This is the busiest week in the Q4 earnings cycle with more than 100 S&P-500 companies reporting. That may have given investors one more reason to take profits.
Falling crude prices also weighed on the market and that is a factor we are going to have to get used to for the next two months. Inventories normally build through March so we are just getting started. Iraq announced they hit a new record for production and Iran is adding a million barrels per day to the market over the next six-weeks. Oil prices would have a tough time rising in that scenario.
It is possible for equity prices to disconnect from oil prices but it rarely happens. The correlation over the last three months has been 96%. That is about as high as it can go.
Just like one day up on Friday did not make a trend, one day down today is also not a trend. However, there are more factors working against equities today than in their favor.
We are changing the format slightly this week. The entry date, earnings date, current price, change for the day and stop loss are all in the portfolio graphic. They will no longer be listed in the individual play descriptions. Everything you need is now available in a single location.
Current Position Changes
KRE - Banking ETF
I raised the stop loss to $34.65 in the last newsletter and we were stopped when that level was hit today.
SWHC - Smith & Wesson
The bullish play was triggered at the open this morning when SWHC traded at $21.35.
SSYS - Stratasys
Short entry was triggered at the open this morning.
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
KRE - SPDR S&P Regional Banking ETF
We were stopped on the short on KRE when the stock dipped to $34.65 this morning. There was no stop loss on the option position. We entered the option at 63 cents and I recommended continuing to hold it in hopes of a banking rebound over the next two months.
However, the regional banks were very negative today and KRE declined well below support. With the Fed not likely to hike rates until June it appears the banks will continue to be sold.
I am recommending today to close that call position, currently 29 cents.
Original Trade Description: January 13, 2016:
Many people thought banks would be winners after the Federal Reserve hiked rates in December. While the Fed did raise rates (barely) the financial stocks didn't see much progress.
The Fed is still talking about raising rates multiple times in 2016. There is a growing camp of market watchers who believe the Fed will be forced to back track. Deteriorating economic conditions both in the U.S. and abroad may force the Fed to pause their rate hike plans or even cut rates again.
Even if the Fed does try to raise rates the yield curve, where many banks make their money, could struggle. If the stock market remains sour throughout 2016 it will drive money into the perceived safety of U.S. bonds and that will keep yields on the 10-year low. So now that I have painted a rather unappetizing picture for the banks I'm adding a new bullish play.
All of the issues above are long-term troubles that could plague financials throughout 2016. On a short-term basis the banks are oversold and due for a bounce. Tonight's trade is a short-term technical one. The KRE is nearing major support and should rebound.
If you are not familiar with the KRE it is an ETF that tracks the S&P regional banks select industry index. The top ten holdings in this ETF are: PNC, BBT, KEY, STI, HBAN, CIWV, RF, FITB, MTB, ZION,
You can see on the daily chart below the KRE is plunging. On the weekly chart I have highlighted long-term support at the $35.00 level. Odds are good that if the KRE is going to bounce that is the spot to watch. Tonight I am listing a buy-the-dip trigger at $35.50. We will start this trade, if triggered, with a stop loss at $34.40. Remember, this is a short-term trade. We want to get in, catch a bounce, and get out.
Position 1/20/16, closed 1/25/16:
Closed: Long KRE shares, entry $35.50, exit $34.65, -.85 loss.
Close Long March $38 call @ 63 cents, currently 29 cents.
SWHC - Smith & Wesson
S&W spiked to $21.71 shortly after the open this morning to trigger the play entry at $21.35. The stock showed good relative strength with a minor gain for the day in a bad market.
Original Trade Description: January 21st.
Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.
The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.
December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.
While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.
S&W said they were on the hunt for candidates but did not have any announcements at the current time.
This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.
Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.
Earnings March 8th.
Long SWHC shares @ $21.35, initial stop loss $18.85
Long June $23 call @ $1.75, initial stop loss $18.85.
UFPI - Universal Forest Products
UFPI gave back -4% today after gaining about 4% on Friday. With earnings only 3 weeks away, I raised the stop loss to $63.50. If there is going to be further weakness we want to exit now.
Original Trade Description: January 16th
UFPI recently experienced a -20% pullback from its December 2015 highs but shares are still trading at levels not seen for almost ten years. More importantly it appears that the correction is over.
UFPI is in the industrial goods sector. According to the company,
"Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America and in Australia that supply wood, wood composite and other products to three robust markets: retail, construction and industrial. The Company is headquartered in Grand Rapids, Mich., and is celebrating its 60th year in business."
The big surge in the stock in mid October was a reaction to the company's Q3 earnings report. It was a record-breaking quarter for UFPI in spite of a -17% drop in the lumber market. Here is an excerpt from the company's earnings press release:
"UFPI announced record-breaking 2015 third-quarter results. The Company posted the best third-quarter earnings in its history with net earnings attributable to controlling interests of $25.6 million, an increase of 32.9 percent over the same period of 2014. It also posted the highest year-to-date net earnings in its history, at $61.7 million. Earnings per diluted share were $1.26 in the third quarter of 2015, up from $0.96 in the third quarter of 2014. Net sales of $762.3 million for the third quarter were up 6.8 percent over the same period of 2014."
The stock has been trading very technically with investors keying in on support and resistance levels. Shares of UFPI did see a rough December after a downgrade on December 8th. However, after a -20% pullback investors started buying UFPI last week. That is noteworthy since the broader market was crashing lower last week. You'll notice on the daily chart that UFPI found support at its simple 200-dma and delivered a pretty good gain for the week.
We think this bounce continues and want to hop on board. There is very short-term resistance at $67.00. Tonight we are listing a trigger to launch bullish positions at $67.15. Investors may want to limit their position size to reduce risk since UFPI has proven itself to be somewhat volatile.
FYI: UFPI does have options but the spreads are too wide to trade them.
Long UFPI stock @ 67.37, stop loss 63.50
BEARISH Play Updates
OIH - Oil service Index
The short squeeze in WTI has faded and the OIH is moving back towards its lows. If we had not been filled initially on the gap up on Thursday we would already be profitable.
Original Trade Description: January 20th
The OIH ETF represents 25 oil service stocks including Schlumberger, Halliburton and Baker Hughes. Once you get past those three largest holdings the rest of the pack has little balance sheet strength and we could easily see multiple bankruptcies or credit defaults. The bottom of the list contains Tidewater (TDW), Carbo Ceramics (CRR), Seadrill (SDRL), etc. The risk of default is high for the bottom half of the list. View Full List
The "perceived" bounce in oil prices by shifting to a new contract at $28.81 instead of the $26.55 close may cause some investors to buy energy stocks in a knee jerk reaction. Do not be fooled. The bottom in oil prices is still ahead.
The API Inventory report tonight after the close showed a larger than expected gain of 4.6 million barrels of oil and 4.7 million barrels of gasoline. The more accurate EIA inventory report comes out at 10:30 on Thursday.
The inventory build season runs from January 6th to the end of April. Last year inventories rose a whopping +106 million barrels to record levels during that period. There is not likely to be another rise like that because there is very little available storage capacity in the USA. Canadian oil is now selling for $15 below WTI because all the Midwest storage locations are virtually full. Bakken oil is selling for $8-$10 below WTI prices for the same reason plus transportation is expensive to other locations.
I believe we will see WTI at $25 or below over the next two months and possibly even $20 because of the price pressure from the Iranian oil sales. They have about 50 million barrels stored on tankers and that oil is now available for sale. Prices are going lower.
This will probably drag the equity market lower as well but eventually there will be a disconnect between equities and oil prices at some level. The constant headlines about lower oil prices will eventually become old news. Of course, key levels like $25, $22, $20 could cause some additional market weakness.
Energy stocks will continue to react to the low oil prices because every dollar of decline is very painful and impacts their ability to service debt and keep the doors open. Analysts claim as many as 50% of the U.S. producers could default or worse if prices remain low for very long.
I am recommending we short the OIH and expect to hold the position until April. The plan will be to close it about the time inventories top out in early April. We could see a minor uptick at the open on Thursday because of the new front month contract. When inventories are announced at 10:30 we should see a decline in WTI if they are high as expected.
Short OIH shares @ $21.26, stop loss $24.25
Long July $20 put @ $1.92, no initial stop loss.
SSYS - Stratasys Ltd
The short entry was triggered at the open this morning when SSYS moved below $17.45. I expect a new low later this week.
Original Trade Description: January 22nd.
Stratasys is a maker of 3D printing systems and parts. The company makes parts for other equipment using its proprietary 3D printing systems. They manufacture for sale production systems under the Dimension, Objet,Fortus, Polyjet, SolidScape and MakerBot brands.
While the 3D printing business is expanding in scope and acceptance all around the world the excitement over 3D stocks has faded. XONE, DDD and SSYS shares have been fading since their peaks back in 2013. Stratasys closed at a new six-year low on Friday despite a minor rebound with the rest of the market.
I debated which 3D stock to short and picked SSYS because of the identifiable trend and it has farter to fall than competitor 3-D Sys Corp (DDD). That stock is cheaper at $7.41 if you would rather have less at risk.
The decline in Stratasys accelerated since mid December. There have been two small rebounds along the way. I see the rebound from the 6-year lows last week as an opportunity for a short at a higher level. This gives us an obvious stop loss at $19.50 and the odds are good we will see a new low in the weeks ahead.
Earnings are March 2nd.
With a SSYS trade at $17.45:
Sell short SSYS shares, initial stop loss $19.50
Buy long March $15 put, currently 90 cents, initial stop loss $19.50
VXX - VIX Futures ETF
Minor rebound on the declining market. We can thank falling oil prices. Volume was not heavy and there was no conviction today. Be patient. The volatility will eventually die.
Original Trade Description: August 24, 2015
The U.S. stock market's sell-off 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 a 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.
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.
Short VXX @ $21.82, no stop loss.
Second Position 9/2/15:
Short VXX @ $29.01, no stop loss.
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
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.