Option Investor
Newsletter

Daily Newsletter, Monday, 2/22/2016

Table of Contents

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

Market Wrap

Monday Morning Follow Through

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Monday traders provided some follow through to last week's rally, the caveat is that much of the gains were driven by oil prices. A variety of factors, including the evolving potential for a deal to support oil prices, helped to drive WTI up by nearly 7% today and the market followed it higher.

The rally started early. Asian indices climbed about 1%, led by the Shanghai index 2.37% gain. Aiding the rally in China, and perhaps the rest of the world, is the weekend announcement that the head of China's securities regulation department was removed and replaced. Xiao Gang, former head of regulation, was singled out for blame concerning the series of missteps taken by the regulator over the past year. European indices made gains near 2%, driven by oil prices, the rally in Asia and relief over the deal keeping the UK in the EU>

Market Statistics

Our indices were indicated higher from the earliest part of the pre-opening session; futures indicated an open nearly 1% higher all morning. At the open the indices quickly moved up by the 1% indicated and were pushing 1.25% within the first 15 minutes of trading. The early surge higher reached its peak at 10AM, about +1.5% for the SPX, and the drifted sideways until early afternoon. Around 1:30PM news that United Technologies and Honeywell may be in talks for merger sent the indices back to test their early highs and then move a hair higher. Late afternoon trading saw the indices trend sideways into the end of the day leaving the indices at or near their highest levels.

Economic Calendar

The Economy

There was no economic data released today but there are some important releases on the schedule for this week, next week is the first of March so we will be getting the monthly round of macro data including ADP, NFP and Unemployment. This week look out for the Case-Shiller 20 City Index and consumer confidence on Tuesday; New home sales on Wednesday; jobless claims, durable goods and the housing price index on Thursday and then personal income and spending, Michigan Sentiment and the 2nd estimate for GDP on Friday. GDP is expected to fall to 0.5% with this read.

Moody's Survey Of Business Confidence ticked higher this week, gaining 0.4% to hit 28. This is up from last week's reading of 27.6 which was a new near term low. The index has been in steady decline since hitting a historic high last summer and shows no sign of bottoming. Mr. Zandi says that the decline in sentiment is clearly linked to global financial market turmoil.


According to FactSet 87% of S&P 500 companies have reported so far this season. Of those 68% have beaten on the bottom line while only 48% have beaten on the top line. Since the start of the reporting season 7 sectors have performed better than expected, led by telecom which has posted a +79% increase in earnings over the previous quarter. Energy of course is the laggard, earnings growth is -73.7%. Ex energy things look a little better, earnings growth is in the range of +7.9%. There are 48 S&P 500 companies and 1 Dow component due to report earnings this week


Looking forward the earnings growth picture continues to deteriorate. First quarter earnings growth projections have now fallen to -6.5%, as have had second quarter growth projections, now -1.1%. Beyond that growth is expected to return but projections continue to decline. Third quarter growth is projected to be 5.1%, fourth quarter projections are 10.0%. Full year 2016 earnings growth projections are now only 3.4%.



I've been looking for the dip in earnings growth to come to an end for the past two quarters, so far it has not materialized. Based on the projections, and aided by the potential bottom in oil prices, it looks like the 2nd quarter could be the turning point. However, until the estimates begin to rise negative expectations could weigh on the market and send the indices back to retest support.

The Oil Index

Oil prices made their largest move yet. WTI gained more than 7.5% on an intraday basis to briefly touch $32. There is still no real sign of a change in fundamentals but there is growing reason to suspect that sign may be at hand. Not only is the chatter surrounding the OPEC/Russia deal to curb output growing, last week's drop in US rig count and today's prediction by the IEA suggests that US production will soon start slowing as well. The IEA says that US shale production will decline by 600K bpd in 2016, followed by another 200K decline in 2017. The caveat is that until some concrete sign of falling production and/or supply hits the market prices are being supported by rumor and subject to quick reversal. Near term resistance is about $32, next is about $35, break above these levels could help draw in more bulls.

The Oil Index gained about 2.75% in today's session. The move appears bullish but was halted at resistance, just above 1,000. This level has been resistance twice before and is now the top of a two month trading range. The indicators are pointing higher but still look weak to me and suggest that the trading range will hold unless another catalyst emerges to drive oil prices higher. A break above 1,000 could go to 1,100 in the near term, support is currently around 950.


The Gold Index

Gold prices fell today, losing about -1.75%, but remain above $1200. Today's move was driven by strength in the dollar, likely due to last week's CPI data. CPI was slightly hotter than expected, not much, but enough to keep an FOMC rate hike on the table. This week GDP and personal income/spending data may help drive this trade; stronger data would support rate hikes and the dollar, weaker data would support no rate hike and gold. Upside resistance for the metal is between $1230 and $1250, support is just above $1200. In any event, gold prices are well off of their lows and helping to support the gold miners, at least in the near term.

The Gold Miners ETF GDX opened the day with a substantial loss, greater than -3%, only to have buyers step in and drive the sector higher. By end of day the ETF had gained more than 1.25% to close near the high of the day. Over the past week or so the sector has been consolidating, at this time it looks like a potential pennant or flat topped triangle but as yet is not confirmed. Gold prices will no doubt play a part in how this pans out, pun intended, as will Goldman Sachs call to short gold.

Regardless of the data this week, next week and the week after will be very important in terms of FOMC speculation, the dollar and the path gold prices take from here. I am not really expecting a hike at the next meeting, about 3 weeks away, or any overtly hawkish statements, a move that would likely help devalue the dollar and support gold. On a technical basis momentum, specifically an extreme peak in the MACD, suggests that the rally in gold is not over.


In The News, Story Stocks and Earnings

The Dollar Index got a little boost today, about 1%, but was halted at resistance. Resistance was met at the 38.8% retracement level which was able to push the DXY back below the 30 day EMA. The indicators are pointing higher so resistance may be tested again but in light of the December to present down trend in the index such a move looks more like a shorting opportunity than not. Resistance is at $97.50, first target for support is near $96.50 and the 50% retracement line.


The news that Honeywell may be in the market to buy United Technologies helped to lift the market during the afternoon portion of today's session. The news also helped to lift shares of UTX, and initially Honeywell too, but by the end of the day Honeywell was down nearly -2%. The deal is expected to be almost a merger of equals but puts a premium on shares of UTX. At this time there is no deal on the table and there is expected to be pushback from regulators and companies doing business with both UTX and HON.


Dean Foods reported better than expected earnings and upbeat first quarter guidance before the opening bell. The nations leading dairy foods company beat adjusted earnings by $0.02 and provided guidance in a range above consensus estimates, driven on a decline in milk prices. Despite the good news investors dumped the stock, driving share prices down by more than -8.5%. The only reason I can see for the sell off is lack of confidence in the guidance. According to forecasts by AGWeb currently low milk prices are expected to lead to lower global production and increased demand among consumers, leading to a shortage of dairy and an increase in prices later on in the year.


Lumber Liquidators suffered from a revised statement by the CDC. The new release says that the cancer risk associated with formaldehyde treated wooden flooring was greater than first assessed. The reason being an error in calculations. The news sent shares down by nearly -20% to trade just above the long term low set in the wake of the initial report released last year.


The Indices

Today was a good day for us bulls. The Monday morning buyers were out in force, drove the market higher right from the start, held those levels all day, pushed to a new high and closed near the high of the day. Gains were fairly even across the board but one index stood out as the definite leader, the Dow Jones Transportation Average. The transports gained 1.86% in today's session to come just shy of upside resistance target of 7,500. The indicators are on the rise and gaining strength so it looks like this level could be tested at least. Stochastic and MACD are both showing some strength although stochastic is still suggestive of a trading range, it is at the upper signal line and may cross over but has not yet. MACD on the other hand is ticked higher in with today's action and remains at a multiyear extreme and suggestive of ongoing up trend. A break above 7,500 would help confirm reversal and could take the index up to 7,750 8,000.


Th next biggest gainer was the NASDAQ Composite. The tech heavy index gained 1.47%, breaking above the 4,550 resistance line and the short term moving average. The indicators are on the rise and pointing to higher prices although stochastic is not yet showing a lot of strength. MACD is at an extreme peak and on the rise suggesting ongoing up trend and/or a retest of the current high should a pull back to support should occur. Next upside target is near 4,650 with first target for support near 4,500.


Third up in today's run down is the S&P 500. The broad market made a gain of 1.45%, closed near the high of the day and just short of a key resistance level at 1,950. A break above 1,950 would help to confirm the reversal and may be on the way. The indicators are bullish, pointing higher, suggestive of a test of resistance or break out but not yet showing a lot of strength. Momentum has not reached an extreme but it is still on the rise, stochastic is pointing higher but overbought in the nearer term and consistent with a trading range in the longer.


The Dow Jones Industrial Average brings up the rear in terms of daily gains but is the most bullish of all in terms of price action. Today the blue chips broke above the top of the two month trading range with rising indicators and appears to be heading higher. The indicators are bullish but like on the SPX chart still weak when compared to the transports and techs; MACD is on the rise but not yet at an extreme level, stochastic is pointing higher but from the middle of the range. The good thing about this is that the indicators show there is room for the index to run with next upside target near 17,000 and the underside of the long term trend line.


It looks like rally on, at least into the near term. Today's action was very promising and could continue to drift higher into the end of the week. The risks are economic data, FOMC speculation, rumors from the oil patch and earnings. This week is going to be fairly light on earnings, not devoid but light, as are economic releases.

The headline sector for earnings this week will be the retailers. Names on the list include Target, TJMaxx, Best Buy, Kohl's and others. Also of note are food and berage companies such as Anheuser-Busch and Domino's Pizza. FOMC speculation may simmer some tomorrow with the release of consumer confidence numbers but the real movers in terms of data aren't due out until Friday. As for OPEC and oil, rumors are solidifying a production cap could be agreed upon but even so, fundamentals are still bearish so I expect to see more volatility in the $28 to $32 range.

I have to say it looks like the market has hit bottom and is in processing of reversing. I am however still concerned about earning outlook for the coming two reporting seasons. If projections continue to decline we could easily see the indices return to retest support levels. Once we get past what we can say for sure is the bottom of the earnings recession and actually begin to look forward to real earnings improvement I will be much more bullish. Until then I'm bullish but still ever so cautious.

Until then, remember the trend!

Thomas Hughes


New Plays

DATA Dump Wearing Off

by Jim Brown

Click here to email Jim Brown
Editor's Note

It is not always nice when one single event crashes a dozen stocks for 20-30%. If you own those stocks at the time it is not fun. If you did not one them then watching to see which ones rebound first is a good way to find some potential plays.


NEW BULLISH Plays


DWRE - Demandware - Company Profile

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

With a DWRE trade at $34.15

Buy DWRE shares, initial stop loss $31.35

Optional

Buy April $35 call, currently $2.60, initial stop loss $28.75




NEW BEARISH Plays


No New Bearish Plays





In Play Updates and Reviews

Volatility Fading Fast

by Jim Brown

Click here to email Jim Brown

Editors Note:

As the rally stretches into its second week, the Volatility Index is dropping fast. After hitting 30 last week the index closed at 19.38 today and almost a two-month low.

The drop in the $VIX is finally having an impact on our long-suffering VXX short. If the rally continues even at a slower pace we could see the VXX return to 20.

We were stopped out on the BG short after the stock rallied 5% on no news other than Zacks reiterating their "strong sell" recommendation.

That minor loss was offset by JB Hunt, which hit our exit target this morning for a $4.50 per share gain.

The Dow broke over strong resistance but the S&P has yet to reach the equivalent position at 1,950. That could be the level that stops this rally unless the S&P rolls over at a lower high before then.

We are in overbought territory so we should expect some profit taking soon.




Current Portfolio





Current Position Changes


JBHT - JB Hunt

The long position in JBHT was closed for a $4.50 gain when the $78.50 target was hit.


LGF - Lions Gate Ent

The long position in LGF remains unopened.


SGI - Silicon Graphics

The long position in SGI remains unopened.


BG - Bunge Ltd

The short stock position in BG was stopped at $51.25. The long put is still open.


Profit Targets

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


Stop Loss Updates

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



BULLISH Play Updates


GPRO - GoPro - Company Profile

Comments:

GoPro gapped back over resistance at $12.70 at the open and managed to hold that level throughout the day. That was a 4% gain.

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.



JBHT - JB Hunt - Company Description

Comments:

JBHT spiked to $78.81 shortly after the open to hit our exit target at $78.50 for a $4.50 per share gain. The play is closed.

Original Trade Description: February 10th.

While the majority of the transportation sector has been in decline in response to lower energy costs trucker JBHunt has been expanding its fleet, hiring new drivers and increasing load volumes across the country. In its most recent earnings report the company produced EPS in line with estimates but it is the internal data that is most promising.

JBHunt Transport services and its wholly owned subsidiaries is a diversified transportation and logistics company operating throughout North American. Operations are centered in the United States with some portions operating in Canada and Mexico. The company operates in the intermodal space using its own fleet and to some extent third party operators in 4 sub-segments.

Fourth quarter results were good. Earnings were in line with expectations on flat revenue but as mentioned, it is the internals that are most interesting. Q4 operating income was up 5% over the previous year with a 9% increase in EPS. Full year results include a 13% increase in operating income with a 16% increase in EPS. Full year revenue was flat, not something we necessarily want to see, but when taken in light of lower fuel surcharges is not the red flag it would seem to be. Remember, in recent years revenues among the entire transportation sector have been inflated due to surcharges related to what were then record fuel prices.

Three of the four business segments showed notable increases. The Integrated Capacity Solutions segment, management of third party transportation services, showed a 4% decline in revenue due to decreased spot market activity and lower revenue per load. The other three segments; Intermodal, Dedicated Contract Services and Trucking all showed notable increases in revenue of 1%, 2%, and 3% respectively for a total operating revenue increase of 9%.

Drivers of the gains, no pun intended, include increases in new customers, revenue realizations from previous rate increases, improved fuel economy, lower maintenance costs attributed to newer equipment, less reliance on third party shippers, increased fleet size and improving margins. These were offset by higher wages and increased costs of recruitment and retaining employees but those cost are ultimately a sign of ongoing improvement in the labor market and the consumer that will eventuall spill over into this and other segments of the economy.

Earnings results are all well and good but the reason why we really like this stock is two-fold; a recent dividend increase and a couple of analyst upgrades. The board of directors approved and announced a 5% increase to the dividend on January 28th. According to the board earnings and free cash flow warrant the increase. As for upgrades, there were two; one in early January and another just after the earnings report was released. The stock was upgraded from hold to buy at BB&T and from peer perform to outperform by Wolfe Research. Based on the average analyst target of $87.14 there is still a minimum upside potential of 16%.

Buy the May $80 call with a trigger price of $74.00.

Position 2/12/16 with a JBHT trade at $74

Closed 2/22: Long JBHT shares @ $74, exit $78.50, +$4.50 gain

Optional

Closed 2/22: Long May $80 call @ $2.25, exit $2.80, +.55 gain.



LGF - Lions Gate Entertainment - Company Description

Comments:

LGF posted only a minor gain after a sharp spike at the open. If we see one more decline before breaking out I will cancel this recommendation. No change in play.

This position remains unopened until LGF trades at $21.25.

Original Trade Description: February 17th.

Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.

Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.

The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.

One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.

Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.

The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.

I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.

With a LGF trade at $21.25

Buy LGF shares, initial stop loss $17.85

Optional

Buy June $23 calls, currently $1.55, no initial stop loss.



SGI - Silicon Graphics Intl - Company Profile

Comments:

SGI posted a minor gain with a high at $5.99. It did not reach the trigger point of $6.05 to open the position. The resistance at $6 is holding.

This position remains unopened until SGI trades at $6.05.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

With SGI trade at $6.05

Buy SGI shares, stop loss $5.25



SWHC - Smith & Wesson - Company Description

Comments:

Resistance at $24 still haunting us with the high today at $24.01 before a $1 intraday decline.

I raised the stop loss to $22.85 because the stock should have rallied today after the weekend shooting in Michigan and President Obama's gun speech again today.

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:

4% rally on the short covering in WTI ahead of the switch to the April futures contract as front month at the close.

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.



WU - Western Union - Company Description

Comments:

WU closed at a 3 day high at $18.37 and appears to be getting ready to move higher if it can overcome that resistance at $18.60.

Original Trade Description: February 12th

Western Union is one of the more recognizable names in the market. Although the mode of transport has changed from stagecoach to digital the basic business model has remained the same for 165 years, the transfer of wealth. Western union is money transfer and payment solutions provider operating in 34 countries with 3 business segments; person to person, person to business and business solutions.

The company reported earnings earlier this week and results were good. Despite the negative impact of currency conversion, the company was able to meet expectations and provide forward guidance in line with expectations. Merely meeting expectations is not enough to get the market excited but the inclusion of a -$0.15 impact into the forward guidance and the recent decline in dollar value is reason enough to think guidance could be low.

Speaking of the dollar. I don't mean to completely discount the impact of currency conversion. Merly to point out that the projected impact for 2016 may be too high. Looking at the chart of the DXY it is clear that the dollar is declining in value and trending in the average range we saw in 2014. If it continues to fall back to the bottom of the range negative impact in 2016 should be no worse than 2015.

Results for the 4th quarter and full year 2015 were good. The company reported earnings of $0.42 on revenue of $1.38 billion; earnings were in line with estimates, revenue was short by 0.02 billion. In constant currency this is a 3% gain in revenue for the fourth quarter and a 4% gain for the full year. There were a couple of other red flags in the report but all related to currency conversion. One was margin. Margin improved from 20% to 20.9% in 2015 but is expected to fall back to 20% in the coming year.

Any reduction in earnings due to narrowing margin should be more than overcome by increased revenue. Economies in North America and Europe, the two largest segments by region totaling more than 40% revenue, are both strong and growing. Speaking solely of the US labor trends and earnings point to strength and should fuel person to person transactions, 80% of total business.

Another reason to expect revenue expansion is the expanding footprint. The company operates in over 200 countries, 34 added in the past year, including 100,000 kiosks and ATM's and is planning to continue expanding into 2016. At the same time the company is expanding its services and has recently added a 3rd payment solution, the WU Connect, which enables users to offer Western Union services on their platforms.

On a technical basis the stock looks like it is in reversal and heading higher. The stock is moving up off of a double bottom with increasing volume. Volume has been on the rise for the last month, the last week has been more than 2X average daily. Today the stock jumped 4% to break above the short term moving average. MACD momentum is bullish and on the rise, confirming the break. Stochastic is still weak but consistent with a signal early within a bullish movement. Today's action saw prices hover around $0.85 with a Delta of 0.48. The average analyst estimate for the stock is just over $18.79, not high, but the data pool is skewed to the upside with low outliers dragging down the mear. The high target is $24.

The option is cheap so I chose the May expiry to give the stock time to move.

Position 2/16/16 with WU trade at $18

Long WU shares @ $18, see portfolio graphic for stop loss.

Optional:

Long May $18 call, entry .79, see portfolio graphic for stop loss.




BEARISH Play Updates


BG - Bunge Limited - Company Profile

Comments:

The short stock position was stopped out at $51.25 on a 5% spike in BG shares at the open. There was no news. Friday's downdraft was completely reversed.

The long put is still open with a stop loss at $51.85.

Original Trade Description: February 18th

Bunge is an agricultural business and food company. They sell food, commodities and fertilizer on a global basis to more than 40 countries. Last week they reported earnings on February 11th and they were not good. Earnings came in at $1.49 compared to estimates for $1.56. Revenue of $11.1 billion missed estimates for $11.6 billion and that was well below the year ago quarter at $13.2 billion.

The company guided lower saying the strong dollar was weighing on revenues and declining economic conditions in countries like Brazil are limiting the available funds to import food. Pricing power is falling as commodity prices continue to decline worldwide.

Adding to Bunge's problems was a cargo of French wheat that was rejected by Egypt because of what they claimed was excessive levels of the ergot fungus. The generally accepted level for fungus is 0.05% and apparently, Egypt decided the content was higher than the standard. Since it is impossible to halt the naturally occurring fungus entirely, it exists in every load. Egypt made the unusual statement that they would have "zero-tolerance" for fungus in the future. If Egypt can get away with that qualification then other countries could try to change their rules as well. Bunge is suing Egypt and the cargo of wheat is still parked off the Egyptian port of Damietta. Egypt subsidizes bread for its population of 88 million.

Reportedly Bunge is trying to resell the wheat but it may be difficult since the rejection has tainted the cargo. The decision by Egypt for zero-tolerance has pressured the prices for wheat to $179 per ton and a five-year low. This hurts future sales by Bunge to any other country.

To recap, Bunge missed on earnings and revenue, guided lower for 2016 and has seen future commodity sales threatened by the Egyptian move and the falling prices of their various commodities.

Shares fell sharply after earnings from $58 to $46. An instant rebound appeared to $53 but that is now fading as the bad news sinks in and the outlook for Bunge's earnings dims even further. I believe that we could see the stock price return to those lows from last week, if not lower. Shares had already been declining since last June.

With a BG trade at $49.75

Stopped 2/22/16: Short BG shares @ $49.75, exit $51.25, -1.50 loss.

Optional:

Still open:
Long April $47.50 put @ $1.80, stop loss $51.85



VXX - VIX Futures ETF ETF - ETF Description

Comments:

The drop in volatility is accelerating with the VXX nearing two-month lows. If the rally continues even at a slower pace, we could see a return to 20.

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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