Option Investor
Newsletter

Daily Newsletter, Tuesday, 11/8/2016

Table of Contents

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

Market Wrap

End of Uncertainty

by Jim Brown

Click here to email Jim Brown
For better or worse, the election uncertainty will be over a few short hours from now.

Market Statistics

However, just knowing who has won the election is just the start of the next phase in the market's volatility. The average market move on the day after an election is 1.5% but the initial direction in inaccurate about half of the time. Twelve months later the market has moved in the opposite direction less than 50% of the time.

For instance, in 2008 the S&P fell -5% after Obama beat McCain but the S&P was up 12% twelve months later. In 2012 the S&P fell -3.6% the day after the vote but wa sup 25% twelve months later.

According to Bloomberg, in the 22 elections dating back to 1928, the S&P has declined 15 times the day after the vote for an average loss of -1.8%. In nine of those instances the S&P was up 12 months later.

Since 1928, the median gain after a republican winner has been 27.3% while the democratic presidents presided over a 27.7% gain.

On Monday the market took the FBI headlines as an all clear signal for Clinton and indications she would win the presidency on Tuesday. The market has wanted a Clinton win as long as the house and senate remain under republican control. That would guarantee gridlock for the next two years with no sweeping changes regardless of the campaign promises.

Clinton is said to have a 2% to 4% lead depending on which poll you are watching. Trump has been surging but it may be too late for a last minute comeback.

However, as we saw with the Brexit vote, polls cannot be trusted. The remain camp was reportedly up 5% in the polls ahead of the vote. The markets went crazy and posted a huge rally the day before the vote. When the Brexit camp won the election, the S&P crashed -123 points over the next two days before rebounding to new highs in the month that followed.

When polls suggest a candidate is well ahead that tends to depress voters for that candidate. They will decide it is not worth the time and effort to go to the polls and stand in line to vote because their candidate is going to win anyway.

Voting does count. The decision between Bush and Gore came down to a 537 vote win in Florida. Out of more than 120 million votes cast, the deciding factor was those 537 votes.

In the 1980 election between Carter and Reagan the polls had Carter up by 2% for most of October. Some private polls had Reagan up 2% but they were private. When Reagan won by 10% it was a landslide victory and completely unexpected.


The 2012 Obama vs Romney election was "too close to call" with Obama holding a 0.2% lead at 47.4% to Romney's 47.2% on the weekend before the vote. Obama won with 54% of the vote and 332 electoral votes to Romney's 206. The polls were wrong by more than 5%.


About the only thing we can predict on Tuesday evening is that the rest of the week will see a major market move and the direction could change more than once. Given the gains over the last two days, a Clinton victory is already priced into some extent. That suggests an actual victory could produce muted results. If the republicans hold the Senate, the rally could be stronger because of the gridlock factor.

There were two economic reports today and neither had any impact on the market. The NFIB Small Business Survey for October saw the headline number rise from 94.1 to 94.9 and a decent gain. That is the highest number since last December. The internal components were mostly flat. However, those expecting the economy to improve fell from zero to -7 and future sales expectations declined from 4 to 1. Only 10% of respondents planned to expand employment. Respondents expressed concerns over policy uncertainty that would impact hiring and expansion plans.

The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings rose +3.7% to 5.486 million but actual hiring declined from 5.3 million to 5.1 million. Separations also slowed suggesting stability in the labor market. There were only 1,474 layoff announcements in September and a cyclical low at 1.0%. This was a 20% decline from the same period in 2015. Overall, the report was positive but it was ignored.

The economic calendar for the rest of the week is devoid of any material events. The market will be moving on the impact of the election rather than economic news.


In the earnings news, Hertz (HTZ) reported earnings of only $1.58 compared to estimates for $2.73. Revenue was $2.54 billion and missed estimates for $2.6 billion. The company said it had mispriced its cars and had failed to depreciate them sufficiently before reselling them in the used market. They slashed their full year forecast from $2.75-$3.50 per share to only 51-88 cents per share. The bad news crushed Hertz shares from $36 to $17 but the stock rebounded $10 to $27.69 on rumors Carl Icahn was buying the dip in volume. Icahn has owned the stock since it was nearly $100 in 2014. It was not a good day for Carl.


CVS Health (CVS) saw its shares fall -12% after reporting earnings of $1.64 that beat estimates for $1.57. Revenue of $44.6 billion missed the estimates for $45.3 billion. Same store sales rose +2.3%. The bad news came in the form of lowered guidance. The company narrowed full year guidance from $5.77-$5.83 to $5.81-$5.89. They guided for 2017 to $5.77-$5.93 and warned they would love 40 million prescriptions because of deals Walgreens (WBA) had lured away. The company did approve a new share buyback of up to $15 billion.


Valeant Pharmaceuticals (VRX) reported earnings of $1.55 compared to estimates for $1.73. Revenue declined -11% to $2.48 billion also missing estimates for $2.49 billion. Guidance was even worse. The company said full year revenue is now expected to be $9.55 to $9.65 billion, down from $9.9-$10.1 billion previously. The adjusted earnings forecast was cut from $6.60-$7.00 to $5.30-$5.50 per share. Adding to the gloom, the CFO warned, "There could still be some surprises yet to be discovered." This was his first earnings call since joining the company and he did not sound too optimistic. The company noted declining sales at some it its key prescription businesses and a bleak outlook for the generic unit. Valeant is expected o sell the Salix unit in the near future for somewhere in the $10 billion range. They paid $14.4 billion for the company in 2015. Valeant has $31 billion in long-term debt and billions in other payments that were previously committed.


Trip Advisor (TRIP) reported earnings of 53 cents that beat estimates for 52 cents. Revenue rose only 1.4% to $421 million and missed estimates for $436.3 million. Revenue from hotels fell -5.9% to $320 million. That was 76% of the company's revenue for the quarter. Transaction revenue fell -9.6%. The company blamed fewer referrals to third-party hotel websites. Shares fell from $63 to $54 in afterhours.


Clearly the reason Trip Advisor had poor earnings, was the strong performance from Priceline (PCLN). The company reported earnings after the bell on Monday and shares rocketed higher. The company reported earnings of $31.18 per share compared to estimates for $29.92. Revenue of $3.69 billion beat estimates for $3.62 billion. They credited higher hotel bookings for the earnings beat.


Wayfair (W) reported a loss of 54 cents, compared to estimates for a loss of 59 cents. Revenue rose 45% to $861.53 million and beat estimates for $845.9 million. However, they guided for Q4 revenue of $920-$960 million that missed estimates for $1.03 billion. Shares fell from $34 to $27.60 on the report but rebounded to close at $32.28.


The earnings calendar for Wednesday is also lackluster. We are moving into the latter part of the week where retail stocks report with Macy's, Container Store, Nordstrom's, Kohl's, Ralph Lauren, Michael Kors and JC Penny's.

Nvidia is the last highlight for the week as the company reports on its ever growing inventory of leading edge products.


After the bell, the API inventory report for crude showed another large build of 4.4 million barrels after the record 14.4 million barrel gain last week. Gasoline inventories rose 3.6 million barrels and distillates declined -4.3 million barrels as homeowners loaded up on heating oil. Crude oil was only down 21 cents for the day and another 8 cents after the API report.


Markets

The market direction for the rest of the week is totally dependent on the election results. The various sectors impacted by a Clinton or Trump victory will be in play and some will be up and some down. For instance, healthcare and drugs will be negatively impacted by a Clinton win and energy, aerospace and military will be positively impacted by a Trump win. Until the smoke clears, the markets are likely to remain volatile for the rest of the week.

The S&P rebounded to resistance at 2,145 and then faded in the afternoon. It is poised to either break through that level and then 2,150, which would trigger additional short covering and a retest of 2,165. The S&P has multiple resistance levels that will be a challenge but once portfolio managers know what to buy the market should go up.

Support is now well below at 2,120 and 2,085 after last week's decline. I seriously doubt we will dip below 2,085 because of the cash on the sidelines waiting for a dip.


The Dow rallied to strong resistance at 18,335 and 18,400 and came to a dead stop at that resistance. The Dow was in short squeeze mode and most of the gains were made at the open with the index fading in the afternoon. Support is well back at 17,900 with speed bumps at 18,100 and 18,000 along the way.



The Nasdaq is now fighting resistance at 5,200. This level was support for three months and should now be strong resistance. There are no major earnings reports that could move the market on Wednesday. The Nvidia earnings on Thursday could energize the chip sector but all the big name leaders have already reported.



The S&P futures have been all over the map tonight. They spiked to +7 when the first early voting returns began to appear, then dipped into negative territory an hour later as those returns did not go as traders were expecting. They are back to +4 as I type this.

However, regardless of the winner, the market is likely to make a major move over the next two days. Unfortunately, the primary direction is unknown and it is likely to see moves in both directions. I reported on the Bloomberg research at the top of this commentary that the average decline the day after a vote was -1.8% with two days declines not unusual. The most common result is volatility where the market goes in both directions at a high rate of speed for a couple days before it picks a final direction.

Sit back and relax and be prepared to buy any dip.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Prepare for Volatility

by Jim Brown

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Editors Note:

The election results will produce volatility. That is the only guaranteed outcome. Bloomberg researched the post election results of the last 22 presidential elections. The only constant is that there was a major market move in the two days after the vote. The average decline in 15 of those 22 years was -1.8%. In all but one year, the initial move was not the final direction. We need to be patient and wait for the results and the post election volatility to pass before we launch a new position.

The S&P futures have gone from zero to +7 back to -3, back to +6 and now back to -4 in just the last hour.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Breathe Now

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets were positive but investors are holding their breath ahead of the election results. With competing forecasts on market expectations the indexes rallied intraday but faded somewhat in the afternoon. There is a lot of pent up tension and that will be released one way or the other on Wednesday.




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


SABR - Saber Group
The short stock position was stopped out at $24.25 for a minor loss.



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BULLISH Play Updates

MENT - Mentor Graphics - Company Profile

Comments:

No specific news. No material movement in a positive market.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long Jan $30 call @ $1.35, see portfolio graphic for stop loss.

Previously Closed 11/1/16: Long MENT shares @ $28.54, exit $28.25, -.29 loss




BEARISH Play Updates

EBAY - Ebay Inc - Company Profile

Comments:

No specific news. New 3-month intraday low.

Original Trade Description: October 31st.

eBay Inc. operates e-commerce platforms that connect various buyers and sellers worldwide. Its platforms enable sellers to organize and offer inventory for sale; and buyers to find and buy it virtually anytime and anywhere. The company's Marketplace platforms include its online marketplace at ebay.com and the eBay mobile apps; and StubHub platforms comprise its online ticket platform at stubhub.com and the StubHub mobile apps, which enable fans to purchase tickets to the games, concerts, and theater shows. Its Classifieds platforms include a collection of brands, such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds, and others that offer online classifieds and help people find whatever they are looking for in their local communities. The company platforms enable users to find, buy, sell, and pay for items through various online, mobile, and offline channels, which include retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants, shopping channels, and networks. Company description from FinViz.com.

For more than a decade Ebay has been the primary sales hub on the web but as Amazon and others grew, Ebay fell out of favor. There are very few new items left for sale on Ebay because you can buy they cheaper from Walmart, Target or Amazon. That left Ebay to struggle to increase sales on mostly used items.

In Q3 Ebay earnings fell from $545 million and 45 cents to $418 million and 36 cents. For Q4 they expect revenue of $2.36-$2.41 billion and earnings of 52-54 cents. Analysts were expecting $2.4 billion and 54 cents. For the full year, they are now guiding for $1.85-$1.90 and $8.95 to $9.0 billion. Analysts were expecting $1.89 and $8.95. For both Q3 and the full year analysts were expecting more than the Ebay guidance.

Shares fell 18% on the news to $28.61 then rebounded two days later to $29.71. That rebound has faded and EBAY closed at $28.51 on Monday with support well below at $24.

There is just no excitement surrounding EBAY today. Since they spun off PayPal they have been struggling to grow the business. I believe shares will retest the $24 level unless we get a runaway tech rally after the election. I am not holding my breath.

Position 11/1/16:

Short EBAY shares @ $28.51, see portfolio graphic for stop loss.

Optional:

Long Dec $28 put @ .72, see portfolio graphic for stop loss.



SABR - Sabre Corporation - Company Profile

Comments:

No specific news. Shares exploded higher to stop us out for a 40 cent loss.

Original Trade Description: November 5th.

Sabre Corporation provides technology solutions to the travel and tourism industry. The company operates through two segments, Travel Network, and Airline and Hospitality Solutions. The Travel Network segment operates a business-to-business travel marketplace that offers travel content, such as inventory, prices, and availability from a range of travel suppliers, including airlines, hotels, car rental brands, rail carriers, cruise lines, and tour operators with a network of travel buyers comprising online and offline travel agencies, travel management companies, and corporate travel departments. The Airline and Hospitality Solutions segment offers a portfolio of software technology products and solutions through software-as-a-service and hosted delivery models to airlines, hotel properties, and other travel suppliers. This segment provides SabreSonic Customer Sales & Service, a reservation system that provides capabilities around managing sales and customer service across an airline's diverse touch points; Sabre AirVision Marketing & Planning, a set of airline commercial planning solutions; and Sabre AirCentre Enterprise Operations, a set of solutions for the holistic planning and management of airline, airport, and customer operations. In addition, this segment offers software and solutions to hotel properties comprising central reservation system, property management solution, and marketing and consulting services. Company description from FinViz.com.

Sabre Corp is a service company that was spun off from American Airlines and the company appears to be struggling with earnings misses and lowered guidance. They reported earnings of 27 cents that missed estimates for 33 cents. They posted revenue of $839 million that rose +6.9% but missed estimates for $852 million.

They guided for revenue to grow to $758 million in Q4 but analysts were expecting $834 million. For the full year they guided for earnings of $1.34-$1.40 on revenue of $3.37-$3.40 billion and analysts were expecting $1.43 on revenue of $3.39 billion.

They blamed the bankruptcy of a travel agency business for a 2 cent impact to earnings but they missed by 6 cents. Revenue rose 6.9% but earnings declined 6.9%. Those ratios are not moving in the right direction. Their Travel Network revenue increased by 2.3% to $582.4 million but operating income fell -11.1% to $182.5 million. Operating margins fell from 36.1% to 31.3%. It was not a good report.

Shares were already declining before the report and they gapped down another $3 after the news. Friday's close at $23.18 was a new 52-week closing low and it appears to be poised to make a new two-year low.

Position 11/7/16:

Closed 11/8/16: Short SABR shares @ $23.85, exit $24.25, -.40 loss.



SHLD - Sears Holdings - Company Profile

Comments:

Shares posted a minor gain after Sears said they would be open on Thanksgiving. I suspect the gain was related more to the positive market than the news.

Original Trade Description: October 26th.

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 in mid September 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 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.

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.

In late September, Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notice of termination for 17 stores totaling 1.7 million square feet at the end of January.

Last week Detwiler Fenton warned that Sears was apparently working on monetizing its real estate. DF said the number of Kmart closures was going to accelerate in order for Sears to raise cash and offset the burn rate. DF said Sears had sent directives to a large number of stores telling them to clear backroom inventories. They also began cutting prices on appliances by 50% and using heavy promotions to reduce inventory. They also noted that Sears was moving appliance inventories from Kmart stores into certain locations suggesting a new round of store closures was coming.

Also making headlines last week was Jakks Pacific halting shipments of much needed toys to Kmart for fear of not being paid. Multiple reports suggested a potential post holiday bankruptcy filing. BMO Capital Markets said it had been asked repeatedly by other suppliers if they should continue shipping merchandise to Sears and Kmart. This news could not come at a worse time for Kmart ahead of the holiday shopping season. Once the news spreads of one supplier halting shipments, it is sure to spread to other suppliers as well. This could be Kmart's last Christmas.

Earnings December 1st.

Shares bounced on a suggestion they might be preparing a real estate sale but are returning to the lows. A trade under $10.50 would be a 13-year low.

Position 10/27/16:

Short SHLD shares @ $10.92, see portfolio graphic for stop loss.



SSYS - Stratasys Ltd - Company Profile

Comments:

No specific news. Only a minor loss but still holding under resistance.

Original Trade Description: October 22nd.

Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. Its 3D printing systems utilize its patented fused deposition modeling (FDM) and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. The company offers entry-level desktop 3D printers to systems for rapid prototyping, and production systems for direct digital manufacturing under the Dimension, Objet, Fortus, Polyjet, SolidScape, and MakerBot brands, as well as MoJo and uPrint product families, and Dental Series products. It also provides 3D printing consumable materials, including FDM, cartridge-based materials, Polyjet cartridge-based materials, Smooth Curvature Printing inkjet-based materials, and non-color digital materials, as well as provides color variation services. In addition, the company offers customer support, basic warranty, and extended support programs; leases or rents 3D printers and 3D production systems; produces prototypes and end-use parts for customers from a customer-provided CAD file; and provides plastic and metal parts for rapid prototyping and production processes, as well as related professional services. Further, it operates Thingiverse, an online community for sharing downloadable, digital 3D designs; and GrabCAD Community for mechanical engineers and designers. The company's products and services are used in aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry, and other industries. Company description from FinViz.com.

Stratasys does not report earnings until Nov 15th. Piper Jaffray believes they will miss on revenue because of a recent survey of 68 firms showed "extremely discouraging" demand for SSYS and 3D Systems (DDD) products. Stratasys is expected to post its first year over year profit in 8 quarters because of extensive cost cutting but revenue is expected to fall short of the $174.5 million consensus estimate.

The challenge is the entry of the 800 pound gorilla into the 3D market. That gorilla is Hewlett Packard. They announced their entry into the market five months ago and will begin shipping products over the next two months. Piper and some other analysts said buyers are waiting to commit to purchases until they actually see the HP products. The HP product line is expected to be robust and priced competitively. Another manufacturer, privately held Carbon 3D, is also drawing attention and suddenly buyers have an entire array of 3D printers and manufacturers to choose from. GE just bought a 3D printing company in Europe and is expected to expand the offering in a big way given their available cash and manufacturing experience. Because of the expense on some of these printers, buyers are taking the extra time to make sure they buy the one that fits their needs the best.

Shares are trading at a 3-month low and only about 50 cents above an 8-month low. If support at $19.35 fails we could see $15 in a hurry as investors flee before the mid November earnings.

Position 10/14/16:

Short SSYS shares @ $19.97, see portfolio graphic for stop loss.

No options recommended because of distance from the strike and short time frame.



VXX - Volatility Index Futures - ETF Description

Comments:

Another big 3% decline in a positive market.

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.





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