The market rallied to a decent gain today but tomorrow may be another story. Amazon reported earnings of $1.00 compared to estimates of $1.56 and was down -$95 in afterhours.
Amazon posted a monster miss after gaining $52 in the regular session. The initial news knocked Amazon back to $540 from the $635 close but dip buyers appeared ahead of the conference call. Shares settled in the $550 range, -$85, at the end of the afterhours session. This could put a cloud over the market on Friday.
However, Microsoft reported great earnings of 78 cents compared to estimates for 71 cents. They also beat on revenue. Microsoft shares rallied 8% to $56.37 in early trading but faded to close the session around $53.00 and a gain of $1.00 from the regular close.
The Dow gained +125 for the day and broke its four-day string of alternating 200-point gains and losses. We still alternated from a loss but the gain did not reach 200 points.
The outlook is mixed for Friday and some traders may be looking to take some quick profits from the rebound while others may be looking to close some shorts before the weekend. I doubt anyone will be putting on new positions ahead of what could be a rocky weekend in Asia.
Current Position Changes
KRE - Banking ETF
The short position in the Banking ETF was stopped out by 2 cents. I am recommending we reload this position.
SSYS - Stratasys
I lowered te stop loss on SSYS.
USO - US Oil Fund
The long position remains unopened due to the spike in WTI.
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
BULLISH Play Updates
SWHC - Smith & Wesson - Company Description
S&W posted a minor gain and there was no follow though to Wednesday's decline. However, the excitement appears to be fading. I will raise the stop loss this weekend.
Original Trade Description: January 21st.
Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.
The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.
December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.
While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.
S&W said they were on the hunt for candidates but did not have any announcements at the current time.
This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.
Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.
Earnings March 8th.
Long SWHC shares @ $21.35, see portfolio graphic for stop loss.
Long June $23 call @ $1.75, see portfolio graphic for stop loss.
UFPI - Universal Forest Products - Company Description
UFPI cannot seem to maintain a positive trend. The pattern is still intact but the resistance at $67.50 is also firm. We have lower highs and higher lows so something is going to happen soon. The pattern will eventually break with a big move. Short-term support is holding.
Original Trade Description: January 16th
UFPI recently experienced a -20% pullback from its December 2015 highs but shares are still trading at levels not seen for almost ten years. More importantly it appears that the correction is over.
UFPI is in the industrial goods sector. According to the company,
"Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America and in Australia that supply wood, wood composite and other products to three robust markets: retail, construction and industrial. The Company is headquartered in Grand Rapids, Mich., and is celebrating its 60th year in business."
The big surge in the stock in mid October was a reaction to the company's Q3 earnings report. It was a record-breaking quarter for UFPI in spite of a -17% drop in the lumber market. Here is an excerpt from the company's earnings press release:
"UFPI announced record-breaking 2015 third-quarter results. The Company posted the best third-quarter earnings in its history with net earnings attributable to controlling interests of $25.6 million, an increase of 32.9 percent over the same period of 2014. It also posted the highest year-to-date net earnings in its history, at $61.7 million. Earnings per diluted share were $1.26 in the third quarter of 2015, up from $0.96 in the third quarter of 2014. Net sales of $762.3 million for the third quarter were up 6.8 percent over the same period of 2014."
The stock has been trading very technically with investors keying in on support and resistance levels. Shares of UFPI did see a rough December after a downgrade on December 8th. However, after a -20% pullback investors started buying UFPI last week. That is noteworthy since the broader market was crashing lower last week. You'll notice on the daily chart that UFPI found support at its simple 200-dma and delivered a pretty good gain for the week.
We think this bounce continues and want to hop on board. There is very short-term resistance at $67.00. Tonight we are listing a trigger to launch bullish positions at $67.15. Investors may want to limit their position size to reduce risk since UFPI has proven itself to be somewhat volatile.
FYI: UFPI does have options but the spreads are too wide to trade them.
Long UFPI stock @ 67.37, see portfolio graphic for stop loss.
USO - US Oil Fund ETF -
The bogus comments from the Russian energy minister continue to spike the crude market. Alexander Novak made headlines when he said Saudi Arabia had proposed for OPEC nations and Russia to voluntarily cut production across the board by 5%. News services reported that OPEC and producers outside OPEC would meet to discuss production cuts. Crude spiked to nearly $35 on the headlines.
Shortly after that Saudi Arabian officials denied they had spoke to Russia about production cuts and said there was no meeting scheduled with any producers. The Saudi official said this was an old suggestion by Venezuela that was being reused to spike oil prices.
An OPEC spokesman said they could not confirm the rumor of a proposed meeting with OPEC producers. Another spokesman from Saudi Arabia said the country had no plan to cut production by 5%.
Later Novak clarified that he had met with representatives from the various Russian oil companies and in that meeting the possibility of a meeting with OPEC had been discussed. It was all in Russia and there was no contact with OPEC.
Despite the multiple denials of the rumors the price of oil spiked to near $35 at the open and then faded to about $33.50 intraday.
Now that oil ministers have figured out they can float these rumors and get a $5 spike in oil prices we should expect to see one at least once a week. Russia produces about 10.6 mbpd and exports about 9 mbpd. A $5 spike in oil prices is a lot of money for a country that is bleeding cash.
I may raise the entry point this weekend to take into account the potential for continued headlines in an attempt to support crude prices.
Original Trade Description: January 27th
The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.
Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.
The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.
If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!
Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.
I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.
Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.
While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.
Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.
I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.
With a USO trade at $8.50:
Buy USO shares no stop loss.
Buy USO $10.00 calls, currently $1.03. No stop loss.
BEARISH Play Updates
KRE - SPDR S&P Regional Banking ETF
Regional banks spiked with the market at the open and then traded sideways the rest of the day. We were stopped out by 2 cents at $36.45. I am recommending we reenter the position with a KRE trade at $35.35. The weakness in the energy sector and the rising defaults in energy loans will continue to pressure the regional banking sector.
Original Trade Description: January 25th
We were knocked out of the long position on this ETF with the drop below support this morning. The keywords in that sentence were "drop below support." Typically, when long-term support breaks we are looking at a continued decline that could be material.
Regional banks are tanking because of their loans to energy companies and to firms that service those energy companies. That includes restaurants, service stations, apparel stores, mom and pop businesses of all types that catered to the families of the 150,000 energy workers that have been laid off.
In addition, the U.S. manufacturing sector is in recession. With energy, manufacturing, transportation already in recession the odds are increasing that the country is going to be headed in that path as well.
Today, the Texas Manufacturing Outlook Survey for January fell from -20.1 to -34.6 and the lowest level since 2008. The outlook for the U.S. economy is not good and that means regional banks could be facing rising defaults.
I hate to go straight from a long position to a short position but in this case, the situation appears to be right. We entered the long position on a dip to support at $35. There was an immediate rebound but then that support failed today based on economic news.
Position 1/26/16, closed 1/28/16:
Closed: Short KRE @ $34.38, exit $36.45, -2.07 loss.
Closed: Long March $33 put @ $1.15, exit .47, -.68 loss
Reload this position with a KRE trade at $35.35.
Short KRE @ $35.35, stop loss $36.65
Buy long March $33 put, currently .47, no stop loss.
OIH - Oil service Index
See the comments on the USO position. Another short squeeze caused by headlines.
Original Trade Description: January 20th
The OIH ETF represents 25 oil service stocks including Schlumberger, Halliburton and Baker Hughes. Once you get past those three largest holdings the rest of the pack has little balance sheet strength and we could easily see multiple bankruptcies or credit defaults. The bottom of the list contains Tidewater (TDW), Carbo Ceramics (CRR), Seadrill (SDRL), etc. The risk of default is high for the bottom half of the list. View Full List
The "perceived" bounce in oil prices by shifting to a new contract at $28.81 instead of the $26.55 close may cause some investors to buy energy stocks in a knee jerk reaction. Do not be fooled. The bottom in oil prices is still ahead.
The API Inventory report tonight after the close showed a larger than expected gain of 4.6 million barrels of oil and 4.7 million barrels of gasoline. The more accurate EIA inventory report comes out at 10:30 on Thursday.
The inventory build season runs from January 6th to the end of April. Last year inventories rose a whopping +106 million barrels to record levels during that period. There is not likely to be another rise like that because there is very little available storage capacity in the USA. Canadian oil is now selling for $15 below WTI because all the Midwest storage locations are virtually full. Bakken oil is selling for $8-$10 below WTI prices for the same reason plus transportation is expensive to other locations.
I believe we will see WTI at $25 or below over the next two months and possibly even $20 because of the price pressure from the Iranian oil sales. They have about 50 million barrels stored on tankers and that oil is now available for sale. Prices are going lower.
This will probably drag the equity market lower as well but eventually there will be a disconnect between equities and oil prices at some level. The constant headlines about lower oil prices will eventually become old news. Of course, key levels like $25, $22, $20 could cause some additional market weakness.
Energy stocks will continue to react to the low oil prices because every dollar of decline is very painful and impacts their ability to service debt and keep the doors open. Analysts claim as many as 50% of the U.S. producers could default or worse if prices remain low for very long.
I am recommending we short the OIH and expect to hold the position until April. The plan will be to close it about the time inventories top out in early April. We could see a minor uptick at the open on Thursday because of the new front month contract. When inventories are announced at 10:30 we should see a decline in WTI if they are high as expected.
Short OIH shares @ $21.26, see portfolio graphic for stop loss.
Long July $20 put @ $1.92, see portfolio graphic for stop loss.
SSYS - Stratasys Ltd - Company Description
Wednesday's minor bounce faded and SSYS is headed for new lows. I lowered the stop to $17.45.
Original Trade Description: January 22nd.
Stratasys is a maker of 3D printing systems and parts. The company makes parts for other equipment using its proprietary 3D printing systems. They manufacture for sale production systems under the Dimension, Objet,Fortus, Polyjet, SolidScape and MakerBot brands.
While the 3D printing business is expanding in scope and acceptance all around the world the excitement over 3D stocks has faded. XONE, DDD and SSYS shares have been fading since their peaks back in 2013. Stratasys closed at a new six-year low on Friday despite a minor rebound with the rest of the market.
I debated which 3D stock to short and picked SSYS because of the identifiable trend and it has farter to fall than competitor 3-D Sys Corp (DDD). That stock is cheaper at $7.41 if you would rather have less at risk.
The decline in Stratasys accelerated since mid December. There have been two small rebounds along the way. I see the rebound from the 6-year lows last week as an opportunity for a short at a higher level. This gives us an obvious stop loss at $19.50 and the odds are good we will see a new low in the weeks ahead.
Update 1/26/16: The stock was downgraded by JP Morgan from buy to neutral. JPM said demand for the parts that DDD and SSYS make is dying and competition is fierce. They cut the price target to $19. UBS cut expected earnings in half for SYS to 30 cents. The bank cut the rating to sell and price target to $16.
Earnings are March 2nd.
Short SSYS shares @ $17.45, initial stop loss $19.50
Long March $15 put @ 95 cents, initial stop loss $19.50
VXX - VIX Futures ETF
No material move. The VXX closed on support at $25. Be patient. The volatility will eventually die.
Original Trade Description: August 24, 2015
The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).
You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.
How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.
Here is an explanation from the product website:
The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.
The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.
I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.
Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.
Short VXX @ $21.82, no stop loss.
Second Position 9/2/15:
Short VXX @ $29.01, no stop loss.
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
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