Option Investor

Daily Newsletter, Tuesday, 2/2/2016

Table of Contents

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

Market Wrap

Oil Rebound Crushed

by Jim Brown

Click here to email Jim Brown

Positive earnings from Google and others were overshadowed by economic concerns and a plunge in the price of oil of more than 12% over the last two days.

Market Statistics

I have been telling readers this would happen once oil prices got past the Russian headline spam from last week. The multiple vague comments about production cuts and meetings with OPEC spiked crude to $34.40 last week. Over the weekend, repeated denials of any potential deal or even any talks killed that headline spike. Russia tried it again this week when Russia's energy minister and Venezuela's oil minister met to "discuss production cuts" but the headlines produced by the meeting failed to lift oil prices. They tried to create a photo op and headline but it had no impact. That suggests further headlines will have no impact and fade quickly.

The American Petroleum Institute (API) said after the close that U.S. crude inventories rose +3.8 million barrels to a new record high. Gasoline inventories rose 6.6 million barrels. This pushed crude prices even lower in afterhours trading to $29.40. The EIA inventories due out on Wednesday morning are generally accepted as more accurate and they showed an 8.4 million barrel build last week. Crude prices should remain under pressure for the next 8 weeks until the normal inventory build cycle ends and refiners begin to produce summer blend fuels ahead of the driving season.

Investors see oil prices as a proxy for the health of the global economy. If oil demand is not rising, prices fall and that suggests the global economy is weak. In the current environment, demand growth has slowed at the same time production growth has increased. Dramatically lower oil prices are forcing inflation down around the world and driving central bankers crazy. Everybody just needs to take a step back and look at the historical inventory patterns and realize that prices will rise somewhat when inventories begin to decline in April.

The economic reports did not create any confidence in the market. The ISM-NY fell to a four-month low at 54.6, down from 62.0 in December. The six-month outlook component fell from 70.7 to 63.3 and the lowest reading in six months. The purchase quantity component declined from 50.0 into contraction territory at 46.4. Current revenues declined from 60.0 to 45.8. The only component to gain materially was employment jumping from 42.9 to 56.9.

The last update from the Empire State Manufacturing Survey on January 15th saw the headline number dip to -19.4 and the lowest since the financial crisis. With the ISM-NY now confirming that decline in New York business activity the outlook is weakening. However, companies would not be adding employees if they were really concerned.

Auto sales for January came in at an annualized rate of 17.6 million and higher than expected. The December rate was 17.3 million. Considering the blizzard in the Northeast those were very strong numbers for January sales. The blizzard cost dealers a week of sales. Auto sales were flat at 7.4 million but light trucks and SUVs rose from 9.9 to a pace of 10.1 million. These numbers are seasonally adjusted so the real impact may not be seen for several months. Low gasoline prices are really helping the auto sector and people are buying larger vehicles, which helps profitability for the manufacturers.

We will get the first payroll report for January on Wednesday and expectations have declined to 195,000 from 210,000 because of rising weekly jobless claims and the seasonal declines in January. Estimates for the Nonfarm payroll number for Friday have declined from 220,000 to 190,000.

The ISM Nonmanufacturing Index on Wednesday declined slightly to 55.1 after the ISM Manufacturing report on Monday came in at 48.2 and the fourth consecutive month in contraction.

The closer we get to Friday the more likely we will see a decline in the Chinese markets ahead of their weeklong holiday next week. Investors would have to have a cast iron stomach to hold long positions over a weeklong holiday.

Alphabet (Google) posted strong earnings on Monday and shares spiked to $810 overnight and again early this morning, for a gain of $40. That gain faded as the day progressed and GOOGL closed today with only 10 points remaining of that initial $40. That was not enough to rescue the Nasdaq from a -103 point loss.

Earnings this morning did not help the market. Exxon (XOM) reported a 58% decline in profits and said it was slashing capex spending by 25%. Exxon reported earnings of 67 cents on revenue of $59.81 billion. That beat estimates for 63 cents but was way down from the $1.32 and $87.28 billion in the year ago quarter. Full year profits declined from $32.5 billion in 2014 to $16.2 billion in 2015. Production rose +3.2% with liquids up +11% to 2.33 mbpd. Exxon reduced capex -19% in 2015 to $31.1 billion and said they would cut another 25% to $23.2 billion in 2016. Exxon bought back 48 million shares of stock at a cost of $4 billion and paid $15.1 billion in dividends. Shares declined -$1.70 on the news.

Exxon's -$1.70 decline did not have an appreciable impact on the Dow but fellow component Chevron (CVX) fell more than $4 on the drop in oil and Exxon earnings news. Investors are afraid that Chevron will not be able to continue its 5.3% dividend if oil prices continue lower. The Chevron decline cost the Dow about 30 points.

BP Plc (BP) reported earnings that fell -91% to $196 million, down from $2.2 billion. The oil giant announced 7,000 planned layoffs. The CEO tried to assure investors that the dividend was secure as a result of the planned cuts in employment and capital expenditures. Shares fell -8.5% so apparently it did not work.

Royal Caribbean Cruises (RCL) reported earnings of 94 cents that beat estimates for 92 cents. Revenue of $1.9 billion missed estimates for $1.95 billion. The company provided weak guidance for Q1 of 30 cents compared to estimates for 46 cents. Full year forecasts of $5.90-$6.10 missed analyst estimates for $6.25. Despite the falling fuel costs, the cruise lines are now dealing with the Zika virus and cancellations for southern cruises. They also expect revenues to suffer a -14% decline from the strong dollar. Shares of RCL fell -15% and were the largest decliner on the S&P-500. Carnival (CCL) shares were down -8%.

UPS (UPS) reported adjusted earnings of $1.57 that beat estimates of $1.41. Revenue of $16.05 billion missed estimates for $16.27 billion. UPS delivered 1.3 billion packages in Q4, a 2% increase over 2014. They hired 95,000 seasonal workers but because of increased automation, they were able to delay some of the hiring until it was needed. The company guided to full year earnings of $5.70-$5.90 and analysts were expecting $5.72. Shares closed with a minor gain and $1.50 off their highs.

After the bell, Gilead Sciences (GILD) reported earnings of $3.32 compared to estimates for $3.00. Revenue of $8.51 billion easily beat estimates for $8.14 billion. Hep-C revenue of $4.9 billion also beat estimates for $4.45 billion. The company announced a 43-cent dividend for Q1 and increased it by 4 cents to 47 cents for Q2. They also announced another $12 billion stock buyback program in addition to the existing $15 billion authorization with $8 billion remaining to be spent. With a market cap of $119 billion, they are going to buy back roughly 20% of their stock. Gilead plans to spend $5 billion over the next three months in an accelerated buyback given the low price of their stock. Shares rose $1 in afterhours.

It is puzzling to me why Gilead shares are not moving higher. Record earnings, record cash, dividend increases and monster stock buybacks are not helping. The only excuse I can come up with is the worry over a new president clamping down on high drug prices. Gilead would be a prime target with their $90,000 Hep-C drugs.

Yahoo (YHOO) reported earnings of 13 cents that matched estimates. Revenue of $1.27 billion beat estimates for $1.19 billion. However, the company remains under pressure from shareholders to do something to improve value. The company said it was considering a reverse spin off to separate the core business from the Alibaba holdings. They are going to lay off 15% of the work force and close five offices in an effort to cut $400 million in expenses by the end of 2016. They are also considering selling off some noncore assets in a move they believe would generate $1 billion or more in cash. Shares declined slightly in afterhours.

Chipotle Mexican Grill (CMG) reported earnings of $2.17 compared to estimates for $1.85. Revenue of $997.5 million missed estimates for $1.003 billion. The decline in sales from the E.coli outbreak has been painful. Same store sales declined -14.6% and net income fell -44% to $67.9 million. The CDC ended its E.coli investigation on Monday but now the company has a bigger problem.

The U.S. Attorney's office in California served them a subpoena that broadened the scope of a previously announced criminal investigation. The original investigation focused on only one store in Simi Valley, California. The expanded investigation is now national in scope. Chipotle said it was cooperating with the investigation. Shares declined -$35 in afterhours.

Apple researcher, 9to5 Mac, said Apple could be planning on releasing a new iPhone at a March 15th event. They also expect a new iPad and new Apple Watch band options. The firm expects an upgraded 4-inch iPhone 5SE and iPad Air 3. Apple needs the smaller, cheaper iPhone to compete with the cheaper Android models in China and India.

Dow Jones is reporting that Amazon is planning on opening 300-400 brick and mortar bookstores. This came from mall operator General Growth Properties CEO Sandeep Mathrani on an earnings call with analysts. Amazon opened its first store in Seattle in November calling it a "physical extension of Amazon.com." The books and products sold at the stores are supposed to be the same price as buying online at Amazon.com. The key here is that people like to browse books and you can bet that there will be plenty of Kindles, Fire tablets and other Amazon electronics and products other than books.


The major indexes gave back nearly all their gains from the Friday market spike and the only real culprit was the drop in oil prices. There is murmuring about the health of the financial sector both here and abroad and the talk of a global recession or deflationary cycle will not go away. Oil prices are contributing to that problem by making significant impact to foreign economies.

In Russia 25% of their GDP comes from the energy sector. In Saudi Arabia 90% of their revenue comes from oil. Venezuela is circling the drain and would already be bankrupt if it were not for the daily influx of petrodollars.

In Europe, the banks are crashing because of their exposure to energy and mining plus the negative interest rates charged by the ECB. One analyst claimed today that several of the major European banks could be going to zero because of their exposure to commodity businesses. For example, Glencore, a major European mining company has more than $20 billion in debt outstanding and much of it was syndicated to European banks. There are rumors that Glencore could file bankruptcy.

In the U.S. Goldman Sachs (GS) declined -$8 today to knock about 56 points off the Dow. The bank has exposure to commodities and to energy loans but they are far from life threatening. Goldman closed at a two-year low.

According to some analysts, the problem is interbank liabilities and derivatives. How much would the collapse of Deutsche Bank (DB), Credit Suisse (CS) or the Royal Bank of Scotland (RBS), just to mention a few, impact the rest of the banking system in Europe. Is there a Lehman moment somewhere in the near future? How much would a European banking crisis impact the USA? Nobody has the answers to these questions and the indecision is causing market unrest.

In the U.S., the yield on the ten-year treasury closed at 1.84% and some analysts believe it is going to 1.5% later this year. That was the low back in 2012. Everybody appears to be rushing to the safety of treasuries in a period of uncertainty.

Earnings for Q4 are down -5.8% as of Friday with revenues down -3.5%. If the quarter finishes as expected this will be the third consecutive quarter of earnings declines and that rarely happens outside a recession. The last time was in 2009.

This is weighing on the markets along with falling commodity prices. The Baltic Dry Index hit another record low today and that means very few companies are shipping anything from country to country.

The U.S. GDP came in at a miniscule 0.7% growth in Q4 and the manufacturing sector is in a recession. There are lots of problems worrying the market and yet analysts keep projecting higher S&P prices by the end of 2016.

Where is that rally going to start? The S&P recoiled violently from resistance at 1,950 on Monday. The high was 1,947 and there was an immediate 10-point drop when that was reached. The index declined to support at 1,900 today and back into correction territory.

Quite a few analysts believe we are going to retest the lows before we begin a real rally into midyear. They are mixed on whether that means the 1,867 lows from August or the 1,812 lows from January. At this point, the S&P is only 36 points above the August lows so that would be the initial target. What happens then is the $64 question.

Initial support is now 1,878 and a break of that level could see the selling accelerate.

The Dow touched resistance at 16,500 on Monday and the selling there was instant as well with a -70 point drop from that level. The Dow has decent support at 16,025, 15,855 and 15,700. Fortunately, most of the Dow stocks have already reported earnings so there will be little headline risk. However, the decline in the financials and energy stocks are sharp enough that we do not need any additional risk to push it lower.

The tech sector is still being dragged lower by the biotechs. The Biotech Index ($BTK) declined another -4.3% today to 2,775. There is potential for a pause at 2,700 but the real target is 2,300 because of the political attacks on drug prices. The BTK is now down -38% from its highs and deeply into a bear market.

The biotechs are dragging the Nasdaq and the Russell into a bear market with them. The Nasdaq Composite is down -13.5% from its highs and could easily retest the August low at 4,292 without any significant event to rescue it from disaster. The major Nasdaq stocks have all reported earnings and are in decline.

The Russell 2000 gave back -2.3% today to close at 1,009 with support at 1,000. With biotechs and energy stocks dragging the index lower the odds are good it will move below that support and possibly retest the January low at 954 if we have another $25 print on oil prices. With crude at $29.45 as I type this that is a very good possibility we will see $25.

The last problem weighing on the market is the emergence of the Zika virus. The virus was first discovered in 1947 and is reported to cause brain damage in unborn infants if the mother contracts the virus while she is pregnant. It is thought to cause Microcephaly where the baby is born with a shrunken head and much smaller brain. More than 4,000 cases of Microcephaly have been reported in Brazil and blamed on the virus. This is causing airline passengers to cancel trips. Summer vacations to southern states and the Caribbean are already being cancelled as well as cruises in southern waters. The U.S. economy is already weak enough and it does not need another crisis but we do not get to chose when it is convenient for a crisis to appear.

S&P futures are down -10 as I write this. If nothing changes, Wednesday could be another down day. Asian indexes opened significantly lower and that is probably one of the factors in our futures decline.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Gains Erased

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market gains from Friday/Monday have almost been erased. With futures severely negative tonight we could see 1,878 on the S&P on Wednesday.

The market rolled over on a multitude of reasons, some valid, some not. The biggest point tonight is that we do not want to enter new positions in a market that is reversing directions almost daily with 200 point moves.

Indecision forms bottoms. Buyers and sellers alike do not know what will happen from day to day. This forces traders to go to cash after getting a bloody nose from being smacked with reversal after reversal. Eventually those left in the market will find a balance point and a direction will appear.

There are indications today that we could decline further in the next couple of days. We could easily retest the August lows at 1,867 on the S&P. There is very strong resistance at 1,950. With no clear direction, it is best to stand aside. We have a lot of shorts in the portfolio and we are ready for a continued decline. No new plays tonight.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Still Waiting on Direction

by Jim Brown

Click here to email Jim Brown
Editors Note:

The market picked a direction today but it was not the one the bulls wanted. However, one day does not make a trend.

The market opened down and stayed down as oil prices crashed and worries over economics and bank health in Europe took their toll. We had a good day despite the market decline. We only lost one position and that was UFPI. Shares dropped -$6 in the last two days on no news.

The KRE, GEF and INSY shorts were all triggered and are now active plays.

Current Portfolio

Current Position Changes

KRE - Banking ETF

The new short position in the Banking ETF was triggered at $35.35.

GEF - Grief Inc

The new short position in GEF was triggered at $24.65.

INSY - Insys Therapeutics

The new short position in INSY was triggered at $16.25.

BAC - Bank of America

The new long position in BAC remains unopened.

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

BAC - Bank of America - Company Profile


Still waiting for BAC to move up to $14.25 to confirm an up trend. Banking sector was weak again today.

Original Trade Description: January 30th.

Bank of America has been ignored since late December and their earnings report in early January did not generate a lot of excitement. The bank said it earned 28 cents that beat estimates for 27 cents. That equates to a profit of $3.3 billion. They ended the full year with a $15.9 billion profit. From where I am sitting that is outstanding since it was up from only $3.38 billion in 2014.

The bank did not get a bounce from earnings because the CFO said increasing revenue was difficult in this market because the bank is more heavily exposed to low interest rates because it has a large retail banking business and very little profit centers like stock and bond trading that support Goldman and JP Morgan. The earned their profits the old fashioned way one retail customer at a time and by slashing costs wherever possible. They eliminated 10,000 of its 223,715 employees and closed 129 branches. That leaves them with 4,726 locations.

BAC has $21.3 billion in energy loans and had $75 million in energy charge-offs in the quarter. The bank had $19.53 billion in revenue for the quarter and ended the year with $1.2 trillion in deposits. Once interest rates begin to rise the profits are going to explode higher.

BAC returned $4.5 billion to shareholders in 2015, $1.3 billion in Q4, through stock buybacks and dividends.

The last nine analyst ratings changes have been upgrades. On Friday Credit Agricole upgraded them from sell to buy and skipping the hold level in the middle. Sandler ONeil, Wells fargo, Nomura, Bernstein and Robert W Baird have all upgraded BAC to buy.

Multiple analysts published notes last week recommending Bank of America at the current three-year low. Their legal troubles are about over with the vast majority of the financial crisis problems behind them. They are well away from any level that could be worrisome in the Fed's stress test scenarios. They are making money and staying out of trouble and they are paying nearly a 2% dividend.

For people looking for a stock they can own and sleep at night this is it. The upside from the $14 close on Friday is $18, which has been resistance for two years. That equates to about a 28% gain if we were going to hold it that long.

To summarize, I believe the worst is over for the large banks and Bank America is in the sweet spot for when interest rates do rise.

With a BAC trade at $14.25

Buy BAC shares, stop loss $12.75


Buy May $15 call, currently 54 cents, no stop loss due to cheap option.

SWHC - Smith & Wesson - Company Description


Outstanding move over resistance at $22 in a very bad market.

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


Another big drop knocked us out of UFPI at our stop of $64.45. That was a $6 drop in only two days after testing resistance at $70 on Monday.

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, closed 2/2/16:

Closed: Long UFPI stock @ 67.37, exit $64.45, -2.92 loss.

USO - US Oil Fund ETF - ETF Description


Sharp drop in crude prices but we knew there would be some declines when we entered the position. We are holding for the eventual rally in prices in April or the emergence of a real production cut by OPEC when they meet in June.

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.

2/1/16: Position entered with a USO trade at $9.00:

Long USO shares @ $9.00, no stop loss.


Long USO July $10.00 calls @ $.85. No stop loss.

BEARISH Play Updates

GEF - Greif Inc - Company Profile


The GEF short was triggered on the breakdown to $24.65. This is a multiyear low.

Original Trade Description: January 28th

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.

Position 2/2/16:

Short GEF shares at $24.65, tight stop loss @ $26.25.

INSY - Insys Therapeutics - Company Profile


INSY traded at a new low today and showing no indications of a rebound soon. The short was triggered with a trade at $16.25.

Original Trade Description: February 1st.

Insys Therapeutics develops and commercializes supportive care products. This includes pain killers for the types of severe pain that can come from cancer and cancer treatments. Their main product is Subsys, a proprietary sublingual fentanyl spray for treatment of cancer pain. They have other products but this is the one taking the heat today.

Roddy Boyd is the "journalist" that took on Valeant (VRX) a couple months ago and crashed the stock from $250 to $80. He has released a new report called "The Brotherhood of Thieves" that takes Insys to task for its methods in getting double the insurance reimbursements than its older competitors.

His point is that Insys "executives pressure employees to develop new ways to mislead insurance companies in to granting coverage to patients prescribed the drug Subsys." He claims he has an audio recording of a meeting where Jeff Kobos, an executive with the company, admitted the company's dishonesty. The tape reportedly highlights "conversational gambits" to deflect pharmacy benefit managers questions.

Insys responded with a press release claiming the report was misleading and unreliable "especially in the light of the biased agenda held by the individuals who made these representations."

I am sure Insys is right to some degree since these short sellers and their supporters do their best to trash the company so they can benefit from the drop in the stock price. However, there has to be some truth to the report or Boyd would be opening himself up to a massive suit for his claims.

For our purposes we want to capitalize on this headline war and make a couple bucks while investors are fleeing the stock.

Earnings are March 1st.

Shares are at a 52-week low and support is about $12.50. I am proposing we short the stock at $16.25, under today's low and target $13.25 for an exit. For this move and timing option prices are too high to recommend an options position.

Position 2/2/16, with a INSY trade at $16.25

Short INSY shares @ $16.25, stop loss $17.65, target $13.25 for exit.

KRE - SPDR S&P Regional Banking ETF - ETF Description


The regional banks finally broke down with leadership coming from the major money centers. The current short recommendation was triggered at $35.35.

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.

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


The oil service stocks sold off after Exxon said they were slashing capex by another 25% and the price of oil collapsed to $29.50. Sure wish I had that short on the OIH back.

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:

Closed 1/29/16: Short OIH shares, entry $21.26, exit $24.25, -2.99 loss


Still long July $20 put @ $1.92, no stop loss.

SSYS - Stratasys Ltd - Company Description


Minor decline but headed in the right direction despite Monday's deal with Adobe.

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, see portfolio graphic for stop loss.


Long March $15 put @ 95 cents, see portfolio graphic for stop loss.

VXX - VIX Futures ETF ETF - ETF Description


The VXX moved slightly higher but failed to reach the prior resistance at $26.25. 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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