That title was an old joke on the TV show the "A Team" but it is appropriate for us this week. With the majority of our existing positions bearish call spreads the market downdraft was very beneficial.
That is the exact opposite of last month when the market was changing directions every couple days and we were being stopped out in both directions. We did lose our only bullish play today when Herbalife declined for the third day. HLF did remain positive for the last several weeks when the market was crazy but it finally rolled over on Monday. We did exit with a profit.
If it were not for the Zillow sales announcement that gapped above our stop two weeks ago, we would be having a pretty good month. That one position was painful.
I am afraid the easy money has been made in this market decline. The geopolitical headlines have been knocking equities for a loop and while the Greek headlines will continue but the outcome is already priced into the market. Today's drop was about China. After rising +150% since July the Shanghai Composite is now down more than -30% in the last three weeks. Nearly half of the stocks in the Chinese market are halted for trading. Corporations, funds and major shareholders have been told they cannot sell any shares for six months. Fund managers were told by the government to buy nearly $20 billion in equities to support the market. The government changed the rules to allow using your home as margin in hopes of bringing individual investors back into the market.
With about 1,700 stocks halted for trading anyone wishing to raise capital for margin calls must sell whatever they have that is available for sale and it may not be what they want to sell. This is a nightmare for the Chinese economy. They were hoping to create a wealth effect by stimulating the stock market and creating profits for investors that would then be spent in the economy. Instead investors increased bets on margin by more than 500% and then the market crashed those on margin have been crushed and are now broke.
Commodities like oil, copper, etc, have been crushed because speculators were forced to sell their positions to cover losses in equities. Copper hit a post crisis low of $2.38 on Tuesday. Copper stocks have been crushed. WTI hit a low of $50.58 on Tuesday. Energy equities are reeling from the impact. The Iranian nuclear negotiations could unleash millions of barrels of stored oil into the market in a matter of weeks and that is a worry for oil traders.
We are going to initiate some August positions this week but we have to be careful because the Q2 earnings cycle begins next week. This could bring some erratic volatility back into the market. It also limits the available plays since we do not want to own a position over an earnings report.
Right now, the path of least resistance is still down but we saw how quickly the market can change directions in the short squeeze on Tuesday.
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Items shaded in blue were previously closed.
Current Position Changes
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.
HLF - Herbalife (Stopped)
We had a put spread on Herbalife using the July $45 put. The shares struggled higher to $55 over the last month despite a rocky market. Unfortunately that all came to an end on Monday when the stock rolled over and collapsed from $56 to $50 over the last three days. We were stopped out at $50.45 today and pretty close to the low for the day. The option premium had declined significantly but the speed of the decline did inflate it again. We did escape with a profit.
Closed July $45 put, entry $1.12, exit .46, +.66 gain.
Close July $37.50 long put, entry .40, currently .13, -.27 loss
Net gain 39 cents.
TIF - Tiffany & Co (Bear Call Spread)
Tiffany was upgraded by Bernstein on Tuesday to an outperform but the stock lost -4.5% today on worries that the strong dollar was going to impact sales to overseas customers. At $15 the price of silver is at a post recession low so margins should be high but you still have to have sales to make a profit. Wednesday's close at $90 was a six week low.
In Q1 Tiffany beat on earnings because of higher sales in Europe. However, the Greek disaster may have turned buyers cold on expensive jewelry.
Earnings August 27th.
Sell short August $95 call, currently 1.07, stop loss $92.15
Buy long Aug $100 call, currently .48, no stop.
Net credit 72 cents.
LULU - LuluLemon Athletica (Bear Call Spread)
LULU made another product recall last week of 318,000 hoodies with elastic draw-strings that could snap back and harm the users eyes and face. While the recall is not material to LULU earnings it is just one more problem for management to overcome. The stock is already priced at a 20% premium to its peers and it seems like every month we see another stumble or an unexpected change in executives. LULU is a good brand but it continues to have execution problems.
On Tuesday Guggenheim called it their "best idea" and shares rebounded from a short-term downtrend with a decent gain. That is now old news and shares declined -2.6% today and near a six-week low.
LULU could be volatile as earnings from other retailers are reported. However, with LULU at $64 and our short stop at $70 I think we have enough cushion to stop out at just over $66 and still be relatively safe. Since the $70 strike would be a new high, I am reaching out to $80 for the long call. We will stop out long before $70 so I want to spend as little as possible for the long call.
Earnings Sept 10th.
Sell short August $70 call, currently .78, stop loss $66.15
Buy long August $80 call, currently .25, no stop.
Net credit 53 cents.
Existing Play Recommendations
Links to original play recommendation
GMCR - Green Mountain Coffee (Bear Call Spread)
HLF - Herbalife (Bull Put Spread)
Z - Zillow (Bear Call Spread)
NSC - Norfolk Southern (Bear Call Spread)
APC - Anadarko Petroleum (Bear Call Spread)
HP - Helmerich & Payne (Bear Call Spread)
WYNN - Wynn Resorts (Bear Call Spread)
SNDK - SanDisk (Bear Call Spread)
XOP - Oil Exploration ETF (Bear Call Spread)
Prices Quoted in Newsletter
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