Option Investor

Daily Newsletter, Tuesday, 2/9/2016

Table of Contents

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

Market Wrap

Seasick Yet?

by Jim Brown

Click here to email Jim Brown

The Dow changed directions seven times and traveled 1,149 points but ended the day only 12 points from where it started. Traders appeared unwilling to make any large bets ahead of Yellen's testimony on Wednesday.

Market Statistics

I am definitely not complaining about a relatively flat close on the major indexes. The Dow was down -145 at the lows and up +106 at the highs. The Nasdaq changed direction six times and traveled 434 points before ending the day with only a 14 point loss. Dip buyers were alive and well but sellers hammered every spike. In the end, there were more sellers than buyers but only slightly.

Global markets and especially European banks weighed on the markets early and crude oil impacted the trading in the afternoon. European markets declined about 1.5% on average today but they were all down over 3% on Monday.

Europe Today

Europe on Monday

The European banks are crashing on negative interest rates and high exposure to energy and commodity loans. With major companies like the UK miner Glencore with $30 billion in debt that is syndicated among all the major banks, the low commodity prices are creating bankruptcy worries. One of the big problems is that we really do not know what is on the balance sheets and loan portfolios of the European banks. The regulators in the U.S. have forced U.S. banks to bare all their secrets but Europe has not, at least to the same level of scrutiny. Banks in Europe have been trading as though there may be a Lehman event in the near future.

Deutsche Bank (DB) was the focus today after the CEO sent a letter to employees assuring them the bank was solvent. For him to do that was like yelling fire in a crowded theater. That acknowledged there was some doubt about its stability. Lehman's CEO said there was no danger until the bank collapsed. Shares crashed about 5% at the open and were trending lower during the day. At 2:PM another headline appeared saying they were considering buying back several billion euros of debt. They currently owe about 60 billion euros of debt. The bank said they would focus on senior debt of which it has about 50 billion euros or $56.44 billion. The story came from the Financial Times and DB would not comment on the headline. However, shares spiked about 6% on the news to lift DB back into positive territory but the rally was short lived. Without further qualification from DB we should expect shares to continue to drift lower. They have a 350 million euro debt payment due in April. They also have numerous legal problems left over from the financial crisis and will have to take additional charges to reserves in the future.

US banks declined as well because the exposure to European banks is unknown. There is a lot of derivative risk between U.S. and European banks.

Economic news was lackuster. The NFIB Small Business Survey saw the headline number decline from 95.2 to 93.9. The majority of the internal components declined. The plans to increase employment fell from 15 to 11. Those expecting the economy to improve declined from -15 to -21. Earnings trends and credit conditions worsened. This report was ignored.

The Job Openings and Labor Turnover Survey (JOLTS) for December showed job openings increased from 5.346 million to 5.607 million. Hires rose from 5.256 million to 5.361 million. This report was a lagging report for December and was ignored.

Wholesale Trade for December declined -0.1% after a -0.3% decline in November. This was the third consecutive month of declines. Estimates were for a -0.2% decline.

None of the reports for today were market movers. The real mover will be the Yellen testimony to the House at 10:AM tomorrow. With Europe and Asia crashing, negative interest rates, weak earnings and economics in the U.S. and falling oil prices will keep the fed from hiking rates in the near future. However, she may try to keep the pressure on by implying a March rate hike is still on the table. The Fed made a mistake in December and now they have to keep up the appearances. This could rile the market even more, depending on how she presents her views. She is normally dovish and she will be challenged in how she remains dovish but keeps rate hikes on the table. This will be a tightrope act for sure.

The morning earnings failed to move the market because it was already reacting to the European news. On top of Europe, there was news from Japan that interest rates had gone negative for the first time. The Nikkei declined -919 points or -5.4% for the day and approaching a 14-month low. This is another reason Yellen cannot raise rates.

In a flight to quality, bonds continued to rise with the yield on the ten-year treasury falling to 1.699% intraday and closing at 1.729%. These are 52-week lows and very close to three-year lows. Bonds are on fire as equities crash and burn. Recession worries are increasing daily.

The afterhours earnings were mostly positive. Akamai (AKAM) reported earnings of 72 cents compared to estimates for 62 cents. Revenue of $579 million also beat estimates for $569 million. The company also announced a $1 billion stock buyback program. The most important metric was the 16.4% growth in the cloud security business, which accounted for $286 million of the revenue. This should calm some of the fears generated by Tableau Software last week. The CEO, Tom Leighton, told analysts on the call he planned to buy $10 million of Akamai shares over the next six months. Shares were up +16% in afterhours to $46 after closing at a two-year low of $39.55.

Panera Bread (PNRA) reported earnings of $1.88 compared to estimates for $1.78. However, revenue of $692 million missed estimates for $695 million. Earnings declined -11% because of costs increased +8%. Same store sales were up +3.6% in Q4 and +6.4% in the first 41 days of Q1-2016. The company said they had completed the conversion of 410 stores to Panera 2.0, which involves kiosks, mobile an online ordering capability. Shares rose $5 to $190 in afterhours.

SolarCity (SCTY) reported a loss of -$2.37 that was better than analyst estimates for a loss of -$2.59. Revenue of $115.5 million, up +61% and beat estimates for $106 million. However, guidance for Q1 was light. They forecast production of 180 megawatts in the quarter compared to analyst expectations for 200 megawatts. During Q4, they installed 272 megawatts, up 54%. That also missed guidance for 280-300 MW. They guided for a Q1 loss of $2.55 to $2.65 and analysts were expecting -$2.36. Apparently, business is booming but they are losing money until they can sell these monster projects into the dividend company. Shares fell -30% to $18 in afterhours.

Disney (DIS) reported a record quarter with net income over $1 billion thanks to Star Wars and the theme parks. The company reported $1.53 compared to estimates for $1.45. Revenue of $15.24 billion beat estimates for $14.75 billion. This was their tenth consecutive quarter of double digit EPS. Revenue from the parks and resorts division rose +20%.

However, the profits from its cable empire fell -6%, due to an increase in the cost of sports-broadcast rights. Disney's sports bill is estimated to be 29% of the $130 billion media companies are contracted to pay for the rights to events like Monday Night Football and the NBA Playoffs. For instance, Time Warner agreed to pay $8 billion to broadcast the Los Angeles Dodgers baseball games. If subscription customers to sites like ESPN continue to decline at its current 1% per year analysts believe the profit growth for Disney could be cut in half within 4 years. In a post earnings interview CEO Bob Iger said Disney saw an uptick in cable subscribers after Q4 ended and he attributed it to increased sales by Dish Networks Sling TV bundle of online channels, which includes ESPN. Iger said "This notion that either the expanded basic bundle is experiencing its demise or that ESPN is cratering in any way from a subscriber perspective, is just ridiculous." He said they are exploring opportunities to sell ESPN into even more bundles that are cheaper than most pay TV packages today. Disney shares declined -$3 to $89.40 in afterhours.

Coca-Cola (KO) reported earnings of 38 cents that beat estimates by a penny. Revenue rose +3%.

Viacom (VIAB) reported earnings of $1.18 that met estimates but revenue missed estimates because film unit revenue was down -15%.

CVS Health (CVS) reported earnings of $1.53 that met estimates with revenue that beat estimates. Same store sales rose +5%.

Sears Holdings (SHLD) warned that Q4 earnings would be below estimates due to a "challenging" holiday season. The company is going to accelerate the closing of unprofitable stores.

Wendy's (WEN) reported preliminary earnings of 12 cents that beat estimates by a penny. Same store sales rose +4.8%.

Wyndham Worldwide (WYN) reported earnings of 98 cents that beat by a penny. They also announced a $1 billion buyback program and increased the dividend from 42 to 50 cents.

There were seven companies that raised guidance on Tuesday. There were 39 companies that guided in line with prior forecasts. There were 21 companies giving negative guidance.

Anadarko Petroleum (APC) fell -7% after the company announced it was cutting its dividend from 27 cents to 5 cents. They said the cut would give them an extra $450 million in cash to utilize during this stressful period. They warned last week they were considering a cut so this was no surprise but the stock still declined.

Oil prices fell to $27.74 intraday after the IEA said demand growth would "ease back considerably" in 2016. Demand growth peaked at +1.6 mbpd in 2015 and they expect that to decline to +1.2 mbpd in 2016. The IEA said stockpiles were "brimming" with oil and storage capacity was being pushed to its limits. The agency said economic slowdowns in Europe, Asia, Brazil and Russia were slowing demand growth.

Global production declined -200,000 bpd in January to 96.5 mbpd. Higher OPEC production offset some declines by non-OPEC producers. The IEA still believes non-OPEC supplies will decline -600,000 bpd in 2016. However, total OPEC production rose +280,000 bpd in January to a record of 32.63 mbpd. That is up +1.7 mbpd from January 2015. The IEA said Iran had restarted some production and Saudi Arabia had increased production to near record levels.

The IEA said the idea that OPEC and Russia would agree to cut production was pure "speculation" and OPEC was not likely to cut alone or in concert with other producers.

Due to current conditions the IEA said, "It is very hard to see how oil prices can rise significantly in the short term. The short term risk to the downside has increased."

Separately the EIA said U.S. production could decline -740,000 bpd in 2016 and slightly more than their prior forecast for -700,000 bpd. The rapid decline in active rigs and the sharp cuts in capex budgets were the reason.

After the bell today, the API reported a rise of 2.4 million barrels in crude inventories for the week ended on Friday. That was slightly less than expectations for a 3.6 million barrel gain. Gasoline inventories rose +3.1 million barrels. The EIA report on Wednesday is considered the most accurate and will move prices tomorrow.

Falling oil prices will weigh on the equity markets and without an OPEC production cut, we could see sub $25 pricing in the next 6 weeks.


There was little change from my weekend commentary. While the indexes did not make a big move today, they are holding in negative territory. The charts remain bearish and traders appear to be looking for the next big headline to take them lower. Yellen could provide a boost on Wednesday and Thursday or make matters worse.

There is no way to make the S&P chart bullish. We could rebound from here but there is significant overhead resistance and the outlook is for a retest of the August low at 1,812 or even the February 2014 low at 1,737.

The Dow is also struggling and resistance at 16,500 seems firm. The January low at 15,450 could be tested at any time and the August low at 15,350 appears to be a more likely target. Banks and energy should continue to weigh on the Dow and Disney will be a drag at the open on Wednesday.

There is no one reason why the Dow should decline. The chart is bearish and that is normally enough to convince investors to go to cash and sellers to continue to add to the decline.

The Nasdaq appears to be headed for a retest of the 4,130 low from October 2014. It has already at a 15-month low and there is no support before that 4,130 level. Miracles do happen but it would be hard to speculate on what could lift the markets this week other than Yellen. We failed to get a short squeeze today when the Dow was up over 100 points so shorts appear to be expecting lower lows. They failed to rush the exits and sellers ganged up on the close.

The Russell 2000 came within 3 points of retesting the June 2013 support low at 954 on both Monday and Tuesday. While this is a psychological win so far, a break below that level could be very bearish for sentiment. The next support level is 900. Small caps have been weak thanks to oil, banks and biotechs. A slight improvement in the biotech sector today probably kept the Russell from breaking down any further. Watch the Russell for your sentiment indicator.

I am sorry I do not have anything positive to tell you about the market. Sometimes we simply have to call a bear a bear and deal with it. We can try to "hope" it up as it passes through each support level but until sentiment changes the path of least resistance is down. We have to play the cards we are dealt until the next shuffle appears.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


If you like the market commentary 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.

subscribe now


New Plays

Betting on Yellen

by Jim Brown

Click here to email Jim Brown
Editor's Note

Markets fought to a draw with sellers having a marginal edge ahead of Yellen's testimony on Wednesday. Investors were unwilling to place any big bets ahead of the Yellen testimony. With market sentiment similar to a quiet scene in a scary movie, you could almost hear the ominous music begin to play.

We do not know what Yellen will say on Wednesday other than try to placate the markets while convincing House members that the Fed is in control and they do not need to worry.

She will try and maintain the "will hike at a gradual pace" theme but probably suggest that while the March meeting is on the table, the Fed is not likely to hike in March.

How she phrases her commentary will determine how the market will react. I am not recommending any new plays today because market direction is equivalent to a coin toss. I would rather stand aside and invest my money when I have at least a general idea which way the market is going.

No new plays today!


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Buyers and Sellers Evenly Matched

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes closed only slightly negative after a day of multiple spikes and dips. Volume was high at 9.9 billion shares and only slightly less than the 10.6 billion on Monday. These levels are very high and suggest there is a lot of rotation in progress. For every seller there is a buyer and stocks are changing hands at a rapid pace.

The lack of direction at the close suggests buyers and sellers were evenly matched. I looked at a lot of charts and quite a few saw volatility at the open and close but the middle of the day was level.

The GoPro play got off to a great start with a dip at the open and a close near a new three-week high.

I am not recommending any new plays tonight because the market direction depends on Yellen and we could move quickly in either direction. Adding a new play would only be a coin toss.

The Russell 2000 is the sentiment index for the market and it is not bullish.

I would be cautious about entering any new positions until the market calms.

Current Portfolio

Current Position Changes

INO - Inovio Pharma

The new long position in INO has been cancelled.

GPRO - GoPro

The new long position in GPRO was entered at the open.

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

GPRO - GoPro - Company Profile


Good move on GoPro in a choppy market. Shares pushed up to a three week high with a +3% gain. We were fortunate that shares dipped with the market at the open to give us an excellent entry at $10.65. There is no stop loss on this position.

Original Trade Description: February 8th

GoPro is the number one action camera maker and created the current market. They moved from a simple camera maker to a content creator over the last couple years. At least that is what they wanted people to believe so that their sky high PE would be based on something other than simply a hardware company.

Fast forward to 2015 and 5-6 companies began to compete with action cameras of their own. GoPro's market share began to dwindle. A botched roll out of a new model in Q3 and two prices cuts in Q4 has knocked their share price down from $65 in August to $9 on Thursday.

One of the problems that GoPro has been unable to conquer is the relatively hard method to recover, edit and publish videos produced by the cameras. They have promised new software for a couple years and it never seems to arrive or fails to satisfy when the updates appear. This is a drag on future camera sales because you have to be a geek to produce any quality videos.

News broke today that GoPro had licensed its video technology, certain file storage and other system technologies. While the details are still unclear this could be a Hail Mary pass to Microsoft for help with their software problems. If it is not related to that then there is something else going on that could provide a boost for GoPro in the future.

Lastly, the drop in market cap from $8 billion to $1 billion makes them a very attractive acquisition target for somebody like Sony or even Under Armour. Microsoft could buy them with their pocket change.

Shares appear to have bottomed at $10 but just in case we can buy a March $10 put as protection for 97 cents. This means we have unlimited upside and almost zero downside risk. If somebody makes an offer for GoPro I would expect it to be $15 or more simply because the company is not in financial trouble. They currently has no debt and $474 million in cash. They just need to get over this technical problem and they will be fine.

Position 2/9/16

Long GPRO shares @ $10.65, no stop loss.

Long March $10 put @ 99 cents, no stop loss

Net debit $11.64.

INO - Inovio Pharmaceuticals - Company Description


No material move on INO. Shares declined slightly despite some Zika news. I am cancelling the recommendation on INO.

Original Trade Description: February 4th

Inovio is a clinical stage biopharmaceutical company that develops vaccines and DNA immunotherapies to treat cancers and infectious diseases. Inovio is currently testing a prospective Zika vaccine on animals. If the trial goes well they could begin testing on humans in Q4-2016.

Inovio surged on the first appearance of the virus last month and any commercialization of a vaccine could be a long way off. However, they are working on it today while other companies are just talking about a vaccine.

Newlink Genetics (NLNK) and Merck (MRK) successfully collaborated on an Ebola vaccine and Newlink is talking about working on a Zika vaccine as well.

Intrexon Corp (XON) is pushing their genetically modified mosquitoes as a partial solution to slow down the spread. However, it would take trillions of mosquitoes to make a sizeable dent in the population in the U.S. much less in South America where the disease is widespread. XON shares have surged significantly higher on the news.

Inovio shares surged last week and then faded slightly despite being the only company actually testing a vaccine. The company has two conferences scheduled, one on Feb 8-9th and another on Feb 24th. You can bet that Zika will be the hot topic at both and Inovio will get its share of the headlines.

Since Inovio is a low dollar stock that has not rallied appreciably on the Zika news, and because the Zika news is eventually going to take over the headlines in the USA, there is a good chance we could see a decent rise in ION shares over the next month.

Just today four cases of Zika were confirmed in New York and the governor of Florida declared a helth emergency in four counties because 9 cases were confirmed. This is only going to get worse. Zika is blamed for the more than 4,000 cases of babies born with shrunken heads and incomplete brain development in Brazil. This is a permanent disability. Pregnant women and those thinking of becoming pregnant are advised to stay away from any location where mosquito contact is likely.

I am recommending we buy INO shares, currently $6.25 with a potential holding period of a month. Earnings are March 14th.

No Current Recommendation, Entry Cancelled

SWHC - Smith & Wesson - Company Description


Down a quarter in a choppy market after being positive in mid afternoon. Still holding at short term support and waiting for the market to recover.

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.


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

USO - US Oil Fund ETF - ETF Description


The IEA and EIA both cut expectations for oil demand and increased expectations for global production. OPEC production hit a record high at 32.6 mbpd.

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.


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

BEARISH Play Updates

DB - Deutsche Bank - Company Profile


DB dropped sharply at the open but recovered in the afternoon when it said it may use its cash to buy back some if its $50 billion in debt. That gave the stock a short term pop but then investors realized that using cash removed an asset and a liability if they buyback debt. That would equate to a zero change in the net position. Immediately, analysts began to suspect the bank would do a capital raise by selling shares and that would dilute existing stockholders. Shares then dipped again at the close.

The CEO tried to calm the markets at the open by sending a letter to employees saying the balance sheet was rock solid. That actually pushed shares lower because he felt the need to assure they were stable. Many times these announcements come just before big negative events.

DB has a 350 million euro payment due at the end of April.

Original Trade Description: February 3rd.

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.

Position 2//3/16:

Short DB shares @ $16.66, See portfolio graphic for stop loss.


Long April $15 put @ 85 cents, no stop loss.

FGEN - Fibrogen Inc - Company Profile


Only a minor rebound despite the gain in the biotech sector. This was short covering by only a few traders. The rest are still looking for lower prices.

Original Trade Description: February 5th.

Fibrogen is a small research-based biopharmaceutical company that discovers, develope and commercializes therapeutic agents to treat serious unmet needs. At least that is what their profile says about them. Their stock chart suggests they are not successful in this field.

The do have some novel drugs in the pipeline but the clinical studies are taking forever and the results of the latest study was limited at best. Their current drug under development is roxadustat, a "first in class anemia treatment" according to the company. However, they have only been able to enroll 80% of their targeted enrollment. If everything goes well they may get approval to market it in China by the end of 2016 but it will be 2018 before it can be marketed in the USA.

The FDA has more than 3,000 drug applications in the pipeline and it takes forever to get one through the system from start to finish.

For the last quarter they reported a loss of 74 cents. They had $365 million in cash and their burn rate is high. AstraZenaca has agreed to fund up to $116.5 million in research after the drug reaches certain clinical test levels. Only $11.8 million remained unspent at the end of the quarter meaning Fibrogen is going to see its own cash disappear even faster.

Shares of the company have been falling like a rock since the start of 2016. While I hate to short a stock already oversold the decline on Friday closed at a new historic low. They went public in October 2015. The decline appears to be accelerating.

The decline began in early January when Miguel Madero, a board member for 20 years resigned unexpectedly. He sold half his stake the week before he resigned. Insiders have been selling shares like crazy with no buys in the last three months and 29 sells. In the last 12 months, there have been 80 sales and only 4 insider buys.

There are options but the volume is too thin and the spreads too wide to play.

Position 2/8/16 with a FGEN trade at $16.45

Short FGEN shares @ $16.45, see portfolio graphic for current stop loss.

INSY - Insys Therapeutics - Company Profile


There was one big spike at 2:30 that appeared to be short covering that caused a $1 rebound in the shares. Sellers appeared again at the close. Shares are holding right at downtrend resistance.

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 Feb 23rd.

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, target $13.25 for exit. See portfolio graphic for stop loss.

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


The bounce in DB just before the close lifted all the banks temporarily. Resistance at $34.50 held.

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.

Position 3/2/16 with a KRE trade at $35.35.

Short KRE @ $35.35, see portfolio graphic for stop loss.


Long March $33 put, @ .80, no stop loss.

OIH - Oil service Index - ETF Description


The OIH finally lost support on the drop in WTI below $28. Expect more weakness ahead as oil prices continue lower.

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


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

VXX - VIX Futures ETF ETF - ETF Description


The choppy market is keeping the volatility at high levels. 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

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now