1% projected by the government. Year over year not adjusted claims are down -10.75% and continue to trend lower over the long term. Simply stated, first time claims are trending lower over time, hitting new lows and remain consistent with ongoing labor market improvements.

Continuing claims rose by 15,000 from last week's not revised figure to hit 2.078 million. The four week moving average of claims fell however, shedding -3,750 to hit 2.075 million. Although it is still trending above the recent low this data is still trending near the long term low and is consistent with labor market health. The recent rise in continuing claims is due to seasonal factors that should work their way out of the data over the next few weeks.

Total claims made a small gain this week, 32,996, versus my expectation it would fall. Even so, total claims remains consistent with seasonal and long term trends, and the concept of labor market health. On a year over year basis claims are down -7.3% and will likely begin falling off as we go into the late winter and early spring.

Wholesale inventories was reported as 1% for December, in line with expectations, and up 2.6% year-over-year. The previous month was not revised. Wholesale sales rose 2.6%, faster than expected, and are up 6.8% year-over-year. The previous month was revised, up 0.1% to 0.5%. The inventory to sales ratio fell to 1.29, the lowest level in two years. While not a robust report it does reveal activity within the economy as wholesalers turnover and replace merchandise. The most positive aspect is that sales are outpacing increases in inventory; as sales deplete inventories manufacturer orders and production could see a boost.

The Dollar Index

The dollar got a boost from Trump's tax announcement. The Dollar Index gained 0.33%, extending its rebound but halted at resistance. The tax plan could be the spark to renew dollar bullishness. Lower taxes are expected to further the US economy's ability to grow, spur inflation and lead to higher interest rates and those are all supportive of dollar strength. Today's gains were capped at the short term moving average which is just above the $100.50 level. The indicators are bullish, both pointing higher, but a move above resistance is needed to get bullish on the index again. A break above the short term moving average would be bullish with upside target near $102.50 in the near term. A failure to move higher may result in a retest of support with target near $99.25.

The Gold Index

Gold prices retreat from their latest highs on the latest in Trump news, spot prices falling a little more than -0.25% after an initial push to retest yesterday's 2.5 month high. Gold has been supported on geo-political tension and soft dollar outlook but that could all be changing right now. Trump's tax plan, and the economic data, has put a bit of strength into the dollar while at the same time his letter to China has eased trade-war fear. If presidential activity and market sentiment continue to shift along those lines the impetus to own gold will disappear and prices will likely fall.

The Gold Miners ETF fell more than -2%, confirming resistance at the $25.50 level. This level is the the 3 month high and consistent with resistance associated with the post-election rally, the dollar's push to new long term highs and gold's fall to long term lows. The candle is long and black, engulfing the prior three days and confirming yesterday's small hanging man doji. The indicators are consistent with a peak, showing divergences that have foreshadowed market weakness for many weeks, but not yet indicative of a sell. If prices continue lower from here first target is the short term moving average near $23.50.

The Oil Index

Oil prices remain volatile and trapped within the near term range. Today's action was driven by a surprise draw in gasoline stockpiles, a net difference of 2 million barrels when compared to expectations, fueled by rising demand. This draw down may be a sign of shifting fundamentals and market rebalance but for now remain a single piece of data in an ocean of conflicting signals. Until a clearer indication of fundamental change is present oil prices will likely remain within the near term range between $51.50 and $54.75.

The oil sector advanced today as relatively firm oil prices support positive forward earnings outlook. The Oil Index gained 1.0%, extending its bounce from yesterday's bounce from the 2 month low, but does not look overly strong. Today's candle is a small spinning top doji, indicative of market indecision, and below potential resistance at 1235. The indicators are consistent with pullback and bounce from support but remain bearish in the near term so that support is likely to be tested again, near 1,200. Longer term outlook remains bullish, earnings growth, economic growth and the opportunity for rising demand are all in the cards, so this dip looks buyable.

In The News, Story Stocks and Earnings

Another big day for earnings with numerous reports before the open and after the close of trading. Early hours was dominated by a few names but the one that sticks out for me is Twitter. Twitter beat EPS estimates by a hair but missed big on revenue. The company reported the slowest quarter of revenue growth in its history and spurred renewed criticism of Jack Dorsey's choice to CEO two companies. Along with the miss forward guidance was weak and helped to depress share prices. Shares of the stock fell in the pre-market session, gapped lower at the open, shed nearly -13% and closed at the low of the day.

Coka Cola revenue beat, EPS matched estimates and guidance was weaker than expected. The company reported its 7th quarter of declining revenue on rising dollar value. KO down -2%.

YUM! Brands revenue missed, EPS beat, comp store sales miss. Operating profit grew 27% as strategic shifts take hold. Taco Bell and KFC remain steady, Pizza Hut is expected to struggle. Shares of the stock gained more than 1% to trade just shy of a near 2 year high.

Viacom reported a decline in year over year revenue but blew past top and bottom line estimates. Along with the beat the company outlined a 5 year strategic plan investors founds encouraging. Shares of the stock rose nearly 4% but were capped at resistance.

After hours was just as busy with reports from Pandora, Expedia and News Corp. Pandora missed top and bottom line expectations on weak growth. The company also gave weak forward guidance and sent shares plummeting 5% in after hours trading.

Expedia also missed top and bottom. Bookings for the quarter were in line with expectations but forward outlook is weak. Shares fell more than 3% in after hours trading.

News Corp reported earnings and revenue down from last year, a net loss, but beat expectations. Shares fell marginally on the news.

The Indices

The indices began the day in wait-and-see mode, waiting to see what might happen in terms of Trump, geopolitical tensions and earnings. To be honest, I don't think there was much expectation for much of anything to happen today at all, much less an indication of when we could expect to learn more about the Trump Tax Plan. There is a lot of expectation built into this plan, the chance for significant increase to forward earnings outlook exists, and that was shown by today's market moves.

The Dow Jones Transportation Average led today's action and is the only index to not set a new all time high. The transports created a medium sized white bodied candle moving up from support. Support is the short term moving average and a previous all time high, confirmed by the indicator. Both MACD and stochastic are consistent with a bounce from support in the near term, both also consistent with short term support at or just below current levels. Today's move is trend following, upside target is the current all time high. A break above that would be bullish.

The NASDAQ Composite made the second largest move, 0.58%, and set a new all time high. The index created another medium sized white bodied candle, extending its rally, but the indicators continue to weaken and give mixed signals. MACD is barely bullish, confirming today's high, but the peak is yet another lower peak in a string of 5 since the election. Stochastic is also warning by showing a peak above the upper signal line, overbought territory. These are by no means an indication of an end to the trend but are reasons for caution. Upside target is 5,750, first target for support is 5,600.

The S&P 500 posted a gain of 0.58%, exactly the same as the NASDAQ, and created a medium sized white bodied candle. Today's action breaks out of the near term consolidation in a move that set a new all time high, above 2,300. This move is trend following and rising up from support. Support is a long term up trend line and the short term moving average and confirmed by the indicators. Stochastic has been firing bullish signals for weeks and gave another one today, both %K and %D moving higher, %K crossing above the upper signal line. MACD is most promising as it confirmed today's move with a bullish crossover. Upside target is 2,400 in the near to short term.

The Dow Jones Industrial Average made the smallest gain today, only 0.40%, but was able to set a new all time high. The blue chips created a medium sized white bodied candle moving up from support and confirmed by the indicators. Support is the previous and recently set all time high, and the short term moving average. The indicators are both bullish, MACD confirming today with a bullish crossover. This move is trend following with upside target near 20,500 in the near to short term.

Aside from the NASDAQ I am pretty bullish on the market. The NASDAQ looks like it might be ready to correct, maybe not, but the others look ready to run. The economic trends are up, the earnings outlook is good, Trump induced fear is subsiding (at least stabilizing) and now we've got positive news on tax reform. I remain cautious, but I am expecting to see the markets move higher in the near to short term, providing no more black swans or other buzzwords pop up to scare the market lower.

Until then, remember the trend!

Thomas Hughes

New Plays

Small Cap Earnings

by Jim Brown

Click here to email Jim Brown
Editor's Note

The next two weeks are known as the small cap earnings weeks. The big caps dominate the first four weeks of the cycle and the small caps report the last two weeks of February. The combination of impending earnings or recent earnings spikes/drops have made just about every small cap stock ineligible for play consideration.

I went through my universe of about 350 small cap stocks today and I could not find anything that looked promising that did not have earnings over the next two weeks.

I almost pulled the trigger on Arconic (the old Alcoa) but the string of gains is too perfect. The instant I add that stock will be the day the profit taking starts. I have been watching it every day since their earnings on the first and there have not been any entry points.

With the market suggesting there are more highs ahead, I am hesitant to add any shorts until the market looks fragile again. The S&P futures are up +3 tonight and hopefully we will have another good day on Friday.

I will look at all the charts again this weekend when I have more time and see what gem is hiding on all the market noise. I do not want to recommend a new play just because it is a newsletter day. We only want to enter a new play if it looks promising.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Trend Change?

by Jim Brown

Click here to email Jim Brown

Editors Note:

All four major indexes broke out to new highs and hopefully it is the start of a new trend. The S&P was the best news with the close at 2,308 and well over resistance at 2,300. The Dow did close at a new high but gave back 36 points into the close. Both Nasdaq indexes closed over their respective round number resistance at 5,700 and 5,200. It was a good day.

Unfortunately, all the gains were made by 11:AM and the markets moved sideways again. It was another short squeeze powered by Goldman Sachs adding 30 points to the Dow and Tesla, Priceline and Regeneron adding the fuel for the Nasdaq. None of the FAANG stocks were in the top 30 point gainers list.

We need the market to at least hold these gains on Friday and ideally add to them by at least a few points. That would setup a positive bias for next week.

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

CARA - Cara Therapeutics
The long position was entered at the open at $16.85.

STM - STMicroelectronics
The long position was stopped at $13.75.

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

AKS - AK Steel - Company Profile


No specific news. Shares rallied 8% with the sector on comments from Trump about some "phenomenal news" on taxes coming soon.

Original Trade Description: February 4th

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

Shares spiked from $5 to $11 after the election on hopes for a surge in infrastructure projects, lower regulations and a growing economy. AK shares peaked early and traded sideways for a month. The week before earnings they began to decline as analyst said the market gains were overdone.

The reported earnings of 25 cents on January 24th that beat estimates for 7 cents. Revenue of $1.42 billion was slightly lower than estimates for $1.43 billion. Shares spiked on the earnings news and collapsed on guidance that shipments to automakers had declined in Q4. The next day a spokesman clarified that saying the "decline in shipments compared to 2015 was primarily the result of a 41% decline in shipments to the distributor and converters market as the company intentionally reduced sales of commodity products." In other words, AK wanted to focus its efforts on the higher margin products and reduce exposure to low margin products.

Shares quit declining after the clarification and bottomed just under $8. Friday's close was right on the verge of a 7-day high. One more positive day and we could see a rebound begin.

Earnings April 25th.

The optional option position is for a longer-term holder with a June expiration. Very limited risk in terms of dollars invested and could be a decent winner if AKS returns to the $11.25 highs or higher on infrastructure stimulus headlines.

Position 2/6/17:

Long AKS shares @ $8.18, see portfolio graphic for stop loss.

Optional long-term option:

Long June $10 call @ 59 cents. No stop loss.

BOX - Box Inc - Company Profile


Box and Mendex announced a partnership to accelerate a development platform in the Box applications. New 52-week high.

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.

CARA - Cara Therapeutics - Company Profile


Mo specific news. Shares spiked to $17 at the open to trigger the position at $16.85 but faded in the afternoon.

Original Trade Description: February 8th

Cara Therapeutics, Inc., a clinical-stage biopharmaceutical company, focuses on developing and commercializing chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors in the United States. The company is developing product candidates that target the body's peripheral nervous system. Its lead product candidate includes I.V. CR845, which is in Phase III clinical trials for the treatment acute postoperative pain in adult patients, as well as completed Phase II clinical trials for the treatment of uremic pruritus disease. The company is also developing Oral CR845, which is in Phase IIa clinical trials for the treatment of moderate-to-severe acute and chronic pain; and CR701, which is in preclinical trial stage for treating neuropathic and inflammatory pain. It has licensing agreements with Chong Kun Dang Pharmaceutical Corporation to develop, manufacture, and commercialize products containing CR845 in South Korea; and Maruishi Pharmaceutical Co., Ltd to develop, manufacture, and commercialize drug products containing CR845 for acute pain and uremic pruritus in Japan. Company description from FinViz.com.

This is a small company with only a $400 million market cap. However, the drug they are current testing has the potential to be a multibillion dollar blockbuster. The drug is CR845 and it treats acute and chronic pain. It does not cross the blood brain barrier to there is no euphoria that users get when they take opioid drugs. Test subjects were injected with 15 times the normal dosage and they reported feeling no different than when taking a placebo. There is no risk of overdose and it is not habit forming.

It does not have any of the other opioid side effects including nausea, vomiting, respiratory depression, sedation and constipation. The drug is also an anti inflammatory and long lasting. The typical dosage it 1 pill twice a day.

In hospital tests post operative use of morphine was cut almost in half. For chronic osteoarthritis the drug was more effective than controlled release oxycodone.

There are 60 million post operative patients in the U.S alone each year. There are more than 140 million prescriptions written for pain meds. This has the potential to be a blockbuster.

Cara presented at the JP Morgan Healthcare Conference in mid January and shares were taking off as investors learn about the potential for this drug.

Earnings March 9th.

Position 2/9/17 with a CARA trade at $16.85

Long CARA shares @ $16.85, initial stop loss $15.75.

No options recommended because of price.

STM - STMicroelectronics - Company Profile


No specific news. First 2-day decline since January 4th. It was enough to stop us out of the stock position with a minor loss. The call position is still open and will be moved to the Lottery Play section this weekend.

Original Trade Description: February 6th

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest chipmaker. The company reported revenue of $1.86 billion, an 11.5% increase. The also raised guidance for Q1 saying they expect 12.5% growth. The CEO said, "Based on market forecasts, a positive booking trend, and a strong performance at our distributors, we see the momentum from the second half of 2016 continuing as we enter 2017."

The chipmaker said improved efficiencies and product mix lifted gross margins from 33.5% to 37.5%. Their smartphone market share helped increase sales in that division by 17.8%. The automotive and industrial products segment saw sales increase 12.5%. STM is a supplier to Apple, Cisco Systems, HP, Seagate and Western Digital. Every one of those companies are reporting stronger sales and new product lines, all of which helps STM. They also make chips for drones, 3D printing and a wide variety of IoT products.

The consensus earnings estimates are for 103.4% growth in 2017.

Earnings April 27th.

Shares have caught fire because of expectations for a large boost in chips for the iPhone 8 or X whatever they end up calling it.

This stock is not cheap with a PE of 75 but the outlook is so strong that volume is exploding and the stock will not go down. We are going to hold our nose and buy it. A safer way to play this would be to buy the call option. That way your total risk is 70 cents a share.

Position 2/7/17:

Closed 2/9/17: Long STM shares @ $14.22, exxit $13.75, -.47 loss.

Optional longer-term play:

Long April $15 call @ 65 cents. See portfolio graphic for stop loss.

BEARISH Play Updates

CONN - Conn's Inc - Company Profile


No specific news. Shares still holding over support at $10.

Original Trade Description: January 26th

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through Retail and Credit segments. The company's stores provide home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home office products consisting of computers, tablets, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. Conn's, Inc. also provides repair service agreements, installment credit plans, and various credit insurance products. As of March 29, 2016, the company operated approximately 100 retail locations in Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Company description from FinViz.com.

In the Q3 earnings cycle, Conn's reported a smaller than expected loss of 12 cents. Analysts were looking for -19 cents. Revenue of $308.4 million and below the $395.23 million in the year ago quarter. They guided for Q4 same store sales to decline -10%. At the end of Q3 analysts were expecting a profit of 13 cents and revenue of $453.44 million. The odds of them beating this forecast are slim. Zacks said the analyst estimates have declined significantly to a loss of 52 cents for Q4. They have dropped 11 cents in just the last 30 days.

Conn's sells electronics along with appliances and furniture. Electronics sales are being dominated by Amazon and Best Buy. The furniture sector has been slow and appliances are hit and miss. With appliance prices rising sharply it has cut down on buyers that can afford the big ticket items.

Earnings March 7th.

I believe Conn's will continue lower. Shares broke to a two month low on Thursday when support at $10.75 failed.

Position 1/27/17:

Short CONN shares @ $10.50, see portfolio graphic for stop loss.

No options because of wide spreads and no open interest.

GNC - GNC Holdings - Company Profile


No specific news. The stock rebounded 5% in a bullish market with the Russell up +1.5%. The stock was rolling over into the close.

Original Trade Description: January 28th

GNC Holdings, Inc., together with its subsidiaries, operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

On January 19th GNC was cut to a sell by Goldman saying the already reduced earnings estimates were still too optimistic. GNC tried to sell itself last year and the deal fizzled. Then they announced a restructuring of the brand and the store format. As part of the relaunch of GNC they slashed prices across half their product line and discontinued many products entirely. The company also ended its Gold Card loyalty, which had been in effect for more than a decade. Six million members were paying $15 a year in exchange for discounted prices.

The GNC CEO said "the new GNC leaves the old, broken model behind" but we know "it will take time for the changes to take hold and translate into improved financial results." That is an implied earnings warning for the next couple quarters.

Earnings Feb 9th.

With earnings in two weeks this will be a short-term position. After looking at the cart I doubt many investors will want to hold the stock into the earnings event and that should cause a further decline next week.

Updare 1/31/17: The NFL rejected GNC's proposed advertisement. The NFL said they had a standing policy not to promote supplements. The NFL said GNC was on a list of prohibited companies because they promote products banned by the league.

FOX has been getting an average of $5 million per 30 seconds of airtime and that is a fee GNC will no longer have to pay but the ad was supposed to be a kickoff of their new marketing campaign.

Position 1/30/17:

Short GNC shares @ $8.77, see portfolio graphic for stop loss.

No options recommended because of the distance from the stock price. However, the Feb $7.50 put is only 25 cents. That might be an interesting lottery play to hold over their earnings report. If they get slammed on earnings again that could be a winner.

IWM - Russell 2000 ETF - ETF Profile


The Russell posted a 1.5% rebound and the IWM rallied exactly to downtrend resistance and stalled. This position expires on Friday.

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 won a $40 million lawsuit against the CEO and Seritage, a REIT spun off from Sears. The suit claimed CEO Eddie Lampert spun off $2.6 billion in Sears best properties to Seritage and Lampert owns 9.6% of Seritage. The suit claimed Lampert use the spinoff to enrich himself by stripping Sears of its best properties. The settlement does not require Lampert to admit guilt.

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.

Update 1/25/17: Fitch Ratings took another look at Sears and reiterated they expect a $1.6 billion cash burn for 2016 and $1.8 billion in 2017. The Barron's laid out the problems ahead for Sears and that tanked the stock on Wednesday.

Update 1/26/17: Moody's joined Fitch in another downgrade on Sears credit instruments. The debt instruments were cut from Caa2 to Caa3 because of accelerating cash burn and declining asset base. The WSJ had another article today negative on the outlook for Sears. Sales at companies like Mattel and Hasbro declined sharply in Q3 suggesting Sears and others did not reorder and earnings could be dismal.

Update 1/30/17: Sears announced a sale-leaseback arrangement with CBL & Associates for five Sears stores and two auto stores. A sale-leaseback is where the company sells the properties to raise cash and then agrees to lease them back from the buyer for a specific term. This is another sign Sears is continuing to have a cash crunch. This transaction leaves Sears with only 204 properties that are unencumbered and could be sold for cash out of the 1,680 stores they operate. Every time they sell a property they take on debt in the form of leases and that means the amount of cash burn increases with each deal.

Update 2/7/17: Credit default swaps rose to $4.5 million annually to insure $10 million of Sears debt. While nobody is likely to actually pay that fee, it is another confirmation point that Sears is headed for default. Kiffen Worldwide said they expect a Sears default in 2017.

Position 1/10/17:

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

No options recommended because of price.

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