Option Investor
Newsletter

Daily Newsletter, Thursday, 7/27/2017

Table of Contents

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

Market Wrap

Tech Falls On Profit Taking

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Tech falls on profit taking but it was the transportation sector which led the market lower. Transportation stocks fell as much as 3.5% as rising oil prices take a toll on forward earnings outlook. Of course this happened after the SPX, NASDAQ and Dow Jones Industrial Average set new all time highs and amid a flurry of less than exceptional earnings reports from the tech sector.

Asian indices closed with marginal gains following yesterday's FOMC announcement. The policy statement did not materially affect forward outlook while reinforcing the idea of economic stability, sending a wave of relief through the market. The Heng Seng led with a gain near 0.70% followed by a 0.36% move in the Korean Kospi. European indices were not so buoyant. Markets there were positive in early trading but fell off later in the day as a setback for Astrazenaca weighed down health care stocks. The company says that two of its drugs failed to shrink target cancers during testing.

Market Statistics

Futures trading was flat to positive all morning, no indication of sell off there. The futures trade held steady through the release of earnings and economic data, gaining a little strength going into the open. The SPX began the day with a gain of 0.25%, quickly moved higher and then just as quickly began to move back to test yesterday's close. An early bottom was hit just before 10AM and just above yesterday's close. This level held for the next few hours until profit taking in tech drove the indices lower. The indices fell quickly once the selling began, the SPX shedding more than 16 points or roughly -0.65%. Bottom was hit shortly after 1:30PM at which time the index made a small bounce but did not recover the days losses. This level, about -0.50%, was held until late in the day. A late day rally drove the index back up to close with a loss of less than -0.10%.

Economic Calendar

The Economy

Initial claims for unemployment rose by 10,000 on top of an upward revision of 1,000 to hit 244,000. This is slightly above expectations but in line with labor market health. The four week moving average of claims was unchanged although the prior week was revised higher by 250. On a not adjusted basis claims fell by -14.7% versus an expectation of -18.4% and are down -5% over this time last year.


Continuing claims fell by -13,000 from last week's not revised figures to hit 1.964 million. The 4 week moving average of claims rose by nearly 5,000 to hit 1.963 million. The number of continuing claims persists in trending sideways near historic lows and consistent with labor market health.

At first glance the total number of Americans receiving unemployment benefits jumped alarmingly. At second glance the jump of 156,859 is a bit sharp but consistent with seasonal expectations, there have been similar spikes in the past. That being said the total number of claims is now 2.028 million and the highest level in 3 months. Based on historical and seasonal trends we can now expect to see this figure begin to fall off as fall seasonal hiring begins. If trends remain intact we should see a new long term and seasonal low late September or early October.


Durable Goods data was released alongside the jobless claims figures and came in above expectations. New orders for durable goods came in at a robust 6.5% versus an expected 5.3%. This increase reverses two months of decreases. Ex-transportation orders came in at 0.2% and ex-defense rose 6.7%. Transportation equipment led gains at +19%. Shipments were unchanged, unfilled orders rose 1.3%.


The Chicago Federal Reserve Activity Index is a gauge of 85 market indicators. The index rose to 0.13% from -0.30% as signs of manufacturing improve. All four for of the index's broad categories improved on a month to month basis, 3 of the 4 made positive contributions. The three month moving average is now positive and indicative of expanding economic growth.

The Dollar Index

The Dollar Index fell to a new 1 year low and is fast approaching the April, 2016 bottom at $92. Yesterday's FOMC statement pulled the rug out from under dollar bulls. The Fed has found a way to support positive economic outlook and weaken the dollar at the same time; They're bullish but they just aren't any hurry to raise rates. After the last round of Yellen testimony it may next spring or later befere the next hike comes. The CME Fedwatch tool shows a less than 50/50 chance of another one this year. The indicators are bearish and gaining strength, in support of lower prices, so I would expect to long term support targets near $92 reached.


The Gold Index

Gold prices are rising on a weaker dollar. The spot price surged to a 6 week high in today's action but profit takers capped gains. By settlement the metal was trading with a marginal loss and below $1,260. Today's candle does give evidence of some resistance to higher prices but with the dollar falling to long term lows higher prices for gold are likely on the way. The caveat is that eventually economic data will support further rate hikes, labor markets are tight wages are rising and inflation is beginning to pick up in the underlying economy is only slightly. The LMCI and Leading Indicators both point to expanding economic growth later this year. Upside target for resistance are $1,270, $1,285 and $1,300.

The Gold Miners ETF GDX opened with a small gain but sold off during the day to close with a loss near -1.20%. The ETF created a medium sized red bodied candle confirming resistance at the long term moving average. The indicators are bullish but weak and showing signs of peaking in the near term. The move higher may continue in the near term but range bound conditions are likely to persist in the short to long term. Next upside target is near $24. A break above that would be more firmly bullish but still be within the greater 6 month trading range.


The Oil Index

Oil prices drifted higher again today, crossing above the $49 level, and set another new 8 week high.. Yesterday's draw down of US stockpiles along with the Saudi's indication to cut exports, shale drillers indicating shut-downs due to low prices and the dollar hitting new lows have created a near-term perfect storm for prices. That being said prices are likely to remain range bound as higher prices will bring more supply online and to the market. Upside target for resistance are $50 and then $55.

The Oil Index gained nearly a full percent and created a medium sized green bodied candle. The index appears to be reversing although there is still some technical work for prices to do before we can say that for sure. The indicators are both bullish, on the rise and showing strength so I do expect to see it continue to move higher near term. First target for resistance is just above today's close near the long term moving average and the 1,150 level. A move above that could go as high as 1,170 in the near term. Longer term I remain bullish on the sector and ready to start nibbling.


In The News, Story Stocks and Earnings

Tech earnings dominated the news today and most of it wasn't great. Twitter reported before the open and for one beat on the top and bottom lines. The proble is it did so without posting any user growth. And revenue and earnings both fell on a year over year basis. They were able to increase monthly and daily usage figures but nonetheless the company continues to flounder. Along with all that they also issued guidance that was below expectations. Shares of the stock fell nearly -15% to a one month low.


Amazon reported after the bell and did not please investors. The international online retail behemoth grew revenue by 25% and beat top line expectations but earnings were light and forward guidance is weak. The company is growing but there is a problem, the company keeps spending money to get that growth and that is hurting earnings. Shares of the stock fell a little more than -3% on the news.


Starbucks also reported after the bell and also delivered mixed results. The company missed revenue expectations, met earnings expectations and delivered positive guidance. A little later in the conference call guidance was updated to positive but not as positive as it was a short time ago. Earnings, revenue and comp store sales are all expected to fall short of consensus. Shares of the stock had been trading higher on the initial release but turned negative during the call.


The Indices

The indices looked like they were going to move higher and then they didn't, and then they looked like they were going to bounce back and they almost did. The techs were blamed for today's selling but the true carnage was in the transports. The Dow Jones Transportation Average closed with a loss of -3.10% and made the largest move by far of any index today. Today's action created a long red candle that qualifies as extremely large. It fell to the long term moving average and potentially strong support. Similar action has proven to be opportune buying times within the last year although the indicators support lower prices at this time. A break below the moving average could go as low as the long term up trend line near 9,000, a bounce would face resistance near 9,350 and the mid point of today's candle.


The NASDAQ lost only -0.63% and created a large red bodied candle with long lower shadow. This candle is indicative of both selling and buying although the sellers won the day. In terms of signal it is a Dark Cloud Cover indicative of impending bearishness. The indicators are both rolling over in confirmation of resistance so it is possible the index will move down to retest support at today's low. A break below there would be more firmly bearish in the near term but may find additional support just below that level at the short term moving average. That being said the index remains in up trend and likely showing a buying opportunity.


The S&P 500 closed with a loss of only -0.09% after moving as low as -0.60% intraday. Today's candle is small and red with long lower shadow reminiscent of a hanging man but unconfirmed. Price action fell from the long term moving average confirming resistance but the long lower shadow shows support at levels just above the short term moving average. The indicators are showing near term weakness within an up trend and set up for a trend following entry should prices recover. A bounce from support would be bullish, first target is today's low and then just below that at the short term moving average near 2,450. A break below there would be more firmly bearish in the near term with targets near 2,400.


The Dow Jones Industrial Average closed with a gain after moving lower to flirt with break even levels during the day. The blue chip index gained 0.39% and closed at the high of the day. The index created a small bodied green candle and broke above the long term moving average with the indicators in support. Both stochastic and MACD are bullish and on the rise in support of higher prices, the only caveat is that MACD is still pretty weak. Upside target is 22,000 in the near term.


The charts are mixed to say the least. The blue chips are breaking out to new highs while the other three are showing some form of bearishness. The silver lining is that they are all showing some for of buy signal as well. Considering that the market is in uptrend of a short and long term nature, that the uptrend is supported by economic and earnings growth, a break to new highs or a touch to support levels are both considered buying opportunities. Because I don't want to get left out of the next big move I am bullish in the near term and buying on the dip. Because I don't want to get caught with my pants down I am doing so cautiously. Long term I am still firmly bullish and am going to start looking to the transports for new opportunities.

Until then, remember the trend!

Thomas Hughes


New Plays

No Option Available

by Jim Brown

Click here to email Jim Brown
Editor's Note

With the S&P futures down hard, the outlook for Friday is grim. The S&P futures have recovered from -9 to -7 but there is plenty of darkness before morning. The big Nasdaq crash at 12:30 today more than likely damaged market sentiment. Traders may not want to go into the weekend with long positions and an unstable market. With the futures down sharply, there is nothing I can recommend tonight that would not be filled at either the low of the day or the high of the day on Friday. There are no options for entering a market using low dollar stocks. In the Option Investor newsletter I recommended a Dow DIA ETF put spread using the Oct 215/205 strikes because the Dow closed up 85 points at a new high. That spread had a debit of just over $2 if you want to make that play.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Boom!

by Jim Brown

Click here to email Jim Brown

Editors Note:

When volatility arrives it is normally and violent. With the indexes opening at new highs this morning there was no hint of trouble until the market suddenly crashed at 12:30. The Nasdaq fell -105 points intraday in just a few short minutes. There was no warning. The Dow remained in record territory thanks to Boeing, Disney and Verizon posting solid gains.

We lost three positions and each was market related. There was no news.

The sudden appearance of volatility could have damaged market sentiment and we could begin the summer doldrums early this year. The S&P futures were down -9 points earlier but have recovered to -7. There is still a lot of darkness before the dawn.







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


BOX - Box Inc
The long stock position was stopped at $19.25.

HZNP - Horizon Pharma
The long stock position was stopped at $12.75.

BOX - Box Inc
The long position was stopped at $22.65.



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Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

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3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

ARNC - Arconic Inc - Company Profile

Comments:

No specific news. Shares declined sharply at exactly 12:30 with the market crash.

Original Trade Description: June 24th.

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. (description from company release)

For Q2, Arconic reported earnings of 32 cents that beat estimates for 27 cents. Revenue of $3.261 billion beat estimates for $3.233 billion. Since the breakup of Alcoa, Arconic has been focused on reducing costs, reducing debt and expanding their product line. They guided for the full year for revenues of $12.3-$12.7 billion, up from prior guidance at $11.8-$12.4 billion. Earnings guidance was raised to $1.15-$1.20, up from $1.10-$1.20. They ended the quarter with $1.8 billion in cash. They declared a 6-cent quarterly dividend payable August 25th to holders on August 4th.

Expected earnings Oct 24th.

After the breakup of Alcoa, Arconic saw their share price double because this was the high tech portion of the business. They make complex aluminum components for airplanes, aerospace, autos and just about everything that needs a high performance, lightweight component. After the big ramp higher they traded sideways for three months along with the market, Shares declined sharply after the high rise fire in England because one of their components was used in the cladding that had recently been added to the building. Investors did not know if Arconic had any liability risk. The answer is probably not.

The contractor on the building combined multiple components in an unsafe manner to cover the outside of the building. It was not an Arconic component that failed and their products conformed to all the building codes. Once that was established shares began to rise again in late June.

Shares closed at $25 on Monday and resistance is $28. They reported earnings before the bell and after a pre-market spike they traded flat for the day with an uptick at the close. I am going to put an entry trigger on this position just in case there is a delayed reaction to the earnings.

Position 7/25/17 with an ARNC trade at $25.35

Long ARNC shares @ $25.35, see portfolio graphic for stop loss.
Alternate position: Long Oct $27 call @ $.95, see portfolio graphic for stop loss.



BOX - Box Inc - Company Profile

Comments:

No specific news. Shares hit a new two month high in the morning then crashed with the market in the afternoon to stop us out of the stock position. The option remains open and will move to the Lottery Play section this weekend.

Original Trade Description: July 17th.

Box, Inc. provides cloud content management 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 primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Company description from FinViz.com.

Expected earnings August 30th.

Box is making a lot os smart moves lately. The recently partnered with Microsoft to jointly offer Box cloud management to Azure enterprise customers. Box will use Azure as a strategic public cloud platform and the companies have committed to share go-to-market investments, including initiatives to co-sell Box with Azure. Any time you can get Microsoft to partner with you, share the expenses and market your product, it was a good move.

Last week Box appointed Stephanie Carullo as the new COO. Carullo led U.S. sales for Apple's education business. Before that whe led the data center and virtualization architecture group at Cisco Systems. That is a good pedigree.

Shares have ticked up since both of those events last week and could be headed for a breakout over $19.50.

Position 7/18/17:

Closed 7/27: Long BOX shares @ $19.21, exit $19.25, +0.4 gain.
Alternate position: Long Sept $20 call @ 90 cents, see portfolio graphic for stop loss.



HZNP - Horizon Pharma - Company Profile

Comments:

No specific news. Shares crashed with the market to stop us out of the stock position with a minor loss. The option position is still open and will move to the Lottery Play section this weekend.

Original Trade Description: July 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Position 7/17: Alternate position:
Long Aug $14 call @ $.50, see portfolio graphic for stop loss.



INFY - Infosys - Company Profile

Comments:

Infosys announced 3 Catalyst awards at the TM Forum Live in Nice, France. The awards recognized Infosys' open innovation to co-create commercially viable prototypes of new digital services and business models. Shares declined with the market.

Original Trade Description: June 26th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. It provides business information technology services, including application development and maintenance, independent validation, infrastructure management, and business process management services, as well as engineering services, such as engineering and life cycle solutions; and consulting and systems integration services comprising consulting, enterprise solutions, systems integration, and advanced technologies. The company's products include Finacle, a banking solution that provides analytics, core banking, consumer e-banking, corporate e-banking, Islamic banking, mobile banking, origination, payments, SME enable, treasury, wealth management, and youth banking solutions. Its products also comprise Infosys Mana, a knowledge-based AI platform; Infosys Information Platform, an analytics platform that enables to get insights from various data sources for decisions across industries; AssistEdge, CreditFinanceEdge, ProcureEdge, and TradeEdge that are cloud-hosted business platforms; Panaya that enables various SAP and Oracle EBS changes; and Skava, which are digital experience solutions, as well as analytics, cloud, and digital transformation services. The company serves clients in the financial services, manufacturing, retail, consumer packaged goods and logistics, energy and utilities, communication and services, hi-tech, life sciences, healthcare and insurance, and other industries. Company description from FinViz.com.

Infosys reported earnings of 24 cents that rose 5.8% and beat estimates by a penny. Revenues of $2.651 billion beat estimates for $2.629 billion. Revenues rose 6.3% on a constant currency basis. The company announced numerous wins of high profile contracts.

The company is dilligently following its "Renew Now" program with three offerings. Those are Artificial Intelligence, Knowledge-based IT and Design Thinking. During the reported quarter, Infosys continued to renew traditional services and rolled out others in areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Cyber Security, and IoT Engineering Services. Also, during the quarter, Infosys launched Boundaryless Data Lake, an offering powered by the Information Grid Solution on Amazon Web Services (AWS).

The company raised 2018 guidance with revenue growth in the range of 7.1% to 9.1%, up from 6.1%-8.1%.

Earnings October 13th.

Shares rebounded over the last week to close at a new 9-month high on Wednesday.

Position 7/27/17:

Long INFY shares @ $15.66, see portfolio graphic for stop loss.
Alternate position: Long Oct $17 call @ 25 cents. See portfolio graphic for stop loss.



NTNX - Nutanix - Company Profile

Comments:

No specific news. Shares crashed at exactly 12:30 when the Nasdaq imploded and we were stopped out.

Original Trade Description: July 19th.

Nutanix makes infrastructure invisible, elevating IT to focus on the applications and services that power their business. The Nutanix enterprise cloud platform leverages web-scale engineering and consumer-grade design to natively converge compute, virtualization and storage into a resilient, software-defined solution with rich machine intelligence. The result is predictable performance, cloud-like infrastructure consumption, robust security, and seamless application mobility for a broad range of enterprise applications.

Expected earnings August 24th.

Nutanix announced last week that its business in Canada had grown 75% over the 12 months prior to the quarter end. They increased their customer base from 179 customers to 313. There was also a record number of customers that invested $1 million or more into Nutanix infrastructure products.

Goldman added the stock to their conviction buy list saying there was a 53% upside potential. Goldman called Nutanix a '"hyperconverged infrastructure company," a "once-in-a-decade tech infrastructure story," as they see strong adoption of the technology among chief information officers. Based on a survey Goldman did in June they found that 18% of CIOs expected to move to this technology over the next two years with Nutanix the leader in the field. They also said the company could easily be an acquisition target because of their size and revolutionary technology.

Position 7/20/17:

Closed 7/27: Long NTNX shares @ $24.48, exit $22.65, -1.83 loss.
Alternate position: Closed 7/27: Long Oct $30 call @ $1.50, exit .70, -.80 loss.




BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile

Comments:

No specific news. Shares traded sideways until exactly 12:30 when they declined sharply with the market.

Original Trade Description: July 22nd.

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

Smith and Wesson saw the future when they changed names to American Outdoor Brands. President Obama was the best firearms salesman ever. He never missed an opportunity to talk down firearms and talk up gun control. Consumers, worried there would be a change in policy, rushed out to buy guns every time there was a new verbal assault on the second amendment. Gun sales hit record levels year after year.

When President Trump was elected as a pro-gun president, the urgency to buy more guns, faded. 2017 is still going to be another record year but only by a thin margin.

Smith & Wesson realized while President Obama was in power they needed to rebrand themselves to avoid the curse of being a prominent gun company in case the laws changed. They changed names to American Outdoor Brands and began a concentrated campaign to acquire a bunch of outdoor brands for products that had nothing to do with the shooting sports but they acquired some of those as well. Scopes, knives, safes, reloading, camping supplies, etc. Unfortunately, their main product line still depended on a continuing rise in firearms sales.

They reported earnings in late June of 57 cents that easily beat estimates for 37 cents. Revenue of $229.2 million beat estimates for $211 million. However, they guided for the current quarter for earnings of 7-12 cents and revenue in the $140-$150 million range. For the full year, they guided for $1.42 to $1.62 and revenue of $750-$790 million. Analysts were expecting $1.61 and $827.8 million. They said gun sales had slowed because of the new president. Secondly, they said they were going to use their unused portion of their $500 million line of credit to acquire additional growth opportunities. That means they were going to leverage up to their max debt to acquire new brands.

The CEO said, "Although good for the long-term viability of the industry, we believe that the election results coupled with a Republican Congress and choice of Supreme Court justice(s) could be a net-negative for [American Brands] as it eliminates any realistic fear of gun regulation, which has been a major driver of gun sales over the past eight years."

Shares declined sharply to $21. Over the last three weeks they have tried to rebound from that level but there is no excitement left. There have been a series of lower highs and Friday's close was below support and a three-month low.

Expected earnings September 24th.

I believe AOBC is going to retest the March lows at $18 if not lower. There are no positive catalysts on the horizon.

Position 7/24/17:

Short AOBC shares @ $20.78, see portfolio graphic for stop loss.
Alternate position:
Long Sept $20 put @ $1.00, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

The VXX spiked sharply intraday but faded back to only a 7 cent gain at the close.

The VIX historical low close was 9.31 on Dec 22nd, 1993. We are at those levels now.

Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

Original Trade Description: April 12th.

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 done 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.

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 market 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 know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.





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