Option Investor
Newsletter

Daily Newsletter, Monday, 9/12/2016

Table of Contents

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

Market Wrap

The Brainard Bounce

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Fedspeak helped to drive the indices up down and sideways and we still don't really know what they are going to do. Volatility was the name of the game today. At first indicated to open with losses greater than -1% they later gained more than +1% in an up, down and sideways kind of a day. The driver behind the moves was FOMC uncertainty and a new round of conflicting statements; two Fed officials made a case for a September rate hike before the opening bell while a third made a case later in the day for not raising rates. The funny thing is, with all this Fed transparency we have about as much of clue as we ever did.

International markets were down heavily in the early hours of the morning. Asian indices closed with large losses, led by the Nikkei's -2.5%. The move was largely driven by Friday's US market sell-off. European indices were equally affected but were able to recover much of their earlier losses before the end of trading. The rebound in US stocks and oil both helped to lift prices, leaving the DAX leading with a loss of about -1.4%.

Market Statistics

Early futures trading saw the indices down by more than -1% only to have FedSpeak send them back to near break-even before the opening bell. The broad market opened with a slight loss, about -0.5% for the SPX, and the proceeded to work its way higher from there. The bounce lasted throughout the morning carrying the index to an intraday high about 0.6% above Friday's close. This level held for over an hour and then gains were extended to near 1% on comments from Brainard. She says the case for a rate hike is less compelling than it once was. The Brainard Bounce, as it has been labeled, cut it's gains by roughly 50% by 1:30PM before reestablishing the rally and moving higher once again. By 2:30PM the SPX was up a little more than 1.5% and looking like it would keep moving higher, only it didn't. From that point on the indices held their ground in sideways trading to close near the highs of the day.

Economic Calendar

The Economy

There was no economic data today and there is very little this week until Thursday. Tomorrow is Treasury Budget and Wednesday is the mortgage index, both non-movers. Thursday there are 10 individual reports ranging from weekly jobless data to retail sales, Philly Fed, Empire Manufacturing, Business Inventories and PPI. The next day, Friday, there are another three reports including Michigan Sentiment and the Fed's favorite gauge of inflation, CPI. Both the PPI and CPI could move the needle in terms of the FOMC and the September rate hike.

Moody's Survey of Business Confidence fell -0.1% to 26.1. According to Mr. Zandi the index shows stability in global business sentiment despite the summer's round of geopolitical events. Sentiment is strongest in the US, it is weakest in South American with positive forward outlook. Looking at the table it is possible that sentiment has bottomed, if so the next thing I'd like to see is some improvement.


Second quarter earnings is over, the final growth rate for the S&P 500 is -3.1%. Looking forward, 3rd quarter earnings are still expected to be poor but there are signs we could be emerging, finally, from the earnings recession. Third quarter expectations for growth remain negative but ticked higher to -2.0% from -2.1% and remain positioned to produce a final growth rate of roughly 2.0% if earnings trends persist (trends predict a roughly +4% increase in the projected rate by the end of the reporting season). There are 3 S&P 500 companies reporting earnings this week but the season does not really get underway for about 3 more weeks.


There are additional signs that earnings declines have bottomed. First, the third quarter is expected to see a return to revenue growth, if so this will be the first quarter since Q4 2104 to post positive growth. Second, 4th quarter earning growth is now expected to be 5.8%, up 0.3% from last report. While still well below expectations at the first of the year a return to expanding expectations is positive in my book. Third, full year 2016 expectations have also risen, they are still negative but not as negative as before. If third and fourth quarter expectations come in better than expected, as is what typically happens, full year 2016 could easily turn positive. Fourth, full year 2017 expectations have also risen in the latest report, gaining 0.2% to hit a two month high. So, what we have on tap is the real possibility of snapping the earnings recession with expanding and robust growth to follow.


The Dollar Index

The Dollar Index fell by -0.25% today but the move was negligible. The index is positioned almost exactly in the middle of a recent trading range and wind-up driven by the upcoming FOMC meeting. Today's action was impacted by Fed-Speak and Fed-Speak alone, holding pat waiting to see what REALLY happens. To recap briefly, in the early hours we got some comments from Lockhart and Kashkari. Lockhart asks the question, are current rates still appropriate? And answers by saying that conditions warrant a "serious" discussion of rate hikes at the September meeting because the economy is showing sufficient momentum. Kashkari says fiscal policy can only help so much with growth, it will take legislative action to really get things going. Along with that immigration reform could help as well. Brainard delivered her address shortly after 1PM and made what was describe as a whole-hearted defense of not raising rates.

The Dollar Index direction will come down to what the FOMC does next week. A hike would be bullish and could take it up to $97.50, the top of the range. No hike would be dovish and could take it down to the bottom of the range, near $93. The wild card will be the BOJ which also meets and delivers their policy statement next Wednesday. Early in the day the Fedwatch tool was showing a 24% probability of September rate hike, after the Brainard comments that fell to 14%.


The Oil Index

Oil prices were volatility today. First down by more than -1.5%, then up 1% and then flat on the day. Today's action was driven by a variety of factors starting off with high supply and high production which are what eventually dominated today's trade. WTI finished the day with a small gain, near the $46 level. Volatility may persist, especially if new rumors/headlines come out concerning possible production caps.

The Oil Index opened the day with a loss of about -1.5% but regained it and another 1% early in the day. The rebound in oil prices helped to lift the index up off the 1,120 support line which is the midpoint of the nearly 6 month trading range. This level may be gaining strength as support, this is the third bounce from it since it was crossed in early August, but the indicators do not yet show it. Both MACD and stochastic remain consistent with range bound trading. The 1,120 is the critical one for near term traders, a break below this would likely take the index down to the bottom of the range near 1,080. If support holds a retest of the upper range, near 1,175, is likely. Looking out to the short term, earnings season is just around the corner and this sector is once again expected to lead year over year earnings decline. Longer term though is much brighter, full year 2017 earnings growth is expected to be over 300%.


The Gold Index

Gold prices fell for the fourth day in a row, extending the fall from the $1,250 resistance level, but remain above critical support levels. The move lower has been driven by renewed, increased, FOMC rate hike outlook and will possibly go lower if the rate hike and/or hawkish stance is taken by the Fed. A break below critical support, in the range of $1300 to $1320, would be bearish. Until then the metal remains range bound and driven by headlines.

The gold miners had a bit of a mixed day, the Gold Miners ETF GDX opening with a loss and then regaining it and more. By end of day the miners had moved higher by about 3% and moved above resistance at the $26.50 level. The ETF appears set to move higher, confirming support at a higher level than the previous bounce, at least in the near term. If the bounce is able to move higher first target for resistance is the short term moving average near $28. A break above this could take it up to retest recent highs.


In The News, Story Stocks and Earnings

The VIX saw another major move today, falling nearly -6%. Despite the fall and apparent reversal the indicators remains consistent with higher volatitility, momentum is on the rise and stochastic is ticking higher. At best I think we can expect to see volatility trend sideways and show some volatility of its own, at least until the FOMC meeting. At worst it will continue to rise with a possible upside targets near $22.50 and $25.


On a sector by sector basis the utilities sector is expected to show the best year over year earnings growth for the third quarter, 5.7%. Fourth quarter outlook is better, bringing the full year 2016 estimate up to 6.2%, third best for the year which is a plus. Next year is not so good though, full year estimate is only 2.2% coming in last place of the ten major sectors. Looking at the Utilities ETF XLU the gained more than 1.75% in today's action but remains in downtrend. The caution is that the ETF also created a long white candle and bullish attack pattern so the downtrend may have found a bottom. The indicators suggest that it will continue higher in the near term, short term is less certain due to resistance just above the current levels. Resistance is near $50 and the short term moving average, a break above this level would be bullish with upside target near $52.50.


The Indices

The indices bounced today after support formed in the early pre-market hours. Even so, volatility has entered the market so it wise to be prepared for some large moves either direction over the next week to ten days. Today's leader was the NASDAQ Composite with a gain of 1.68%. The tech heavy index created an significantly large white candle which moved up to and broke above the short term moving average. Despite this move the index remains below potential resistance at the previous all time high. A break above this level is needed to get bullish right now and the indicators don't support it. MACD is bearish, not strong but bearish, and stochastic is rolling over and pointing lower following a bearish crossover. A break above would find next resistance at the current all time high, a move lower may go as deep as 5,050 before finding support.


The S&P 500 made the second largest move today, about 1.5%. The broad market created a significantly long white candle, larger than Friday's (not counting the gap), confirming support at 2,120. The indicators are mixed and consistent with range bound trading so no clear indication is given. Despite today's move the index remains below potential resistance at the short term moving average which has itself begun to peak. A break above the moving average would have to be strong enough to break additional resistance at the current all time high. Until further evidence is presented I think it best to assume that volatility may persist.


The Dow Jones Transportation average made the third largest move today, about 1.32%, and confirmed support along the bottom of a potential trading range. Support is at 7,750, upside target for resistance is near 8,150. The indicators are a bit mixed but more bullish than not, stochastic is weak in the nearer term but moving higher in the longer, basically consistent with range bound trading. A break below support would be bearish, a break above resistance bullish.


The Dow Jones Industrial Average made the same move as the transports, 1.32%. The blue chips also made a large white candle and have also confirmed support levels, this time at the 18,000 level. The index broke through potential resistance at the previous all time high as well and looks set to test next resistance at the short term moving average. The indicators are mixed so the strength of any move is questionable at this time. A move above the short term moving average would find next resistance at the current all time high, failing to break resistance could take it down to retest support at 18,000.


Volatility has returned to the market, a relief to option traders worldwide I'm sure. Today's move recovered much of the losses experienced Friday but it may offer false promise. The indices, despite large gains, remain beneath resistance levels with little reason for bullishness. The most immediate concern is the FOMC with economic data a close second. We'll get quite a bit of data including important reads on inflation between now and the meeting next week so interest rate outlook will likely roller coaster over the next 4 trading days.

If the Fed raises rates it brings us back to the duality of higher rates in that they aren't great for the market but signify health in the economy. In the near term it may spark the correction I have feared coming while in the long term economic health will bring improved corporate earnings and higher index prices. If they don't it's just more of the same. In either event, so long as earnings outlook remains positive and we actually see positive earnings growth come back to the market we should get a rally into the end of the year. I expect to see more volatility in the indices over the next few days and in that movement perhaps a clear signal will emerge. I remain cautious in the near term, waiting for the next great bull market entry.

Until then, remember the trend!

Thomas Hughes


New Plays

Buyout Candidate

by Jim Brown

Click here to email Jim Brown
Editor's Note

Biotech companies with any major drugs in the pipeline are buyout candidates. Portola is especially attractive because they have a billion dollar drug in the pipeline.

Sorry for the delay tonight. Our internet went down 5 min after the market closed and was down for 5 hours.



NEW BULLISH Plays

PTLA - Portola Pharmaceuticals - Company Profile

Portola Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes therapeutics for patients in the areas of thrombosis, other hematologic disorders, and inflammation. The company is developing Betrixaban, an oral, once-daily Factor Xa inhibitor, which is in Phase III clinical trial for treating venous thromboembolism prophylaxis in acute medically ill patients in-hospital and post discharge; and Andexanet alfa, a recombinant protein that is designed to reverse the anticoagulant activity in patients treated with a Factor Xa inhibitor. The company is also developing Cerdulatinib, which is in Phase I/IIa proof-of-concept study, an orally available kinase inhibitor that inhibits spleen tyrosine kinase (Syk) and janus kinases enzymes, which regulate signaling pathways, as well as for hematologic, or blood, cancers, and inflammatory disorders. In addition, it is involved in the development of PRT2607, a selective Syk inhibitor. Portola has collaboration agreements with nearly a dozen major pharma companies including Bristoll Myers, Pfizer and Bayer to name a few. Company description from FinViz.com.

The billion dollar drug is Andexxa (Andexanet Alpha). In February, Portola licensed the rights in Japan to Bristol-Myers and Pfizer for $15 million in upfront payments, $90 million in milestone payments and double-digit royalties. This is just for Japan. Portola is planning on submitting the MAA for approval in Q3.

In the U.S., Portola suffered a setback in August when the FDA rejected its BLA submission for Andexxa. The FDA asked for some manufacturing information and a change to the labeling. Portola plans to meet with the FDA in the coming weeks to resolve any outstanding questions. Once the drug is approved we could see the shares spike significantly. There is almost zero risk of non-approval based on the remaining questions posed by the FDA. Shares fell from $28 to $18 on the news in late August and the rebound is starting to accelerate.

Shares only lost $1 in the Friday crash and recovered 50% of that on Monday. Support is $21 and shares closed at $22.

Earnings Nov 9th.

Because the futures are down so sharply tonight I am going to put an entry trigger on the position. I hate to say buy something and then have the market gap down -100 points at the open on its way to a repeat of Friday.

With a PTLA trade at $22.25

Buy PTLA shares, initial stop loss $19.75.

(Wide stop loss because of the market volatility)

No options recommended because of price.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Not Out of the Woods

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite today's rebound, we are not out of the woods yet. The S&P-600 small caps only rebounded +1% compared to the -3% drop on Friday. The S&P futures were down over 7 points in the afterhours session. That could change before the open but it appears volatility has returned.

We have been knocked out of the majority of our positions and it will take a week or so to replenish. However, I am not in a rush to jump right in and back up the truck.




Current Portfolio


Stop Loss Updates

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


Profit Targets

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





Current Position Changes


RDN - Radian Group
The long stock position was stopped with a trade at $13.35.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

CC - Chemours Co - Company Profile

Comments:

No specific news. Big 4% rebound after a 6% decline on Friday.

Original Trade Description: September 3rd.

The Chemours Company provides performance chemicals in North America, the Asia Pacific, Europe, the Middle East, Africa, and Latin America. It operates in three segments: Titanium Technologies, Fluoroproducts, and Chemical Solutions. The Titanium Technologies segment produces and sells titanium dioxide (TiO2) under the Ti-Pure brand name to deliver whiteness, brightness, opacity, and protection in various applications, such as architectural and industrial coatings, flexible and rigid plastic packaging, PVC window profiles, laminate papers, coated paper, and coated paperboard used for packaging. The Fluoroproducts segment provides fluoroproducts, such as hydrofluorocarbon refrigerants, and fluoropolymer resins and downstream products and coatings under the Teflon brand name. The Chemical Solutions segment offers industrial and specialty chemicals used in gold production, oil refining, agriculture, industrial polymers, and other industries in North America. This segment provides cyanides; and performance chemicals and intermediates, such as clean and disinfect chemicals, aniline, methylamines, glycolic acid, Vazo free radical initiators, and reactive metals. Company description from FinViz.com.

This company has had a hard life since going public. Back in June Citron Research released a report critical of Chemours saying it was a "zero" because of lingering liabilities they inherited when DuPont spun them off. According to Citron they had liabilities for the manufacture of PFOA while it was part of DuPont. Citron said the company was "designed for bankruptcy" to rid DuPont of those lingering liabilities. Chemours issued a strong rebuttal. Bloomberg researched the background and said Chemours might have $800 million to $1.5 billion in risk. Anyone suing for contamination has to sue DuPont first and they have deep pockets. Chemours agreed to share some of the risk in the event of a judgment. In any event, it will be years before there is any real liability to Chemours.

Shares collapsed but at the same time David Einhorn raised his stake from 5.44 million shares to 8.44 million. If Einhorn is not worried, we should not be worried for a 30-45 day trade. We will exit before earnings. Argus upgraded them to a buy saying they had a significant competitive advantage becaus of their size, vertically integrated structure and rapid cost cutting.

Earnings Nov 3rd.

When they reported for Q2 they earned 27 cents compared to estimates for 17 cents. Revenue was $1.38 billion and missed estimates for $1.42 billion because of the sale of a division. The company said it was delivering $350 million in cost reductions and add $150 million in adjusted EBITDA through 2017. The prior quarter they earned 6 cents compared to estimates for a penny. They have history for strongly beating estimates.

They announced the sale of their sulfur business for $325 million and the sale of the Clean and Disinfect business for $230 million. The company is shedding noncore assets to improve profitability.

Zachs said analysts they follow are raising estimates but they still believe Chemours will post another beat. Based on Sach's proprietary indicators companies with the Chemours profile beat 70% of the time. Over the prior week the 2016 consensus estimate rose from 63 cents to 77 cents. For 2017 the estimates rose from $1.10 to $1.27, which is 64% over 2015 levels.

A week ago, a large investor sold 2,000 October $10 calls for $2.90 and reinvested the gain into 4,200 January $15 calls for $1.

Position 9/6/16 with a CC trade at $13.75

Long CC shares @ $13.75, see portfolio graphic for stop loss.



RDN - Radian Group - Company Profile

Comments:

No specific news. The market drop at the open stopped us out of the stock position at $13.35 for a minor gain. The long call is still open but only has 4 days to run. It is a $14 call with RDN at $13.83. If we could get another market move like we had today RDN could push through that $14 level.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter, they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss, the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

Position 8/12/16 with a RDN trade at $13.15

Closed 9/12/16: Long RDN shares @ $13.15, exit $13.35, +.20 gain.

Optional:

Still Open: Long Sept $14 call @ .15, no stop loss.



UNT - Unit Corp - Company Profile

Comments:

No specific news. Shares still holding just below resistance.

Original Trade Description: September 7th.

Unit Corporation, operates as an oil and natural gas contract drilling company primarily in the United States. The company operates through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream. The Oil and Natural Gas segment acquires, explores, develops, and produces oil and natural gas properties primarily located in Oklahoma and Texas, as well as in Arkansas, Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, and Wyoming. As of December 31, 2015, this segment had approximately 65 gross proved undeveloped wells. The Contract Drilling segment is involved in the contract drilling of onshore oil and natural gas wells for its own account, as well as for a range of other oil and natural gas companies primarily in Oklahoma, Texas, Wyoming, and North Dakota, as well as in Louisiana and Kansas. As of December 31, 2015, this segment had 26 operating rigs. The Mid-Stream segment buys, sells, gathers, transports, processes, and treats natural gas for third parties and for its own account. This segment operates 3 natural gas treatment plants, 13 processing plants, and 25 gathering systems, as well as approximately 1,464 miles of pipeline. Unit Corporation was founded in 1963. Company description from FinViz.com.

For Q2 the company reported an adjusted loss of 15 cents compared to estimates for a loss of 22 cents. Revenue was $138.3 million. They recorded record production of 97 million cubic feet per day from the Wilcox play, a 25% increase year over year and a 9% increase from Q1. Seven of eight of their highly features BOSS rigs were currently operating under contract to other producers compared to six in Q1. The Midstream segment volumes rose 15%.

Earnings Nov 3rd.

Since oil and gas prices have declined they have reduced drilling of new wells and used their rigs to recomplete existing wells to boost production. An example of the production increase came from four Wilcox wells that were producing 700 Mcfe per day before the recompletion and 17,000 Mcfe after the work over. They anticipate putting additional rigs to work on new wells in early 2017.

Unit has been using the weakness in oil prices to reduce costs and streamline operations rather than try to continue drilling new wells during glut conditions. They are poised to increase production on demand because they own their own fleet of rigs and are not paying high lease fees for drilling equipment.

Oil prices are in rally mode this week because of a unique agreement announced on Monday where Russia and Saudi Arabia will form a joint venture to stabilize oil prices among OPEC and non-OPEC producers. It remains to be seen if it will ever happen but prices are rising on the expectations.

Unit has been relatively calm during the ups and downs in oil prices in 2016 and are poised to break out to a new high for the year.

Position 9/8/16:

Long UNT shares @ $18.38, see portfolio graphic for stop loss.

No options recommended because of price.




BEARISH Play Updates

ACAT - Arctic Cat - Company Profile

Comments:

No specific news. Major breakdown at the open but recovered in the market rebound.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

Position 8/31/16 with a ACAT trade at $14.15

Short ACAT shares @ $14.15. See portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Major increase in volatility only a couple days after we entered the position. Unless there is going to be several days in a row like Friday this spike will fade in a hurry. There will be ups and downs. Just hang in there and the long-term trend will always be down.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.





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