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Daily Newsletter, Saturday, 1/9/2016

Table of Contents

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

Market Wrap

Welcome to 2016

by Jim Brown

Click here to email Jim Brown

The year began with the worst start in decades and the declines may not be over. I saw a wanted poster for Santa offering a huge reward but I doubt it will help.

Market Statistics

Friday Statistics

The Dow peaked before New Years at 17,750 at 3:PM on Dec 29th. We have been on a slippery slow ever since with Dow closing at 16,346 on Friday and losing -1,394 points since that post Christmas peak. You can pick from a variety of excuses but it was probably a combination rather than one event in particular.

The 7% drop in China that halted trading on Monday was definitely a trigger that sent us lower but we were already in crash mode after the -328 point drop from that peak on the 29th. The U.S. markets were already fading fast and the China news just accelerated that decline.

Moving farther into the week the second Chinese trading halt and the crash in oil prices greased the skids to allow the U.S. markets to move to three-month lows. It appeared for a while on Thursday night that a positive close in China was going to spare the U.S. markets from more pain but the early morning rebound was quickly sold and the Dow ended down -167 points for the day. There was $1.3 billion in market on close orders to sell on the NYSE. There was NO dip buying or short covering at the close. Apparently, traders were convinced we are still going lower. Rarely do markets this oversold fail to see at least a minimal short covering bounce going into the close ahead of the weekend.

This suggests traders are expecting more downside risk and probably the potential for the Chinese markets to continue their downward move. The Chinese markets were rescued when regulators said they were extending a ban on insider trading that was due to expire on Friday. Anyone with more than 5% of a company's stock is prohibited from selling that stock until the government releases that ban. This was instituted back in July when the Chinese market was in meltdown mode.

U.S. traders are facing not only the economic and geopolitical events of China, Saudi Arabia, Iran, Syria and weak economics in the U.S. but also an increasing number of earnings warnings ahead of the Q4 reporting cycle. Add in the constant chatter from the Fed about future rate hikes and suddenly there is no support under the market.

Not even a blowout number on the Nonfarm Payrolls could hold the market up for more than a few minutes. In December, the country added a whopping 292,000 jobs compared to 211,000 in November and consensus estimates for 200,000. November was revised higher by +41,000 to 252,000 and October was revised higher by +9,000 to 307,000. This produced a three-month average of 284,000 new jobs and well over the Fed desire for 200,000 or better. The third quarter average was 174,000.

Total new jobs declined from 3,116,000 million in 2014 to 2,650,000 in 2015 but the employment rate declined from 5.6% to 5.0% because more people left the labor force. Those not in the labor force have risen to 94,103,000 million.

On the surface, this was a stunning report suggesting the job market was exploding higher. However, average hourly earnings were unchanged, suggesting there are still plenty of workers applying for available positions. The average workweek was also unchanged at 34.5 hours where it has been for the last year. Again, no rise in the workweek means plenty of workers and no need to work longer hours.

Most analysts believe the jump in December employment was seasonal. Art Cashin pointed out that in the separate Household Survey there was a gain of 485,000 jobs but 35% went to workers under the age of 19 and another large chunk to workers over 55. Only 16,000 out of 485,000 went to workers between the ages of 24-55. That sounds an awfully lot like seasonal workers.

There was another catch as well. Workers with multiple jobs have increased by +752,000 since May. If you have to work 2 or 3 jobs to pay the bills because you can't find a full time job then each of your jobs counts as a new job. Multiple jobholders have accounted for 64% of all job gains since May. The BLS said they would like to sort all the jobs by social security numbers and eliminate the duplicates but they cannot have access to the data for privacy reasons. Also, if you worked as little as 1 hour, say parking cars at an event, then you are considered "employed." Looking for jobs online on Monster.com does not make you part of the labor force. You actually have to interview in person with a prospective employer to avoid being logged as "not in the workforce." In other words, the monthly payroll numbers are not even a decent guesstimate of actual employment or new jobs. Artificial Employment

The managed unemployment rate remained at 5.0% for the third month. The broader U6 measure of underemployment remained at 9.9% or roughly 15.6 million workers. More than 5.7 million workers are working part time because they cannot find full time jobs.

The December number is going to be very hard to follow for January. Typically, jobs decline in January and if a lot of those Q4 jobs were seasonal, we could see a much smaller number next month. I have not seen any analyst expecting over 200,000 and it is possible it could be a lot lower.


The GDP forecast for Q4 took another hit when the Wholesale Trade numbers for November were released. Inventories declined -0.3% compared to the prior month at -0.1% and consensus estimates for -0.1%. However, the October headline number was revised downward to -0.3% as well. Were it not for a rise of +2.3% in petroleum inventories the headline number would have been a lot worse.

Declining inventories are actually positive to some extent. The rise in inventories boosted the Q2 GDP numbers to nearly 4% growth but that was an abnormal increase in inventory levels. Now that they are declining, we are seeing the GDP forecast decline as well.

Wholesale trade declined with sales falling -1.0%. That was led by nondurables falling -2.4% and durables rising +0.4%. The inventory to sales ratio increased slightly from 1.31 to 1.32.

Moody's Chart

The Atlanta Fed GDPNow forecast for Q4 fell back to +0.8% growth after rebounding from 0.7% to 1.0% on Wednesday after the International Trade report. The next update will be on January 15th when the Retail Sales report for December is released. Morgan Stanley slashed their forecast to only +0.1% because of the stream of weak data we have seen in recent weeks.


The calendar for next week is relatively light. None of the reports should move the market with the possible exception of the Retail Sales on Friday. The Beige Book on Wednesday is not expected to show any major change from the last update.


There were no forward splits announced last week. Seanergy Maritime (SHIP) announced a 1:5 reverse split to keep from being delisted.

For the full split calendar click here.


Friday was a tough day for retailers. The Container Store (TCS) started the bad news with a -41% decline after reporting a loss for last quarter. The company said is lost 4 cents and consensus estimates were for a gain of 5 cents. Revenue of $197.2 million was slightly under forecasts for $199.1 million. The company guided for the current quarter for revenue of $222-$232 million with earnings of 19-22 cents. Analysts were expecting 29 cents. Same store sales may decline as much as -5% in the quarter. The CEO said they suffered a "challenging quarter." They operate 77 stores and opened 10 last year.


American Eagle Outfitters (AEO) reported that Q4 same store sales came in at 4% compared to estimates at 4.87%. Management had originally guided for a range of 3.4% to 6.6%. The company affirmed guidance of 40-42 cents and analysts were expecting 42 cents. The company reports earnings on March 2nd. Shares fell -16%.


Gap (GPS) shares fell -14% after the company said same store sales for December fell -5%. Store brand Banana Republic fell -9% and Old Navy sales declined -7%. The headline Gap brand saw sales fall -2% and the least of the group. This was the second consecutive decline in same store sales. Total revenue fell -4% to $2.01 billion for the five-week period.


Macy's (M) announced they had decided to close 40 stores because of slowing mall traffic. They will be terminating 3,000+ employees. Since Macy's is an anchor tenant, it means other stores in the malls are going to suffer. JC Penny's (JCP) has 19 stores in malls where Macy's is leaving. That suggests traffic in those malls is going to decline even further and hurt JC Pennys. Sears (SHLD) has 16 stores, Claire's 8 stores, Bon-Ton four stores and Nordstrom 3 stores. Macy's reported a -4.7% decline in same store sales. The company guided to earnings of $2.18-$2.23 for Q4 and analysts were expecting $2.55. Shares rallied on Thursday on the store closings but declined Friday with the rest of the sector.

The malls are dying thanks to the availability of online shopping. Both Macy's and JC Penny's said they had strong online sales. Retail shoppers are deciding not to take their life into their hands and congregate in busy malls where some crazy terrorist may show up. Since you have a four times greater chance of a shark bite and eight times better chance of being struck by lightning this is a misplaced fear. However, it is a fear and it will grow once a U.S. mall is attacked.


Best Buy (BBY) shares fell -4.2% after Cleveland Research warned investors about sales trends ahead of the stores report next week. Cleveland expects disappointing results. Hedge funds long the stock decreased from 28 to 24 in Q4. Amazon is still ruling the retail sector and Best Buy has put up a valiant fight but it remains to be seen if they are winning market share or just delaying the inevitable. Multiple analysts have suggested that Amazon buy Best Buy because they could use the floor space for "show rooming" and the warehouse space could be added to their distribution system.


Software company Microstrategy (MSTR) has had a struggle over the years with executives and accounting. The company filed with the SEC on Friday saying the president, Paul Zolfaghari and Jonathan Klein, the chief legal officerwho also held the title of president, had "left" the company. Just six months ago, the CFO was replaced. Founder Michael Saylor, currently the chairman and CEO will now assume the role of president as well. W.Ming Shao, EVP, will now assume the chief legal officer role. Microstrategy has a revolving door for officers and going to work there should be considered temporary employment.

Shareholders have tried in the past to get Saylor to relinquish control but it never seems to last long. About 15 years ago, I was short 10 contracts of the $220 puts on MSTR. I turned on my computer one morning and MSTR was trading at $110. I remember thinking "I don't remember MSTR having a 2:1 split scheduled." Unfortunately, it was not a split but some accounting problems had been disclosed by the company. I eventually traded my way out of the problem thanks to a decent $30 rebound that allowed me to profit on a truckload of calls I bought at the bottom but it was a very unsettling couple of weeks. Since then I have never traded MSTR and strongly suggest it be avoided. Sudden high profile events tend to occur to this stock as you can tell from the many gaps on the chart.



Chip maker Ambarella (AMBA) crashed another 10% on Friday after Cirus Logic (CRUS) and Qorvo (QRVO) warned after the bell on Thursday. Ambarella has been following GoPro lower and shares of GPRO were down -5% on Friday on hangover from CES and new competitors popping up everywhere. Ambarella has declined from $129 to $45 since July. That exactly mirrors the plunge in GoPro.



December was a weak month for auto sales despite it being a record year. The car dealers, like Lithia Motors (LAD) began falling mid month and have not stopped. Investors are fickle. Once they see a trend turn, it is a race to get out of that sector.


Next week is the start of the Q4 earnings cycle. Because of the flurry of guidance warnings S&P Capital IQ is now predicting S&P-500 companies will post an earnings decline of -5.5% and the second consecutive quarter of declining earnings. The last time that happened was in 2009. Revenues are expected to decline -1.7% but other analysts have predicted as much as a -3.2% decline. The strong dollar is still getting the blame.

The declining earnings estimates may also be weighing on the market. Two consecutive quarters of declines, means PEs are expanding unless stock prices contract. With the PE on the S&P between 18-20 depending on how you calculate it the market is somewhat overvalued.

I looked at a lot of charts this weekend and the vast majority are very ugly. Only 45 stocks in the S&P-500 are up for the year. Most are in bear market territory after last week's decline.

Intel is the first big tech to report for this cycle and earnings are Thursday after the close. JP Morgan will get a one-day jump on banking Friday by reporting on Thursday. The rest of the major banks report on Friday with the exception of Bank America.


The energy sector continues to drag the market lower as oil prices set new lows. The Energy Sector SPDR (XLE) set a six-year low at $56 on Friday because the low oil prices guarantee that exploration and production is going to shut down until prices recover.


The commodity markets are crashing just as hard as the equity markets. The CRB index closed at a new 42-year low. This is due to lack of demand leading to excess supply. This severe of a correction has never happened outside of a global recession.


The Baltic Dry Index of shipping rates is at another historic low because nobody is shipping commodities. Until the Baltic Index begins to rebound, the global economic conditions are going to continue to worsen. When shipping begins to increase that will be a leading indicator the economy is recovering.


WTI closed at $32.88 on Friday and a -10% decline for the week. Analysts believe the dispute between Iran and Saudi Arabia could force both to produce even more oil. Saudi will produce it to force prices lower to hurt Iran and Iran will produce more in order to make up for the lower prices. Also, there were rumblings out of Washington last week that the sanctions on Iran could be lifted by the end of January. That means an almost immediate 500,000 bpd of additional oil on the market plus the 30 million barrels Iran has stored on tankers in the Persian Gulf. This will immediately push prices lower.

Most people see the price of WTI at $32.88 and think, wow that is low. Unfortunately, for some producers they only wish they could get that price. In the Bakken shale, the ultra light oil is discounted even further because there is limited pipeline capacity and transportation out of the Bakken is expensive. Last week there was an $8 discount to WTI for Bakken crude. As of Friday that would mean roughly $25 is what Bakken producers could get.

This is even worse for Canadian producers. Western Canadian Select traded under $20 last week. This crude is now being priced at a $14 discount to WTI because there is nowhere to store it. All the storage tanks in the Midwest are nearing capacity and there is limited pipeline capacity to take it south to the Gulf of Mexico. This is what the Keystone XL pipeline was supposed to solve. The Keystone would take oil from the Bakken and Canada and send it south to Cushing and the Gulf refineries.

If you really want to see how badly the low oil prices are impacting E&P companies you only need to look at the rig counts. For the week ended on Friday the rig count declined by -34 rigs to 664. Twenty of those rigs were oil rigs and 14 were natural gas. Active rigs have now declined -1,267 from the peak last year or almost two-thirds.

Despite the drop in active rigs, U.S. production rose again to a three month high at 9.219 million barrels per day. Producers are squeezing out every last drop because they know prices are about to collapse even further. This is going to eventually decrease production significantly, probably by July, as the number of new wells shrinks significantly.

Analysts keep talking about a 2 handle on WTI, meaning anything under $30. Over the last week, people started talking about oil in the teens because of the lack of storage. Cushing Oklahoma, the delivery point for crude futures saw inventories rise to 63.9 million barrels and a record high. Cushing has a capacity of about 70 million but they need to keep 10% available for mixing and blending the various crude grades they get to the required density for sending through the pipelines to the Gulf refiners. If you are good at math you see the problem. They are already over their 90% operational capacity and nobody can deliver crude to Cushing unless an equal amount is shipped out.

I cannot visualize oil in the teens, although it was in single digits in 1998 because of an internal OPEC war similar to this one that created a glut. I can see it in the high $20s over the next few weeks. Inventories normally peak at the end of April so the next three months are going to be tense for oil producers.



Markets

I could summarize my market commentary in one word. Ugly! The Dow dropped nearly -1,400 points in seven days. There is little in the way of support for the Dow until 16,000.

The S&P declined -139 points over the last seven days and is in free fall territory with 1,867 the next material support.

The Nasdaq Composite is closing in on support at 4,600 and could easily test 4,500.

The scariest thing about all the charts is that there has been no material pauses. It has been straight down every day. Friday saw a minor blip higher at the open but it was quickly erased.

When funds and investors decided to take profits it was immediate and there has been no dip buyers.

Volume has also been spiking. Friday saw 8.8 billion shares with 3:1 decliners to advancers. Thursday saw a whopping 9.8 billion shares with decliners 6:1 over advancers. Tuesday was the lightest day of the week at 6.9 billion shares and that is the only day of the week that closed with a gain. This is not a good sign.

The severity of the decline has thrown all the technicals into extremely bearish mode. The percentage of S&P stocks still over their 200-day long-term average has fallen to 25.4%. Even worse, the percentage of stocks still over their short-term 50-day average has declined to only 12.8%. We are rapidly nearing the lows we saw back in September.



Another indicator I found somewhat surprising is the Bullish Percent Index. Thirty-six percent of S&P 500 companies still have a buy signal on the Point & Figure charts. Given the number of ugly charts I looked at on Friday, I would have thought it was much lower. Of course, that includes the utility companies and dividend payers like Altria (MO) and Reynolds American (RAI). They benefit from the flight to quality trade when the market collapses.


Late December and early January is the strongest period of the year for small caps, except for this year. The advance decline line for the small caps has declined to very near the September low and there is zero buying interest for small caps. On a sentiment basis, this is very bearish for the broader markets.


The same A/D line on the Nasdaq is at three year lows. It does not get much more bearish than this.


Another indicator of economic health is the Dow Delivery Service Index. If companies are thriving, they will be shipping a lot of product. The index fell to a two-year low last week. The Dow Railroad Index is also at a two-year low. The Dow Transports ($TRAN) closed at a new two-year low on Friday. With oil at $33 the shippers, airlines and railroads should be at their highs. The confirmation of these three charts shows that the economy is sick regardless of what the Fed believes.




Lastly, the Wilshire 5000 Index, the broadest market index available, is about to break two-year lows. This index shows graphically the normal 5-6 year economic cycle with significant market declines during the recessionary periods. The current expansion is 81 months old and is due for a rest. A garden-variety recession could knock it back to 12,000. I am not claiming that will happen but simply showing the length of time between business cycles.


There is little left to say about the S&P. Support at 2,000 broke and 1,867 is the next logical target. HOWEVER, we are VERY oversold and we could see a short squeeze at any time. Whether that would reverse the trend is unknown but doubtful. We saw the Dow futures up +200 points before the open on Friday. The Dow spiked about +150 at the open and then gave it all back to close down -167. That does not give me much confidence that a short squeeze is going to solve our problems.

Resistance on the S&P is now 1,960 and 2,020 with support at 1,867.



Where could the S&P go if the selling continues? Here is a very long-term chart of the S&P going back to 2000. The horizontal support is 1,600 and the Fib retracement of the 2009-2015 rebound is at 1,581. If I had to bet on a bear market bottom I would draw the line at 1,600. I am not saying that is where we are going but that could be a worst-case scenario.


After a nearly 1,400-point drop in seven days, there is not much to say about the Dow. That was the worst start for the Dow dating back to 1897. Support broke and we have another lower low and the prior pattern was confirmed. Apple was up on Friday simply because it had been down so much in the prior weeks. When markets collapse, investors try to find safety in stocks that were beaten down before the current decline. They figure there is less risk in a stock that is already -25% off its highs.

Dow component Intel reports earnings on Thursday.

Support is 16,000 and I sure hope traders are ready to buy the dip. A continued decline from there puts us into an entirely different market posture.



The Nasdaq decline accelerated and nearly every day was a gap lower. However, Friday the index declined less than its peers. Whether that was just a coincidence or somebody nibbling at the dip is unknown. With Facebook and Apple higher it could be just somebody buying losers.

Note the winners list below. Most of the symbols are stocks you never see in that list. A lot of them I did not even recognize at first while all the big name favorites are on the losers list. Until the big names start showing up on the winning side we are going lower.

Near term support is 4,600 followed by the more likely support at 4,500. The flash crash low was 4,292 and hopefully we are not going that low but 4,130 cold also be in play for a protracted decline.



The Russell 2000 has collapsed back to the October 2014 low at 1,046 and is showing no signs of a rebound soon. In fact, the Russell is the most dangerous index this weekend. If the support at 1,046 fails, it could be a long drop. The Russell is now -19.2% off its highs and only about 10 points away from a bear market. If the Russell does collapse below this support, it should be a signal the broader markets are going much lower.


Last week we put on our 5th grader hats and determined the major averages were headed lower. I recommended not making any trades last week and hopefully everyone took my advice or were short. The first 10 days of January can be volatile and we still have five days to go. Once the earnings cycle begins the market should pick a direction. I could see some short covering before that happens. The first big companies are Intel and JP Morgan on Thursday and then most of the banks on Friday.

I would continue to be a watcher not a trader. Be patient. There is always time to trade as long as you have capital to invest. If you miss an entry on the stock you want, be patient. There are 4,500 stocks. Another opportunity will appear.

Don't Miss Out in 2016!

Recent reader comment on 1/4/16:

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Random Thoughts


Are we already in a bear market.

A bear market is normally a market that has declined -20%. Bespoke did the math for all the stocks in the S&P 500 and found that we are already in a bear market. The average stock is down -24% from its recent highs. Small caps are down an average of -27.6%, mid caps -23.6% and large caps -19.9%. The reason the indexes are not down -20% or more is that they are being held up by the performance of a very few large cap stocks. The top ten gainers have supplied nearly all of the gains in the S&P-500. Bespoke Article

Bespoke Chart

While the energy sector is the biggest drag on the index, only three of the S&Ps 10 sectors have declined less than 20%.

Bespoke Chart


Just because China's markets calmed on Friday does not mean the problem is over. China has a long way to go on its path to currency normalization. China's yuan has been pegged to the dollar for a very long time. Currently the yuan is roughly 6.5 to the dollar. That means one dollar buys 6.5 yuan.

Because it is pegged to the dollar, it goes up when the dollar goes up and down when the dollar declines. The dollar rose +26% from May of 2014 to March 2015. That means the yuan appreciated roughly the same amount. That made Chinese goods more expensive around the world. If you are paying in euros, Iranian rials, Swiss franc's, Japanese yen, etc, those goods cost you more because the dollar went up. In order to depreciate its currency back to 2014 levels and make their products more affordable to the world they need to further devalue the yuan by 10-15%. In currency terms, that is a very big move and it will upset the global markets. China has to do it to reboot their manufacturing economy. China is moving to peg their yuan to a basket of currencies rather than just the dollar but that is a long process.

We can expect further competitive devaluations from China ahead of its formal inclusion in the IMF SDR club in October. To devalue significantly before that event is going to require some pain in the currency markets. Be prepared. Effective January 15th margin requirements on yuan currency trades will be doubled. Margin update

China wants quick sharp currency decline


On Friday, Kyle Bass explained the real problem in China. He said it is not the equity markets or the currency market. It is the financial system. The Chinese banking system has $35 trillion in assets. China's GDP is about $10 trillion. The government's remaining reserves are about $3.5 trillion. The banking system grew by more than 400% over the last 8 years. There are zero "nonperforming loans." China uses the "extend and pretend" method of dealing with bad debt. If a company defaults, they extend the loans for another year and pretend it did not happen.

Bass said the Chinese banking system is a monster bubble that will pop. The emerging market miracle that was China's growth over the last decade was built on credit. Anybody could get a loan for anything as long as it created jobs. With the economic cycle declining those debtors cannot pay back the loans.

When the system eventually fails those loans will have to be written off. If only 10% of the assets are written off that is $3.5 trillion and equal to the government's reserves. The odds are significantly higher that much more than 10% are nonperforming and will be written off. Analysts believe it could be 25-35% of the total. This is going to be a monster shock to the Chinese economy similar to Lehman Brothers and Bear Stearns going under only worse. Bass said the bill for lack of regulation and supervision is coming due.

We saw over the last couple of years that inventories of commodities like copper were being used as collateral for multiple loans from multiple banks. In other words, the owners or even purported owners of a pile of copper had borrowed multiple times from different banks using the same pile of copper as security. That is like getting a dozen mortgages on your home without anyone finding out. Eventually there will be only one winner and the rest of those loans will be worthless.


Bank America warned last week that investors should be in cash and long volatility. They joined Citigroup, UBS and RBC Capital in warning of a rough market ahead. They are expecting a sharp drop in the S&P to 1850-1900.

The bank said to remain in cash until one of three things happened.

China PMI is back over 50.

Buyers return for high yield and emerging market debt.

A spike in volatility or an equity market reset causes the Fed to pause.

The bank also said the drop in the U.S. manufacturing ISM to 48.2 was the weakest since June 2009. Readings lower than 50 indicate contraction. A reading under 45 has coincided with a recession in 11 of the last 13 times since WWII. Full article


UBS distributed a 30-page report last week to outline their claim that the world has entered a bear market.

"The S&P-500 is currently in 4th longest bull market since 1900. Bear markets are defined by a market decline of 20% and more. It's a fact that since its March 2009 low, with 82 months and a performance of 220%, the S&P-500 now trades in its 4th longest and 5th strongest bull market since 1900. So from this angle alone we suggest the 2009 bull cycle has reached a mature stage."

"Together with the 200-day moving averages rolling over in more and more markets globally, the break of the 2011 bull trend in the Russell-2000 and the equally weighted Valueline-100 index in the US, as well as intact sell signals in our monthly trend work, we can clearly say that globally, a bear market is already underway in more and more markets."

Bear Market Has Begun



Global equity markets lost -$2.3 trillion in market cap last week. U.S. equity funds saw $12 billion in outflows, the most in 17 weeks. The S&P-500 saw $1 trillion in market cap erased. Can you say "extremely oversold."


Here is a really good article on why the world is headed for recession or even deflation. It is long but worth the read. Recession or Deflation?


Bill Gross posted his market outlook on Friday and it is worth a read. Here is the first paragraph.

The Romans gave their Plebian citizens a day at the Coliseum, and the French royalty gave the Bourgeoisie a piece of figurative "cake", so it may be true to form that in the still prosperous developed economies of 2016, we provide Fantasy Sports, cellphone game apps, sexting, and fast food to appease the masses. Keep them occupied and distracted at all costs before they recognize that half of the U.S. population doesn't go to work in the morning and that their real wages after conservatively calculated inflation have barely budged since the mid 1980's. Confuse them with demagogic and religious oriented political candidates to believe that tomorrow will be a better day and hope that Ferguson, Missouri and its lookalikes will fade to the second page or whatever it's called these days in new-age media. Meanwhile, manipulate prices of interest rates and stocks to benefit corporations and the wealthy while they feast on exorbitantly priced gluten-free pasta and range-free chicken at Whole Foods, or if even more fortunate, pursue high-rise New York condos and private jets at Teterboro. It's a wonderful life for the 1% and a Xanax existence for the 99.

Bill Gross Investment Outlook


When the Santa Claus Rally fails to appear as it has only 14 times since 1950 the rest of January and much of February tends to be bearish. However, for the full year the markets have been up in nine years and down in five. The up years significantly outperform the negative years. The average gain in an up year is 14.1%. If you remove 2008 from the list because of the external factors, the average down year loses only 0.8%. In 2008 the market declined -38.5% for the full year and that skews the average significantly if you include it. The average loss including 2008 is -12.4%. I think it is safe to say we are not expecting another 2008 in 2016. When Santa Fails to Appear

This analysis suggests a real washout in Jan/Feb is a positive for the year and we should be looking at this as a buying opportunity.

However, as I reported last week, according to the Stock Trader's Almanac the 8th year of a presidential term has been down 5 of the last 6 times it has happened with an average loss of -13.9%. Sorry to burst your bubble.

We have two vastly different historical trends with exactly opposite outcomes. I know which one I am rooting for.


The December Low Indicator. In the 1970s, Lucien Hooper, a Forbes columnist, coined that term. He found that in years when the Dow declined below the December low during the first quarter of the year, a more bearish market move was likely to follow. The Stock Trader's Almanac said that in the 30 times this has happened since 1952 the market continued lower in 28 years. The average decline is more than 10%.

This may have been the reason for the flush last week when the Dow declined below the December closing low of 17,128.55 at the open on Wednesday.

The First Five Days indicator registered its worst reading on record going back to 1930. Fortunately, that indicator by itself is not that reliable. Since 1930, that has been negative 28 times and 15 years finished up and 13 down. However, in the last 16 presidential election years, the indicator has been right 14 times. Only in 1956 and 1988 did the market turn positive for the year after being down the first 5 days.


Investor sentiment is shifting into bearish with a 14.6% rise to 38.3%. However, the survey closes on Wednesday so the end of week declines are not yet in the picture.



Your chances of winning the Powerball this weekend are 1 in 292 million. The last stated prize has risen to $900 million. If you take the cash value option you would receive $558 million. Taxes at that level are 39.6% but the government only withholds 25%. The rest of the taxes are due with your regular tax bill. Since you are probably going to give a large amount to charity that will reduce the actual amount you owe at year-end. If you live in New York there is an additional 8.82% tax plus a lottery tax of 3.9%.

If you live in New York City and win, you will receive about $348 million out of the $558 million lump sum payment. Advisors always recommend the lump sum payment. Even if you invest it in something safe like tax-free municipal bonds, your total payout over the next 30 years could be even more than $900 million. If nobody wins on Saturday, the jackpot could climb to $1.3 billion.

Lottery officials said only about 65% of the available number combinations had been played as of Friday night. Good luck and please send some money my way if you win!


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"It is not enough to be busy. So are the ants. The question is: What are we busy about?"

Henry D Thoreau


 


New Plays

Manufacturing In Recession

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Eaton Corp. - ETN - close: 49.17 change: -0.56

Stop Loss: 51.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 09, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 3.9 million
New Positions: Yes, see below

Company Description

Trade Description:
Industrial stocks did not have a good 2015. The XLI industrials ETF and the Dow Jones Industrial Average both fell more than -6% last year. ETN significantly underperformed its peers with a -23% decline for 2015. Part of the problem is weak demand overseas compounded by a stronger dollar. Plus, the manufacturing sector in the U.S. is in recession.

ETN is in the industrial goods sector. According to the company, "Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."

Earnings and revenue growth for ETN was challenging last year. The company lowered guidance four times in 2015. Their most recent earnings report (Q3 results) from October 30th showed revenues were down -9.2% from a year ago. Earnings were down -25%.

ETN management is trying to be proactive. They plan to expand their restructuring efforts into 2016. Hopefully they will be able to cut costs by another $190 million if all goes as planned. The one positive side of ETN's slide has been the surge in its dividend. The stock just closed at three-year lows, which as boosted the dividend yield to 4.2%. Although I don't know why you'd buy ETN for the dividend if you are in jeopardy of losing more than 4% in the stock. The point & figure chart is forecasting a $42.00 target.

The ISM index measures manufacturing activity in the United States. December's ISM reading was negative for the second month in a row and marked the sixth monthly decline in a row. Numbers under 50.0 on the ISM index represent contraction. November's was 48.6. December's slipped to 48.2. Odds are it will be under the 50.0 again this month.

With the industrial sector in recession, revenues and earnings falling, the bearish momentum in ETN should continue. Last week's market decline has pushed ETN below round-number, psychological support at the $50.00 level. Now shares are poised to accelerate lower. Tonight we are suggesting a trigger to launch bearish positions at $48.85. My only caution is our time frame. ETN has earnings coming up in early February (no confirmed date yet). This could be a short-term three-four week play.

Trigger @ $48.85

- Suggested Positions -

Short ETN stock @ $48.85

- (or for more adventurous traders, try this option) -

Buy the FEB $47.50 PUT (ETN160219P47.5) current ask $1.50
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Strong Jobs Number No Help For Stock Woes

by James Brown

Click here to email James Brown

Editor's Note:
The December jobs number on Friday came in way above expectations. Yet that failed to stop the market's sell-off and equities delivered their worst start to the year ever.

We are adding another entry trigger to our XBI trade.
Plan on exiting the GME trade on Monday morning.


Current Portfolio:


BULLISH Play Updates

The Kroger Co. - KR - close: 40.80 change: -0.27

Stop Loss: 40.45
Target(s): To Be Determined
Current Gain/Loss: -4.6%
Entry on December 30 at $42.75
Listed on December 26, 2015
Time Frame: Exit PRIOR to earnings in early March
Average Daily Volume = 726 thousand
New Positions: see below

Comments:
01/09/16: KR might be growing weary of fighting the market's declines. Shares did lose -0.6% on Friday but that was better than the S&P 500's -1.0% loss. KR is down -2.4% year to date versus the market's -6% plunge. Unfortunately KR is also sitting on short-term support near $40.50 and if there is any further weakness we could get stopped out at $40.45.

No new positions at the moment.

Trade Description: December 26, 2015:
If you're looking for a company with consistent growth then look no further. KR appears to be the king of same-store sales and recently announced 48 quarters of consecutive same-store sales growth.

KR is in the services sector. According to the company, "Kroger, one of the world's largest retailers, employs nearly 400,000 associates who serve customers in 2,626 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's. The company also operates 780 convenience stores, 327 fine jewelry stores, 1,342 supermarket fuel centers and 37 food processing plants in the U.S."

A few months ago BusinessInsider ran an interesting article on KR that suggested the grocery chain is shaping up to be growing competition for the fast-food industry. A recent poll showed that 1 out of 4 consumers would choose Kroger instead of McDonald's to grab a quick bite to eat. KR has become more attractive because they have been expanding their prepared-food selection.

Another interesting tidbit came from CNBC Mad Money's Jim Cramer who said KR has twice the growth of rival Whole Foods Market (WFM). KR's most recent quarterly results showed same-store sales growth of +5.4%, which easily outpaces its rivals.

Speaking of Whole Foods, KR is quickly catching up. WFM built its brand on organic and natural foods, which also happen to have better margins than traditional grocery items. Rivals took notice and KR jumped into organics with both feet. According to JPMorgan, KR is on track to surpass WFM as the biggest seller of organic foods within the next two years. (FYI: Costco actually sells more organic food than anyone else in the U.S. but they are not a traditional grocery story).

Looking at the company's results they continue to beat estimates. KR announced their fiscal 2015 Q1 results on June 18th with earnings of $1.25 per share. That beat estimates of $1.22. Revenues were $33.05 billion, which actually missed estimates. The stock rallied anyway. KR management reaffirmed their fiscal year 2016 earnings forecast for $3.80-3.90 per share (essentially +10% growth).

Their 2015 Q2 results were announced on Sept. 11th. Earnings were $0.44 a share, beating estimates by five cents. Revenues were relatively flat at $25.44 billion. Same-store sales were up +5.3%. Management raised their full-year same-store sales guidance from +3.5%-4.5% to 4.0-5.0%

Q3 earnings came out on December 3rd. Earnings of $0.43 a share beat expectations by four cents. Revenues were still relatively flat at $25.07 billion (from a year ago). Same-store sales were up +5.4%. Management then raised their fiscal 2016 earnings guidance above Wall Street estimates. The stock soared on this report and bullish outlook.

Traders have been reluctant to let go of KR's stock. When the market dipped sharply a couple of weeks ago investors jumped in to buy the dip. Now KR has rebounded back toward its all-time highs. The point & figure chart is very bullish with a long-term target of $62.00. Thursday's intraday high was $42.67. Tonight we are suggesting a trigger to launch bullish positions at $42.75.

- Suggested Positions -

Long KR stock @ $42.75

- (or for more adventurous traders, try this option) -

Long APR $45 CALL (KR160415C45) entry $1.15

12/30/15 triggered @ $42.75
Option Format: symbol-year-month-day-call-strike

chart:


S&P Biotech ETF - XBI - close: 60.51 change: -1.31

Stop Loss: see below
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 07, 2016
Time Frame: 3 to 4 weeks
Option traders: exit prior to February option expiration
Average Daily Volume = 4.3 million
New Positions: Yes, see below

Comments:
01/09/16: Stocks continued to sink on Friday and biotech stocks underperformed again. The XBI lost -2.1% and is quickly approaching what should be significant support at $60.00.

This ETF looks very short-term oversold and when it bounces the rally could be sharp. Currently the XBI is down $11.00 or -15.4% from its December 29th high just seven trading days ago.

In our initial trade description I mentioned an alternative entry point to buy a dip near $60.00 (see below). Tonight we are going to implement that strategy. We will list TWO different entry points. One at $63.55 and the other at $60.00.

Trade Description: January 7, 2016:
The last six months of 2015 were rough on biotech stocks. The XBI fell from $90 to $70 (a -22% drop). The selling pressure has accelerated in 2016. This ETF is already down -12% this year (last four days) and down -13.5% from its late December 29 high.

Normal volume is about 4.3 million shares a day. The current sell-off has seen volume picking up and today volume hit 11.6 million shares. We suspect the XBI is nearing a short-term selling crescendo and will see a sharp bounce back. When the broader market bounces the biotech stocks should outperform to the upside.

Today's intraday high in the XBI was $63.35. We are suggesting a trigger to launch small bullish positions at $63.40. Biotech stocks are volatile so we want to limit our risk by using small positions. Readers should consider this a more aggressive, higher-risk trade.

Nimble traders may want to take a different approach. The $60.00 level should be major support for the XBI. If you're nimble enough you could try and buy a dip (or a bounce) near the $60 level instead but this is an alternative strategy. Officially the newsletter is listing a trigger to launch bullish positions at $63.40.

Trigger #1 @ $63.55 *small positions to limit risk*

- Suggested Positions -

Buy the XBI @ $63.55 (initial stop loss @ 59.75)

- (or for more adventurous traders, try this option) -

Buy the FEB $65 CALL (XBI160219C65)

Trigger #2 @ buy a dip at $60.00 *small positions to limit risk*

- Suggested Positions -

Buy the XBI @ $60.00 (initial stop loss @ 57.45)

- (or for more adventurous traders, try this option) -

Buy the FEB $65 CALL (XBI160219C65)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

01/09/16 Entry Strategy Update - We are listing two entry triggers.
One trigger is at $63.55 with a stop loss at $59.75.
The other is a buy-the-dip trigger at $60.00 with a stop at $57.45
(Note: the higher trigger has been adjusted from $63.40)
Option Format: symbol-year-month-day-call-strike

chart:




BEARISH Play Updates

Akamai Technologies - AKAM - close: 48.10 change: -0.09

Stop Loss: 50.35
Target(s): To Be Determined
Current Gain/Loss: +2.5%
Entry on January 07 at $49.34
Listed on January 06, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 2.1 million
New Positions: Yes, see below

Comments:
01/09/16: The midday rally attempt in AKAM failed on Friday and shares rolled over to close at new lows. Tonight we are adjusting our stop loss down to $50.35.

No new positions at this time.

Trade Description: January 6, 2016:
Right now the market's momentum is lower so we are adding a bearish momentum play. The long-term up trend in shares of AKAM appear broken after disappointing Q4 guidance. Shares underperformed the market last year with a -16% decline for 2015. That is thanks to a -33% plunge from its October peak (just before its Q3 earnings report).

AKAM is in the technology sector. According to the company, "As the global leader in Content Delivery Network (CDN) services, Akamai makes the Internet fast, reliable and secure for its customers. The company's advanced web performance, mobile performance, cloud security and media delivery solutions are revolutionizing how businesses optimize consumer, enterprise and entertainment experiences for any device, anywhere."

Shares were killed on October 28th with a -16.7% plunge following its Q3 earnings report. AKAM had reported earnings the night before. Analysts were expecting a profit of $0.58 a share on revenues of $550 million. The company said earnings grew +0% from a year ago to $0.62 a share. That beat estimates. Revenues were up +10% to $551 million, just a hair above expectations. The issue was AKAM's guidance. They guided Q4 revenues into the $557-577 million zone and Q4 earnings into the $0.60-0.64 range. Wall Street was forecasting Q4 revenues closer to $596 million and earnings near $0.65 a share.

Several analyst firms downgraded AKAM shares following its disappointing Q4 guidance. The stock has continued to underperform since this pivotal announcement with investors selling every rally. AKAM's stock tried to bounce off round-number support near $50 in mid December. Unfortunately the bounce has been failing at the $54.00 level. Now the broader market is in sell-off mode and AKAM is testing major support at $50.00 again. A breakdown here could signal a drop toward the $44-45 area. Tonight we are suggesting a trigger to launch small bearish positions at $49.75. I am suggesting smaller positions to limit risk since AKAM can be somewhat volatile.

*small positions to limit risk* - Suggested Positions -

Short AKAM stock @ $49.34

- (or for more adventurous traders, try this option) -

Long FEB $50 PUT (AKAM160219P50) entry $3.43

01/09/16 new stop @ 50.35
01/07/16 triggered on gap down at $49.34, suggested entry was $49.75
Option Format: symbol-year-month-day-call-strike

chart:


CF Industries - CF - close: 33.82 change: -0.32

Stop Loss: 35.75
Target(s): To Be Determined
Current Gain/Loss: +12.5%
Entry on January 06 at $38.65
Listed on January 05, 2016
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
01/09/16: CF shares popped on Friday morning. Fortunately for the bears the rally struggled near round-number resistance at $35.00. Tonight we are adjusting our stop loss down to $35.75.

No new positions at this time.

Trade Description: January 5, 2016:
CF underperformed the broader market and its sector in 2015. The S&P 500 lost -0.7% for the year while the IYM basic materials ETF lost -14.4%. Shares of CF returned a -25% loss last year. Momentum remains to the downside.

According to the company, "CF Industries Holdings, Inc., headquartered in Deerfield, Illinois, through its subsidiaries is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States, and distributes plant nutrients through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States. The company also owns a 50 percent interest in an ammonia facility in The Republic of Trinidad and Tobago."

It is important to note that CF is currently in the process of merging with OCI. Here's a brief description, "OCI N.V. is a global producer and distributor of natural gas-based fertilizers and industrial chemicals based in the Netherlands. The company produces nitrogen fertilizers, methanol and other natural gas based products, serving agricultural and industrial customers from the Americas to Asia. The company ranks among the world's largest nitrogen fertilizer producers, and can produce more than 8.4 million metric tons of nitrogen fertilizers and industrial chemicals at production facilities in the Netherlands, the United States, Egypt and Algeria."

Once the merger is completed they plan to move the new company's headquarters to the Netherlands to reduce their tax burden. Last year some U.S. government officials voiced their displeasure at these tax-inversion mergers to avoid paying U.S. taxes. There is a chance (albeit a small one) that the U.S. tries to stop this merger before it's completed.

Meanwhile the company continues to struggle with weak prices for nitrogen fertilizer. Looking at CF's last four quarterly earnings reports they have missed Wall Street's earnings estimates three of the last four quarters (and two quarters in a row). Revenues were down -8.3%, -15.8%, -10.9%, and -0.7% in the most recently reported quarter.

CF faces tough competition from fertilizer producers in China and in Russia and the Ukraine. It is worth noting that Bank of America just recently came out with a bullish call on CF. The BoA analyst suggested that fertilizer prices are too low and will bounce and CF's stock price should bounce with it. CF claims demand remains strong but that doesn't help if prices keep falling (obviously demand isn't strong enough or prices would rise).

Technically the path of least resistance is down and CF just broke support near $40.00. These are new two-year lows. Tonight we are suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to CF's earnings report in mid February.

- Suggested Positions -

Short CF stock @ $38.65

- (or for more adventurous traders, try this option) -

Long FEB $35 PUT (CF160219P35) entry $1.20

01/09/16: new stop @ 35.75
01/07/16: new stop @ 37.05
01/06/16: new stop loss @ 38.75
01/06/16: triggered on gap down at $38.65, suggested entry was $38.85
Option Format: symbol-year-month-day-call-strike

chart:


GameStop Corp. - GME - close: 28.37 change: -0.08

Stop Loss: 29.05
Target(s): To Be Determined
Current Gain/Loss: +6.1%
Entry on December 11 at $30.22
Listed on December 10, 2015
Time Frame: 6 to 8 weeks
Option traders exit prior to January expiration
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
01/09/16: It's time to exit our GME trade.

The S&P 500 index lost -6% for the week while the NASDAQ composite plunged -7.3%. What did GME do? Shares actually gained +1%. The stock remains below resistance at $29.00 but we are suggesting an immediate exit on Monday morning to lock in a potential gain.

- Suggested Positions -

Short GME stock @ $30.22

- (or for more adventurous traders, try this option) -

Long JAN $30 PUT (GME160115P30) entry $2.44

01/09/16 prepare to exit on Monday morning
01/07/16 new stop @ 29.05, readers may want to take profits now
01/04/16 Caution - GME sank to new lows and reversed higher.
12/30/15 new stop @ 29.35
12/17/15 new stop @ 31.25
12/11/15 triggered on gap down at $30.22, suggested entry was $31.40
Option Format: symbol-year-month-day-call-strike

chart:


Harley-Davidson, Inc. - HOG - close: 43.75 change: +0.62

Stop Loss: 44.55
Target(s): To Be Determined
Current Gain/Loss: +4.4%
Entry on December 11 at $45.75
Listed on December 09, 2015
Time Frame: Exit prior to earnings in late January
Average Daily Volume = 3.15 million
New Positions: see below

Comments:
01/09/16: HOG managed an oversold bounce on Friday. Shares gained +1.4%. Fortunately the stock seemed to struggle with short-term resistance at $44.00.

No new positions at this time.

Trade Description: December 9, 2015:
HOG was a big winner during the market's rally off the 2009 bear-market low. Shares surged from about $8 in early 2009 to over $74.00 in 2014. Unfortunately that bullish momentum is long gone.

HOG is in the consumer goods sector. According to the company, "Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson Financial Services. Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom with custom, cruiser and touring motorcycles, riding experiences and events and a complete line of Harley-Davidson motorcycle parts, accessories, general merchandise, riding gear and apparel. Harley-Davidson Financial Services provides wholesale and retail financing, insurance, extended service and other protection plans and credit card programs to Harley-Davidson dealers and riders in the U.S., Canada and other select international markets."

The company has seen sales slow down. Their most recent earnings report was October 20th. Q3 earnings growth was flat (+0%) from a year ago at $0.69 a share. That missed estimates by 8 cents. Revenues only rose +0.9% to $1.14 billion, which also missed estimates. The company said their dealer new motorcycle sales were down -1.4% worldwide from a year ago. Their U.S. sales fell -2.5%. Shipments came in below guidance.

Matt Levatich, President and Chief Executive Officer, said, "We expect a heightened competitive environment to continue for the foreseeable future." The company lowered their shipment guidance for 2015. They also lowered their margin guidance. The stock reacted with a big drop on the earnings miss and lowered guidance. Multiple analyst firms downgraded the stock in response to the news.

Technically HOG is in a bear market. Shares have a bearish trend of lower highs and lower lows. HOG spent most of November struggling with resistance at $50.00. The recent weakness has pushed shares to new two-year lows. The next drop could push HOG toward $40 or lower. Tonight we are suggesting a trigger to launch bearish positions at $45.75.

My biggest concern is some analyst deciding that HOG looks "cheap" on valuation. At this point HOG could be a value trap. Cheap stocks can always get cheaper.

- Suggested Positions -

Short HOG stock @ $45.75

- (or for more adventurous traders, try this option) -

Long FEB $45 PUT (HOG160219P45) entry $2.59

01/06/16 new stop @ 44.55
12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike

chart:


iPath S&P500 VIX Futures ETN - VXX - close: 24.83 change: +1.23

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: -13.8%
2nd position Gain/Loss: +14.4%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: to be determined
Average Daily Volume = 50 million
New Positions: see below

Comments:
01/09/16: The stock market's collapse last week has fueled more gains for the volatility index (VIX) and the VXX. Both have closed at new three-month highs. Normally these spikes do not last very long.

No new positions at this time.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike

chart: