The Russell 2000 is in full collapse and now almost 40 points below prior support at 1,200. The small caps are in collapse mode and moving fast. The index is now down -100 points or -8% from the 1,263 closing high in September. Portfolio managers are running scared and the volume is increasing.
With only four more trading days until the election is over, there is little time to raise cash and escape from potentially catastrophic positions. The biotech sector was down another -2.4% on worries Clinton could pull off a win.
I believe we need to remain on the sidelines until this volatility event is over.
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
DISH - Dish Networks
The long call position was stopped out at $56.85.
XBI - Biotech ETF
The long call recommendation remains unopened until $58.
If you are looking for a different type of option strategy, try these newsletters:
Credit spreads and naked puts = OptionWriter
Long term option investments = LEAPS Investor
3-6 month Option Trades = Ultimate Investor
Iron Condors = Couch Potato Trader
Long and short equity trades = Premier Investor
BULLISH Play Updates
DISH - Dish Networks - Company Profile
No specific news. Dish crashed -4% to break below support and stop us out.
Original Trade Description: October 3rd.
DISH Network Corporation provides pay-TV services in the United States. The company operates through two segments, DISH and Wireless. The company provides video services under the DISH brand. It also offers programming packages that include programming through national broadcast networks, local broadcast networks, and national and regional cable networks, as well as regional and specialty sports channels, premium movie channels, and Latino and international programming. In addition, the company provides access to movies and TV shows via TV or Internet-connected tablets, smartphones, and computers; and dishanywhere.com and mobile applications for smartphones and tablets to view authorized content, search program listings, and remotely control certain features. Further, it offers Sling TV services that require an Internet connection and are available on streaming-capable devices, including TVs, tablets, computers, game consoles, and smart phones primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Additionally, the company operates Sling International that offers over 200 channels in 18 languages; and Sling domestic package that consists over 20 channels and tiers of programming, including sports, kids, movies, world news, lifestyle and Spanish language, and premium content, such as HBO. Further, it offers Sling Latino service; and satellite broadband services, wireline voice, and broadband services under the dishNET brand. Additionally, the company has wireless spectrum licenses and related assets. As of December 31, 2015, it had 13.897 million Pay-TV subscribers. Company description from FinViz.com.
Dish is gaining a significant number of views in the millennial generation that either have never had a cable subscription or cannot stand paying the monthly cable bills for what they believe should be free TV. They are also developing a large audience of Latino viewers with their various Spanish language channels. They also offer 18 other languages and more than 200 channels.
In early September, they gained the rights to about 800 sporting events offered by the six PAC 12 networks. Millennial's love to watch sports, especially when it is free or nearly free.
The online Sling TV offering is gaining market share with its skinny bundles including channel packages like HBO and Starz.
Over the last month, the consensus earnings estimates for the current quarter have risen from 63 cents to 68 cents. Full year estimates have risen from $2.92 to $3.05.
Earnings Nov 7th.
Since they signed the sports deal on September 12th the stock has been in rally mode. Shares are closing in on resistance from June at $56.50 and should easily break through. The next resistance is in the $65 range.
Closed 11/2/16: Long Nov $57.50 call @ $2.43, exit $2.19, -.24 loss
HON - Honeywell - Company Profile
No specific news. Mario Gabelli commented on Honeywell saying the recent Elster acquisition should drive meaningful and sustained growth for HON spurred by global energy efficiency initiatives and natural resource management.
Original Trade Description: October 15th.
Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.
On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.
The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.
After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.
The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.
He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.
Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.
Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.
I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.
Update 10/21/16: Honeywell reported earnings of $1.67 that beat estimates for $1.60. Revenue of $9.8 billion also beat estimates for $9.77 billion. They guided for the current quarter to earnings in the range of $1.74-$1.78 and analysts were expecting $1.75.
Long Dec $110 call @ $2.51, see portfolio graphic for stop loss.
TREE - Lending Tree - Company Profile
No specific news. The company said it was adding more than 300 jobs in Charlotte headquarters expansion. Posted a minor gain in a weak market.
Original Trade Description: October 31st.
LendingTree, Inc., operates an online loan marketplace for consumers seeking loans and other credit-based offerings in the United States. The company offers tools and resources, including free credit scores that facilitate comparison shopping for these loans and other credit-based offerings. Its mortgage products comprise purchase and refinance products. The company also provides information, tools, and access to various conditional loan offers for non-mortgage products, including auto loans, credit cards, home equity loans, personal loans, reverse mortgages, small business loans, and student loans. In addition, it offers information, tools, and access to other products, including credit repair, through which consumers obtain assistance improving their credit profiles; debt relief services, through which consumers obtain assistance negotiating existing loans; home improvement services, through which consumers have the opportunity to research and find home improvement professional services; personal credit data, through which consumers gain insights into how prospective lenders and other third parties view their credit profiles; real estate brokerage services, through which consumers are matched with local realtors who assist them in their home purchase or sale efforts; and various consumer insurance products, including home and automobile, through which consumers are matched with insurance lead aggregators to obtain insurance offers. Company description from FinViz.com.
Lending Tree reported revenues that rose 35.5% to $94.6 million but missed estimates for $96.9 million. Earnings of 80 cents were in line with analyst estimates. The company lowered its revenue guidance for the full year from $380-$390 million to $370-$375 million. The stock was knocked for a $16 loss to $75.
Yes, they reported a 35.5% increase in revenue but missed estimates by $2 million and the stock was crushed. That is hardly worth a major decline.
That is not the entire story. Mortgage product revenues rose 21%. Total loan requests rose 68%. Small business lending has risen more than 200% from the year ago quarter. The MyLendingTree.com customer portal product now has more than 3.7 million members.
The CEO was not apologetic. He said in a quarter where mortgage rates were near a record low we optimized the business to expand margins and grow profits.
Earnings Jan 26th.
I see nothing wrong with Lending Tree. While they did miss revenue fractionally and guided fractionally lower for the full year, the business is booming. We should see a swift rebound because there are very few companies of any type growing this fast.
Long Dec $85 call @ $4.00, see portfolio graphic for stop loss.
XBI - Biotech ETF ETF Profile
Monday's positive gain was too good to last. Support broke at $56 and now the next target is $50. I am going to leave the recommendation active and I will lower the entry trigger as appropriate. If Clinton loses the election there will be a monster rebound.
This position remains unopened until a trade at $58. We will reset the entry point if the ETF continues lower.
Original Trade Description: October 29th.
The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.
The XBI traded up to $69 in late September and has since crashed back to support at $56 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.
The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls.
Comments from Clinton, Warren and Sanders about drug pricing concerns also caused investors to flee the biotech sector.
The biotechs may have ended their decline in fear of Hillary Clinton. After the news on Friday about the FBI reopening the criminal investigation on her emails, that should make it really tough to win the election. That means the biotech sector could begin to rebound even before the vote if the polls tighten even further or move into Trump's favor.
On Friday 10/28, the healthcare sector imploded on earnings and warnings from several companies including McKesson, AmerisourceBergen, Cardinal Health and others. The XBI failed to decline after hitting support at $56.
With the XBI now -18% off its September high, all of those factors above are baked into the market. This may be time to place a bet on a biotech rebound.
The ETF has support at $56 and the 200-day at $56.55. The dip on Friday penetrated to $55.80 but then rebounded $1 in a weak market.
I am recommending we buy a cheap December call ahead of the polls that will be out next week. If Clinton does win, we will exit on any weakness.
With a XBI trade at $58
Buy Dec $60 call, currently $2.07, no initial stop loss.
BEARISH Play Updates (Alpha by Symbol)
BIG - Big Lots - Company Profile
No specific news. Down with the market. Big rebound on no news. Missed our stop loss by 5 cents.
Original Trade Description: October 26th.
Big Lots, Inc., operates as a non-traditional, discount retailer in the United States. The company offers products under various merchandising categories, such as food category that includes beverage and grocery, candy and snacks, and specialty foods departments; consumables category, which comprises health and beauty, plastics, paper, chemical, and pet departments; soft home category that consists of home decor, frames, fashion bedding, utility bedding, bath, window, decorative textile, and area rugs departments; hard home category, including small appliances, table top, food preparation, stationery, greeting cards, and home maintenance departments; and furniture category consisting of upholstery, mattress, ready-to-assemble, and case goods departments. It also provides merchandise under the seasonal category that includes lawn and garden, summer, Christmas, toys, and other holiday departments; and electronics and accessories category, including electronics, jewelry, hosiery, and infant accessories departments. The company operates 1,449 stores in 47 states. Company description from FinViz.com.
For Q2, the company reported earnings of 52 cents compared to estimates for 45 cents. Revenue of $1.2 billion missed estimates for $1.22 billion. For the current quarter they guided for a profit of 1 cent to a loss of 4 cents. That is not exactly a stellar performance.
Revenue growth in Q2 slowed from the 3% in Q1 quarter to a -0.5% decline in Q2. Same store sales only rose +0.3%. Big Lots warned Q4 comps would be "flattish" and leaving the door open for a decline. They revised down full year revenue guidance to only 1-2% growth. The admitted online sales were only about 4% of the total and there was limited inventory online. That is not what investors wanted to hear.
Earnings Dec 2nd.
Shares collapsed to plateau about $47 in September. In October that plateau declined to $44.50 and this week that level has now broken. With the market weakening there is less tolerance for companies that are not performing. Shares are near a 9-month low.
Long December $42.50 put @ $2.10, see portfolio graphic for stop loss.
VXX - VIX Futures ETF - Company Profile
Another dead stop at resistance at $36.
This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.
Original Trade Description: September 21st.
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. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.
This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.
The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.
I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.
Long Dec $33 Put @ $4.20. No stop loss.
YHOO - Yahoo - Company Profile
No specific news. Secondary support broke intraday. There was a big spike at the open to $41.26 but missed our stop loss at $42.35. The selling was immediate and strong.
Original Trade Description: October 15th.
Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.
After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.
When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.
On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.
I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.
If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.
Update 10/18/16: Yahoo reported revenue that fell -14% to $857 million. This is the fourth consecutive quarter that revenue has fallen more than 10%. They beat on earnings with 17 cents compared to estimates for 11 cents but did it on major cost cutting with the termination of 2,200 employees or one-fifth of its workforce. Verizon signaled last week it was reconsidering the acquisition because of the damage from the cyber attack. The decision to complete the deal or back out should be made over the next 2-3 weeks. Yahoo did not hold a conference call in order to avoid having to answer questions that might stir up more objections by Verizon.
Update 10/26/126: Verizon executive, Marni Walden, said Verizon was taking an in-depth look at how the Yahoo cyber attack occurred and what risk Verizon would have from continuing the acquisition. They would have an answer within 60 days. She said the deal still makes sense strategically BUT we have to be careful about what we do not know. The deal was tentatively still on track but the impact of the breach was "material" and still a big unknown. Use of the word material refers to a possible "material adverse change" or MAC clause in the contract that would allow Verizon to walk from the deal. With 500 million accounts hacked, a $20 fine on each account would be $10 billion and more than twice the $4.8 billion sales price.
This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.
Long Jan $40 put @ $1.90. See portfolio graphic for stop loss.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.