Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/3/2016

Table of Contents

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

Market Wrap

Bounce Corrections

by Keene Little

Click here to email Keene Little
The bounce off the January 20th lows fit as a correction to the decline from December. The bounce off this morning's low fits as a correction to the decline from Monday. Both point to a stronger move down but the bears will need to prove it with an early move on Thursday.

Today's Market Stats

The stock market has been its best to fight off the bears but the price pattern suggests it could be a losing battle. A 3-wave bounce off the January 20th lows into Monday's highs fits as an a-b-c correction to the decline from December 20th. The decline from Monday's high into this morning's low has been followed by an a-b-c bounce off into this afternoon's high and that's a bearish setup for an immediate decline on Thursday. But the bears can't waste any time taking advantage of this setup otherwise something more bullish, even if only short term, could follow.

What the stock market is fighting is more evidence of a slowing economy, and not just in the U.S. The global economy is slowing in unison (some faster than others) and this is the first time for this to occur since the 1930s. This of course fits the general thesis that says we've been in a secular bear market since 2000 (since 1998 by measures other than price) and that the next cyclical bear within the secular bear could be a very painful move for those who hold long positions.

Further evidence of a global slowdown in the economy is what we see happening in the currency markets. Everyone is in a race to devalue their currencies in hopes of making their products cheaper for other countries to import. But with everyone doing it the only thing that's been accomplished is a race to the bottom and a global devaluing of fiat currencies, which has created a deflationary cycle. That of course is what the central banks are trying to fight with their QE and ZIRP/NIRP policies but each is negating the efforts of the other. In the past, as in the 1930s, this currency war tends to lead to very bad things between countries.

The Chairman of the OECD's Review Committee, William White, wrote "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end. The global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20% of GDP higher today. We are holding a tiger by the tail." We all know what happens when the tiger gets tired of us yanking on his tail.

The economic slowdown obviously affects businesses and we're seeing that show up in the slowdown in earnings, which is making it more difficult to service the massive debts that they've taken on. Some of the debt has been for the development of new energy sources, such as the fracking. Think that debt might be in trouble. Much of the debt has been from companies borrowing heavily to buy back stock in an effort to boost earnings per share and hide the fact that actual earnings have been slowing. Again, a slowdown is now making it more difficult for those companies to service their debt and the slowdown is going to cause a double whammy to earnings.

The Fed keeps pinning their hopes on the employment picture but that picture is a lot dimmer than their simple observations of how people are employed (it's part of their flawed economic models). The chart below is hard to read because I had to squish it to fit but basically it's showing the inflation-adjusted price of SPX (on top) vs. the ratio of nonfarm employment to part time employment. Each time the ratio has been in decline (meaning part time employment is becoming larger than nonfarm (full) employment) we've been in a secular bear market. The dates of the first secular bear (pink band) is 1966-1982 and the second secular bear (pink band on the right) is from 1999. You can clearly see how the employment ratio has declined from its 1999 peak and since the 2009 low it hasn't even recovered to the 2002 low. In other words, the employment picture remains weak but the Fed feels it was strong enough to warrant a rate increase in December.

Inflation-adjusted S&P 500 index vs. Nonfarm employment/Part time employment, chart courtesy Martin Pring

The chart above shows why it can't be used as a timing tool but it does support why we've been in a secular bear, regardless of the new (non-inflation adjusted) price highs for the stock market in both 2007 and 2015. And if we're still in the secular bear, as I've contended for many years, the new price highs into 2015 merely made the stock market more vulnerable to a market crash. Have we started that crash? It's too early to tell but yes, I do believe we've started the next (and should be final) leg of the secular bear. But for those who think it's a good idea to just sit tight and let the market recover after the decline, I think the recovery will be far slower than the one off the 2009 low. It could take a generation before prices recover back to the December highs.

Starting the review of tonight's charts, the SPX weekly chart below shows a wave count I think is the most probable at the moment. The relatively small bounce off the January 20th low, which was a test of the October 2014 low, is a small 4th wave correction is what should become a larger 5-wave move down from May. This bearish wave count suggests SPX will stair-step lower into the fall before setting a much larger bounce correction. The next move, if the decline continues as depicted, should drop SPX to support at its uptrend line from March 2009 - October 2011, which will be near 1760 next week. This would set us up for a bounce into February's opex week.

S&P 500, SPX, Weekly chart

The daily chart shows the 3-wave bounce off the January low and up to the bottom of a previous parallel down-channel, which is a very common resistance level. Monday's high tagged the line to the penny and then turned back down, which suggests the decline will continue from here. A rally above Monday's high, near 1945, would have me looking for a move up to 1992 (price-level resistance and the 50-dma).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1945
- bearish below 1867

In addition to the bottom of its previously broken down-channel, SPX achieved a 50% retracement, at 1946.93, of the decline from December 29th. It's hard to see on the 60-min chart but the bounce off this morning's low is another 3-wave pattern that retraced 62% of the decline from Monday into this morning's low. This makes it a good setup for a reversal back down into a stronger selloff (for the 3rd wave of the move down from Monday). But this is also why the bears need to take advantage of the setup immediately Thursday morning otherwise the pattern could turn at least short-term bullish.

S&P 500, SPX, 60-min chart

The Dow was the stronger index today, closing up +183 (+1.1%), while the techs were weaker (NDX closed down -21 (-0.5%). As you can see in the table below, there were some star performers today, starting with XOM's +4.9% rally. There were seven stocks that did better than +2% while only one stock (MCD) declined more than 2%.

Dow Industrials component stocks

The Dow bounced off price-level S/R this morning, at 16K, and left a bullish candle at support. This certainly has the potential for follow through to the upside and the bottom of its previously broken down-channel is up near 16800. A nearly 600-point rally would obviously be painful if you're short and it's another reason why the bears need to step back in quickly on Thursday if the bearish pattern is correct, which calls for the Dow to drop down to at least retest its January 20th low at 15450 and likely down to price-level support at 15340-15370 (its February 2014 and August 2015 lows).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,510
- bearish below 15,863

On the NDX daily chart below you can see how it has been struggling to hold onto its uptrend lines from June 2010 - November 2012 and March 2009 - August 2015, which are converging and currently near 4180 (where it closed today) and 4140, resp. This morning's low dropped slightly below the January 27th low, which strongly suggests the 3-wave bounce off the January 20th low has completed and we're looking for another leg down. The decline from Monday afternoon's high to this morning's low looked like a 1st wave down and the bounce into this afternoon's high looks like a completed correction to the decline from Monday, which suggests an immediate drop lower on Thursday. It's up to the bears to make it happen otherwise the bulls could take advantage of trendline support and launch another rally leg.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4302
- bearish below 4112

I've drawn an up-channel for the RUT's bounce off the January 20th low and it's certainly possible the bounce pattern is only half way through. Monday's high hit the 1036-1040 target zone I was looking for and the turn back down fits the larger bearish pattern that calls for a continuation lower to at least the trend line along the lows from February-October 2014, currently near 965. The 5th wave of the move down from December 2nd, which is the leg that started down from Monday's high, would equal the 1st wave at 941.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1040
- bearish below 996

The 10-year yield has continued lower and the projection at 1.729%, shown on the weekly chart below, is where the decline from June 2015 would achieve two equal legs down. This projection, or its uptrend line from July 2012 - January 2015, near 1.76%, are potential support levels if there will be one more leg up inside a sideways triangle pattern before dropping lower (to head for 1%). If it breaks below 1.72% I'd say it will head lower sooner rather than later. The bearish pattern would be negated with a rally (selling in bonds) above the November 2015 high near 2.38%.

10-year Yield, TNX, Weekly chart

The banks have been relatively weak as the talk increases the chances for the Fed to not raise rates any further this year. Moving closer to a NIRP policy would decrease banks' earnings and the concern by many is that the Fed, along with the other central banks, has run out of options in their need to do Something. But BKX could be ready for at least a consolidation before continuing lower. Today's low at 59.05 stopped a little short of price-level support at 58.83, which is its April 2010 low (pretty amazing that a 2-year rally has been retraced in six months and the meat of the expected decline hasn't hit yet). Assuming we'll see price bounce/consolidate for a few weeks we'd then have a setup for another drop lower to complete a 5-wave move down from its July 2015 high, which would target the 52.50 area. From there I would then expect a bigger bounce correction for a few months before heading more strongly lower.

KBW Bank index, BKX, Weekly chart

On January 13th the TRAN lost support at its uptrend line from March 2009 - October 2011, near 6950 at the time. Following its January 20th low it made a choppy bounce back up to the broken uptrend line, near 6985, with Monday's high at 7000, and then sold off. That was a nice back-test followed by a bearish kiss goodbye and that sell signal can only be negated with a rally above Monday's high. Until then, it's looking like a good setup for the 5th wave down in the decline from November 2015 and the 5th wave would equal the 1st wave at 6003, shown on its daily chart below.

Transportation Index, TRAN, Daily chart

The U.S. dollar snapped to the downside today, starting from the overnight session. Today's low was a test of its 200-dma, at 96.90, as well as its 50-week MA 97.10, as can be seen on its weekly chart below. Two equal legs down from its December 3rd high points to 96.56, not much below today's low at 96.88. That's also where it would test an uptrend line from August-October 2015 so I would expect a bounce if that level is reached. The dollar could then rally up to at least a minor new high before pulling back again but I'll stick with the larger pattern that calls for a continuation of the sideways consolidation into the summer before heading higher.

U.S. Dollar contract, DX, Weekly chart

Looking at just about any commodity you choose there's no question they've been beaten to a pulp over the last couple of years. The dollar's strength has had a negative impact on many commodities but it's primarily due to either excess supply or weakening demand and for many it's both (think oil). Whenever a sector gets pushed down into the mud and just when you think the poor bastard is going to suffocate in it there is often a very good buying opportunity. As Warren Buffet often said, when there's blood in the streets you want to be a buyer. Of course many have been thinking this for a while and they've joined the commodities in the mud as they too get pushed lower. Obviously the saying "don't try catching falling knives" is apropos here.

But we might in fact be looking at a good opportunity to be thinking long some of the commodities and while I don't study individual ones, other than gold, silver and oil, there are some that are worth watching closely. Some worthy stocks are listed below as the BARF stocks (listed below the table below), which is also apropos considering how many investors have puked their positions. I have not evaluated the listed stocks below but the fundamental comparison between the FANG and BARF groups is certainly compelling as far as why you want to sell FANG and buy BARF. I didn't make up those terms and this particular table came from extract.com

FANG vs. BARF, 2015

FANG stocks:(Facebook, Amazon, Netflix, and Alphabet - GOOG;
BARF stocks: BHP Billiton - BHP, Anglo American - LSE:AAL, Rio Tinto - (LSE:RIO), and Freeport-McMoran - FCX

As I mentioned above, I have not looked at the individual stocks but the chart of the commodities index shows the drop down to support at the February 1999 low at 74.24. It can of course continue lower but I like the setup for at least a larger bounce correction before heading lower (maybe). There's been a large separation between stock prices and commodity prices since commodities peaked in April 2011 and I've been saying for a long time that the huge gap will get closed someday. It's been my expectation that it will mean the stock market will join commodities by dropping. But commodities could rally while the stock market declines. This happened in 2000 when commodities were coming up from lows in early 1999 while stocks peaked in 2000 and didn't bottom until 2002. So the two have traded separately in the past and could do so again.

Bloomberg Commodity index, DJUBS, Weekly chart

Countering an expectation for at least a larger bounce in the commodities index, my view of gold and oil is that we have not seen their lows yet. Gold has made it up to price-level S/R at 1142 and its 50-week MA at the same level. The bearish pattern calls for another leg down and a downside target will be near 1000 if it starts back down from here. But it would obviously be more bullish if it can continue to rally through resistance and especially if it used 1142 as support on a pullback.

Gold continuous contract, GC, Weekly chart

Like gold, oil has been building a bullish divergence since its January 2015 low and it could be ready to at least bounce higher in a multi-month move. But the pattern for the decline from June 2015 would look best with one more new low, perhaps down to about 23, before starting a larger bounce.

Oil continuous contract, CL, Weekly chart

Today's ADP Employment report showed a stronger than expected employment gain, which suggests we might have an upside surprise from Friday's NFP report. But as mentioned at the beginning of tonight's report, the employment report is not that accurate as a predictor of the stock market, especially since it tends to peak with the stock market. Economic indicators, such as today's ISM Services report and tomorrow's Factory Orders, continue to point to a slowing economy, which is far more important for stock prices going forward. Only the Fed gets hung up on employment numbers and they've pretty much run out of options to help the market, I mean economy.

Economic reports

Conclusion

The stock market bounce off the January 20th lows appears to be over, or at least that's what the bearish price pattern suggests. That interpretation of the pattern says the leg down from Monday is the start of the next decline that should take the indexes below the January 20th lows. That means today's bounce off this morning's low should lead to a continuation lower, which means if the bulls can thwart that expectation it will mean the bounce off the January 20th lows could extend higher before turning back down.

I have not seen enough in the bounce pattern to suggest anything more bullish than just a bounce correction to the December-January decline, which has me looking at bounces as shorting opportunities. The immediate setup for the bears calls for a decline pretty much out of the gate Thursday morning. If the indexes do rally above Monday's highs I would be careful about chasing it higher since the choppy move up will mean it could fail at any time. Day trade the long side whereas a short trade should take us into next week and then maybe set up a bounce/rally into opex week.

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 Plays

Financial Armageddon

by Jim Brown

Click here to email Jim Brown
Editor's Note

If you are a big bank with a major customer facing financial Armageddon your stock may be headed for the same battle.


NEW BULLISH Plays


No New Bullish Plays



NEW BEARISH Plays


DB - Deutsche Bank

Glencore, a large UK miner, has more than $100 billion in liabilities and $39 billion of those are corporate borrowings. Glencore is a huge company with $85.7 billion in revenues in 2015 but it made a gross profit of only 2% of revenues. They had net income of $676 million.

Glencore said it only has $29 billion in net debt. That is what Glencore said would be left over if they sold all their "readily marketable inventories" and assets that could be liquidated quickly. Unfortunately, that process would take time, be very costly and strip the company of profitable operations.

Glencore said it was structuring its balance sheet for "financial Armageddon." There are many analysts that believe Glencore is on the verge of bankruptcy. The problem is copper and iron ore. Both are trading at multiyear lows and below the cost to produce the commodities.

The European banking system owns roughly $20 billion of Glencore's debt. If the company were to go into bankruptcy those banks would be in serious trouble.

The European economy is also failing. The influx of nearly 2 million refugees with no jobs, no skills and dependence on welfare is causing a financial crisis. Mario Draghi is planning on creating more stimulus in March in hopes of heading off a bigger problem down the road. The ECB already imposed negative interest rates so banks no longer have any income from their excess cash. They have few opportunities to make new loans that will be profitable in a declining economy so they are stock with shrinking profits.

The European banking system is also interconnected. Many of the big loans are syndicated so a Glencore bankruptcy could impact dozens of banks at the same time. This would require massive recapitulation at a time when capital is scarce.

I am recommending we short Deutsche Bank (DB). When DB reported earnings last week it was actually a loss of -2.1 billion euros on a -15% decline in revenue to 6.6 billion euros. Operating expenses rose +19% for the quarter. The bank has numerous liabilities related to the Libor, FX and other probes alleging market manipulation and has set aside $5.5 billion but analysts believe this is not enough. On Wednesday a U.S. judge ruled the bank would have to face a lawsuit for $3.3 billion for failing to monitor 10 trusts that held toxic mortgages. The ten trusts have become essentially worthless according to Royal Park. DB has numerous problems and they are getting worse with every passing week.

Copper prices rebounded on Wednesday because of the crash in the dollar. Glencore shares (traded in the UK) should bounce on Thursday and DB shares could rise with them. I am recommending we short this potential bounce.

One analyst on Tuesday warned that some European banks could go to zero. DB was one of those banks.

Short DB shares, currently $16.63, at the open on Thursday. Stop loss $18.25.

Optional:

Buy long April $15 put, currently 85 cents, no stop loss.






In Play Updates and Reviews

Mixed Market, Direction Still Elusive

by Jim Brown

Click here to email Jim Brown
Editors Note:

A triple digit loss was followed by a triple digit gain as the Dow moved 427 points from the lows to the highs.

We were right in not adding any new plays last night since the market remains extremely volatile. Shorts would most likely have been filled at the low of the day and stopped out on the rebound.

The volatility in crude oil helped to lift the markets again but it is likely temporary. The falling dollar lifted all commodities including gold, silver and copper.


Current Portfolio





Current Position Changes


BAC - Bank of America

The new long position in BAC remains unopened.


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


BAC - Bank of America - Company Profile

Comments:

Still waiting for BAC to move up to $14.25 to confirm an up trend. Banking sector was weak again today with yields and the dollar falling. The yield on the ten-year treasury traded as low as 1.8%.

Original Trade Description: January 30th.

Bank of America has been ignored since late December and their earnings report in early January did not generate a lot of excitement. The bank said it earned 28 cents that beat estimates for 27 cents. That equates to a profit of $3.3 billion. They ended the full year with a $15.9 billion profit. From where I am sitting that is outstanding since it was up from only $3.38 billion in 2014.

The bank did not get a bounce from earnings because the CFO said increasing revenue was difficult in this market because the bank is more heavily exposed to low interest rates because it has a large retail banking business and very little profit centers like stock and bond trading that support Goldman and JP Morgan. The earned their profits the old fashioned way one retail customer at a time and by slashing costs wherever possible. They eliminated 10,000 of its 223,715 employees and closed 129 branches. That leaves them with 4,726 locations.

BAC has $21.3 billion in energy loans and had $75 million in energy charge-offs in the quarter. The bank had $19.53 billion in revenue for the quarter and ended the year with $1.2 trillion in deposits. Once interest rates begin to rise the profits are going to explode higher.

BAC returned $4.5 billion to shareholders in 2015, $1.3 billion in Q4, through stock buybacks and dividends.

The last nine analyst ratings changes have been upgrades. On Friday Credit Agricole upgraded them from sell to buy and skipping the hold level in the middle. Sandler ONeil, Wells fargo, Nomura, Bernstein and Robert W Baird have all upgraded BAC to buy.

Multiple analysts published notes last week recommending Bank of America at the current three-year low. Their legal troubles are about over with the vast majority of the financial crisis problems behind them. They are well away from any level that could be worrisome in the Fed's stress test scenarios. They are making money and staying out of trouble and they are paying nearly a 2% dividend.

For people looking for a stock they can own and sleep at night this is it. The upside from the $14 close on Friday is $18, which has been resistance for two years. That equates to about a 28% gain if we were going to hold it that long.

To summarize, I believe the worst is over for the large banks and Bank America is in the sweet spot for when interest rates do rise.

With a BAC trade at $14.25

Buy BAC shares, stop loss $12.75

Optional

Buy May $15 call, currently 54 cents, no stop loss due to cheap option.



SWHC - Smith & Wesson - Company Description

Comments:

Tuesday's move over resistance at $22 was short lived but the decline was only 38 cents. Shares held at short term support.

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.

Position 1/25/16:

Long SWHC shares @ $21.35, see portfolio graphic for stop loss.

Optional:

Long June $23 call @ $1.75, see portfolio graphic for stop loss.



USO - US Oil Fund ETF - ETF Description

Comments:

I would be thrilled if the Russian headlines actually came true and OPEC cut production but I think this bounce will erode before that happens. This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.

Original Trade Description: January 27th

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

2/1/16: Position entered with a USO trade at $9.00:

Long USO shares @ $9.00, no stop loss.

Optional:

Long USO July $10.00 calls @ $.85. No stop loss.




BEARISH Play Updates

GEF - Greif Inc - Company Profile

Comments

Shorts continue to get squeezed. The market rebound caused another short squeeze in GEF after a new multiyear low at the open.

Original Trade Description: January 28th

Greif produces and sells industrial packaging products worldwide. With the global economic slowdown and decline in package shipping Greif shares have been sliding.

They reported earnings in December and revenue declined -17% because of lower volumes and the impact of the strong dollar. They also passed along some price decreases because of a decline in the cost of steel and other commodity materials used in their packaging.

They reported earnings of 76 cents compared to estimates for 49 cents but the majority of the gain was due to a reduction in expenses and a lower tax rate rather than an increase in sales. Revenues declined from $1.048 billion to $869 million and missed estimates for $897 million. Profits fell -19.7% year over year. Their cash on hand slipped to $106 million compared to debt of $1.23 billion.

Shares spiked on the earnings beat but then quickly declined from that $35 level to the close today at $25. That is an 11-year low.

With the global economy shrinking and China in decline the outlook for custom industrial packaging products is getting weaker. I expect we will see even lower lows ahead until the global economy begins to recover. Shares did not participate to the upside on the recent positive days in the market.

The volume on GEF is low at 250,000 shares. If that scares you then I would avoid this position. Option volumes are too low so this will be a stock only position.

Earnings are March 2nd.

Position 2/2/16:

Short GEF shares at $24.65, tight stop loss @ $26.25.



INSY - Insys Therapeutics - Company Profile

Comments:

Minor rebound but still a new multiyear low.

Original Trade Description: February 1st.

Insys Therapeutics develops and commercializes supportive care products. This includes pain killers for the types of severe pain that can come from cancer and cancer treatments. Their main product is Subsys, a proprietary sublingual fentanyl spray for treatment of cancer pain. They have other products but this is the one taking the heat today.

Roddy Boyd is the "journalist" that took on Valeant (VRX) a couple months ago and crashed the stock from $250 to $80. He has released a new report called "The Brotherhood of Thieves" that takes Insys to task for its methods in getting double the insurance reimbursements than its older competitors.

His point is that Insys "executives pressure employees to develop new ways to mislead insurance companies in to granting coverage to patients prescribed the drug Subsys." He claims he has an audio recording of a meeting where Jeff Kobos, an executive with the company, admitted the company's dishonesty. The tape reportedly highlights "conversational gambits" to deflect pharmacy benefit managers questions.

Insys responded with a press release claiming the report was misleading and unreliable "especially in the light of the biased agenda held by the individuals who made these representations."

I am sure Insys is right to some degree since these short sellers and their supporters do their best to trash the company so they can benefit from the drop in the stock price. However, there has to be some truth to the report or Boyd would be opening himself up to a massive suit for his claims.

For our purposes we want to capitalize on this headline war and make a couple bucks while investors are fleeing the stock.

Earnings are March 1st.

Shares are at a 52-week low and support is about $12.50. I am proposing we short the stock at $16.25, under today's low and target $13.25 for an exit. For this move and timing option prices are too high to recommend an options position.

Position 2/2/16, with a INSY trade at $16.25

Short INSY shares @ $16.25, stop loss $17.65, target $13.25 for exit.



KRE - SPDR S&P Regional Banking ETF - ETF Description

Comments:

The regional banks have definitely been volatile with a return to the lows at the open but a retracement of the losses on short covering by the close.

Original Trade Description: January 25th

We were knocked out of the long position on this ETF with the drop below support this morning. The keywords in that sentence were "drop below support." Typically, when long-term support breaks we are looking at a continued decline that could be material.

Regional banks are tanking because of their loans to energy companies and to firms that service those energy companies. That includes restaurants, service stations, apparel stores, mom and pop businesses of all types that catered to the families of the 150,000 energy workers that have been laid off.

In addition, the U.S. manufacturing sector is in recession. With energy, manufacturing, transportation already in recession the odds are increasing that the country is going to be headed in that path as well.

Today, the Texas Manufacturing Outlook Survey for January fell from -20.1 to -34.6 and the lowest level since 2008. The outlook for the U.S. economy is not good and that means regional banks could be facing rising defaults.

I hate to go straight from a long position to a short position but in this case, the situation appears to be right. We entered the long position on a dip to support at $35. There was an immediate rebound but then that support failed today based on economic news.

With a KRE trade at $35.35.

Short KRE @ $35.35, stop loss $36.65

Optional:

Buy long March $33 put, currently .47, no stop loss.



OIH - Oil service Index - ETF Description

Comments:

Monster volatility with a six-day low at the open and then a 3% gain at the close on the Russian headlines.

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.

Position 1/21/16:

Closed 1/29/16: Short OIH shares, entry $21.26, exit $24.25, -2.99 loss

Optional:

Still long July $20 put @ $1.92, no stop loss.



SSYS - Stratasys Ltd - Company Description

Comments:

Rebound to resistance at $16.50 for a 5% gain. I lowered the stop loss to $16.65.

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.

Update 1/26/16: The stock was downgraded by JP Morgan from buy to neutral. JPM said demand for the parts that DDD and SSYS make is dying and competition is fierce. They cut the price target to $19. UBS cut expected earnings in half for SYS to 30 cents. The bank cut the rating to sell and price target to $16. Earnings are March 2nd.

Position 1/26/16:

Short SSYS shares @ $17.45, see portfolio graphic for stop loss.

Optional:

Long March $15 put @ 95 cents, see portfolio graphic for stop loss.



VXX - VIX Futures ETF ETF - ETF Description

Comments:

Big spike at the open but back down to support at 25 at the close. 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.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
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





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