Option Investor

Daily Newsletter, Thursday, 2/16/2017

Table of Contents

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

Market Wrap

Profit Taking

by Thomas Hughes

Click here to email Thomas Hughes


The indices hover near all time highs as profit taking caps near term gains. Selling wasn't frenzied, there wasn't a lot of downside volume and buyers stepped in on the dips. All in all a decent day of consolidation following four days of rally.

International markets were much the same. Asian indices closed mixed, Japan was down but China set a new 18 month high. European indices were more muted, most closing lower, although losses were minimal. Investors in both regions cautiously watching the US rally, economic data, domestic political turmoil and Donald Trump.

Market Statistics

Futures trading was negative right from the start and a round of stellar economic data did nothing to change that. The indices were indicated to open with small losses, near break even in most cases, with the SPX indicated to open with a small loss. The open was fairly calm, there was a bit of volatility with the indices moving up briefly to set new intraday highs (DJIA and COMP) before profit taking set in. The first half of the trading day saw the indices drift lower until hitting bottom just after 11AM. The second half of the day saw the indices drift sideways with a narrow range.

Economic Calendar

The Economy

There was a lot of economic data, all of it good. Starting off with initial jobless claims, first time claims rose by 5,000 to hit 239,000 from last week's not revised figure. The 4 week moving average of claims also moved higher, gaining 500 to hit 245,250. On a not adjusted basis claims fell -5.3% versus an expected -7.2% and are down -7.15% year over year. Claims continue to trend near the long term lows and are consistent with labor market and economic health.

Continuing claims fell -3,000 to hit 2.076 million, last week's figure was revised higher by 1,000. The four week moving average gained 1,000. Continuing claims continues to trend near the 2.0 million mark, near the long term low, and consistent with labor market health.

The total number of claims fell -11,449 to hit 2.526 million. The decline is in-line with seasonal and long term trends, and consistent with ongoing labor market health. Looking at the chart we can expect to see this number continue to fall off into the next few months, bottoming sometime in mid-May. Downside target for this figure is 1.65 million.

Along with the weekly jobless claims figures we also received the latest reads on housing starts, building permits and the Philadelphia Federal Reserves Manufacturing Business Outlook Survey. ON the housing front, starts fell -2.6% on a month to month basis, roughly in line with expectations, but are up 10.5% from this same time last year. The previous month was revised higher. Permits rose by 4.6%, above expectations, and are up 8.2% over this same time last year. Last month figure was also revised higher.

The Manufacturing Business Outlook Survey was the star of the day. The Philly Fed survey jumped nearly 20 points to hit 43.3 and has been positive for 7 straight months. This is the highest reading since 1984. Within the report there were strong gains in new orders and shipments, unfilled orders and deliveries were both positive. Employment was also positive and has been so for 3 months. The forward outlook fell a few points but remains strong at 53.5 and is just off a long term high.

The Dollar Index

The Dollar Index fell in today's session despite the strong data and rate hike support from two Fed officials. The index fell nearly -0.7% to hit support at the $100.50 level. Both Lacker and Dudley came out in support of rate hikes saying to the effect that the Fed was on track for raising rates and that the pace of hikes may be faster than currently indicated. Today's move looks more like profit taking to me than anything else, rate hike outlook is still positive so there is little reason to think the dollar will fall, so long as the ECB and BOJ don't start tightening. The indicators are both bullish if showing weakness in the near term. A break below support would be bearish, a bounce would be bullish with upside target near $101.50 and then $102.50.

The Gold Index

Gold prices gained nearly 0.75% on today's dollar weakness. The rise puts spot price just over $1,240 but still below long term resistance. This move may have legs, should the dollar continue to fall, but the fundamental outlook is still dollar positive in my view, and gold negative. The risk now is that US data will cool and the FOMC will back off of raising rates, or that the other central banks will start tightening. Until then upside is limited and may be capped at $1,250 if not lower.

The gold miners got a lift on rising gold prices, climbing more than 1%. Despite the rise the miners ETF GDX did not move above resistance and still looks like a fall is on the way. Divergences persist in the indicators that suggest weakness and those divergences have been confirmed by bearish crossovers in both MACD and stochastic. This of course does not guarantee a fall but qualifies as a text book example of such a signal. Downside targets are the short term moving average, near $23.50, and then $21.50 where stronger support may be found.

The Oil Index

Oil prices got a little today from OPEC. The cartel announced that it might extend the production cut deal, further diminishing demand. The bad thing, for them, is that we'll keep on pumping to fill the demand which will keep prices range bound for now. WTI closed with a gain of $0.25 at $53.36. I expect tomorrow's inventory and Friday's rig count data to support this idea.

The Oil Index fell in tandem with the broad market despite the rise in oil prices. The index fell nearly a full percent, created a medium sized black bodied candle and looks like it will retest support at the 1,250 level. If the market is bullish on this sector as I think it is, this is a good time for it to prove it. A test of, and bounce from, support would help confirm the uptrend. The indicators are consistent with a trend following bounce but have yet to confirm with strong signals. A bounce from support would help that along as well. Support is at 1,200, resistance is the short term moving average near 1,235.

In The News, Story Stocks and Earnings

Dean Foods reported earnings before the bell, delivering 177% profit growth, but failed to impress investors nonetheless. The companies forward guidance is weaker than expected, about half, and sent shares tumbling in the pre-market session. Shares gapped down more than -3% and then doubled that loss during the open session.

Avis was a major cause of today's selling. The rental car company reported a miss on profit due to rising expenses and discount pricing. Along with the miss came guidance that was not so much weak as non-specific. The range is pretty large, $3.05 to $3.75 with consensus smack in the middle at $3.45. Shares of the stock did not respond well and fell -12% from yesterday's close.

Fear tried to creep into the market but it just couldn't do it today. The VIX rose, but only 2% at the close and price action is not bullish. Today's candle is a small black bodied candle with long upper shadow, indicative of resistance to higher prices. The candle formed at and confirmed resistance at 12.50 with a pin-bar and possible shooting star. The indicators remain weak and consistent with an asset trending near its lows; momentum is barely poking above flat line and the bullish signal fired by stochastic is already fading. There may be another test of resistance tomorrow, it is OPEX, so there may be a little more volatility. In any event, the VIX is very very low and consistent with a rising market.

The Indices

The indices tread water today, just below the current all time highs, and one of them at least set a new all time high. The Dow Jones Industrial Average led the market, closing with a gain of 0.04%. Even so, today's candle is a small black bodied candle, forming when the index made a small gap up at the open, and has visible lower shadow. This candle is not unexpected given the rally we've seen this week and is welcome. The trend remains up and the indicators are on the rise so I am expecting higher prices. MACD momentum is still pretty low and has plenty of room to move up before reaching extreme levels, stochastic is showing strength with a cross of the upper signal line. Upside target is 21,000 in the near term.

The NASDAQ Composite posted the smallest loss, a mere -0.08%. The index created a small spinning top doji, setting a new all time intraday high, and appears to be hitting a peak. MACD has begun to crest, consistent with a peak, but the current wave is stronger than the last so it looks like momentum may be building again. Support on a pullback is 5,750, upside target is 6,000.

The S&P 500 made the 2nd largest decline today, -0.09%, barely edging out the tech heavy NASDAQ. The broad market created a small hanging man/spinning top doji, just under yesterday's all time high. The indicators are both bullish although MACD reflects today's consolidation move. Stochastic is more bullish, showing strength with a crossing of the upper signal line. Near term resistance is 2,350, a break above there is bullish with upside target near 2,400 in the near term.

The Dow Jones Transportation Average was today's laggard, giving up -0.83%. The index created a small bodied black candle but gapped lower and created a long enough lower shadow to engulf yesterday's. The indicators are consistent with a peak so today's action may be a precursor to deeper pullback although the long lower shadow suggests that buyers are waiting to step in on any dips. Support is near the short term moving average, near 9,250, should the index continue to pullback. A break to new highs would be bullish and trend following with upside target near 10,000.

The rally took a breather today and that is probably a good thing. A little profit taking, a little new money, a little rotation is just the thing to keep a bull market rally nice and healthy. Consolidation may continue tomorrow, there may even be a dip, but I expect to see higher prices in the near and short term driven on economic data, earnings expectations and Donald Trump, and there isn't a lot of data due out over the next week. I am bullish, cautiously buying on the dips.

Until then, remember the trend!

Thomas Hughes

New Plays

I Have Sinned

by Jim Brown

Click here to email Jim Brown
Editor's Note

I am going against my rules with today's recommendation. Please forgive me if the play goes badly.


ARNC - Arconic - Company Profile

Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. Company description from FinViz.com.

What that description does not tell you is that Arconic is the old Alcoa. Back in October Alcoa spun off the aluminum smelter business and named it Alcoa. The remaining hith tech manufacturing business they named Arconic. Basically, this is the profitable part of the old Alcoa. They produce all sorts of high tech aluminum products for nice profits.

Their Q4 earnings were mixed because of expenses incurred as a result of the spinoff.

Zacks reported Q1 estimates have risen from 20 cents to 25 cents over the last several weeks as analysts reevaluate the new company. Full year estimates have risen from 92 cents to $1.10, a 19.6% increase.

On Wednesday Arconic said it had sold 60% of the Alcoa stake it kept during the spinoff for $890 million and would use the money to pay down debt and buy back shares. They also retained loss carry forward tax credits that will offset future earnings.

Earnings May 2nd.

Shares went ballistic after the Q4 earnings and rose from $23 to $30. Every day I kept watching the stock and thinking, "ok, tomorrow they will dip and I will add them to the portfolio." They never dipped until this week. That dip was very shallow and has lasted only 3 days.

We never know. They could fall off a cliff tomorrow and retest the $23 pre-earnings. I seriously doubt it because funds have been adding Arconic as a new position.

I am going to recommend an options only strategy with a four-week duration. I am recommending we buy a $30 call and a $28 put. The total cost will be $1.52 and that is our total risk. We only need ARNC to move in either direction more than a couple bucks and we should be profitable.

Either way at least one option should be profitable and offset the cost of the other. Depending on the market we could actually profit on both if we got a big dip and then a big rebound. The only way we lose both premiums is if the stock holds at $29 for the next month. That is not likely.

Buy Mar $30 call, currently 95 cents. No stop loss.
Buy Mar $28 put, currently 57 cents, No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Small Caps Struggling

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap stocks continue to struggle despite the overall bullish market. Out of the hundreds of small cap charts I scanned today the vast majority were bearish. Recent gainers with positive earnings are trading sideways but those yet to report over the next ten days are showing minor positives. There is no discernible trend other than sideways despite the Russell's new high on Wednesday. That was powered by very few stocks.

The Russell 2000 declined -11 at 11:AM but recovered half of that to lose only 5 but it did close back under 1,400. The Russell index was the biggest loser at -0.36% by far but it would be hard to call that a serious loss.

Today's market drop appeared to be a sell program between 10:45 and 11:00. The indexes rebounded at the close so the dip buyers appear to be alive and well but lacking a lot of conviction since they did not lift the indexes back into positive territory, with the exception of the Dow.

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

UA - Under Armour
The long position was entered at the open.

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Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

AKS - AK Steel - Company Profile


No specific news. Lots of option activity in AKS today. They bought the weekly $9 calls for next Friday. More than 28,000 were bought at a whopping 20 cents each. That is still $560,000 worth for a one week option. I hope there is some good news coming to back up that purchase.

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


No specific news. Minor loss after Wednesday's 52-week high. BOX is not moving in a hurry. It has held at this level for more than a week. I hope this is a consolidation before the next sprint higher.

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.

BRKS - Brooks Automation - Company Profile


No specific news. Only a minor decline from the new high close.

Original Trade Description: February 13th

Brooks Automation, Inc. provides automation and cryogenic solutions for various applications and markets. It operates through two segments, Brooks Semiconductor Solutions Group and Brooks Life Science Systems. The Brooks Semiconductor Solutions Group segment offers critical automated transport, vacuum, and contamination controls solutions and services. This segment's products include atmospheric and vacuum robots, robotic modules, and tool automation systems that provide precision handling and clean wafer environments; automated cleaning and inspection systems for wafer carriers, as well as reticle pod cleaners and stockers; and vacuum pumping and thermal management solutions for use in critical process vacuum applications. This segment also provides support services, including repair, diagnostic, and installation, as well as spare parts and productivity enhancement upgrades. The Brooks Life Science Systems segment provides automated cold storage systems; consumables, including various formats of racks, tubes, caps, plates and foils; and instruments used for labeling, bar coding, capping, decapping, auditing, sealing, peeling, and piercing tubes and plates. This segment also provides sample management services, such as on-site and off-site sample storage, cold chain logistics, sample relocation, bio-processing solutions, disaster recovery, and business continuity, as well as project management and consulting. In addition, this segment offers sample intelligence software solutions and customer technology integration; and laboratory work flow scheduling for life science tools and instrument work cells, sample inventory and logistics, environmental and temperature monitoring, and clinical trial and consent management, as well as planning, data management, virtualization, and visualization services. The company sells its products and services in approximately 50 countries. Company description from FinViz.com.

Brooks reported earnings of 25 cents that beat estimates for 20 cents. Revenue of $160 million also squeezed by estimates for $159.7 million. For the current quarter they guided to earnings of 24 to 27 cents and revenue from $165 to $170 million.

The company provides automation and cryogenic solutions for various markets. Their expected growth rate for 2017 is 105% compared to the industry rate of 19.5%. Consensus estimates for the current year rose from 82 cents to 96 cents over the last 30 days. Estimates for the current quarter rose from 21 to 24 cents and the company guided for 24 to 27 cents.

Shares spiked from $17.50 to $21.00 on the earnings beat on February 1st. After three days of consolidation and profit taking, shares have started to rise again. They closed at a new high on Monday. I know this chart is over extended but the strong earnings, guidance and expected growth rate suggests they can continue climbing, market permitting.

Earnings May 3rd.

Position 2/14/17:

Long BRKS shares @ $21.58, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

FEYE - FireEye - Company Profile


No specific news. Shares fell -38 cents after Cisco reported earnings that were better than expected. One analyst suggested it was negative for FEYE but I don't see it.

Original Trade Description: February 11th

FireEye, Inc. provides cybersecurity solutions for detecting, preventing, analyzing, and resolving cyber-attacks. The company offers vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic that may contain sensitive information. It also offers Central Management System that provides cross-enterprise threat data correlation to identify and block attacks across multiple attack vectors; and Threat Analytics Platform to identify and respond to cyber threats by correlating enterprise-generated security event data from any security product with real-time threat intelligence, as well as Malware Analysis System to manually execute and inspect advanced malware, zero-day, and other advanced cyber-attacks embedded in files, email attachments, and Web objects. In addition, the company offers Network Forensics Platform that helps in detecting threats and view specific packets and sessions before, during, and after the attack to confirm what may have triggered a malware download or callback; Investigation Analysis System, a centralized analytical interface to the Network Forensics Platform; and Mandiant Intelligent Response that enables remote investigation of endpoints and allows security teams to collect targeted forensic data to identify attacker behavior, tools, and techniques. Further, it provides cloud-based subscription services; Security-as-a-Service; and incident response, compromise assessments, and related consulting, as well as training and professional, and customer support and maintenance services. Company description from FinViz.com.

FireEye is transitioning from a firewall appliance vendor to a cloud service and as always happens when companies go this route, the revenue slows temporarily. They reported Q4 results of a loss of 3 cents. Analysts were expecting a loss of 16 cents. This compares to a loss of 55 cents in the year ago quarter. Revenue of $184.7 missed estimates for $191.1 million.

For the current quarter the company guided to earnings of 26 to 28 cents and revenue of $160-$166 million. Analysts were expecting $177.5 million.

The company said several large deals had been expected to close in Q4 and they were pushed into Q1 versus being "lost."

They added 330 net new customers during the quarter. They closed 34 deals for more than $1 million each, including one of their largest SaaS deals ever. They announced a new product called Helix and more than 250 customers have already signed up to get the product as soon as it is released.

Other onetime negatives from the earnings release was news the CFO was leaving to pursue another opportunity and Chairman David Dewalt resigned from the board.

Earnings May 4th.

Cisco (CSCO) recently acquired AppDynamics and that is expected to start a flurry of acquisitions in the cybersecurity space. The space is fragmented today and highly competitive with each player commanding its own niche. The quickest way to expand your product offerings is to acquire somebody else that is a leader in their niche. FireEye is a leader in intrusion detection and tracking. Their recent fall from grace should make them an attractive target with only a $2 billion market cap.

Regardless of whether an acquisition cycle has begun, the stock decline to support is a buying opportunity.

Position 2/13/17:

Long FEYE shares @ $11.75, see portfolio graphic for stop loss.

No options recommended because of price.

UA - Under Armour - Company Profile


No specific news. Shares backed off from resistance at $20 but just a minor dip.

Original Trade Description: February 15th

Under Armour, Inc. together with its subsidiaries, develops, markets, and distributes branded performance apparel, footwear, and accessories for men, women, and youth primarily in North America, Europe, the Middle East, Africa, the Asia-Pacific, and Latin America. The company offers its apparel in compression, fitted, and loose types to be worn in hot, cold, and in between the extremes. It provides various footwear products, including football, baseball, lacrosse, softball and soccer cleats, slides, performance training, running, basketball, and outdoor footwear. The company also offers accessories, which include headwear, bags, and gloves; and digital fitness platform licenses and subscriptions, as well as digital advertising, as well as licenses its brands. It primarily provides its products under the UA Logo, UNDER ARMOUR, UA, ARMOUR, HEATGEAR, COLDGEAR, ALLSEASONGEAR, PROTECT THIS HOUSE, and I WILL, as well as ARMOURBITE, ARMOURSTORM, ARMOUR FLEECE, and ARMOUR BRA trademarks. The company sells its products through wholesale channels, including national and regional sporting goods chains, independent and specialty retailers, department store chains, institutional athletic departments, and leagues and teams, as well as independent distributors; and directly to consumers through a network of brand and factory house stores, and Website. Company description from FinViz.com.

UA posted 26 consecutive quarters of +20% revenue growth. For Q4 that fell to 12%. That was a major blow for the stock. They also announced the CFO was leaving immediately for personal reasons. Could it be because he missed so badly on guidance?

They guided for 2017 for revenue growth of 11% to 12%. That is significantly lower than the 20% bar they have been reaching for the last 9 years.

However, Q4 was a really bad quarter for retailers. Traffic was down everywhere and overall sales only rose 1.4%, Under Armour gets 85% of its revenue from the U.S. and 60% of its revenue from retail stores. Under Armour supplied the products but retailers were unable to attract any traffic. It was not a shoe problem but a retailer problem.

To be fair there was a shoe problem as well. The super high dollar famous player shoes were discounted heavily because of the lack of retail customers. Foot Locker was having 50% off sales on their website because shoes were not moving. The lack of buyers was due to a weak retail season rather than a specific drop in UA products.

Earnings May 2nd.

Shares fell from $25 to $18 on the earnings and after two weeks in the dungeon they closed at a two week high on Wednesday.

I am going to recommend a distant option because the stock is $19.86 at the close making the $20 call "at the money" with an inflated premium of $1.20 for April. The $22.50 option is only 40 cents but it is 12% out of the money or $2.64 away from the strike. However, we have 65 days and if UA cannot move $2.64 in 65 days, I picked the wrong play.

Position 2/16/17:

Long UA shares @ $19.94, see portfolio graphic for stop loss.

Optional: Long April $22.50 call @ 35 cents, no stop loss.

BEARISH Play Updates

IWM - Russell 2000 ETF - ETF Profile


This position will expire on Friday. This was a bet on the historical trend for stocks to decline in January. The Trump rally negated that trend and even though the Russell was the weakest index over the last month, it has not declined enough to make a difference.

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.

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