Option Investor

Daily Newsletter, Thursday, 1/28/2016

Table of Contents

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

Market Wrap

An Oil Bounce?

by Thomas Hughes

Click here to email Thomas Hughes
Fed? What Fed? The market jumped on rising oil prices and positive earnings.


The market jumped today on rising oil prices but don't get your hopes up to soon, the catalyst may be nothing more than the same rhetoric we've been hearing the last 12 months. WTI got a 5% pop on news that there was going to be a meeting of oil ministers. Soon after that Russia made a statement that Saudi Arabia was calling for a 5% production cut and then not too long after that the Saudis denied the call saying there were, as always, willing to discuss such a cut should other nations meet them at the negotiating table.

This time a deal to cut support global oil prices could happen but nothing concrete happened today, except a rumor driven gain in oil prices. The conspiracy theorist in me wonders if Russia and Saudi Arabia didn't orchestrate this little rumor, $1 a barrel price difference is a lot of money for a country pumping 100's of thousands of barrels per day. The Russians and Saudis are both pumping at or near record levels, more than 10 million barrels per month each.

Market Statistics

Global markets were mixed. Most Asian indices closed lower, well before the oil news, led by the mainland Shang Hai. It fell -2.85%. In Europe the indices started the day with small losses, then moved into positive territory, and then sold off on weaker than expected earnings among EU businesses. The DAX led with a loss of -2.44%.

Futures trading on the US indices indicated a flat to positive opening for most of the early session. This strengthened a little after the 8:30AM data and a host of better than expected earnings reports but did not get really strong until nearly 9AM, just after the Russia/Saudi rumors began to swirl. At that point the futures jumped nearly a full percent and held those levels going into the opening bell.

The open was strong, the indices opened as expected, the SPX making gains near 0.80% in the first minute and rising as high as 1.05% before hitting the intraday high. The high was hit during the opening rush, about 5 minutes after the open, and held until late in the day. In between, the indices retreat to test support at yesterday's close before lunch, bounced during lunch, built a bottom in early afternoon and were approaching the early high by 2:30PM. The late day rally did not quite reach the high set earlier in the day but it did recover most of the early gains and left the indices near the highs of the day.

Economic Calendar

The Economy

There were two releases other than the jobless claims data this week, Durable Goods and Pending Homes Sales. Durable Goods Orders, released at 8:30AM, came in at a disappointing -5.1%, more than 4% lower than the expected -1%. Within the report ex-transportation durable goods orders fell only -1.2%. Shipments and unfilled orders both fell, inventories rose slightly by 0.5%.

Initial claims for unemployment fell -16,000 from an upward revision of +1,000 to hit 278,000. The four week moving average of initial claims also fell, losing -2250 to hit 283,000. On a not adjusted basis claims fell by -21.6%, well ahead of the expected drop of -17.1%. At face value the decline is good, in line with trends and consistent with ongoing labor market health but there is a red flag popping up; not adjusted claims are now higher than at this same time last year, the first time this has happened in several years. It may be nothing, just part of seasonal flux, but worth noting.

Continuing claims gained 49,000 from an upward revision of 11,000 to reach 2.268 million. The four week moving average of continuing claims also rose, gaining 15,750 to hit 2.246 million. This is a new 6 month high but not yet alarming, continuing claims remain low relative to trend and consistent with labor market health. If this metric continues to rise, and spill through into the total claims is noticeable, then we may have a problem.

Total claims fell by -122,445 from the peak set last week. This total number of Americans receiving unemployment benefits is now 2.729 million. The drop seen this week was predicted by historical data, if the data holds true then initial, continuing and total claims should begin to trend lower over the next 4 to 6 weeks and then into the summer months. On a year over year basis the total number of claims is down -7.9% and consistent with ongoing labor market recovery.

Pending Home Sales rose by a meager 0.1% in December and the November data was revised lower by a -0.1% so that gain is a wash. On a year over year basis signed contracts for new homes are up 4.2% in December, the 16th consecutive month of increase. Lawrence Yen, chief economist for the National Association of Realtors, says that difficulty in finding affordable homes is being offset by strengthening labor markets. Demand is expected to continue into 2016 but may see some dampening. Existing Home Sales are forecast to rise by 1.5% in 2016.

Tomorrow look out for Chicago PMI, Michigan Sentiment, the Employment Cost Index and the 1st estimate for 4th quarter GDP. Expectation is for growth to temper from 2% in the 3rd quarter to about 1% in the 4th.

The Oil Index

Oil prices spiked on rumor in today's session. WTI jumped by more than 7% at one time but tempered that gain going into the close. By end of day WTI and Brent were both up by more than 3.5% but well off the early highs. In my view this move is reactionary and without substance; the rumor is just that, a rumor. There is no change to fundamentals at this time so today's spike is most likely another shorting opportunity for oil bears. If a meeting of ministers does take place, and they do reach an agreement, prices may rise again but until there is a substantive change in the supply/demand picture I expect prices to remain low.

The oil sector got a boost from today's pop in oil prices that drove the Oil Index up by nearly 3%. Today's action created a gap to the upside that opened the session just below resistance, and then sold off from there. Resistance is at the short term moving average, just below the 1,000 level, and may prove strong. A failure to break above could result in a move back to support levels near 900. If oil prices fall back from today's peak the move to support could be swift.

The Gold Index

Gold prices have held steady over the past 24 hours, in the wake of the FOMC meeting and policy announcement. The Fed statement did not make any reference to when, if or how interest rates would be raised, weakening the dollar and leaving the market open for another 6 weeks of data driven speculation. Today, gold prices held flat near $1115, supported by a weaker dollar, but well below resistance targets and yesterday's high near $1125. Prices may remain at this level, within a range, until data or central bank activity provide a clearer outlook.

The Gold Miners ETF GDX fell from yesterday's peak but remains above the short term moving average. Today's candle is a small spinning top but one with bullish overtones. Today's action helps confirm near term support at the moving average and an upward trend within the 7 month trading range. The indicators are pointing higher, confirming the recent break above the moving average, and pointing toward the upper end of the range. First target is near $15 with additional targets near $16 and $17 should gold prices move higher as well.

In The News, Story Stocks and Earnings

The Dollar Index fell a little more than -0.30% in today's session. The FOMC's apparent dovishness has weakened the dollar and sent the index down to test support near $98.25. The downward move in dollar value could continue if global financial turmoil and/or weak US data persists. The indicators have confirmed the downside move with bearish crossovers but are otherwise consistent with a range bound index. At this time the most likely catalysts for the dollar are the ECB and BOJ which have both indicated a willingness to increase QE; the Fed is monitoring the situation.

Earnings. Today was one of the biggest days of the season, both in terms of sheer numbers and numbers of big name companies. Based on my calendar it looks like there were at least 175 major reports with names like Amazon, Microsoft, Pulte, Time Warner, JetBlue, Ford, Harley Davidson and many others. All in all the reports were good, there are isolated misses but in general earnings and revenues are coming in better than expected.

Names reporting before the bell:

Pulte Homes-Beat on the top and bottom line. Sales prices are up 6% over last year. Company CEO says they are benefiting from a favorable demand environment. Back logs are up 26% year over year.

Time Warner-Beat expectations although earnings fell -11% from last year.

Harley Davidson- Beat EPS and revenue expectations but edged down from last year. Revenue of $1.18 billion is down from last year's $1.20 billion but well ahead of the expected $1.02 billion projected by analysts. Shares of HOG jumped more than 5% at the open but sold off from there.

Ford-Beat on top and bottom line, reports first profits in Europe since 2011.

Caterpillar- Revenues miss, earnings beat (smaller than expected loss) and guidance is better than expected. Company CEO says the coming year is going to be tough.

UnderArmor- The star of the morning may have been UnderArmor. The company reported better than expected revenue, earnings and guidance driven on strong demand. The news helped to drive the stock up by more than 20% and left it near the high of the day.

After hours action included names like Microsoft, Amazon, Visa and Electronic Arts, all of which beat expectations, except for Amazon. Amazon reported revenues that more than doubled last years results for the same period but earnings were much weaker than expected. The street was calling for near $1.50 in earnings, reported adjusted earnings were $1. Shares of the stock had been trading up as much as 10% during the open session, but fell by an equal or greater amount after the earnings report hit the market.

Microsoft jumped by more than 3% in after hours trading, driven by better than expected earnings. The stock moved up above the short term moving average and looks like it is heading up to retest the recently set high.

The Indices

The indices tried to rally today but the signals are mixed. Most of them were able to make gains and hold them, if capped by resistance, but not all. The Dow Jones Transportation Average was the only of the four major indices to close with a loss, just over -0.80%. Today's action returns the index to support at the 6,700 level. The indicators are moving higher, confirming the bounce from support, but it looks like support will be tested again. If 6,700 fails, next target for support is 6,600.

Today's leader was the NASDAQ Composite, led by Amazon in the early hours so we'll see how if it retains leadership tomorrow. In any event, today's action carried the tech heavy index up by more than 1% at the open only to lose some of those gains during the day, the index closed with a gain of 0.86% and created a bearish candle with long lower shadow. The indicators are mixed; momentum remains bearish although it is close to shifting to the upside, stochastic is pointing higher with both %K and %D. This set up could be a preamble to a bullish break above the 4,500 resistance line, or a drop down to retest support along 4,400, depending on market whim and the price of oil Friday morning.

The Dow Jones Industrial Average made the 2nd biggest gain in today's session, about 0.79%. The blue chips created a medium bodied white candle with long lower shadow, indicative of support just below yesterday's closing price and the bottom of a 5 day consolidation. The indicators are rolling into a bullish signal, MACD is crossing the zero line today in confirmation, so it looks like this one could continue rising up to test resistance at the short term moving average. Upside target is near 16,500 with 15,600 target for support should the index pullback.

The S&P 500 made the smallest gain in today's session, only about 0.55%. The broad market created a white bodied candle with upper and lower shadow, indicative of indecision, between a two potential support and resistance lines; support is near 1,860 with resistance near 1,900. The indicator are pointing higher, consistent with a bounce from support, MACD confirming today with a bullish crossover. Upside target, should resistance be crossed, is near 1,950 in the near term.

The market certainly looks like it is trying to bounce, although the indications remain mixed. With the FOMC out of the way for at least a couple of weeks market direction is going to come down to earnings and oil prices. Earnings are coming in better than expected, if weak, while oil prices remain questionable. Oil may cause a retest of support but I think earnings, and forward outlook, will help support to hold. Whether or not a rally develops is yet to be seen. I remain bullish in the long term, cautious in the near.

Tomorrow look out for after shocks from today's post-closing earnings reports, another onslaught of new reports and the first estimates for 4th quarter GDP.

Tomorrow is also the last trading day of January, this could bring additional volatility as money managers liquidate losers and scoop up bargains.

Until then, remember the trend!

Thomas Hughes

New Plays

Slowing Global Economy

by Jim Brown

Click here to email Jim Brown
Editor's Note

With the global economy slowing there is lower demand for certain kinds of products. One of those is industrial packaging.

Some companies come on to the scene in a fiery burst of glory and surge to new highs over the next few years as their niche in the industry expands. Once that niche expands too much other competitors begin to appear and the fight is on for market share. Those companies that did well in a low competition environment sometimes to not fare well once the giant corporations begin to crowd out the space. Chinese companies are very adept at recognizing an opportunity and then flooding the space with low cost goods. The original leaders begin to fade and while they may have their own niche for years to come their stock prices slowly dwindle away. This may be one of those companies.


No New Bullish Plays


GEF - Greif Inc - Company Profile

Greif produces and sells industrial packaging products worldwide. With the global economic slowdown and decline in package shipping Greif shares have been sliding.

They reported earnings in December and revenue declined -17% because of lower volumes and the impact of the strong dollar. They also passed along some price decreases because of a decline in the cost of steel and other commodity materials used in their packaging.

They reported earnings of 76 cents compared to estimates for 49 cents but the majority of the gain was due to a reduction in expenses and a lower tax rate rather than an increase in sales. Revenues declined from $1.048 billion to $869 million and missed estimates for $897 million. Profits fell -19.7% year over year. Their cash on hand slipped to $106 million compared to debt of $1.23 billion.

Shares spiked on the earnings beat but then quickly declined from that $35 level to the close today at $25. That is an 11-year low.

With the global economy shrinking and China in decline the outlook for custom industrial packaging products is getting weaker. I expect we will see even lower lows ahead until the global economy begins to recover. Shares did not participate to the upside on the recent positive days in the market.

The volume on GEF is low at 250,000 shares. If that scares you then I would avoid this position. Option volumes are too low so this will be a stock only position.

Earnings are March 2nd.

Sell short GEF shares, currently $24.96, tight stop loss @ $26.25.

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In Play Updates and Reviews

Amazon Misses

by Jim Brown

Click here to email Jim Brown
Editors Note:

The market rallied to a decent gain today but tomorrow may be another story. Amazon reported earnings of $1.00 compared to estimates of $1.56 and was down -$95 in afterhours.

Amazon posted a monster miss after gaining $52 in the regular session. The initial news knocked Amazon back to $540 from the $635 close but dip buyers appeared ahead of the conference call. Shares settled in the $550 range, -$85, at the end of the afterhours session. This could put a cloud over the market on Friday.

However, Microsoft reported great earnings of 78 cents compared to estimates for 71 cents. They also beat on revenue. Microsoft shares rallied 8% to $56.37 in early trading but faded to close the session around $53.00 and a gain of $1.00 from the regular close.

The Dow gained +125 for the day and broke its four-day string of alternating 200-point gains and losses. We still alternated from a loss but the gain did not reach 200 points.

The outlook is mixed for Friday and some traders may be looking to take some quick profits from the rebound while others may be looking to close some shorts before the weekend. I doubt anyone will be putting on new positions ahead of what could be a rocky weekend in Asia.

Current Portfolio

Current Position Changes

KRE - Banking ETF

The short position in the Banking ETF was stopped out by 2 cents. I am recommending we reload this position.

SSYS - Stratasys

I lowered te stop loss on SSYS.

USO - US Oil Fund

The long position remains unopened due to the spike in WTI.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

SWHC - Smith & Wesson - Company Description


S&W posted a minor gain and there was no follow though to Wednesday's decline. However, the excitement appears to be fading. I will raise the stop loss this weekend.

Original Trade Description: January 21st.

Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.

The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.

December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.

While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.

S&W said they were on the hunt for candidates but did not have any announcements at the current time.

This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.

Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.

Earnings March 8th.

Position 1/25/16:

Long SWHC shares @ $21.35, see portfolio graphic for stop loss.


Long June $23 call @ $1.75, see portfolio graphic for stop loss.

UFPI - Universal Forest Products - Company Description


UFPI cannot seem to maintain a positive trend. The pattern is still intact but the resistance at $67.50 is also firm. We have lower highs and higher lows so something is going to happen soon. The pattern will eventually break with a big move. Short-term support is holding.

Original Trade Description: January 16th

UFPI recently experienced a -20% pullback from its December 2015 highs but shares are still trading at levels not seen for almost ten years. More importantly it appears that the correction is over.

UFPI is in the industrial goods sector. According to the company, "Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America and in Australia that supply wood, wood composite and other products to three robust markets: retail, construction and industrial. The Company is headquartered in Grand Rapids, Mich., and is celebrating its 60th year in business."

The big surge in the stock in mid October was a reaction to the company's Q3 earnings report. It was a record-breaking quarter for UFPI in spite of a -17% drop in the lumber market. Here is an excerpt from the company's earnings press release:

"UFPI announced record-breaking 2015 third-quarter results. The Company posted the best third-quarter earnings in its history with net earnings attributable to controlling interests of $25.6 million, an increase of 32.9 percent over the same period of 2014. It also posted the highest year-to-date net earnings in its history, at $61.7 million. Earnings per diluted share were $1.26 in the third quarter of 2015, up from $0.96 in the third quarter of 2014. Net sales of $762.3 million for the third quarter were up 6.8 percent over the same period of 2014."
The stock has been trading very technically with investors keying in on support and resistance levels. Shares of UFPI did see a rough December after a downgrade on December 8th. However, after a -20% pullback investors started buying UFPI last week. That is noteworthy since the broader market was crashing lower last week. You'll notice on the daily chart that UFPI found support at its simple 200-dma and delivered a pretty good gain for the week.

We think this bounce continues and want to hop on board. There is very short-term resistance at $67.00. Tonight we are listing a trigger to launch bullish positions at $67.15. Investors may want to limit their position size to reduce risk since UFPI has proven itself to be somewhat volatile.

FYI: UFPI does have options but the spreads are too wide to trade them.

Position 1/19/16:

Long UFPI stock @ 67.37, see portfolio graphic for stop loss.

USO - US Oil Fund ETF - ETF Description


The bogus comments from the Russian energy minister continue to spike the crude market. Alexander Novak made headlines when he said Saudi Arabia had proposed for OPEC nations and Russia to voluntarily cut production across the board by 5%. News services reported that OPEC and producers outside OPEC would meet to discuss production cuts. Crude spiked to nearly $35 on the headlines.

Shortly after that Saudi Arabian officials denied they had spoke to Russia about production cuts and said there was no meeting scheduled with any producers. The Saudi official said this was an old suggestion by Venezuela that was being reused to spike oil prices.

An OPEC spokesman said they could not confirm the rumor of a proposed meeting with OPEC producers. Another spokesman from Saudi Arabia said the country had no plan to cut production by 5%.

Later Novak clarified that he had met with representatives from the various Russian oil companies and in that meeting the possibility of a meeting with OPEC had been discussed. It was all in Russia and there was no contact with OPEC.

Despite the multiple denials of the rumors the price of oil spiked to near $35 at the open and then faded to about $33.50 intraday.

Now that oil ministers have figured out they can float these rumors and get a $5 spike in oil prices we should expect to see one at least once a week. Russia produces about 10.6 mbpd and exports about 9 mbpd. A $5 spike in oil prices is a lot of money for a country that is bleeding cash.

I may raise the entry point this weekend to take into account the potential for continued headlines in an attempt to support crude prices.

Original Trade Description: January 27th

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

With a USO trade at $8.50:

Buy USO shares no stop loss.


Buy USO $10.00 calls, currently $1.03. No stop loss.

BEARISH Play Updates

KRE - SPDR S&P Regional Banking ETF


Regional banks spiked with the market at the open and then traded sideways the rest of the day. We were stopped out by 2 cents at $36.45. I am recommending we reenter the position with a KRE trade at $35.35. The weakness in the energy sector and the rising defaults in energy loans will continue to pressure the regional banking sector.

Original Trade Description: January 25th

We were knocked out of the long position on this ETF with the drop below support this morning. The keywords in that sentence were "drop below support." Typically, when long-term support breaks we are looking at a continued decline that could be material.

Regional banks are tanking because of their loans to energy companies and to firms that service those energy companies. That includes restaurants, service stations, apparel stores, mom and pop businesses of all types that catered to the families of the 150,000 energy workers that have been laid off.

In addition, the U.S. manufacturing sector is in recession. With energy, manufacturing, transportation already in recession the odds are increasing that the country is going to be headed in that path as well.

Today, the Texas Manufacturing Outlook Survey for January fell from -20.1 to -34.6 and the lowest level since 2008. The outlook for the U.S. economy is not good and that means regional banks could be facing rising defaults.

I hate to go straight from a long position to a short position but in this case, the situation appears to be right. We entered the long position on a dip to support at $35. There was an immediate rebound but then that support failed today based on economic news.

Position 1/26/16, closed 1/28/16:

Closed: Short KRE @ $34.38, exit $36.45, -2.07 loss.


Closed: Long March $33 put @ $1.15, exit .47, -.68 loss

Reload this position with a KRE trade at $35.35.

Short KRE @ $35.35, stop loss $36.65


Buy long March $33 put, currently .47, no stop loss.

OIH - Oil service Index

ETF Description


See the comments on the USO position. Another short squeeze caused by headlines.

Original Trade Description: January 20th

The OIH ETF represents 25 oil service stocks including Schlumberger, Halliburton and Baker Hughes. Once you get past those three largest holdings the rest of the pack has little balance sheet strength and we could easily see multiple bankruptcies or credit defaults. The bottom of the list contains Tidewater (TDW), Carbo Ceramics (CRR), Seadrill (SDRL), etc. The risk of default is high for the bottom half of the list. View Full List

The "perceived" bounce in oil prices by shifting to a new contract at $28.81 instead of the $26.55 close may cause some investors to buy energy stocks in a knee jerk reaction. Do not be fooled. The bottom in oil prices is still ahead.

The API Inventory report tonight after the close showed a larger than expected gain of 4.6 million barrels of oil and 4.7 million barrels of gasoline. The more accurate EIA inventory report comes out at 10:30 on Thursday.

The inventory build season runs from January 6th to the end of April. Last year inventories rose a whopping +106 million barrels to record levels during that period. There is not likely to be another rise like that because there is very little available storage capacity in the USA. Canadian oil is now selling for $15 below WTI because all the Midwest storage locations are virtually full. Bakken oil is selling for $8-$10 below WTI prices for the same reason plus transportation is expensive to other locations.

I believe we will see WTI at $25 or below over the next two months and possibly even $20 because of the price pressure from the Iranian oil sales. They have about 50 million barrels stored on tankers and that oil is now available for sale. Prices are going lower.

This will probably drag the equity market lower as well but eventually there will be a disconnect between equities and oil prices at some level. The constant headlines about lower oil prices will eventually become old news. Of course, key levels like $25, $22, $20 could cause some additional market weakness.

Energy stocks will continue to react to the low oil prices because every dollar of decline is very painful and impacts their ability to service debt and keep the doors open. Analysts claim as many as 50% of the U.S. producers could default or worse if prices remain low for very long.

I am recommending we short the OIH and expect to hold the position until April. The plan will be to close it about the time inventories top out in early April. We could see a minor uptick at the open on Thursday because of the new front month contract. When inventories are announced at 10:30 we should see a decline in WTI if they are high as expected.

Position 1/21/16:

Short OIH shares @ $21.26, see portfolio graphic for stop loss.


Long July $20 put @ $1.92, see portfolio graphic for stop loss.

SSYS - Stratasys Ltd - Company Description


Wednesday's minor bounce faded and SSYS is headed for new lows. I lowered the stop to $17.45.

Original Trade Description: January 22nd.

Stratasys is a maker of 3D printing systems and parts. The company makes parts for other equipment using its proprietary 3D printing systems. They manufacture for sale production systems under the Dimension, Objet,Fortus, Polyjet, SolidScape and MakerBot brands.

While the 3D printing business is expanding in scope and acceptance all around the world the excitement over 3D stocks has faded. XONE, DDD and SSYS shares have been fading since their peaks back in 2013. Stratasys closed at a new six-year low on Friday despite a minor rebound with the rest of the market.

I debated which 3D stock to short and picked SSYS because of the identifiable trend and it has farter to fall than competitor 3-D Sys Corp (DDD). That stock is cheaper at $7.41 if you would rather have less at risk.

The decline in Stratasys accelerated since mid December. There have been two small rebounds along the way. I see the rebound from the 6-year lows last week as an opportunity for a short at a higher level. This gives us an obvious stop loss at $19.50 and the odds are good we will see a new low in the weeks ahead.

Update 1/26/16: The stock was downgraded by JP Morgan from buy to neutral. JPM said demand for the parts that DDD and SSYS make is dying and competition is fierce. They cut the price target to $19. UBS cut expected earnings in half for SYS to 30 cents. The bank cut the rating to sell and price target to $16. Earnings are March 2nd.

Position 1/26/16:

Short SSYS shares @ $17.45, initial stop loss $19.50


Long March $15 put @ 95 cents, initial stop loss $19.50

VXX - VIX Futures ETF


No material move. The VXX closed on support at $25. Be patient. The volatility will eventually die.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

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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