Disappointing Retail Sales Numbers Cannot be Ignored

The market has continued to trend higher this week leading up to when December quarter earnings kick into gear next week and ahead of tomorrow’s December Retail Sales Report.

We had a few earnings reports so far this week, and building on dollar related comments from Honeywell (HON) and other industrials before the Christmas holiday, WD40  (WDFC) reported disappointing results, due in part to the strength of the dollar. While most of us think of WD40 for its industrial lubricant products, it derives 40 percent of its revenues from markets outside of the US. The dollar aside, the company’s domestic business fell 4 percent year-over-year, which in our view helps to confirm the disconnect between the move in the stock market, especially industrial stocks, since November and the tone of the domestic economy.

We’ve been turning over several industrial put positions and we’ll look to put one or more into action when:

1. The risk-to-reward is compelling
2. We see enough volume to provide sufficient cover to warrant trading a put position.

Given the commentary over the last week from a number of brick & mortar retailers, like Macy’s (M), Kohl’s (KSS), JCPenney (JCP) and Sears (S) that pointed out how disappointing their holiday sales were, odds are the December Retail Sales will be less than pretty.

• As such. we’re going to close the Consumer Discretionary Select Sector SPDR Fund (XLY) position on the Tematica Select List, which closed up just shy of 7.5 percent, including dividends received since we added the position last May.

Time to Sit on the Healthcare Sidelines

Being based in the metro DC area we tend to here quite a bit about what is being contemplated when it comes to policy. Earlier this week, President-elect Donald Trump demanded that Congress immediately repeal the Affordable Care Act and pass another health law quickly. While we agree the so-called Affordable Care Act has been anything but affordable (and even caring in many cases) and should be replaced, we also remember the old carpenter adage that it’s better to measure twice and cut one. In other words, the risk we see in a quick replacement of Obamacare is that it will be fraught with issues identified later.

As the hare learned when he was beaten by the turtle, doing something quickly is not always the right strategy. Amid what is likely to be another bout of uncertainty for healthcare stocks:

• We’re going to unload the Health Care Select Sector SPDR ETF (XLV) shares we added to the Tematica Select List last January 25. 
• Clearing out that position now also ensures the better than 6 percent gain including dividends paid as of last night’s close will be treated as short-term gains, which is in keeping with the vast majority of our Tematica Pro trades. 

Doubling Down on One Call as Another Moves Against Us

Last week we added both the Universal Display (OLED) February 2017 $70 calls (OLED170217C00070000) and the Financial Select Sector SPDR ETF (XLF) $25 April 2017 calls (XLF170421C000250000) to the Tematica Select List. Despite the positive developments regarding organic light emitting diodes products at CES 2017 last week, we were stopped out of our Universal Display calls earlier this week. 
We saw our XLF calls move lower as well, but later this week we have a number of banks reporting their December quarter earnings, including JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and PNC Financial Services (PNC). Three of those — JPMorgan Chase, Wells Fargo, and Bank of America — are top five holdings in the XLF ETF and account for 27 percent of the overall portfolio. For those wondering, PNC is the 13th largest position clocking in at just over 2 percent of the ETF’s holdings.

• With almost 30 percent of XLF’s holdings reporting earning on Friday, we’re going use the proceeds for our XLY and XLV to double down on our XLF calls ( Financial Select Sector SPDR ETF (XLF) $25 April 2017 calls (XLF170421C000250000) , which closed last night at 0.26, and add another position in those calls.
• As we take advantage of the lower price, we’re going to move our stop loss on those calls lower to 0.15 from 0.20.