Sellers are lowering the resistance levels with each passing day but buyers are still active. The Dow rebounded from a -181 point drop as dip buyers rushed into the market. However, the rebound came to a dead stop at 19,900 when resistance was 19,950 on Wednesday and 19,975 on Tuesday. Sellers are becoming more aggressive but there appears to be plenty of dip buyers just waiting for an opportunity. Eventually one side or the other will lose its conviction. The afternoon rebounds are bullish but lacking in total volume. The early surge runs out of volume once resistance levels are hit.
However, Friday's before 3-day weekends are notorious for late day selling rather than risk potential headline events overseas while our market is closed. There is also the headline risk surrounding the inauguration next Friday. While the market appears to be turning more bullish, there are still potential potholes in our path.
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.
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
BAK - Braskem
The long stock position was entered at the open.
VXX - VIX Futures ETF
The short position remains unopened until a trade at $24.50.
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BULLISH Play Updates
BAK - Braskem S.A. - Company Profile
Moody's said the sale of the quantiQ division to GTM Holdings was credit positive. Braskem will receive $172 million for the non-core asset. Shares opened higher but faded with the weak market.
Original Trade Description: January 11th.
Braskem S.A., together with its subsidiaries, produces and sells thermoplastic resins. Its Basic Petrochemicals segment offers olefins, such as ethylene, polymer and chemical grade propylene, butadiene, isoprene, and butene-1; BTX products comprising benzene, toluene, ortho-xylene, para-xylene, and mixed xylenes; fuels, including automotive gasoline and liquefied petroleum gas; intermediates, such as cumene; and other basic petrochemicals, which include ethyl tertiary butyl ether, solvent C9, and pyrolysis C9. This segment also supplies electric energy, steam, compressed air, and other products to second-generation producers. Its Polyolefins segment produces polyethylene, including LDPE, LLDPE, HDPE, ultra-high molecular weight polyethylene, and EVA; green polyethylene from renewable resources; and polypropylene. This segment's products are used in plastic films for food and industrial packaging; bottles, shopping bags, and other consumer goods containers; automotive parts; and household appliances. Its Vinyls segment produces polyvinyl chloride, caustic soda, chlorine, hydrogen, caustic soda flake, and sodium hypochlorite. The company's USA and Europe segment produces polypropylene in the United States and Germany. Its Chemical Distribution segment distributes solvents, including aliphatic, aromatic, synthetic, and ecologically-friendly solvents; engineering plastics; hydrocarbon solvents and isoparafins; and general purpose chemicals, such as process oils, chemical intermediates, blends, specialty chemicals, and pharmaceuticals. The company also imports and exports chemicals, petrochemicals, and fuels; produces, supplies, and sells utilities, such as water and industrial gases; and provides industrial services. The company was formerly known as Copene Petroquimica do Nordeste S.A. and changed its name to Braskem S.A. in 2002.
Company description from FinViz.com.
In early December, Braskem announced a potential settlement in a probe that was started in 2014 when controlling shareholders Odebrecht and Petrobras (PBR) became a target in a corruption scandal. Between 2006-2014 the company had paid $250 million into an account created by Odebrecht to pay bribes to politicians and political parties in Brazil.
The potential settlement would allow those shareholders to eliminate their ownership and the money collected be divided between the USA, Switzerland and Brazil. The deal would formally erase any potential liabilities for Braskem. On December 14th Braskem said it was paying $920 million in fines over six years with half paid now and the rest paid in annual installments starting in 2018 Source
JP Morgan immediately upgraded the company from neutral to overweight.
Braskem is the largest petrochemical in South America.
Shares have been moving up steadily now that it is free from the probe that has weighed on shares for the last two years. The prior high was $32.
Earnings Feb 9th.
Long BAK shares @ $23.11, see portfolio graphic for stop loss.
No options recommended because of the wide spreads.
HZNP - Horizon Pharma - Company Profile
Shares tried to rebound from the Trump comments but the weak market keep pharma stocks to minor gains. No specific news.
Original Trade Description: January 7th.
Horizon Pharma plc, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; DUEXIS and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis; and PENNSAID for the treatment of pain of osteoarthritis of the knees. Its products also include MIGERGOT to treat vascular headache; RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus and multiple other indications; and KRYSTEXXA to treat chronic refractory gout. The company has a collaboration agreement 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. Company description from FinViz.com.
Horizon recently received approval to sell the drug Quinsair in Canada. It was already approved in the EU. This is a drug for the management of chronic pulmonary infections in adults with cystic fibrosis. Only about 75,000 people around the world are candidates for the drug and 4,500 in Canada. They acquired the drug when they bought Raptor Pharmaceutical Corp in October.
The company also announced they had received a Notice of Allowance from the U.S. Patent office on the drug Ravicti. This will result in a patent being issued to Horizon that is good to 2030. Horizon has seven patented drugs and 11 drugs currently available for sale.
Shares of Horizon declined in early December after a late stage trial on another drug failed to achieve the desired result. Shares have been moving up steadily since that December drop. Friday's close was a 4-week high.
Horizon will present next week on the 10th at the JPM Healthcare Conference.
Earnings Feb 6th.
I am putting an entry trigger on the position just in case the market decides to roll over on Monday.
Position 1/9/17 with a HZNP trade at $17.75
Long HZNP shares @ $17.75, see portfolio graphic for stop loss.
No options recommended because of wide spreads.
BEARISH Play Updates
IWM - Russell 2000 ETF - ETF Profile
The Russell ETF rebounded nearly $2 as the broader market saw a huge recovery on dip buying. They can keep the indexes off their lows but they cannot seem to return to the highs. Resistance levels are dropping.
Original Trade Description: December 10th
The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.
The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.
I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,150 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.
Dow - January 2016
We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.
I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.
There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.
Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.
The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.
Position 12/12/16 with an IWM trade at $137.00
Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.
SHLD - Sears Holdings - Company Profile
No specific news. An article in the Wall Street Journal said Sears is one "sick puppy" and the only alternative may be bankruptcy. The author said closing stores, cutting workers and selling off brands is only decreasing its ability to recover. It is a cancer that is eating away at every part of the Sears operating model. Shares declined 30 cents.
Original Trade Description: January 9th
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 October 31, 2015, this segment operated approximately 952 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 October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.
We played Sears as a short several times before. We were stopped out on Dec-30th when the CEO arranged a bridge loan to get them out of trouble temporarily. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is eventually expected to file bankruptcy.
In November, they posted a GAAP loss of $748 million and an adjusted loss of $333 million. Gross margins fell to 19.2% compared to JC Penny at 37.2%. Sears is forced to severely discount items to attract what few shoppers they have. Same store sales at Kmart fell -4.4% and -10% at Sears. Revenue fell -12.5% to $5.0 billion.
Earnings March 9th.
Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.
Sears closed at a new 14-year low on Dec-28th and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in 2017 once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.
In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the sale of the Craftsman brand to Stanley Black & Decker for $900 million but they get less than half of that in cash. The rest is paid out over the next 3-5 years. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.
With the Craftsman sale and the loan from the CEO and a new $500 million loan secured by real estate, they have developed about $1.5 billion in Liquidity. Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.
When they announced the Craftsman sale at less than expected terms, the stock fell back from the early January gains. The outlook is grim despite the short-term cash inflows.
Update 1/11/17: In an OP-ED piece Forbes said the sale of Craftsman signaled the opening of the final chapter for Sears. They said the Craftsman sale and the potential sale of the Kenmore and Diehard brands represented a "going out of business" sale.
Short SHLD shares @ $8.97, see portfolio graphic for stop loss.
No options recommended because of price.
VXX - Volatility Index Futures - ETF Description
The VXX spiked to $22.50 at the open but the market did not sustain its decline. Once the dip buyers began lifting the indexes the volatility began to decline. We could still get a spike around the inauguration.
Original Trade Description: December 28th
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.
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 began.
We exited the last short at $26.65 for a $7 gain back on December 13th. I am expecting the January volatility to lift the VXX back to $30. That will give us a great entry for the expected market rally in Feb/Jan where the VXX will crash again.
Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. 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. We may have to rotate in and out a couple times but it will eventually go to $10. Once we are in the position and profitable I will put a trailing stop loss on it. If the stop is hit 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.
I am putting an entry trigger on the position at $29.50, a level we saw on December 1st. I would expect this to be hit in early January. The VXX could rise well over $30 if the market really corrects so I am not putting a stop loss on the position until the correction is over.
With a VXX trade at $24.50
Short VXX shares, currently $21.40, no initial stop loss.
No options recommended because of price.
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