Option Investor

Daily Newsletter, Saturday, 1/23/2016

Table of Contents

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

Market Wrap

Finally a Real Short Squeeze

by Jim Brown

Click here to email Jim Brown

Overseas markets rallied strongly on Friday on expectations for the ECB to add more stimulus to Europe. Whether additional QE would have any impact remains to be seen but the possibility spiked European markets.

Market Statistics

Friday Statistics

The rise in the overseas market and spiking oil prices caused an old-fashioned short squeeze in the U.S. markets. The Dow opened up +254 and declined to +100 intraday as sellers hit the open one more time. They were unable to push the Dow back below 16,000 for more than a few minutes and with the weekend looming the shorts began to cover.

The rally was helped by a short squeeze in crude oil. The prospect of stimulus in Europe that would increase demand, an ISIS attack on an oil facility in Saudi Arabia and the switch to the March contract as the front month all added up to a rebound in oil prices and once shorts began to get squeezed the move higher was very strong to close at $32.

The selling was extremely overdone on Wednesday when the expiring February contract saw traders panic at the close with the price at $26.55. The March contract became the front month on Thursday at $29 and some uninformed traders saw that as a rally and the short covering began.

Nothing changed in the fundamentals for oil and this short covering bounce will not last.

You can also credit the U.S. economic reports for part of the gain. However, the main report was bogus. The existing home sales for December spiked +14.7%. Do you really think consumers rushed out in mass to buy a home in December? Some did but if you look under the hood you will see a -10.5% drop in November compared to an average of 4% in the prior four months. The major difference in the months was a change in the documentation requirements in November that delayed a large number of closings into December.

In November the TILA-RESPA Integrated Disclosure document, nicknamed TRID, became the law. This is also called the "Know before you owe" disclosure. Lenders now have to provide borrowers with this document showing all their fees and costs three days before closing so they can ask questions and get answers before signing the loan documents. The new requirements caused delays as mortgagers reprogrammed their computers to produce the documents. These delays pushed many closings into December and that caused the biggest one-month rise on record. In reality if you average the two months together you get a 2.2% rise in December.

Uninformed traders celebrated the economic strength and the market received another push higher.

The headline number showed home sales rising from November's pace of 4.76 million homes per year to 5.46 million, which just happens to be almost the same 5.43 million average pace in the four months prior to November.

The Chicago Fed National Activity Index rose slightly from -0.30 to -0.22 but it was still the fifth consecutive month in decline and 10 out of the last 12 months in decline. The three-month moving average is at the lowest level since March at -0.24. Manufacturing is the biggest drag on U.S. economic activity followed by the energy sector. The chart below does not paint an encouraging picture about U.S. economic health.

Moody's Chart

The Atlanta Fed forecast for Q4-GDP ticked up slightly after the Consumer Price Index on Wednesday suggested consumer spending might be slightly higher than expected. The forecast rose from +0.6% to +0.7% but remains significantly below the average of the analyst community. If the Atlanta Fed forecast comes true the GDP for all of 2015 would be 1.78% and significantly under trend.

The calendar for next week is headlined by the Fed meeting announcement on Wednesday. Absolutely nobody expects the Fed to hike rates at this meeting. The current forecast is for a hike in June with the March and April meetings being ignored because of the market rout, economic weakness, Asian decline and Mario Draghi's promise to add stimulus in the coming months.

Friday's GDP will be important for reasons I stated above. However, the market will probably ignore any weakness because it would push the Fed hikes farther into the future.

The following week we will get the employment reports and nearly everyone expects a sharply lower jobs number for January. The weekly jobless claims are ticking up with a 293,000 print last week and the highest week since July.

There were no new splits announced last week.

For the full split calendar click here.

If you enjoyed Friday's rally you can thank Apple (AAPL). Piper Jaffray analyst Gene Munster said investors should buy the stock ahead of earnings on Tuesday saying the stock could rally 50% over the next year. Munster has a $179 price target on Apple. That is 86% higher than Friday's close.

Munster said the bad news for slowing iPhone sales was already priced into the stock. Typically, Apple shares rise into a new launch, which is expected in September. Stock buybacks will drive single digit earnings growth "regardless of revenues" if Apple continues to buy $20-$30 billion a year in stock. Apple should report margins at the high end of guidance around 40%. Munster believes Apple upside exists despite macro risks, China issues and EU "instability."

Aaron Rakers at Stifel Nicolaus also weighed in saying the pessimism over falling iPhone sales is way overdone.

A recent survey showed analysts expect sales of 76.6 million phones in Q4, up from 74.5 million in Q4-2014. Verizon already warned that iPhone sales were weaker in Q4 than in prior years so there is plenty of disagreement in the space.

With earnings Tuesday after the bell, we will quickly get a chance to see if Munster's comments are true. Apple shares rallied +$5.12 to add about 40 points to the Dow.

News also broke that Google (GOOGL) is paying Apple $1 billion a year or more to retain its search position on the iPhone. Plus Apple gets a percentage of the search revenue Google receives.

On the opposite side of the ledger Dow component American Express (AXP) fell -$7.58 (-12%) after reporting disappointing earnings. That removed about 56 points from the Dow. Shares were already down about -25% in 2015 after losing Costco (COST) as a dedicated account after 16 years. That will impact 10% of American Express customers. Earnings for Q4 declined -38% to $899 million with the strong dollar a big driver of the decline. AXP also lost its deal with Fidelity, which is moving to offer Visa cards issued by U.S. Bank (USB).

AXP outlined its plans to cut $1 billion in costs but also warned on revenue for the current year. Revenue declined -7.6% to $8.39 billion. Earnings were $1.23 per share. Analysts were expecting $1.12 and $8.34 billion.

General Electric (GE) reported earnings of 52-cents compared to estimates for 49-cents. Revenue of $33.9 billion was a big miss compared to estimates for $35.91 billion. The challenge came from delays in shipping some turbines in Q4 that will now be delivered in Q1. Also, sales of equipment to the oil and gas sector declined -16%. GE is planning on cutting $800 million in expenses from that segment after a $600 million cut in 2015. Their manufacturing backlog rose to a whopping $315 billion after the $11 billion acquisition of Alstrom in November. GE shares are currently yielding 3.22%. Shares declined fractionally on Friday.

Starbucks (SBUX) reported earnings of 45 cents that beat estimates of 44 cents. Revenue rose +12% to $5.37 billion but missed estimates of $5.39 billion because of terror headlines and the strong dollar.

The company said the Paris terror attacks hurt sales because of changes in consumer behavior. Revenues in Europe, the Middle East and Africa declined -6% immediately after the Paris attacks. Same store sales in those regions rose +1% and well under estimates. CEO Schultz said they were on track for a record quarter in Europe until the attacks and everything came to a screeching halt. We are now "seeing business gradually return to normal." A Morningstar analyst said they were seeing similar things from other retailers in the area.

Analysts were concerned about the muted sales in China given the rapid expansion rate. Starbucks said it would open 500 stores a year for the next five years. Same store sales in the Asia-Pacific region rose +5% compared to expectations for +6.1%. Starbucks does not breakout sales by country. Schultz believes China sales will eventually overtake U.S. sales.

Starbucks guided for earnings in the range of 38-39 cents and analysts were expecting 39 cents. Foreign exchange rates are expected to reduce revenue by -3%. Starbucks is still producing 8% overall comps and 15% earnings growth in a tough economy. That was the 24th consecutive quarter of same store sales growth over 5%. U.S. same store sales rose +9%.

Starbucks K-cups are the number one brand in the USA. More than $1.9 billion was loaded onto gift cards over the holiday season. One in six American adults received Starbucks gift cards for the holidays. Online ordering is soaring. Customers know they can order and pay online and it is ready when they walk in the door. No other coffee shop can compete with that.

Schlumberger (SLB) reported earnings of 65 cents compared to estimates for 63 cents. Revenue of $7.7 billion missed estimates for $7.8 billion. Earnings for the full year fell -39% to $3.37 because of the weakness in the energy sector. They said they cut 10,000 workers in Q4 and took a $530 million charge. In addition, the company took a $1.6 billion charge for asset impairment, which was mostly for underused pressure pumping (fracking) equipment. The CEO said they expected continued weakness in the first half of 2016. He said customer budgets were plunging and most were exhausted early in the quarter. This led to unscheduled and abrupt activity cancellations. The company announced a new $10 billion share buyback program. They will complete the acquisition of Cameron Intl (CAM) in Q1 once the regulatory approvals are received. Shares rose +3.75 on the earnings and the spike in oil prices.

Golar LNG (GLNG) soared 50% on Friday after they signed a deal with Schlumberger to "cooperate" on development of greenfield, brownfield and stranded gas reserves. The goal of the joint venture is to accelerate the time it takes to bring proven gas reserves into production. They will jointly market gas monetization solutions to owners, investors and governments. Golar will contribute floating LNG assets and technology while Schlumberger will provide upstream development knowledge, resources and capital. The object is to gain access to a wide range of currently uneconomic gas reserves by delivering LNG production solutions.

Kansas City Southern (KSU) reported earnings of $1.23 compared to estimates for $1.10. Considering railroads have been in the dumps lately that was a good report. However, revenue of $598 million missed estimates for $609 million. The miss was attributed to an 11% decline in energy related shipping. Falling frac-sand and coal volumes were to blame. Carload volumes declined -2%. Intermodal volumes declined -9%. Full year earnings reached $4.49 and beat estimates for $4.37 but that was down -7% on a year ago basis. Shares rallied $3 with the market from severely oversold conditions.

Earnings kick into high gear next week with the busiest week of the quarter. Apple, Facebook, Amazon and Microsoft will be the companies most watched.

The Dow has 12 components that will report next week with Tuesday the busiest day. Four report before the open on Tuesday with Apple reporting after the close. That means several misses in the morning could tank the Dow on Tuesday and Apple could pressure it on Wednesday.

Winter storm Jonas is wreaking havoc with the Northeast this weekend with nearly 7,000 flights cancelled as of Friday evening. Those 7,000 flights would have burned a lot of jet fuel so we should expect to see a rise in distillate inventories over the next couple of weeks as the fuel backs up in the system. This will negatively impact airline earnings for Q1.

The Dow Transports ($TRAN) rebounded +1.3% on Friday but I would not start celebrating just yet. All the fundamentals are still negative. This was just an oversold bounce and we should see lower lows ahead.

The rebound from the Wednesday crash helped to turn around some of the internals. The percentage of S&P stocks over their 200-day average improved from 19.2% to 24.8%. That is still low but a definite improvement.

The percentage over the 50-day average improved from 9% to 17.8% or almost double. That is still very oversold.

The percentage of stocks over their 200-day on the NYSE Composite Index dipped to 15.1% and the lowest level since July 2011 at 9.79%. The NYSE Composite is likely to test 8,815 as energy stocks decline with oil and earnings.

The Baltic Dry Index ($BDI) set a new record low at 354 showing that ocean shipping is almost nonexistent at the present time. Goods are not flowing and that means the global economy is stagnating.

DryShips (DRYS) rallied 40% on Friday on no news. It was definitely not because the Baltic Index rallied. That 40% spike lifted shares to 15 cents. That is significantly lower than their $125 high back in 2008 when shipping was at a premium. The dry shipping business is almost out of business thanks to the global slowdown in shipping.

The CRB Commodity index set a new 40 year low on Wednesday at 156 and recovered slightly to close at 163.8 late in the week as oil rebounded.

Only 28% of the S&P-500 stocks have a buy signal on the point & figure charts. I wish I could find them. I looked at more than 1,000 charts on Friday and other than the Friday short squeeze the charts were very bleak.

The High Yield sector (HYG) is still leading the markets lower although we did see a minor bounce last week. Like everything else, this was short covering and the weakness is likely to continue once oil prices roll over.


The markets suffered a perfect storm last week with Asia and oil prices crashing at the same time. I mentioned two weeks ago that sovereign wealth funds were probably liquidating equities to cover losses in the oil market. The top ten sovereign wealth funds excluding Canada have about $6 trillion in assets according to Jack Bouroudjian from Index Financial Partners. Much of those assets are tied up in investments that are not liquid like real estate. With oil prices crashing under $40 at the beginning of January that gave them added incentive to sell what they could rather than what they wanted to sell. That means equities were kicked to the curb.

It is no coincidence that most global markets were down almost equal amounts over the first three weeks of January. China was its own problem but the rest of the world was in the same sinking ship as funds liquidated global equities. JP Morgan estimates that sovereign wealth funds have liquidated more than $75 billion in assets in recent weeks. Others, including Jack, believe that is a very conservative estimate.

The oil producing nations are in severe pain because their budgets are built on $75 oil or higher. Oil at $30 means they are running huge deficits and only Saudi Arabia has the assets and credit to go to the debt markets to offset the shortage of petrodollars.

Dollars run the world. When oil prices were high these oil producers were awash with dollars and they poured the money into social programs and investments. Now that the petrodollar flows have shrunk about 75%, they have nowhere to turn except to liquidate those investments.

If oil prices do not rebound sharply and soon, which is highly doubtful, these countries will be forced to sell more assets. That will further depress our markets.

The rebound in the S&P from the October 2014 Ebola lows at 1,820 was a textbook recovery. However, it will only remain a textbook recovery if it continues. If the S&P rolls over next week, that rebound will have been just another bear market bounce and we are likely to see lower lows. Nobody wants that to happen but we have to be prepared just in case.

The S&P closed just over the 1,900 level at 1,905 on short covering at the close. Whether that level holds probably depends on the Asian markets on Sunday night and the return of saner minds to the oil trade. Fundamentals have not changed on crude. Inventories are going to continue rising until March and prices should continue falling thanks to Iran's contribution to the global glut.

Various agencies like the IEA now expect the glut will rise from 1.2 mbpd to 2.0 mbpd over the next six months. It is going to get worse instead of better.

Baker Hughes (BHI) reported another decline of -13 active rigs to 637 with oil rigs declining -5 to 510 and gas rigs falling -8 to 127 and another 18 year low. U.S. production rose again for the seventh consecutive week to 9.235 mbpd and a three-month high. Eventually the rapidly declining rig count will force lower production but it has not happened yet.

For next week we need to watch the 1,950 resistance level on the S&P and initial support at 1,867. If that support fails a retest of the lows is likely and the potential for an even lower low. The S&P dipped to 1,812 intraday on Wednesday.

The Dow has had a wild ride since the 17,750 high on December 29th. The index declined -2,300 points in 14 trading days to touch 15,450 on Wednesday. That is extremely oversold in anybody's terminology. We were due for a bounce even if only temporary. Markets do not go straight up or down without a temporary reversal every 5-7 days. Since 1940, there have been 50 bear markets. Thirty-one of those saw 5% rebounds in the middle of the decline. The pressures have to equalize and give traders a chance to reload.

A 2,300 point drop in 14 days was severely oversold and begging for a major rebound. We got that on Thr/Fri and now next week will be a new beginning.

The Dow came within 100 points of the February 2014 lows and the August 2015 lows at 15,370. In theory, that was a textbook rebound point. Back in August we spiked for two days and about +1,300 points off the lows but then rolled over for a nearly -700 point drop back to 16,000 where the index rested for over a month. I seriously hope we are not in for a repeat of that experience. I would much rather see a repeat of the October 2014 Ebola rebound that took 40 days and recovered 2,136 points from 15,855 back to 17,991 with only about 5 days of weakness across those 40 days of trading.

Unfortunately, we rarely get what we wish for and we will have to play the cards we are dealt. Next week begins a new hand. We do have an FOMC meeting on Wednesday and typically, the market is up the day before the meeting. Whether that trend will overcome the swirling market currents is of course unknown.

The Nasdaq Composite also came very close to the August lows and the rebound was strong with a recovery of +277 points from the Wednesday low of 4,313. The Nasdaq stopped at 4,600 on Friday and that should be psychological resistance with real resistance at 4,700 from two failures back on the 12th and 13th.

If you look at the winners list below the top few stocks are the favorites from last year. I said repeatedly we were not going higher until those few stocks returned to the winning side.

The exception was Netflix. The company reported earnings earlier in the week and while I thought they were good and the outlook strong, I was in the minority. Shares have declined back to $100 with strong support at $97. Netflix was one of the biggest gainers in 2015 and it may need time to rest now that earnings expectations are in the past. We call this the "post earnings depression" period. Traders that owned the stock hoping for an earnings boost are now leaving to find other trades and repeat the process.

The Nasdaq has a few high profile earnings reporters due out next week with Amazon, Facebook, Apple, Microsoft, Alibaba, Amgen, Ebay, Qualcomm, Juniper and Skyworks leading the list. This could provide some volatility in both directions depending on the reports.

Initial support is 4,435 and real resistance at 4,700. I am rooting for the high number but a lot of factors have to fall in our favor for that to happen.

The Russell 2000 rebounded +62 points or roughly 6.5% from its lows at 958. That put it well over 1,000 to close at 1,020. The 1,000 level is mostly psychological but there is some minimal support at 1,007 from early 2014.

The 1,050 and 1,082 levels were support on the way down, although both were just momentary pauses in the crash. They may be resistance if the index decides to move higher.

I would love to see the small caps come back to life because that would provide positive sentiment for the broader market. It would mean fund managers were no longer afraid of a larger dip.

I am encouraged about the rebound and the decent short squeeze on Friday. I am not confident that the gains will stick because the fundamentals have not changed.

I seriously doubt oil will continue to rise. When oil begins to dip back below $30 that is going to be market negative. I did read one commentary this weekend that suggested $30 oil was a very big plus for Europe. They import the majority of their oil and $30 is a lot better than $100. That is the equivalent of QE for consumers and Mario Draghi does not have to do anything for the economy to benefit. Unfortunately, it has a long fuse. It will take a year or more for the benefits to be seen.

Tony Dwyer, chief market strategist at Canaccord Genuity, said the market moved enough into oversold territory that it has become a buying opportunity. His metrics had only been this oversold twice before in 25 years. That was in 2008 and June 1994. He believes that any further declines will be limited. He has a 2,350 end of year target for the S&P-500.

The AAII Investor Sentiment Survey hit 17.9% bullish last week and that was the lowest reading since April 2005. The bullish reading rebounded slightly this week but even the 21.5% is the lowest since the market crash last August. On a contrarian basis, this extremely low reading on bullish sentiment is actually bullish. The long-term average is 38.7%. The bearish sentiment at 48.7% has not been this high since August 2011 when the market dropped on the government shutdown. That is also bullish from a contrarian perspective.

We just need to be ready for whatever the market gives us. I would continue to keep positions small and be prepared for moves in both directions. A continued rebound would be against the historical odds that suggest there are multiple bounces in a longer-term decline. I am sure none of us would complain if that trend was broken and the market moved higher.

My comments from last weekend. "Remember, in every prolonged decline we will always get sporadic rebounds fueled by dip buyers and short squeezes. Until those rebounds become progressively higher and longer lasting, we should be careful about plunging our hard-earned money into a lottery ticket on the market. I would continue to be a watcher not a trader. Be patient. Be cautious. There is always another day to trade as long as you have capital to invest."

The advertising for the EOY subscription special is over. However, we still have a limited number of mouse pads and books left over so I will leave the link open for a few days in case anyone decides to take advantage of the savings.

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Random Thoughts

Venezuela Circling the Drain

Inflation is soaring in Venezuela with the central bank now admitting it rose +141.5% in 2015. In reality it was probably worse but that is the first time since December 2014 that the bank has published its monthly report. Yes, over a year since the bank last updated the official numbers.

In a recent Bloomberg survey of 12 economists, they expected inflation to rise +184% in 2016. Nomura securities was the highest forecast at 700%.

However, the IMF updated their forecast last week and they are expecting 720% inflation in 2016, up from their prior forecast of "only 204%." To put that in perspective it means the price of an average product will go up 7 times over the next 12 months.

Inflation is already so bad that there are no products to buy. People in Venezuela cannot afford to buy products from neighboring countries because the Venezuelan currency is worthless. All transactions now take place in the black market.

Economists believe the economy will shrink by more than 8% in 2016 following a 10% decline in GDP in 2015. Barclay's said a country bankruptcy in 2016 will be "difficult to avoid."

On the positive side, a country collapse will probably take its oil production off the market at least temporarily. In 2008, Venezuela produced 2,394,020 bpd and was the tenth largest producer. According to some analysts, production has declined to less than 2.0 mbpd as a result of nationalization of everything by Hugo Chavez. In order to keep the peace the government has subsidized gasoline to citizens at 2 cents per liter (not a misprint) so they are losing money on every transaction. The country consumes 900,000 bpd and exports the rest. Some 95% of export revenue comes from oil. If the oil industry was shuttered because of the looming financial crisis the country would collapse. The loss of those exports would help temporarily balance the global supply.

Venezuela's oil is heavy crude and it was trading at $20.20 on Friday. They need $125 to balance their budget.

Venezuela has 298 billion barrels of proven oil reserves. That is the largest in the world with Saudi Arabia second at 268 billion barrels and Canada third at 173 billion.

Creditors are learning an expensive lesson about the oil cycle. When crude prices are at 13-year lows the assets of bankrupt companies are nearly worthless.

Quicksilver, the third largest energy company bankruptcy in 2015 had $2.35 billion in debt. The assets sold at auction for $245 million. Endeavour International had debts of $1.63 billion and its assets sold for $9 million with creditors seizing the rest. American Eagle Energy had debts of $215 million and its properties sold for $45 million in October. Dune Energy had debts of $144 million and the assets sold for $20 million.

There are plenty more auctions ahead as the pace of bankruptcies increases.

Partial list of U.S. energy companies filing bankruptcy in 2015:

Ivanhoe Energy $77 million in debt.
BPZ Resources $238 million
Larcina Energy $133 million
Shoreline Energy $17 million
ERG Resources $401 million
Duer Wagner Oil & Gas $122 million
Sun River Energy $11 million
Primera Energy $7 million
Saratoga Resources $206 million
Arabella Petroleum $18 million
Sabine Oil & Gas $2.8 billion
American Standard $38 million
Black Elk Energy $144 million
Sable Operating $16 million
American Natural energy $22 million
Armada Oil $3.1 million
Samson Resources $4.3 billion
Miller Energy Resources $215 million
AIX Energy $35 million
RAAM Global Energy $304 million
Escalera Resources $42 million
Parallel Energy $168 million
Energy & Exploration Partners $1.2 billion
Transcoastal $22 million
Cubic Energy $126 million
Magnum Hunter Res $1.0 billion
New Gulf Resources $575 million
Swift Energy $1.285 billion
Rough total for all is $17.2 billion

Goldman Sachs compiled a list of reasons given by their clients for not buying stocks. These are the top five reasons given.

Not brave enough to catch a falling knife.

U.S. industrial activity is contracting. Consumers will follow and drag the economy into a recession.

Falling crude prices will cause additional capex cuts and lead to profit declines across many industries.

China's economy is slowing and they will be forced to dramatically devalue the yuan, exporting deflation and causing the Fed to cancel its rate hike program, causing investors to become confused.

Share prices need to fall further to offer an attractive risk-adjusted return given heightened economic and market risk.

Moody's just put half a trillion dollars in energy debt on review for a possible downgrade. On Friday Moody's put 175 energy and mining companies on review for a downgrade due to the prolonged decline in commodity prices.

Moody's said they now expect crude oil to "average" $33 for all of 2016, a $10 drop from their prior forecast. Of the 120 energy companies with 69 public and private, the agency said there was "substantial risk" of a slow recovery in oil that could compound the stress in oil and gas firms. Total SA and Shell were on the list for downgrades but Exxon and Chevron were not.

Read full story here

New York Mayor Michael Bloomberg is taking early steps to join the presidential race as an independent candidate. Saying he was disappointed with the prospects of an eventual race between Bernie Sanders and Donald Trump, he believes now is the time for a third party candidate. Bloomberg said he will definitely run if it appears Sanders is going to win the Democratic nomination and if Trump or Cruz appear to be the victors on the Republican side.

Bloomberg said he would spend up to $1 billion of his own money to fund his campaign. He said Clinton is a "flawed politician" but if she is ahead in the race she is mainstream enough that Bloomberg would not have a chance as a third party candidate. His advisors believe he can wait until March to declare and still get on the ticket in all 50 states.

If you thought the presidential race was a hectic up to this point, it is really going to get crazy if Bloomberg throws his hat into the race and makes it a three-ring circus. This would be a good thing for the republicans because as a liberal democrat he would take votes away from Clinton and Sanders.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Be humble. Be hungry, and always be the hardest worker in the room! "

Dwayne "The Rock" Johnson


New Plays

Print This

by Jim Brown

Click here to email Jim Brown
Editor's Note

Printers have become obsolete with the ability to send emails, documents and faxes from PC to PC. However, some new printers have lost their excitement despite an increasing number of users.

The 3D printer market is hardly ever discussed in the media. This hot sector has cooled despite a growing business of printing parts on demand rather than having them machined at great expense. This is another example of fad stocks turning into boring industrial stocks.


No new bullish plays


SSYS - Stratasys Ltd

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. Full Company Description

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.

Earnings are March 2nd.

With a SSYS trade at $17.45:

Sell short SSYS shares, initial stop loss $19.50


Buy long March $15 put, currently 90 cents, initial stop loss $19.50

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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In Play Updates and Reviews

3 Weeks Down, 3 Weeks Up?

by Jim Brown

Click here to email Jim Brown
Editors Note:

After three weeks in decline, I vote for a three-week rally. Unfortunately, my vote rarely counts. While I would love to see the earnings cycle power a rally that lasts until May there are quite a few factors that will be working against that outcome.

Earnings this week from Apple, Amazon, Ebay, Microsoft, Qualcomm, Amgen and others will probably move the market but the odds of them all moving it in the same direction are slim. Apple will be the first hurdle after the close on Tuesday and there are a lot of negative expectations built in that have knocked 25% of the stock price. There is the potential for a better than expected result because the bar is now very low.

Amazon could help out a lot on Thursday because all indications are for a record quarter.

Economics could be a headwind. Offsetting that would be the FOMC meeting and the historical tendency for gains the day before the announcement.

Keep your fingers crossed that the rally continues but be prepared if it does not.

Current Portfolio

We are changing the format slightly this week. The entry date, earnings date, current price, change for the day and stop loss are all in the portfolio graphic. They will no longer be listed in the individual play descriptions. Everything you need is now available in a single location.

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.

KRE - Banking ETF

I raised the stop loss to $34.65 after a weak performance in Friday's rally.

BULLISH Play Updates

KRE - SPDR S&P Regional Banking ETF


KRE shares posted a weak 44-cent gain on Friday in a strong market. Just in case the financials do not continue the rebound I raised the stop loss on the stock position.

The current stop loss on the stock position is now $34.65.

There is no stop loss on the option position. Our entry was 63 cents and any stop would give us nothing back. That means we can hold the option side until expiration without any additional risk.

Original Trade Description: January 13, 2016:

Many people thought banks would be winners after the Federal Reserve hiked rates in December. While the Fed did raise rates (barely) the financial stocks didn't see much progress.

The Fed is still talking about raising rates multiple times in 2016. There is a growing camp of market watchers who believe the Fed will be forced to back track. Deteriorating economic conditions both in the U.S. and abroad may force the Fed to pause their rate hike plans or even cut rates again.

Even if the Fed does try to raise rates the yield curve, where many banks make their money, could struggle. If the stock market remains sour throughout 2016 it will drive money into the perceived safety of U.S. bonds and that will keep yields on the 10-year low. So now that I have painted a rather unappetizing picture for the banks I'm adding a new bullish play.

All of the issues above are long-term troubles that could plague financials throughout 2016. On a short-term basis the banks are oversold and due for a bounce. Tonight's trade is a short-term technical one. The KRE is nearing major support and should rebound.

If you are not familiar with the KRE it is an ETF that tracks the S&P regional banks select industry index. The top ten holdings in this ETF are: PNC, BBT, KEY, STI, HBAN, CIWV, RF, FITB, MTB, ZION,

Tonight I am listing a buy-the-dip trigger at $35.50. We will start this trade, if triggered, with a stop loss at $34.40. Remember, this is a short-term trade. We want to get in, catch a bounce, and get out.

Position 1/20/16:
Long KRE shares @ $35.50, initial stop loss $34.25


Long March $38 call @ 63 cents, no stop loss.

SWHC - Smith & Wesson

Company Description


The play remains untriggered. S&W posted a minor gain to $20.81 and the entry trigger is $21.35. We want to see it move over that resistance at $21 before we buy the stock.

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.

With a SWHC trade at $21.35:

Buy SWHC shares, initial stop loss $18.85


Buy June $23 call, currently $1.80, initial stop loss $18.85.

UFPI - Universal Forest Products

Company Description


UFPI posted a decent gain and moved to a three-week high close. Earnings are three weeks away and we will close the position before the report.

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.

Position 1/19/16:

Long UFPI stock @ 67.37, stop loss 61.90

BEARISH Play Updates

OIH - Oil service Index

ETF Description


The OIH rebounded again on the continued short squeeze in WTI. However, it closed well off the highs for the day that were set at the open. Fundamentals have not changed for crude oil. The glut is increasing daily. This was simply a short squeeze on the change in futures contracts to March. However, the rebound in the market also lifted some energy stocks and caused a short squeeze there as well. This will pass.

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.

Position 1/21/16:

Short OIH shares @ $21.26, stop loss $24.25


Long July $20 put @ $1.92, no initial stop loss.

VXX - VIX Futures ETF


Nice decline in the VXX thanks to the rising market. We do not need a 200 point rally every day for the VXX to decline. We just need more days positive than negative. 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.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
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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