Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/21/2016

Table of Contents

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

Market Wrap

Central Banks Please the Market

by Keene Little

Click here to email Keene Little
Equity futures shot higher during the overnight session after the BOJ announced some policy tweaks that supported the stock and bond markets. The FOMC announcement this afternoon was essentially the same -- hold steady -- and the market rallied some more. As long as the central banks remain accommodative and continue to hand out free money the market is happy.

Today's Market Stats

The market went into a holding pattern following the September 12th low and the indexes began coiling in a tighter consolidation pattern while waiting to get through today's FOMC announcement. It was setting up for a big move but of course the big question has been what direction the coil will break. There are a couple of different short-term patterns for the consolidation but coming into today's FOMC report there was still no clear direction setting up and the FOMC announcement keeps the waters just as muddy as they were.

While there was much speculation about the Fed wanting (needing) to raise rates by +0.25%, they had practically no wiggle room to do so. The economy, other central bank actions and the strength of the US$ make it extremely difficult for the Fed to start tightening since they'll surely upset the apple cart and cause a stock market selloff. One of their new self-imposed mandates is to not let the stock market sell off and they've painted themselves into a smaller and smaller corner. There's no way out without causing the market to have a hissy fit.

The Fed is leaving rates alone, again, but Yellen mentioned she believes one increase this year would be "appropriate." That leaves December as their likely next opportunity (so as not to upset the markets days before the election) and as long as nothing has changed much they might be able to get away with it, but I doubt it. I think they're trapped and they know it and we'll see lower (negative) rates before we see higher. JMHO.

Yellen said senior Fed officials "are generally pleased with how the economy is doing" but that they still want to see a better labor market and an increase in inflation. The decision to leave rates unchanged was not a unanimous decision as there were three dissenters, the same number as in the December 2014 decision to raise rates. Those who dissented this time argue for a need to cool down the financial markets (do ya think?). There's been more and more concern expressed about the Fed's blowing more bubbles into the market and the fear of course is what happens when those bubbles pop.

The market cares about only one thing -- is the Fed going to keep the party going or are they going to start reducing the amount of Vodka in the punch? As long as the Fed continues to offer plenty of free booze the market will continue to party. The hangover won't be pleasant, which is what the Fed is now afraid of, but as far as the market is concerned it's looking like it could party at least into December. But the chart patterns don't fully support that view so let's get into their review, starting with the SPX weekly chart.


S&P 500, SPX, Weekly chart

This week SPX recovered back above its May 2015 high near 2135 and remains potentially bullish for another rally to a new high inside a rising wedge off the February low. We could see a rally to the 2250 area by November, especially if there will be an effort to not rock the political boat and keep the Democrats in the White House, followed by a brief celebration into a final market high. That's not a political comment since I'd say the same thing if a Republican was President, but is instead simply a recognition that the government and Fed readily admit to buying the stock market to prevent a selloff. If they're successful for another 6 weeks I can easily see this bullish scenario completing and the Democrats maintaining the White House. Whether or not it will be a sickly Hillary or someone else is hard to say (OK, that was a political comment, wink). But if the buyers lose the battle here and SPX drops below the September 12th low near 2119 I think it would be the fat lady singing the blues as the market would likely sell off hard, at least into a cycle turn window in mid-October.


S&P 500, SPX, Daily chart

The spike down from September has been followed by a choppy consolidation and that's one of the things that keeps me bearish at the moment. The setup for a strong reversal, like we saw off the June 27th low (note the similar RSI setup), has not followed through and that change of character is a warning sign for bulls to heed. A rally above the 50-dma, near 2168.60, would change my tune and turn me bullish for an expected new high but right now I lean with the bears and the next big move could be down to at least the 200-dma near 2060. The cycles point down hard into mid-October and therefore I would not be surprised to see a mini-crash leg lower and a test of the June 27th low at 1992 in the next few weeks. That's not a prediction but instead more of a warning about the potential. The bearish setup at the moment is a back-test of the broken uptrend line from August 2 - September 1, near 2163 (where it closed today), its broken 20-dma, near 2161, and its broken 50-dma. That's tough resistance between 2161 and 2169. The bulls need to hold onto today's rally otherwise it's going to look like a bull trap.

Key Levels for SPX:
- bullish above 2181
- bearish below 2119


S&P 500, SPX, 60-min chart

The choppy pattern for the consolidation following the September 12th low can be viewed a few different ways but the bottom line is that it looks corrective. While we could see a choppy rally to new highs, since it followed the strong spike down from September 7th it looks like a correction to the decline rather than the start of another bullish rally. Not shown on the 60-min chart below is the 62% retracement of the September 7-12 decline, which is near 2162 so throw that into the 2161-2169 resistance zone mentioned above that the bulls need to break through. If they can do it I'll be impressed but let's first see if they can do it. For the bounce off the September 12th low it achieved two equal legs up today at 2164, also in that 2161-2169 resistance zone. From a short-term perspective, I have the key level to the upside at 2171 for two equal legs up from September 14th, above which would leave little doubt the bulls mean business.


Dow Industrials, INDU, Daily chart

The Dow's pattern is very similar to SPX and today's rally brought it up close to its broken trend line along the lows from August 2 - September 1, near 18330 (today's high was 18307). A 38% retracement of its August 15 - September 12 decline is at 18331. Two equal legs up from September 12th points to 18356, just above its May 2015 high at 18351. Its broken 20-dma is near 18326 so like SPX, there's some tough resistance at roughly 18330-18360 and it's important that the bulls crack this zone. Otherwise a back-test followed by a bearish kiss goodbye here would look ominous (except for salivating bears).

Key Levels for DOW:
- bullish above 18,351
- bearish below 17,994


Nasdaq-100, NDX, Daily chart

After weeks of trying (since August 15th) NDX looks like it might have finally broken free of resistance at its March 2016 high near 4816. It's only a 1-day break, as it was on August 15th, August 23rd, September 6-7, September 15-16 and now today, so the bulls will need to hold today's gains to prevent another failure. But even if they hold today's gains there's another line of resistance just overhead -- the trend line along the highs from July-November 2015, currently near 4865. Not shown on the daily chart below is a price projection at 4865 for two equal legs up from February so there's tight correlation at 4865 for it to be potentially tough resistance to break. If the bulls can power through 4865 I see upside potential to 4930 but at the moment the bearish divergence since August is not confidence inspiring if you're looking for a bullish trade.

Key Levels for NDX:
- bullish above 4931
- bearish below 4656


Russell-2000, RUT, Daily chart

The rally from September 12th for the RUT also looks corrective and I see potential trouble for it near 1250 (actually from here, at 1245, up to 1250), which would include a back-test of its uptrend line from August 3 - September 1. The RUT is more bullish than the others as far as its moving averages since it's now above both its 20- and 50-dmas and if it's able to rally above 1250 it would open the door to a new high. Otherwise the bearish pattern calls for a steep decline to follow the bounce off the September 12th low, one which should at least test 1205 area but could drop quickly to support near 1160.

Key Levels for RUT:
- bullish above 1250
- bearish below 1205


20+ Year Treasury ETF, TLT, Daily chart

Bonds also rallied this afternoon following the FOMC announcement, which of course dropped bond yields. I've been expecting a bond market rally since last week but I'll want to see TLT above 136.15 to break into its gap down on September 9th as well as climb back above its broken uptrend line from December 2015 - May 2016, currently near 136.15. At the moment we could be looking at a bearish setup with a back-test of the broken uptrend line so it's going to be important what it does over the next couple of days.


High-Yield Corporate Bond index, HYG, Weekly chart

Another bond ETF to watch is HYG. As mentioned in prior updates, it tracks well with the stock market because the bullishness (or lack thereof) in stocks is typically matched with bullishness in the higher-yield (junk) bonds. Since the top in 2013 for HYG we've seen the stock market continue to new highs while HYG has only been able to make lower highs so that's been a longer-term warning sign for stock market bulls. Eventually that will correct and I doubt it will be HYG making new highs. But what happens following today's rally will tell us whether or not we should expect new highs in the coming week(s).

As can be seen on its weekly chart, the rallies in HYG tend to form rising wedge patterns and predictably the breakdowns from them happen quickly. With the strong selloff in the stock market on September 9th, HYG also broke down and dropped out of its latest rising wedge (the one off the February low). It found support on September 13th at its broken downtrend line from June 2014 - April 2015 so it's possible it's a back-test of resistance-turned-support but I think it will be good for only a bounce. However, today's rally brought it back up near the bottom of its wedge, currently at 86.80, so we'll get to see if it's stronger resistance on a back-test than support at its broken downtrend line. If HYG breaks down further it would suggest a big selloff is coming. Not shown on this chart, there's a big rounding top pattern for the price action since 2009 (it can be more easily seen on the monthly chart), which suggests the 2009 low will be taken out. The combination of patterns right here is a setup to get short HYG against its August 30th high at 87.14, which provides a nice tight stop on the play.


Transportation Index, TRAN, Daily chart

The TRAN has been struggling with its downtrend line from August-November 2015 all year. It managed to pop above the line for 3 days, making it look like a real breakout but then the September 9th selloff dropped it quickly back below the line. Today's rally (thanks largely to FedEx (FDX), which rallied more than $11 for a +7% gain) has it back up to the line for another test, currently near 7916 (it closed slightly above it with today's close at 7931). It's another opportunity for the bulls to shine but if today's rally is followed by selling and the TRAN drops below the September 15th low at 7712 I think we'll see a lot more selling follow. Do or die time for the bulls.


U.S. Dollar contract, DX, Daily chart

The US$ lost some ground today following the FOMC announcement since no rate increase weakens the dollar, which is part of the reason why the Fed doesn't want to raise rates. Strengthening the dollar would hurt international businesses, which would in turn further hurt the economy an stock prices. What's a Fed to do? So many things to think about. The dollar is coiling between the downtrend line from December 2015 - July 2016 and the uptrend line from May-August, each currently near 96.75 and 94.80, respectively. I'm looking for a continuation of a choppy rally into October/November but it would obviously turn at least short-term bearish below the uptrend line.


Gold continuous contract, GC, Daily chart

With the help from the dollar's decline gold got a little boost but it remains stuck inside a tightening consolidation pattern since the July 6th high. This sideways consolidation fits well as a 4th wave triangle (descending) in the move up from December 2015. If this is the correct interpretation the correction should be over and we should get another rally leg for the shiny metal. I show an upside projection to the top of rising wedge, near 1475 by the latter part of October. It has me wondering if a selloff in the stock market, if it comes, will spark interest in the safety of gold. A stock market selloff would also likely have traders seeking the perceived safety of Treasuries. But if gold loses support near 1308 it could instead prompt some panic selling (a failed bullish pattern would likely fail hard).


Oil continuous contract, CL, Daily chart

Oil is fighting hold on and so far with just a 3-wave pullback from August 19th it might be able to start another rally leg. Above its downtrend line from June 2014 - June 2016, near 46.10, would be a good start for oil bulls and then above its September 8th high at 47.75 would leave a confirmed 3-wave pullback correction. The next upside target would be back to its October 2015 high at 50.92 and then its June 9th high at 51.67. Above that would open the door to its next price-level S/R near 58.50. But if oil breaks down instead and drops below 41 I think it would start of lot more selling.


Economic reports

There are very few economic reports Thursday morning and none on Friday so the market will left to react to whatever is happening overseas. Each morning this week has started with a gap up following an overnight rally and then the rally completes by 10:00 so we'll see if that pattern continues.


Conclusion

Today's rally added some strength behind the bounce attempt off the September 12th lows and there's certainly a good chance for more to come, in which case we should see a rally to new highs into the end of the month. But the choppy bounce pattern suggests it's just a correction to the decline off the September highs and that it will be followed by stronger selling. The post-FOMC bullish reaction (it always seems to be a bullish reaction) might have put the finishing touches on the bounce correction rather than something more bullish but that means there should be very little, if any, buying on Friday.

There's nearby resistance for each of the indexes, which I pointed out on the charts, so we should find out quickly whether this afternoon's rally was anything more than a short squeeze. The day after the FOMC announcement often sees a reversal of the post-FOMC afternoon move and that's one more reason to be careful about expectations for higher prices on Friday.

I've mentioned in recent wraps that there is a grouping of market cycles that point hard down into mid-October and between that and the choppy bounce pattern since September 12th I've been leaning bearish. But that also means we cannot see much more of a bounce correction otherwise I'll start wondering if the mid-October turn window will be a high instead of a low. Sometimes the cycles invert like that.

For those who follow any of Jeff Cooper's work (he used to write for Minyanville), he has some very interesting numerology patterns, as well as Gann date relationships that suggest a market top could be found by the end of September. That means we could see a rally to a new high next week but based on relationships to past market crashes the new high could turn into a monster bull trap that leads to strong selling into mid-October.

All of this is to say I'd be very careful about a new market high from here -- the wave count and Jeff Cooper's analysis tell me it would be a high to be shorted, not bought. In the meantime, if Friday turns down we might see a negative week instead of a positive one next week. Trade very carefully the next few days.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

Paper or Plastic

by Jim Brown

Click here to email Jim Brown
Editor's Note

The demand for paper products continues to grow and recycling is not enough. Kapstone Paper announced the opening of another plant and partnership with another vendor in an effort to catch up with demand.



NEW BULLISH Plays

KS - KapStone Paper & Packaging - Company Profile

KapStone Paper and Packaging Corporation manufactures and sells containerboards, corrugated products, and specialty paper products in the United States and internationally. The company operates in two segments, Paper and Packaging, and Distribution. The Paper and Packaging segment offers containerboards consisting of linerboard and corrugated medium to manufacture corrugated containers for packaging products; and corrugated products. It also offers specialty paper products, including kraft paper comprising multiwall paper used to produce bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags; specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps; and lightweight paper. In addition, this segment provides saturating kraft paper under the Durasorb trade name for use in construction, electronics manufacturing, and furniture manufacturing industries; and unbleached folding carton board under the Kraftpak trade name to integrated and independent converters in the folding carton industry. Company description from FinViz.com.

On Sept 7th Kapstone announced it was spending $25 million in Q4 to build a new state of the art sheet plant in Ontario, California. They are also investing as a minority partner in a sheet feeder plant in the same city. The facilities will be producing paper by January 2017. The investments will boost Kapstone's annual capacity by over 60,000 tons. They recently completed an acquisition of Central Florida Box, which added 20,000 to 25,000 tons per year.

Kapstone is the fifth largest U.S. producer of containerboard and corrugated packaging products and the largest producer of kraft paper. They have 4 paper mills, 22 corrugated converting facilities and 65 distribution centers.

They reported adjusted earnings of 27 cents that missed estimates for 30 cents. Revenue of $784.9 million missed estimates for $823.8 million. However, revenue rose 17%. The earnings miss was due to the integration costs from multiple acquisitions, and less favorable product mix and the timing of planned maintenance outages. The CEO said this was temporary now that they have achieved the goal of integrating the 115,000 tons of supply from the Victory acquisition into Kapstone's mill and plant system. The company said earnings would now rise over the next 12 months thanks to the higher capacity.

Earnings Oct 26th.

Shares dipped only slightly after the July 27th earnings and have risen steadily in the weeks that followed. On Monday Bank of America upgraded Kapstone from underperform to neutral saying containerboard market conditions are improving and there is limited downside risk for Kapstone. They highlighted the robust revenue growth both in the recent past but expected in coming quarters.

Shares closed at a 9-month high on Wednesday with a breakout over resistance at $18.50.

With a KS trade at $19.35

Buy KS shares, initial stop loss $17.65.

No options recommended but the Nov $20 call is $1.30.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Small Caps Leading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P-600 rose +1.4% compared to the Dow's +0.9%. The Nasdaq set a new high on both indexes. The market seemed to appreciate the lack of a rate hike even though Yellen said investors should expect a rate hike in 2016.

The post meeting rally was slow to get started but after the press conference it gained some momentum. The big question now is follow through. Today was about covering short position and putting some additional money to work. Thursday will be about follow through. Will investors see the Fed decision as an all clear signal and continue to push the indexes higher?




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


WFM - Whole Foods Market
The short stock position remains unopened until a trade at 27.75.



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

AAOI - Applied OptoElectric - Company Profile

Comments:

No specific news. Decent gain, still fighting resistance from the 52-week high.

Original Trade Description: September 17th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide. Company description from FinViz.com.

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25



BOX - Box Inc - Company Profile

Comments:

No specific news. Only a minor gain in a strong market. This is not a good sign.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.



PTLA - Portola Pharmaceuticals - Company Profile

Comments:

No specific news. Resistance at $24 is holding.

Original Trade Description: September 12th.

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.

Position 9/14/16 with a PTLA trade at $22.25

Long PTLA shares @ $22.25, see portfolio graphic for stop loss.

(Wide stop loss because of the market volatility. I will raise it when it makes sense.)




BEARISH Play Updates

SHLD - Sears Holdings - Company Profile

Comments:

No specific news. Minor rebound on short covering in a strongly positive market. Shares did not rise until after the Fed statement.

Original Trade Description: September 19th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.

The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.

After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced on Friday it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May they warned the total store closings for the year would reach 170 so they are well on their way.

The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter. Moody's warned last week that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

When Sears does go out of business, it will be a windfall for JC Penny. There are 59 malls that have both Sears and JC Penny stores. Any Sears customers that have not already made the switch will immediately move to JC Penny as their general merchandise store of choice. Some people are very faithful to malls they have shopped at for years and that is a boon for JC Penny.

The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long term position.

Position 9/20/16:

Short SHLD shares @ $12.00, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

The VIX/VXX fell -8% and we are nearly back where we started this short. It would be nice to get more than 1 day of market gains in a row.

There was a major increase in volatility only a couple days after we entered the position. There will be ups and downs. Just hang in there and the long-term trend will always be down.

If you are not already in this position the spike today would be an excellent place to enter a new short.

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.



WFM - Whole Foods Market - Company Profile

Comments:

No specific news. No material movement.

On Thursday 9/15, more than 5,500 of the Nov $28 puts were purchased at $1.72 to more than double the open interest of 3,800.

This position remains unopened until a trade at 27.75.

Original Trade Description: September 14th.

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, grocery, and household goods. As of January 28, 2016, the company had approximately 434 stores in the United States, Canada, and the United Kingdom. Company description from FinViz.com.

Whole Foods Market has been known to consumers as the Whole Paycheck Market because of their high prices. That has changed somewhat in recent months because the competition is rapidly accelerating. Sprouts Farmers Market, Walmart and all the various Kroger branded chains are slashing prices on organic products and adding them to their shelves by the hundreds.

Last week Sprouts (SFM) warned that Q3 same store sales would be flat compared to prior guidance of +3.5% to +4.5% that they gave just two months ago. That is a significant decline in expectations. They cited increased price competition and a highly promotional environment that was cutting into profits as well. Their own chart for same store sales tells the tale.


I am choosing to play WFM instead of SFM because the latter dropped significantly on the guidance warning while did drop and is continuing to drop. Since Whole Foods is the most expensive store in the group they have the most market share to lose.

Earnings are Oct 26th and investors should be afraid to hold into that event.

With a WFM trade at $27.75

Short WFM shares, initial stop loss $28.75

Optional: Buy Nov $25 put, currently .60, no stop loss.





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