Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/16/2016

Table of Contents

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

Market Wrap

Positive Reaction to FOMC Announcement

by Keene Little

Click here to email Keene Little
The market has been essentially on hold this week until this afternoon's FOMC announcement and reaction was positive. Now the bulls want to prevent the typical reversal the next day.

Today's Market Stats

Following last Friday's strong rally the market consolidated Monday and Tuesday and this morning while waiting to hear what the Fed intends to do this year. The initial reaction to this afternoon's announcement was positive for stocks and especially for precious metals and oil while the U.S. dollar tumbled. The Fed still intends to raise rates this year but Treasury yields chopped up and down and the 30-year finished flat while the 10-year finished 1% lower and the 5-year dropped more than 5%, which steepened the yield curve.

The Fed kept rates the same and said it would raise rates this year less than had originally thought (it's now down to two more instead of four). More importantly, Yellen did a good job walking the tight rope by not sounding too dovish or hawkish. While acknowledging the global economy has slowed more than expected, the Fed believes the slowdown has not negatively affected their expectations for the U.S. economy. Yellen also said inflation has not picked up and the lack of wage growth could continue to pressure inflation expectations. She did say she continues to believe inflation will gradually move back to 2% over time (no definition of "time"). In the meantime though, the Fed cut this year's forecast for core PCE (Personal Consumption Expenditures) from 1.6% to 1.2%.

A reduced expectation for rate hikes caused the U.S. dollar to sell off and that in turn helped spike precious metals and oil to the upside. Whether or not all of these moves will see follow through the rest of the week remains to be seen. Oftentimes the first reaction the Fed is reversed the next day.

If you've felt a little whipsawed by this market this year you can rest assured that your feelings are accurate. Last week Bloomberg had an article that showed how many 1% days we've seen for the S&P 500 this year and it's the highest number since 1938. This is usually not a good sign following a bull market since it's typically associated with topping action (as the bulls and bears battle it out for control). In 1938 the stock market was in a bounce correction off the November 1937 low (1937 was not a good year for the stock market) and the big back and forth swings into early March led to another strong decline (the Dow dropped about -27% into the end of the month before starting a bigger recovery for the rest of the year. The below chart is through March 8th and since then we've had two more days where the index has finished more than 1% from the previous day (this does not include intraday 1% moves). I haven't had time yet to look at volume on each of those 1% days but it would make for an interesting study.


1% days for S&P 500 in 2016

What this year's volatility means for the market obviously can't be known yet but I think it's a warning sign and part of a larger rolling top pattern that we've seen develop over the past three years, which can be seen on the longer-term SPX charts below.
S&P 500, SPX, Monthly chart

Here's something you can pass along to your non-trading family members and friends to help them enjoy bull markets and avoid bear markets. I'm sure many of you have seen, if not bought/tested, trading systems that give you little green and red arrows to show you when to buy and sell (no thinking involved, just do what the arrow tells you to do). So here's a simple trading system for investors who don't want to actively trade their accounts (and it won't cost you $5000 to purchase). Perhaps it's your IRA account or something your parents and/or friends would be interested in since it doesn't require sophisticated chart analysis or knowledge of indicators. The monthly chart below uses two monthly moving averages -- the 8 and 21 (I pick these because they're Fib numbers but 10 and 20 also work well).

When the 8-month MA crosses above the 21-month MA you go long the market and when the 8-MMA crosses below the 21-MMA you get out of the market (and/or get into some inverse funds). As you can see, this system allows you to capture the bulk of the longer-term bull market rallies and avoid the bulk of the bear market declines. We are on a new sell signal as of the cross in February. The 21-MMA is currently at 2027 (the 20-MMA is at 2032) and is currently being back-tested with the rally off the February low. Not shown on the chart is the Bollinger Band and after punching below the bottom of the lower BB in February it's back up to the midline of the band, which is often resistance to be shorted.

The other thing you can see from this monthly chart is how it rallied up to its long-term broken uptrend line from 1990-2002 in 2013 and pushed up along the line, breaking above it several times, into the 2015 high. The pullback from the line leaves a bearish kiss goodbye and the rounded top from 2013 is also a bearish rounding top pattern. The neckline near 1815 is a must-hold level for the bulls on any future pullback.


S&P 500, SPX, Weekly chart

In addition to SPX testing its 20-MMA at 2032 it's also testing its 50-week MA at the same level so from a moving average perspective it's important for the bulls to close the week above 2032 (an intraweek break is not as important). Today's post-FOMC rally hit a high at 2032 (20-MMA) and closed at 2027 (21-MMA). I'm sure those two numbers were pure coincidence today (wink). The week needs to close above 2032 otherwise the bearish setup is for the bounce off the February to lead to a stronger decline than we've seen so far this year.


S&P 500, SPX, Daily chart

Last Friday's rally stopped marginally above its downtrend line from December, currently near its 200-dma at 2018. Monday and Tuesday it consolidated near the downtrend line and now today's rally is a clear break above the line and that's bullish. The next line of resistance is the 78.6% retracement of its December-February decline, at 2041. This has been a very common retracement level for years and it's been very common for it to hold as resistance (or support in a decline). SPX would go positive for the year above 2044. For this reason I think it would be confirmed bullish above 2042-2044 but at the moment it's looking like we could be a lot closer to the end of the rally instead of in the middle of a higher move. What kind of pullback that follows will provide more clues about whether or not we should expect higher but the bearish risk here is for the start of a very strong decline.

Key Levels for SPX:
- bullish above 2042
- bearish below 1969


S&P 500, SPX, 60-min chart

There's a trend line along the highs since February 1st, currently near 2032 (the same 2032 as the 20-month MA and 50-week MA), which stopped the rally on Monday and again today. As can be seen on the 60-min chart below, the bearish divergence at the new highs this month suggest the bulls are running out of energy and considering the trend lines and important moving averages I don't think now is a good time to be betting on the long side. With the potential of a reversal of this afternoon's post-FOMC rally I think the better trade is the short side with a tight stop. It essentially needs to work right away Thursday morning and then assuming we'll start at least a larger pullback we'll then get some clues about whether to expect just a pullback or instead something more bearish.


Dow Industrials, INDU, Daily chart

Like SPX, the Dow made it above its downtrend line from December, currently near 17299, and nearly up to its 78.6% retracement of its December-February decline, at 17388 (with today's high at 17379). If today's rally does not hold it will leave a head-fake break of the downtrend line so bulls need to hold the line on a pullback. If the bulls can keep things going here, the next upside target would be the downtrend line from May-November 2015, near 17670. Not shown on the daily chart below, two equal legs up from February, for an a-b-c bounce correction, is at 17327, which was achieved today.

Key Levels for DOW:
- bullish above 17,390
- bearish below 16,820


Nasdaq-100, NDX, Daily chart

NDX rallied up just shy of resistance today at its 62% retracement of its December-February decline, at 4420, and its 200-dma at 4421. It would obviously be more bullish above 4421, especially if it can close above it for the week. But it's a risky place to bet long with it up against strong resistance.

Key Levels for NDX:
- bullish above 4420
- bearish below 4220


Russell-2000, RUT, Daily chart

Since running into its broken H&S neckline on March 7th the RUT has been struggling to make it higher with the other indexes. It's possible we're seeing a little sideways consolidation following the March 7th high, which will be followed by another rally, but the daily oscillators have crossed back down and as long as it stays below price-level S/R at 1080 it will stay bearish. It would turn much more bearish with a drop below price-level S/R at 1040 but it would be more bullish above 1105.

Key Levels for RUT:
- bullish above 1105
- bearish below 1040


KBW Bank index, BKX, Weekly chart

The weekly chart of the BKX shows the importance of the 66-67 area since it's now strong resistance until proven otherwise. This level was strong support in 2014-2015 until it broke in January and its March 4th high at 66.07 was a back-test of this resistance zone. Bouncing back up to this price-level S/R is a good setup to play a reversal back down following the bearish kiss goodbye against resistance. It would turn more bullish above 67.


Housing Market

Home sales have been mixed but showing some signs of slowing. Today's housing data was mixed with slightly better housing starts than were expected but permits were lower. The chart of both starts and permits shows the steep decline from the peak in 2005 to the 2009 low followed by the slower climb back up and level off this year. Interestingly, the decline is impulsive (5-wave move down) and that's been followed by a correction to the decline that has not yet retraced 50%. An impulsive decline followed by a correction to the decline strongly suggests another leg down will follow.

DJ U.S. Home Construction index, DJUSHB, Weekly chart

Banks have been doing what got them into trouble in the last housing bubble -- lending to unqualified buyers (little to no money down, large mortgages, fog-a-mirror qualification standards, etc.). It's even worse for automobile loans and college student loans, making total risky loans much higher than in 2007, but sticking with the home market, the higher risk-taking by the banks is an indication there's again an effort to find buyers, any buyers, to move inventory and that's a warning sign. The weekly chart of the home builders index below shows the bounce off the February low has the index back up to its broken uptrend line from October 2011 - October 2014, which it broke below in January, and at the same time it's back-testing price-level S/R at 553 (starting from the May 2013 high) with last Friday's high at 550. Not shown on the weekly chart, the 62% retracement of the December-February decline is at 555. Until proven otherwise, this is a good setup for the bears.


Transportation Index, TRAN, Daily chart

The transportation index has made a strong bounce off the January low, up nearly +21% off that low. It was bullish when the TRAN made it back above its August low at 7464 and it has remained inside a narrow up-channel for its rally. It's looking like the index could make it up to its 200-dma, at 7842, if not its downtrend line from March-November 2015, currently near 7940. Importantly, the higher number is also where it would retrace 78.6% of the leg down from November 2015, above which would indicate a greater likelihood that it will make it above its November high. The short-term risk here is that this week's highs are showing bearish divergence against the March 4th high on the oscillators. The bulls need to keep price inside the up-channel whereas the bears need to see a break below the March 10th low at 7426 to confirm the leg up from January finished.


U.S. Dollar contract, DX, Weekly chart

The US$ tanked on the FOMC announcement due to traders believing fewer (if any) rate cuts will weaken the dollar. It's still holding inside an up-channel for its climb off its August 2015 low, the bottom of which was tested this afternoon, near 95.70. A further drop would likely have it dropping down to the bottom of the down-channel that it's been in since its December 2015 high, the bottom of which is near 94. There's not much to tell us which way it will go from here and longer term I think we'll see the dollar remain rudderless for most of 2016.


Gold continuous contract, GC, Weekly chart

The metals and oil spiked higher on the FOMC announcement, which was helped by the dollar's decline. Gold's overnight high last Thursday, at 1287.80, achieved a test of its 38% retracement of its 2001-2011 rally, at 1285.49, and that was followed by a pullback this week. The rally into last week's high was also a small break above the top of a parallel down-channel for the decline since August 2013, which is near 1260, and this week's decline below 1260 left a failed breakout attempt. But this afternoon's rally took it back up to the top of the down-channel and unless it turns right back down from here there is potential for a push higher to test the January 2015 high near 1308. The bearish pattern calls the 3-wave move up from July 2015 low as complete, which suggests another leg down to the bottom of its down-channel, which will be near price-level support near 1000 (S/R from 2008-2009). The bullish interpretation of the pattern is that the rally from the December 2015 low is the 1st wave of what will become a much stronger rally following a pullback correction. We can't know which pattern will play out but at a minimum it's looking like gold is ready for at least a larger pullback, either from here or after another minor new high.


Oil continuous contract, CL, Daily chart

Oil rallied +6.1% today and most of that was before the FOMC announcement. At its March 11th high, at 39.02, oil reached its downtrend line from June-October 2015 (to the tick) and this week it dropped back below price-level S/R at 38, which left it on a sell signal. Today's rally got it back above 38 but it again stalled at its downtrend line, now near 38.70. A rally above 39 could see a rally to 40, where the c-wave of an a-b-c bounce off the January 20th low would be 162% of the a-wave. Oil would turn more bullish above 40. The larger wave pattern would look best with another decline into May/June, potentially down to about 23 before putting in a longer-term bottom. If that happens it would likely turn most traders very bearish on oil at exactly the wrong time but we'll have time to evaluate it if it happens.


Economic reports

Tomorrow's economic reports include unemployment numbers and more importantly the Philly Fed, which is expected to come in at a "less bad" -1.4, an improvement from -2.8 in February. If it comes in below zero it will be the seventh month in a row.


Additional thoughts and conclusion

One of the problems facing the market is where the buying is coming from. Bloomberg published an article last week that highlighted the fact that corporations are doing most of the buying (share buybacks). The divergence between the buying by individuals and funds vs. corporations is historically large, especially in the past two months, and it highlights the importance of corporate buybacks, without which the stock market would very likely be much much lower today.

S&P 500 companies are expected to buy about $165B of their stock in the current quarter whereas there has been a net selling in ETFs and mutual funds of about $40B since January (making it one of the largest quarterly withdrawals ever). The problem is that corporations have borrowed massively (almost $10T since 2008), some of which was used to buy back shares of their own stock (not a productive use of the money).

With corporate earnings in a steady decline they now have two problems -- they can't continue to borrow at the rate they've been borrowing, which means less money for buybacks, and reduced earnings are going to make it more difficult to pay back their loans. Corporations could turn from buyers to sellers of stock in order to free up some needed capital. Not only would they stop supporting the stock market with their buybacks but they'd become net sellers, which could exacerbate the selling by others.

The amount of share buybacks has amounted to about $2T since 2009, which is obviously a lot of support for the stock market. Much of this was made possible with very low borrowing rates, thanks to the Fed's distortions of rates. And the buybacks have only distorted the picture of health for businesses -- they show improved earnings per share even when earnings are in decline. This will all come to an end since it can't be sustained and the impact on the stock market can only be guessed but I don't think it's hard to see it's not going to be good for the bulls.

More corporations have been resorting to "adjusted" earnings instead of using GAAP (Generally Accepted Accounting Practices) to help them report stronger earnings. This was done extensively in the lead up to the 2000 dot.com bubble. Last year 20 or the 30 DJIA companies used adjusted earnings, which were 31% better than GAAP results last year vs. a 12% difference in 2014 so you can see what's happening and the distortions in "real" earnings. Adjusted earnings are used to hide weaknesses in their business and all of this is going to come to a head, probably sooner rather than later.

There's a lot of talk about the relative strength of the U.S. market as a reason why we'll continue to attract money to both the bond and stock markets. While I definitely agree with that belief, what many market participants fail to recognize is the tight linkage in the global financial system and how weak it is. There is a massive global debt burden and a collapse in the bond market of one company, bank or sovereign entity could quickly spread through the system.

Contagion risk is very real and it doesn't take a big company/bank to create the problem. There are derivatives of derivatives and the same counter-party risks we saw in 2007 except larger by order of magnitude. The problems we had back then were not solved and instead were only made worse over the years. The coming correction could also be worse by a large factor. Be careful with your assumptions that everything is fine just because that's what you read in the financial press and hear from central bankers and government officials. It might be harsh to say it but if their mouths are moving, they're lying. And the more they deny something the more you can believe the opposite.

As for the market right here, the bounce off the February low has turned most participants bullish, as I had said it would when the bounce got started. The bearish wave count calls it a 2nd wave correction and I call these the sucker waves for a reason. The 3rd wave (down in this case) is called the recognition wave because it's when the majority of traders recognize they got sucker punched. Don't be one of them.

There is a possible bullish wave count that suggests the rally will continue to new all-time highs and I'm watching the pattern for that possibility. If we see a larger pullback that remains choppy and consolidating then I'll look higher. But at the moment, until I see that kind of bullish pattern, there is risk for the bounce off the February low to turn back down into a very strong decline (stronger than we saw last August and January). It is for this reason that I think it's very important to play defense until we see evidence the bulls have more buying up their sleeve after a pullback.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Looking Ahead to May

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market setup for the next week appears bullish but there are roadblocks in the distant future. The odds for a post Fed rally are pretty good since they basically stepped to the sidelines and lowered their projections for future hikes.

The market could recover from the sideways volatility we have seen since March 7th and move higher in the days ahead. The S&P closed over resistance at 2,020 and appears ready to tack on some more points on Thursday. The futures are up +7.50 on Wednesday night.

We already have a full portfolio of longs that should benefit from any continued move higher. With the futures up strongly any new long recommended today would probably be filled on a gap higher and that would not be in our best interest. Instead I am going to recommend a play that looks forward a couple weeks and could capitalize on the eventual summer doldrums and the Sell in May cycle. This bearish play may not be triggered immediately but it will be there when the time is right.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS


SPY - S&P 500 ETF -
ETF Description

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

With a SPY trade at $207

Buy June $200 put, estimated premium $4.50, initial stop loss $213.

If the market continues higher I plan on adding to that position at $210.




In Play Updates and Reviews

Goldilocks Statement

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Fed said all the right things in their statement and press conference but the market was reserved in its response. After a brief period of volatility, the indexes posted moderate gains that lifted the Dow & S&P over near term resistance but there was no excitement.

It was as though investors did not believe what the Fed said or became worried that the Fed may have seen something we have not. Why did they really lower inflation expectations when the two most recent reports show inflation rising? Why did they change their 2016 guidance from 3 rate hikes to 2 when jobs are growing rapidly?

We may never know their real motives but having the ECB, China and the BOJ promoting a policy with increased stimulus the Fed may have just taken a pass because it was the politically correct thing to do. They obviously cannot say "The ECB and China cut rates again so we are going to pass." Everything the Fed does is supposed to be based on the U.S. economy and their dual mandate so they used that as their excuse.

In theory, the markets "should" move higher from here but theory rarely works in practice according to Yogi Berra.

The 2,040 level and the 300-day average and the 2,078 level and the resistance from December are now the major hurdles to cross.



Current Portfolio




Current Position Changes


VXX - VIX Index ETF

This long put position hit our exit target at $20 for a minor gain.


KORS - Michael Kors

This long position was stopped out on the drop to $56.25 on the weak retail sales numbers and the Gap downgrade to sell.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


AKAM - Akamai Technologies -
Company Description

Comments:

Nice gain but still stuck to the $55 resistance. No news.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.


AON - AON Plc - Company Description

Comments:

Big spike at the open to $100.55 but faded in the afternoon. I raised the stop to $98.65 in case it rolls over. No news.

Original Trade Description: March 9th.

AON offers risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services globally with operations in more than 120 countries.

Q4 earnings of $2.09 were up +34%. Revenues of $3.28 billion narrowly missed estimates for $3.33 billion due to the impact of the strong dollar. The dollar reduced earnings by 10 cents. They repurchased 4.2 million shares for $400 million. For the ful lyear free cash flow increased 10% to a record $1.7 billion.

The CEO said in the earnings release "In a year of substantial earnings volatility driven by macroeconomic factors and industry headwinds, investments in our industry leading platform contributed to our strongest rate of organic growth in Risk Solutions since 2007."

Earnings April 29th.

I have wanted to add AON as a position since their post earnings spike in early February but the stock just kept climbing. The last three days provided some consolidation and allowed the call premiums to shrink. I believe AON will continue higher out of this consolidation period to test resistance at $102.50, which would be my exit target.

I want to see a trade at $99.50 to insure we do not enter a new play just as the market rolls over. That is closer to the preferred strike price so the option is going to cost a little more than the price listed below.

Position 3/10/16 with an AON trade at $99.50

Long April $100 call @ $1.70, initial stop loss $97.75


AOS - AO Smith - Company Description

Comments:

Still moving sideways in a choppy market. No news.

Target $77.65 for an exit.

Original Trade Description: February 18th.

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.


CRM - SalesForce.com - Company Description

Comments:

Minor gain but it did move over resistance at $72. Oracle earnings helped.

Original Trade Description: March 14th.

Salesforce.com provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. They provide an entire menu of applications tailored to various industries with an emphasis on sales force automation and customer resource management.

The last six analysts ratings changes have been upgrades with four new analysts initiating coverage with a buy. Salesforce is growing quickly with revenues growing 24% in 2015 to $6.67 billion. Subscription and support revenues rose to $6.21 billion and accounted for 93% of all revenue. These fees continue from quarter to quarter and should continue growing.

Morgan Stanley said customer demand for applications software was expected to remain quite strong and Salesforce.com was positioned to make the most of this development.

The Salesforce.com CEO said sales efforts to enterprise customers were becoming more time consuming because of the greater complexity of the large enterprises but once sold they became very profitable long term assets. Once a large enterprise invests in Salesforce.com and trains its thousands of employees there is a huge inertia factor that prevents them from leaving. That subscription revenue becomes repeatable for a long time.

These longer sales and implementation cycle means that Salesforce.com has a lot of delayed revenue that it will recognize in future quarters in addition to the current revenue for those quarters. This is the equivalent of a snowball rolling down hill. Future revenue is growing even though it is not readily apparent. In Q4, the company reported deferred revenue of $4.29 billion and its unbilled deferred revenue was $7.1 billion.

For Q4 Salesforce reported earnings of 19 cents that matched estimates but revenue of $1.81 billion beat estimates for $1.79 billion. The company guided higher for 2016 and shares rose 8% on the news.

The next earnings are May 18th.

Shares moved sideways from the earnings spike for three weeks and are just now starting to move higher. Given a positive market, I think they will retest the highs in the weeks ahead.

I am recommending the May $75.00 call even though it is a little farther away from the money and slightly more expensive than the April $72.50 call. With only 32 days left in the April cycle we are reaching the point where premium decay will accelerate. If we hit a soft patch in the market the April premiums may not have time to recover. The May premium will cover the earnings on May 18th so when we exit before earnings there will still be some expectation built into the premium.

Buy May $75 call, currently $3.15, initial stop loss $66.85


DLPH - Delphi Automotive - Company Description

Comments:

Nice gain in a choppy market. That is two consecutive days and it missed the entry point for the play at $72.50 by 2 cents with a high at $72.48.

The position remains unopened until DLPH trades at $72.50.

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

With a DLPH trade at $72.50

Buy May $75 call, currently $2.40, initial stop loss $65.85.


EA - Electronic Arts - Company Description

Comments:

Fourth consecutive day of gains. Approaching resistance at $66.25. No news.

Target $70.35 for an exit.

Original Trade Description: February 29th.

Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.

Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.

Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.

The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.

The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.

At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.

Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.

EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.

I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.

I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.

Earnings may 5th.

With EA trade at $65.45

Buy April $67.50 call, currently $1.62, no initial stop loss.


EMR - Emerson Electric - Company Description

Comments:

New life after Tuesday's decline. Next target is resistance at $52.35. After the close, they filed a SEC form showing that orders declined in February. Shares dipped slightly then recovered.

Original Trade Description: March 3rd.

While you may not have heard about Emerson Electric they have 110,800 employees and are involved in many different aspects of the economy. They design and manufacture products and deliver services to industrial, commercial and consumer markets worldwide. They specialize in process management valves, meters, switches, regulators and digital plant applications.

A major segment is providing infrastructure, power, uninterruptible power systems, thermal management equipment and integrated solutions for large datacenters and cloud computing installations. They handle climate control, heating and cooling, electrical control monitoring and management.

They reported earnings for Q4 of 56 cents that beat estimates for 51 cents. Revenue of $4.713 billion beat estimates for $4.642 billion. However, revenue was down -16% because of the recession in the energy sector. The CEO said, "Lower oil prices continued to apply downward pressure on oil and gas spending, particularly upstream projects, as well as power generating alternators used in upstream applications."

Shares declined sharply but began to rebound almost immediately. The company plans to spin off its network power business later this year, which will downsize revenue by about $8 billion. They are restructuring to lower costs until the energy sector recovers and are selling noncore assets to reduce complexity. Investors liked the plans that were presented.

The company also declared a 47.5 cent quarterly dividend which produced a 4% yield at the time it was announced.

Their next earnings are May 3rd.

Emerson has resistance at $50.50 and it broke through that level on Thrusday. The next material resistance would be well above in the $60 range with a speedbump at $52.50. I am recommending we buy the June $52.50 call and plan to exit well before earnings. By purchasing the June call it will still have earnings expectations in the premium when we exit before earnings.

Emerson is somewhat of a slow mover so the options are cheap thereby limiting our risk.

Position 3/4/16

Long June $52.50 call, entry $1.60, see portfolio graphic for stop loss.


HPQ - Hewlett Packard - Company Description

Comments:

HPQ rose +2% to $11.62. One good day could hit our exit at $12.

Exit the position with a trade at $12.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.



JNJ - Johnson & Johnson - Company Description

Comments:

After two consecutive days of intraday highs, JNJ declined slightly as safety stocks fell out of favor as tech stocks rallied.

I am recommending an exit target at $108.75.

Original Trade Description: February 24th

JNJ is broadly diversified with more than 250 subsidiaries. If you need a Band-Aid, mouthwash, cold capsule, cancer drug or artificial joint, they make it. They spent about $10 billion on research in 2015. Seven of the 15 new drugs they brought to market since 2009 have annual sales in excess of $1 billion.

They have increased their dividend for 53 consecutive years. The yield today is about 3%. They have a rare AAA credit rating and produce more than $11 billion in free cash flow annually. At the end of 2015 they had $38.5 billion in cash.

JNJ is recession resistant because their products are not bought on a whim. If you need a Band-Aid you buy it. If you have arthritis, you buy Motrin. If you have acid indigestion you take Pepcid. If you are sick you get a prescription for their drugs. This makes them relatively safe in times of economic weakness. With worries over a potential recession in the near future this has powered their shares to a 52-week high.

I do not need to explain JNJ to everyone because we have grown up with their brands. The company was founded in 1886 and is older than anyone reading this newsletter.

The close on Wednesday at $104.94 is right at resistance and a breakthrough here should retest the historic highs at $109 where a breakout to a new high is entirely possible. They have based at the $100 level for the last two years with the exception of the flash crash last August.

Earnings are April 12th.

Position 2/25/16:

Long May $110 call @ $1.30, see portfolio graphic for stop loss.


KORS - Michael Kors - Company Description

Comments:

The retail sector continued to be weak after the disappointing retail sales report on Tuesday. This morning Morgan Stanley downgraded Gap Stores (GPS) to a sell and that pushed the sector lower again to stop us out for a 4 cent loss on Kors.

Original Trade Description: February 22nd

Michael Kors designs, markets and distributes branded women's apparel and accessories and men's apparel. They operate more than 350 stores in the USA and 200 stores internationally. They also license their brands.

Kors shares crashed from $100 in early 2014 to $35 at the end of January on declining sales in the expensive categories that impacted all the major retailers. Inventory levels rose and margins dropped. Kors went from being the premier brand to just another high priced name.

Fast forward to Q4 earnings and everything changed. The company reported a solid holiday quarter when everyone else was just getting by. Kors reported a 6.3% increase in revenue to $1.6 billion that beat estimates for $1.4 billion. Earnings rose to $1.59 and also beat estimates for $1.46. Same store sales rose +2%. Sales overseas boomed +14% with Japan leading with a 68% rise. U.S. same store sales declined -0.9% but that was significantly better than the -8.5% drop in the prior quarter.

Kors heard what customers wanted and shifted to fill that demand. Kors introduced a new line of smaller leather handbags that cost less and customers snapped them up in volume. The company said they were selling so good they were going to raise prices and increase margin. The trend is away from the larger bags that made Kors famous but they adapted and sales are rising again.

Kors also suffered from the strong dollar and weak currencies overseas but overcame the headwinds to easily beat on earnings.

Shares spiked $12 on the news from $40 to $52. After trading sideways for the last three weeks the shares have broken out to a new 52-week high at $55 and appear to be headed for $60 or higher. Investors remember Kors as the leading fashion merchandiser and they believe the company is back on top again.

I want to take that ride to $60 and then see what happens when we reach that level.

Earnings are May 26th.

Position 2/23/16 with a KORS trade at $55.25

Stopped 3/16/16: Long May $57.50 call @ $2.48, exit $2.44, -4 cent loss.


KR - Kroger - Company Description

Comments:

Recovered Tuesday's losses but that was all.

Original Trade Description: March 11th.

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Feb-11th crash. This is long-term support and shares were very oversold. In a previous play we bought the dip in February and rode the stock back up to $40.35 and exited before earnings in early March.

In the March earnings Kroger reported earnings of 57 cents compared to estimates for 54 cents. Revenue rose +4% to $26.2 billion and narrowly missed estimates for $26.3 billion. Sales excluding fuel rose +7%. Same store sales rose +3.9% but that was less than the 4.0-4.5% they had predicted in January. Kroger said shifting the Super Bowl into February hurt sales for the quarter ended January 31st. Warmer weather and fewer snow storms also hurt because people stock up on food ahead of storms but shop as normal in regular weather.

The retailer said they expect earnings to rise 6-11% in 2016 to $2.19-$2.28 per share. Same store sales are expected to rise 2.5-3.5%. This is lower than 2015 because of lower inflation.

Investors were not happy with the earnings because most never look at the details and only read the one sentence headline to make their decisions. Shares declined from $40.50 to $36.50 to give us another entry point at support.

I believe Kroger will make a new high this time. Earnings are well out in the distance on June 16th and that will allow us to buy a longer dated option and give it time to mature. Kroger is a slow mover so we need time for it to grow. With support at $36 dating back to the August crash it should be a relatively safe position.

Position 3/14/16:

Long July $40 call @ $1.55, no initial stop loss


N - NetSuite - Company Description

Comments:

Still fighting resistance at $64.50 but 2 month high close. No news.

Target $68.85 for an exit.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss


NTAP - NetApp - Company Description

Comments:

Minor rebound after dipping to a 2 week low at the open. I added a stop loss at $25.25.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.


PII - Polaris Industries - Company Description

Comments:

Recovered yesterday's losses but we need to move over $100 soon to stimulate new buying.

Target $105.85 for an exit.

Original Trade Description: February 25th.

Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. The company reduced guidance in December and shares declined from $96 to $68 by late January.

In Q4 sales declined -20% because of the lack of snow but also because of the oil recession. They sell a lot of off road equipment to oil field workers and they are not buying today. When oil field workers are employed they make a lot of money with starting wages in the $70-$80K range when times are good so there is a lot of extra cash floating around. Retail sales in oil regions were down -10% in Q4.

However, despite the lack of snow and a rough Q4 the company still managed to increase sales for 2015. That is impressive when snowmobile sales declined -25%. We have had some significant snowstorms in 2016 so that snowmobile inventory is probably shrinking in Q1.

Motorcycle sales rose +43% in Q4 so there is a bright side to warm weather and no snow. Sales in that division were up +74% for the full year.

Polaris is the number one off road vehicle manufacturer in the U.S. and are expecting a better 2016 with most of the growth in the second half.

Earnings are April 26th.

Shares are about to break over resistance at $89, market permitting. I am recommending the April $95 calls currently $2.00 on a breakout.

Position 2/26/16 with a PII trade at $89.50

Long April $95 call @ $2.15, see portfolio graphic for stop loss.


PKG - Packaging Corporation of America - Company Description

Comments:

Excellent gain of $1.61 to a two-month high close but still in the grip of resistance at $55.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 25th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.


QSR - Restaurant Brands Inc - Company Description

Comments:

Shares recovered half of the $1.57 drop from Tuesday on the retail sales news. Shares are back over resistance at $37.65 and should move higher from here in a positive market. No news.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

With a QSR trade at $38.15

Buy April $39 call, currently $1.10, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)


VXX - iPath S&P 500 VIX Futures ETN - ETF Description

Comments:

The post Fed rally finally pushed volatility low enough that the VXX dipped to 20 and our exit point. The volatility rebound in mid February sidetracked the original play and we needed to take a gain if one was offered. That gain was minimal at 59 cents but it was still a gain. The play is closed.

Original Trade Description: January 16th

At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally do not move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.

Position 1/19/16:
Closed 3/16/16: Long March $23 Put @ $2.41, exit $3.00, +.59 gain.






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