Option Investor

Daily Newsletter, Thursday, 2/4/2016

Table of Contents

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

Market Wrap

Weak Dollar Supporting Market

by Thomas Hughes

Click here to email Thomas Hughes
A dramatic fall in dollar value is helping to support the market; gold prices are up, oil is holding above $30 and the impact of currency on earnings expectations is diminished.


The dollar has fallen sharply this week as global slowing and iffy US data weighs on FOMC expectations. This move is, at least in the near term, helping to support the market. The price of gold is rising and lifting the entire complex, oil prices are holding above $30 and supporting the energy sector, and the impact of currency exchange on earnings expectations is lessened. Whether or not this will continue depends on future data (NFP tomorrow) and the actions of central bankers in the coming months.

Market Statistics

The international markets were mixed as ours were waking up. In Asia, Japan closed lower by nearly -1%, both Chinese indices made gains greater than 1%, possibly affected by the Chinese New Year holiday which begins on Monday. In Europe wavering oil prices and weaker than expected earnings from Credit Suisse left those indices mixed but mostly flat across the region.

Early futures trading had our indices opening mixed as well but early weakness in oil prices helped to send them down by about -0.5% going into the 8:30 release of economic data. After the data futures trading slipped a little further, up to and until oil prices started to shoot higher. By the time the opening bell sounded the markets were indicated to open flat and this held for the first 5 or 6 minutes.

Between 9:45 and 10AM the indices fell below break even, bounced off their respective support levels, 1900 for the SPX, and then moved higher in tandem with a 3% jump in oil prices. The rally looked pretty strong at first but did not hold, a late morning reversal in oil prices is to blame. The rest of the day saw the market hover around break even, neither touching the early low or high, and held those levels into the close leaving the indices just above break even for the day.

Economic Calendar

The Economy

Lots of data today, and little good. The first bit released this morning was the Challenger Gray & Christmas report on planned layoffs. The number of layoffs jumped 218% in January, up more than 50,000 from December's report to hit 75,114. This is the highest level since July 2015, the highest January total since 2009 and 42% higher than last year at this time. The cuts were led by the energy and retail sectors which added more than 20,000 each. The number of cuts in the energy sector is the highest level for the sector since January last year. The cuts in the retail sector were broad but led by Wal-Mart (planning to close 269 stores) and heavily affected by the shift to online sales. The top three reasons given for cuts are restructuring, oil prices and store closings. There were 5 job cuts associated with the Flint, Michigan H2O scandal.

Now for some perspective. First, this month's gain in cuts comes on the heels of a 15 year low set last month. While high, this month's cuts are largely seasonal and affected by a shift toward cutting end of year jobs AFTER the holiday's, rather than during. Taking this into account the average over the past 2 months is closer to 49,000, slightly above the average monthly job cuts in 2015 (about 48,750). In addition to planned job cuts Challenger also reports on planned hirings. Planned hirings in January totaled 8,362, including 858 jobs in the retail and energy sectors. In 2015 job cuts ran near a record high, but were outpaced by job openings.

Initial claims for unemployment rose by 8,000 from a downward revision of -1,000 to hit 285,000. The 4 week moving average of claims rose 2,000 from a mild revision to hit 284,750. Looking at the charts, the adjusted number of claims is elevated from last summer but remains low by historical standards, near the long term lows and consistent with labor market health. That being said, the red flag raised by not adjusted claims in last week's data is still flying and will need to be monitored. On a not adjusted basis the number of claims rose by +5.5% versus an expected 2.4% and are now about 2% above levels seen this time last year. On a state by state basis Kansas led with an increase of only 65 new claims while California led with a decline in claims of -21,269.

Continuing claims fell by -18,000 to hit 2.22 million. This is down slightly from the 8 month high set last week but remains low by historical standards and consistent with labor market health. The four week moving average continues to rise however, gaining a little over 5,000 to hit 2.52 million. Last weeks continuing claims were revised higher by 5,000.

The total number of jobless claims fell by -26,783 to hit 2.702 million. This is in line with historical expectations and should lead to a drop in claims over the next 2 months. On a year over year basis total claims are down -4.5%, less than the -8 to -10% I've been tracking over the past 2 years but still down and consistent with labor market health. Going forward we'll need to keep an eye on this as well as initial and continuing claims, if the data refuses to return to trend and remains elevated we could be in for some trouble.

Q4 productivity and labor costs were released at 8:30AM. Productivity fell by -3%, more than the expected -1%, while labor costs rose by 4.5%, also ahead of expectations. Within the report output rose by 0.1% while hours worked rose 3.3%. On a year over year basis 4th quarter productivity is up 0.3% while the average quarterly gain is just over 0.6%. Hourly compensation rose 1.3%. I think this data is a good example of the old adage, what's good for Mainstreet is not good for Wall Street; cost are going up but Americans are working more and getting paid more. Third quarter productivity and cost were revised up and down by 0.1% respectively.

Factory orders was released at 10AM and came in a little worse than expected. The headline number, new orders, fell by -2.9% versus an expected -2.6%. The previous month was revised lower by -0.5% to -0.7%. Shipments and unfilled orders also fell, -1.4% and -0.5%, while inventories rose by 0.2%.

There is some important data coming out tomorrow that will likely move the market; NFP and unemployment, along with hourly earnings and average workweek. Based on the ADP figures from yesterday the NFP could stronger than the 188K predicted by the analysts. A strong number I think could be a good and bad thing for the market at this. At first blush it will point to ongoing recovery in the labor market and strengthening of the consumer, on the flipside it could lead to increased expectation for another rate hike. Unemployment levels may rise due to the high level of job cuts revealed today.

The Oil Index

Oil prices wavered in the early pre-market session as a weakening dollar and expectations for an OPEC led production cut wrestled for dominance with high levels of supply and production. WTI was first above $32, then below $32. After the opening bell prices shot higher with WTI gaining close to 3% to trade above $33 and then later fell back below $32 to close with a loss of nearly -2% for the day. The weaker dollar should help to support prices into the near term, expectations for a production cut may help but I think may leave price open to correction as we saw in the later part of today's session. Current resistance target for WTI is just below $35 and may keep oil prices contained into the near term.

The oil sector moved higher on the back of oil prices, gaining a little over 1% during the early part of the day but hit resistance at the 1,000 level, fell back and closed with a small loss. The sector is trying to balance poor earnings and poor earnings expectations with the OPEC/Russia rumors, the recent bounce in oil prices and a weaker dollar.

If oil prices are able to maintain current levels and/or move higher earnings projections for the sector in 2016 could begin to bottom if not reverse. The caveat is that oil prices have been extremely volatile and could easily fall back to support, near $30, especially if/when expectations for an OPEC/Russia deal to cut production evaporate. The indicators are bullish and point to a continued test of resistance but have yet to show real strength, until then we may see it range between 950 and 1000 with a chance for a move to 900 should bearish sentiment reassert itself. . . and this may happened soon if Obama is able to get traction for his proposed $10 per barrel tax on US oil.

The Gold Index

The weaker dollar is helping to lift gold prices as well. Gold rose more than 1.25% in today's session to trade above $1150 for the first time in 3 months. Candle stick action over the past few days looks strong, momentum could easily carry prices up with next target for resistance near $1175. Risks at this time are stronger data points leading to increased expectation for another FOMC rate hike as well as the ECB's and BOJ's apparent willingness to increase QE.

The gold miners are rising on the back of gold prices. Higher prices mean higher profits and better margins, coupled with production that has been on the rise could lead to upside surprises in earnings, most likely in the next reporting season. Today the miners ETF GDX gained more than 5%, gapped higher, above the $15.75 resistance line and is now approaching the top of the 8 month trading range near $16.50. The indicators are on the rise, momentum is strong, and are pointing to at least a test of resistance if not a break above it. A break above $16.50 may find resistance at $17, next target above that is near $17.50. The caveat at this time is that the gap opened today may be closed before the ETF moves higher.

In The News, Story Stocks and Earnings

The Dollar Index fell another -1% in today's session and is now approaching the $96 support target. Based on the extremely large black candles which formed yesterday and today, along with bearish crossovers in both indices and rising downside momentum it looks like this level could be hit very soon, perhaps as early as tomorrow. A Fibonacci Retracement of the rally from the August low to the December high have today's closing price sitting right on the 50% line, with the lower shadow extending beyond. This level could provide support but a I expect a pretty firm test at least before consolidation or reversal can take place.

ConnocoPhillips reported quarterly results before the bell. The company is suffering from low oil prices and reported a miss on revenue and earnings, the quarterly loss of $2.78 is a little of 9000% larger than last year at this time, and 400% larger than predicted. Along with the loss the company reported an updated capex plan for next year, lower, and also lowered its dividend its dividend by roughly 66%. The news shocked investors and may be a sign of more dividend cuts in the sector. Shares of the stock fell more than -8% with weakening indicators and is now trading just above the 12 year lows set last week.

A couple of the big name retailers reported before the bell as well, namely Kohls and Ralph Lauren. Both companies reported misses on revenue, Ralph Lauren at least beat on the earnings end. Both also lowered full year guidance. Kohl's fell more than -8%, Ralph Lauren more than -22% both weighing on the entire sector. The Retail Sector SPDR fell in the early part of the session, losing about a half percent, before buyers stepped in to support prices. If the rest of the sector is as weak as these two I think we can expect to see the ETF retest support near $37.50.

LinkedIn reported after the bell, beating EPS estimates. The bad news is that revenue fell short of expectations and led to a lowering of first quarter and full year 2016 earnings guidance. Shares of the stock fell nearly -25% on the news and are now trading near 2 year lows.

The Indices

The indices tried to rally today but just couldn't hold the gains. The weakness in the dollar is helping to support the market, but volatility in oil prices remains and is a strong driver of day to day pricing. Today's action was led by the Dow Jones Transportation Index. The index gained a little more than 3.15%, created a long white candle, closed at the high of the day and broke above two resistance targets; if we can expect the transports to lead the market higher, as they did lower, this could be the sign it's about to happen. Both indicators are pointing higher, consistent with a rising market and confirming the break above resistance. Stochastic has yet to show strength, it is still in the middle of its range, but MACD is on the rise and has reached what is at least a 2 year extreme dating back to the October '14 bottom. Following that bottom the index made a gain of roughly 20% within only 3 months.

The next biggest gainer in today's session is the Dow Jones Industrial Average with a gain of 0.49%. The index did not make an overly bullish move as did the transports but nonetheless appear to be moving higher. Today's candle was halted at resistance, just below the short term moving average and the 16,500 level, but the indicators remain bullish and on the rise so a test of the resistance is likely.

The third biggest gainer in today's session is the S&P 500 which closed with a gain of 0.15%. The broad market index was able to hold support in the face of wildly fluctuating oil prices creating a doji like candle with prominent upper and lower shadow. Today's action appears to be confirming support along the 1,900 level, with a little oil driven indecision, and comes with bullish indicators. Both MACD and stochastic are on the rise and suggest the index will continue to move higher, at least up to the short term moving average near the 1,945 level.

The smallest gain in today's session was made by the NASDAQ Composite. The tech heavy index made a gain of only 0.12%, capped at the 4,550 resistance line and created a doji like candle. This index looks the weakest of all and may be in for a test of support, LinkedIn's results are sure to have an impact on it tomorrow. The indicators are bullish but momentum is in decline and a bearish crossover on stochastic may be pointing to such a test.

Something is building in the market. Looking at the SPX, DJI and COMP it may be nothing more than a consolidation of recent lows, looking at the DJT it looks like an extended rally is brewing. Whether or not it happens will come down to a couple of factors, deeply intertwined and circular, that boil down to this; earnings expectations.

Data will show strength or weakness in the economy. Strength or weakness in the economy will put spin FOMC expectations. FOMC expectations will drive the dollar. Dollar value will drive earnings across the broader market including the gold sector, the energy sector and those companies who have exposure to currency conversion. All of these will affect the earnings potential of the broad market. A Goldilocks number for the NFP is what we need, hot enough to support ongoing labor market recovery, not so hot that the FOMC has to raise rates again.

Today's action in the transport sector looks very promising but until the NFP is released, and we see some confirmations in other indices, I remain a little skeptical. As of this past week earnings expectations for 2016 were still falling, if positive for the year; when these estimates begin to rise I will feel more comfortable about long positions. I remain bullish for 2016, but cautious, oh so cautious.

Until then, remember the trend!

Thomas Hughes

New Plays

Zika is Coming

by Jim Brown

Click here to email Jim Brown
Editor's Note

With cases of the Zika virus popping up all over the USA and the World Health Organization calling it a global emergency there are multiple searchs for solutions to Zika.


INO - Inovio Pharmaceuticals

Inovio is a clinical stage biopharmaceutical company that develops vaccines and DNA immunotherapies to treat cancers and infectious diseases. Inovio is currently testing a prospective Zika vaccine on animals. If the trial goes well they could begin testing on humans in Q4-2016.

Inovio surged on the first appearance of the virus last month and any commercialization of a vaccine could be a long way off. However, they are working on it today while other companies are just talking about a vaccine.

Newlink Genetics (NLNK) and Merck (MRK) successfully collaborated on an Ebola vaccine and Newlink is talking about working on a Zika vaccine as well.

Intrexon Corp (XON) is pushing their genetically modified mosquitoes as a partial solution to slow down the spread. However, it would take trillions of mosquitoes to make a sizeable dent in the population in the U.S. much less in South America where the disease is widespread. XON shares have surged significantly higher on the news.

Inovio shares surged last week and then faded slightly despite being the only company actually testing a vaccine. The company has two conferences scheduled, one on Feb 8-9th and another on Feb 24th. You can bet that Zika will be the hot topic at both and Inovio will get its share of the headlines.

Since Inovio is a low dollar stock that has not rallied appreciably on the Zika news, and because the Zika news is eventually going to take over the headlines in the USA, there is a good chance we could see a decent rise in ION shares over the next month.

Just today four cases of Zika were confirmed in New York and the governor of Florida declared a helth emergency in four counties because 9 cases were confirmed. This is only going to get worse. Zika is blamed for the more than 4,000 cases of babies born with shrunken heads and incomplete brain development in Brazil. This is a permanent disability. Pregnant women and those thinking of becoming pregnant are advised to stay away from any location where mosquito contact is likely.

I am recommending we buy ION shares, currently $6.25 with a potential holding period of a month. Earnings are March 14th.

With an ION trade at $6.45

Buy ION shares, stop loss $4.45


No New Bearish Plays

In Play Updates and Reviews

Not a Good Day Despite market Gain

by Jim Brown

Click here to email Jim Brown
Editors Note:

Several small cap stocks spiked sharply at the open on no news only to decline again in the afternoon. Some of those were our positions.

We were stopped out on GEF and SSYS on monster spikes at the open on no news. I looked at a lot of charts today and a lot of small cap stocks had that same pattern. It looked like somebody may have bought a large basket of small caps at the open and some of them were heavily shorted. The Russell 2000 had the same pattern with the high of the day at 10:30. I would be thrilled if the small caps were being bought but the afternoon selling knocked them back to only a +4 point gain. That is hardly exciting.

Current Portfolio

Current Position Changes

BAC - Bank of America

The new long position in BAC remains unopened.

SSYS - Stratasys

The short position in SSYS was stopped out.

GEF - Grief Inc

The short position in GEF was stopped out.

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. The banking sector improved slightly today with the dollar continuing to fall. Goldman was the biggest gainer on the Dow.

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


Sharp dip at the open but recovered and closed just under resistance at $22. Shares held at secondary support.

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.

USO - US Oil Fund ETF - ETF Description


Reality returned and the USO declined as comments began to fade over the proposed Russian meeting. This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.

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

DB - Deutsche Bank - Company Profile


Minor rebound thanks to the rise in copper prices. That relieves the worries temporarily that some big miner will file bankruptcy. Lots of negative talk about DB today. Glad I did not pick CS because that stock fell -11% at the open. That would have been a terrible fill. The decline in the European banks should continue because CS problems also exist at the other banks.

Original Trade Description: February 3rd.

Glencore, a large UK miner, has more than $100 billion in liabilities and $39 billion of those are corporate borrowings. Glencore is a huge company with $85.7 billion in revenues in 2015 but it made a gross profit of only 2% of revenues. They had net income of $676 million.

Glencore said it only has $29 billion in net debt. That is what Glencore said would be left over if they sold all their "readily marketable inventories" and assets that could be liquidated quickly. Unfortunately, that process would take time, be very costly and strip the company of profitable operations.

Glencore said it was structuring its balance sheet for "financial Armageddon." There are many analysts that believe Glencore is on the verge of bankruptcy. The problem is copper and iron ore. Both are trading at multiyear lows and below the cost to produce the commodities.

The European banking system owns roughly $20 billion of Glencore's debt. If the company were to go into bankruptcy those banks would be in serious trouble.

The European economy is also failing. The influx of nearly 2 million refugees with no jobs, no skills and dependence on welfare is causing a financial crisis. Mario Draghi is planning on creating more stimulus in March in hopes of heading off a bigger problem down the road. The ECB already imposed negative interest rates so banks no longer have any income from their excess cash. They have few opportunities to make new loans that will be profitable in a declining economy so they are stock with shrinking profits.

The European banking system is also interconnected. Many of the big loans are syndicated so a Glencore bankruptcy could impact dozens of banks at the same time. This would require massive recapitulation at a time when capital is scarce.

I am recommending we short Deutsche Bank (DB). When DB reported earnings last week it was actually a loss of -2.1 billion euros on a -15% decline in revenue to 6.6 billion euros. Operating expenses rose +19% for the quarter. The bank has numerous liabilities related to the Libor, FX and other probes alleging market manipulation and has set aside $5.5 billion but analysts believe this is not enough. On Wednesday a U.S. judge ruled the bank would have to face a lawsuit for $3.3 billion for failing to monitor 10 trusts that held toxic mortgages. The ten trusts have become essentially worthless according to Royal Park. DB has numerous problems and they are getting worse with every passing week.

Copper prices rebounded on Wednesday because of the crash in the dollar. Glencore shares (traded in the UK) should bounce on Thursday and DB shares could rise with them. I am recommending we short this potential bounce.

One analyst on Tuesday warned that some European banks could go to zero. DB was one of those banks.

Short DB shares, currently $16.63, at the open on Thursday. Stop loss $18.25.


Buy long April $15 put, currently 85 cents, no stop loss.

GEF - Greif Inc - Company Profile


Huge short squeeze at the open after Greif announced an investor day for June. That was the only news but the spike was extreme. We were stopped out at $26.25. We will not be reloading this position.

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, closed 2/4/16:

Closed: Short GEF shares, entry $24.65, exit 26.25, -1.20 loss

INSY - Insys Therapeutics - Company Profile


Minor rebound but still a new multiyear low. No news.

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 Feb 23rd.

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, target $13.25 for exit. See portfolio graphic for stop loss.

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


The regional banks rallied slightly on the falling dollar and rising oil and commodity prices. That lessens the risk of energy loan defaults. I raised the stop loss slightly to get just over resistance.

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 3/2/16 with a KRE trade at $35.35.

Short KRE @ $35.35, see portfolio graphic for stop loss.


Long March $33 put, @ .80, no stop loss.

OIH - Oil service Index - ETF Description


OIH rallied on the spike in oil prices in the morning and did not fall off in the afternoon. With Conoco cutting their dividend I would have expected more weakness.

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


Big short covering spike at the open on no news to stop us out.

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, closed 2/4/16:

Closed: Short SSYS shares, entry $17.45, exit $16.65, +.80 gain


Closed: Long March $15 put, entry 95 cents, exit $1.10, +.15 gain.

VXX - VIX Futures ETF ETF - ETF Description


Only a minor gain today because of the morning volatility. 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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