Option Investor

Daily Newsletter, Saturday, 2/6/2016

Table of Contents

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

Market Wrap

Techs Take a Beating

by Jim Brown

Click here to email Jim Brown

Weak earnings guidance from Linkedin and weak earnings from Tableau Software knocked the Nasdaq to the lowest close since October 2014.

Market Statistics

Friday Statistics

The Nasdaq rout was just that, a monster rout that crushed dozens of big names. The Nasdaq closed at 4,363 and the lowest level since October 20th, 2014. The Nasdaq is suddenly down -16.3% from its highs and nearing the bear market level at 4,175. The tech bounce out of the January lows has been erased. The carnage was unbelievable.

These are just some of the tech stocks that were crushed on Friday. These are losses for Friday only!

The Friday carnage was caused by Linkedin (LNKD) and Tableau Software (DATA) but the overall tech decline had been in progress all week. The Nasdaq stalled at just over 4,600 on Monday, which was a two week high and then dropped -273 points starting on Tuesday. The Friday close at 4,363 is only slightly above critical support at 4,330. A breakdown there targets clustered support in the 3900-4050 range and that would be a bear market level.

Linkedin reported earnings and revenue that beat estimates but gave weaker than expected guidance. A lot weaker! The company reported earnings of 94 cents on revenue of $862 million. Analysts were expecting 78 cents on $858 million in revenue.

For the current quarter, the company guided to earnings of 55 cents and revenue of $820 million. Analysts were expecting 75 cents and revenue of $858.3 million. The CEO said they were going to stop throwing money at the wall to see what would stick and instead focus on a limited number of high value, high impact initiatives. While that is a good plan long term the sharp drop in guidance crushed their stock with a -$44, -84% drop. I am sure if the CEO could relive Thursday's earnings call he would do it a lot different. He erased more than $10 billion in market cap in one conference call.

Tableau Software (DATA) reported earnings of 33 cents that easily beat estimates for 16 cents. Revenue of $202.8 million also beat estimates for $201.2 million. The company added 3,600 new customers to a total of 39,000. Unfortunately, management guided for revenue of $160-$165 million for the current quarter and well below estimates for $179.5 million. They also see a loss for the quarter of 8-12 cents per share. They also cut full year revenue estimates from $845-$865 million to $830-$850 million and well below analyst expectations for $871.5 million. Full year earnings were now expected to be in the range of 22-35 cents and analysts were looking for 62 cents. The company said this would be "another investment year" and would lead to lower earnings. It also led to a lot lower stock price. Shares fell -$49.44 or -40.4%.

The problem with the weak guidance from Tableau is that it created growth concerns for the rest of the cloud software sector. Even big companies like Adobe, SalesForce.com and Workday were crushed as investors raced to exit the sector before somebody else warned and suffered a 40% drop in the stock price. Normal investors do not get that concerned about a 4% drop but seeing a tech stock or in this case a couple of tech stocks get knocked for a 40% loss it sent them fleeing for the exit on anything tech related.

Tableau reported license revenue that missed estimates for the first time since their 2013 IPO. Growth of 31% was well below the 75% growth in the year ago quarter and 75% and 60% in the prior quarters this year. The CFO said customers had slowed spending, particularly in North America. This comment worried analysts because it could mean enterprise spending overall in every sector was slowing. This also caused the rush out of anything technology oriented on worries other companies could also report slowing sales.

It was a bad week for earnings. Also on Friday aerospace and defense supplier Esterline Technologies (ESL) reported earnings of 62 cents where analysts were expecting $1 per share. Revenue of $441.5 million missed estimates for $476.6 million. The company said the lower revenue was due to lower end-market demand and the strong dollar. Shares declined -30% on the earnings.

The company also announced an investigation for possible SEC violations by Johnson & Weaver. This is a typical "ambulance chaser" case whenever shares drop sharply and will not have any bearing on ESL in the end.

Ultimate Software (ULTI) reported earnings on Tuesday that beat the street but they were crushed on Friday as part of the tech bloodbath. They reported earnings of 83 cents that beat estimates for 73 cents. Shares rallied $15 on the news and held the gains for two days. On Friday the stock collapsed -$18.50 because of the Tableau Software disaster. This kind of guilt by association was rampant on the Nasdaq on Friday.

Athenahealth (ATHN) killed estimates when they reported earnings of 45 cents compared to estimates for 16 cents. Revenue of $257.5 million rose +21% but just missed estimates for $257.7 million. The company added 13,067 health providers to their network. They now boast more than 75,000 providers and 38 million patients for their Internet based service. They guided for full year earnings of $1.65-$1.85 on revenue of $1.09 to $1.12 billion.

Shares declined -$18 on Friday because revenue grew +20.8% but earnings declined -13.6%. Direct expenses rose +28% and selling and marketing costs rose +30%. I suspect the majority of the stock loss was Nasdaq weakness related because shares only declined -$2 in the afterhours session on Thursday after reporting results.

Shares have very strong support at $112-$115 and I would be a buyer in that range.

Palo Alto Networks (PANW) dropped -$18 on no news to break below strong support at $140. This was another casualty of the Nasdaq crash. It was a tech stock and suddenly everybody wanted out. If we see a Nasdaq bounce next week I would expect PANW to be a leader out of the depression.

There was only one economic report that mattered on Friday. That was the Nonfarm Payrolls and they showed a gain of +151,000 jobs. That was well below the initially reported December gain at 292,000 and well below estimates for January that had shrunk from 220,000 to 190,000 over the last two weeks. The December number was revised lower to 262,000. November was revised up from 252,000 to 280,000.

The unemployment rate ticked down from 5.0% to 4.9% because the BLS updated their population estimates to show a higher population. They said the civilian population rose +265,000, civilian labor force by +218,000, employment by +206,000 and unemployment by +12,000. The number of people not in the labor force increased by +47,000. In the annual benchmark revisions done in January nearly 100,000 jobs were removed from the final totals.

Accounting for the sharp drop in January payrolls was the seasonal shift away from temporary holiday hiring, which decreased -45,000. Also, a factor was a drop of -30,000 in construction worker hiring from 48,000 in December to 18,000 in January. Manufacturing helped to offset some of the declines with a very strong +29,000 jobs. Retailers hired an unexpectedly high 58,000.

Of the 151,000 new jobs, 102,000 were in the minimum wage category. The broader U6 category of unemployment was flat at 9.9%.

What riled the market was not the miss in the headline number but the sharp spike of +0.5% in average hourly wages, up +2.5% from January 2015. While this would appear to be a sudden jump in compensation that could put the Fed back in rate hike mode, it was simply the result of multiple states and cities raising the minimum wage effective January 1st. I guarantee you raising the minimum wage a buck or two is not going to suddenly spike inflation. Anyone working at a minimum wage and seeing it rise $1 an hour is not going to be bidding up prices at the local grocery store. That $30 a week is going into their gas tank and probably an extra order of fries for lunch. The consternation over the sudden jump in wages was definitely misplaced.

The calendar for next week is very light with the exception of Yellen's testimony in Washington on Wed/Thr and the Fed's Williams speaking on "The Health of the Economy" on Wednesday. That should be an interesting speech.

Much ado has been made about the Fed decisions being "dependent on the data" when in reality it appears they have been making decisions independent of the data. It will be interesting to see how Williams will get around that inconvenient truth.

The Yellen testimonies will boil down to "the economy has weakened but we expect it to pass. We are monitoring it closely." I suspect she may try to put a bullish spin on it to some extent to try and talk the equity markets back off the cliff.

No forward splits were announced last week. Top Ships (TOPS) announced a 1:10 reverse split to keep from being delisted. They split 1:7 in April 2014 so their track record is not very good. Hormel (HRL) splits 2:1 on Tuesday.

For the full split calendar click here.

The earnings calendar is devoid of a bunch of market moving announcements. Disney, a Dow component, could be a highlight on Tuesday along with Cisco Systems on Wednesday. Tesla could garner some excitement after a drop to a two-year low at $162 on Friday.

FactSet reported on Friday that overall earnings had actually improved. Blended earnings for Q4 have now declined -3.8% compared to -5.8% the prior week. To date 70% of S&P companies have beaten earnings estimates and 48% have beaten on revenue. Revenue has declined -3.4%. So far, 57 companies have issued negative guidance and 14 companies issued positive guidance. Next week 65 S&P companies will report earnings.

FactSet is not expecting positive earnings growth until Q3.

Oil prices declined to $31 at the close despite the scheduled meeting on Sunday between the Venezuelan and Saudi Arabian oil ministers. The Venezuelan minister had been on a whirlwind tour last week pleading for a production cut with anybody that would listen. He met on Friday with the Qatari oil minister, who happens to be the President of OPEC this year. That is a rotating presidency with each country in OPEC being president for a year.

The Venezuelan minister is facing a tough battle. His country is rapidly going broke with inflation expected to be 740% this year and no goods to buy or sell other than oil. The country has not been able to produce its quota for years as a result of the failed Hugo Chavez socialism project and the country is very close to complete failure. Venezuela needs to convince everyone else to cut production but you can bet Venezuela will not cut a single barrel and justify it because they are not producing their current quota.

While the Venezuelan minister has been country hopping to try and generate a call for an emergency production meeting, not a single Persian Gulf member of OPEC, including Saudi Arabia has publically backed a meeting. Nobody will do anything without Saudi Arabia on board and the Venezuelan minister meets with Ali al-Naimi in Saudi Arabia on Sunday. The odds are nearly 100% that no production meeting will be scheduled. However, you never know. Eulogio del Pino may have a pocket full of promises from all those OPEC states saying they will meet if Saudi Arabia agrees. I find that extremely unlikely but it is possible.

U.S. crude inventories rose 7.8 million barrels last week to more than 502 million and a new record high. With six more weeks of the inventory build cycle ahead we are likely to move much higher.

The price of oil is causing severe pain to producers. Conoco (COP) cut its dividend by 67% last week even after saying in months past that would be a last resort. Linn Energy (LINN) warned on Thursday it had run out of money and credit and was "exploring strategic alternatives" to shore up its balance sheet. As recently as November Linn had exchanged $2 billion in unsecured debt for $1 billion in secured debt as it tried to reduce its overall debt load, which is currently $3.6 billion. Linn made the "throwing in the towel" announcement after it drew down the remaining $919 million in its credit facility. I am sure that bank will be firing somebody soon.

Chesapeake (CHK) recently said it had run out of options and had hired Evercore Partners to help it address its $11.6 billion in debt.

The lack of cash at $30 oil is strangling producers. Baker Hughes reported on Friday that active rigs dropped a whopping -48 to 571 total rigs. That is down -1,361 from the peak of 1,931 in 2014. Oil rigs fell -31 to 467 and gas rigs declined -17 to 104. Those are both 18-year lows.

If we wake up on Monday and Saudi Arabia agrees to a production cut meeting the price of oil could be $40-$50 within weeks. If instead Saudi says no to the emergency production meeting and announces that fact, then we could see $25 oil before the week is out. Saudi knows this and they do not want to see $25 oil so there may be some headline spam to suggest the possibility of a future meeting just to keep the prices from crashing again. The entire rebound in oil prices over the last three weeks has been the result of countries trying to talk up a meeting in the press in order to lift prices.


We may have reached the fork in the road. With the Nasdaq closing at 15-month lows we have the perfect setup for a continued crash to bear market levels at 4,175. However, as I pointed out in the charts above, many stocks crashed with the market rather than on individual fundamentals. This makes them extremely oversold and without a good reason. They have become bait for dip buyers. Whether investors will attempt to catch these falling knives or wait until a bottom appears is of course unknown.

Despite the carnage in the Nasdaq the Biotech Index ($BTK) only lost -57 points for the day but it was down -155 for the week. Maybe it has reached a point where sellers are running out of stock. The biotech sector has been a major drag on the Nasdaq over the last month.

While the Nasdaq closed at a new low the intraday dip in January declined to 4,313 and about 50 points lower than Friday's close at 4,363. That intraday low would be the first line of defense with the 4,292 low in August as backup support. If we bust through those levels it could be a long drop to 4,000.

Investor sentiment has soured. The rally from the January dip now looks like a typical correction rebound and now that has failed. Typically, we would go lower from here although it is possible we could see a double bottom form. However, with sentiment now severely negative it could be at a lower low.

Some analysts are looking for a flush early next week and then a late week rebound. Markets rarely bottom on Fridays and closing on the lows will trigger some margin selling on Monday. If Monday is another decline then more margin selling will follow on Tuesday, etc, until somebody buys the dip.

On the plus side with the earnings cycle winding down the major companies are now free to buy their stock back again. They are prevented from doing that prior to earnings. At these levels, those companies with big buyback programs should be backing up the truck.

If you ask your 5th grader to look at the chart below and tell you which way the Nasdaq is going, they are going to say down. As older and more intelligent adults, we get confused by what is happening in the headlines and by what we want to see and ignore what is really happening. When in doubt, ask a 5th grader. They have no preconceived bias.

The S&P appears to be targeting 1,820 again. If you look at the August dip, rebound, dip and rally, that could be what we are setting up for this time. I doubt the 1,867 bottom from August is going to hold given the severity of the Nasdaq drop. A failure there targets 1,820 and that is far enough down that sellers should lose some intensity before we get there. Given the three prior tests of the 1,820 level most traders would be conditioned to buy that level. Whether that is the right move remains to be seen.

In the weekly and monthly charts below the outlook is bearish. Sometimes we get so caught up in the day to day market movement that we do not look at the longer term direction.

In the monthly chart, the 10-month average in blue has crossed below the 21 months in red. This is only the third time in 21 years that has happened and you can see the results. This is a super slow indicator but it works well for IRAs and long-term investments. You will not get in/out at the exact top and bottom of a move but I do not think anyone would argue with the long-term results.

The Dow was dragged down by Visa, J&J, McDonalds, Apple, Home Depot, Nike and United Health. None of them had any material news. What did they have in common? With the exception of Unitedhealth they are consumer stocks and declining job numbers suggests retail sales could turn sluggish. I am guessing Unitedhealth was down on the verbal beating the health care sector took from the Democratic debate on Thursday evening. I would bet that a weaker than expected jobs report did not suddenly create a consumer recession.

The Dow has decent support at 16,000 and again at 15,855. If those level break the August flash crash low at 15,370 would be the next target. However, the Dow chart is significantly stronger than the Nasdaq. The Dow is still in a minor uptrend from the January 20th lows.

The Russell 2000 broke out of its tight trading range of the last two weeks and could now be headed for a retest of the 958 low from January. I was somewhat encouraged over the last two weeks by the lack of weakness in the Russell. Every dip to the bottom of the range was bought and it appeared fund managers were nibbling. If the Russell declines from here it could quickly worsen sentiment and another flush could quickly retest the lows.

It was just a week ago that the Dow gained +397 points on Friday. Despite that gain it only gave back -1.6% this week compared to a -4.8% decline on the Russell and a -5.4% decline on the Nasdaq.

I mentioned last weekend that a lot of analysts were expecting a retest of the January lows once the earnings cycle was over. The majority of the big names have reported and most of what is left is the stragglers. We know how the quarter will end up with negative earnings of around -5%. The individual earnings disasters on Friday may have triggered that February retest. Time will tell.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts

Citi helpd spread some doom and gloom on Friday when strategist Jonathan Stubbs said the global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market. He was definitely going for the scary headlines in this note.

He said the stronger dollar, weaker oil/commodity prices, weaker world trade, petrodollar liquidity, weaker emerging markets and global growth, etc, could lead to "Oilmageddon," a significant and "synchronized" global recession and modern-day bear market.

He did say that some analysts at Citi predicted the dollar would weaken in 2016 and oil prices would likely bottom. "The death spiral is in nobody's interest. Rational behavior, most likely will prevail."

So, release the report with scary headlines and then end it with "rational behavior, most likely will prevail." Sounds like somebody was starved for attention and wanted his 15 min of fame.

He did have one point right. The lack of a world economy floating on petrodollars is a very scary place. When oil was $100 every producing country was flush with dollars and they spent that money all around the world. This kept the global economy lubricated. With global producers now living on 30% of what they received two years ago, an entirely new dynamic is in place. These countries are broke and they are being forced to cancel/remove subsidies that kept their populations happy.

Gasoline for 20 cents a gallon is now 2-3 times that. Utility subsidies that kept electricity, gas and water flowing to poor citizens have been cancelled or reduced significantly. Government wages are being slashed, jobs cut, infrastructure projects cancelled, road maintenance postponed, etc. All of this is due to the 70% decline in oil prices. Hundreds of millions of people are living in countries where the current revenue can no longer support them in the manner in which they were accustomed.

It is no surprise that the global economy is slowing. There is a shortage of petrodollars to keep it lubricated.

This is not likely to change in the near future. Oil prices will rise in Q3/Q4 but it could be years before they return to a level where governments will be able to subsidize/support the population and economic activity like they did in the past.

Investor sentiment for the week ended on Wednesday saw bullish and bearish sentiment decline while neutral sentiment rose. Wednesday's market was positive but it was down from the Monday high. Investors are definitely confused but 72% are not bullish.

Verizon (VZ) confirmed on Friday it was considering a bid for Yahoo. Verizon acquired AOL in June. CEO Lowell McAdam said their strategy was to have great connectivity, own platforms that drive traffic to its network and own content that supports its ecosystem. McAdam said "We have to understand the trends at Yahoo but at the right price, I think marrying up some of their assets with AOL and the leadership would be good."

Mark Cuban is a big investor in Netflix (NFLX). He recently bought more shares when the stock began to drop sharply. On Friday he posted on Cyber Dust, his favorite social media platform that he was not selling his shares but he had bought puts to cover his entire position. That is a lot of puts! He already had a "large" position and added 50,000 shares in October 2014 and then added more in late 2015 and bought more in January. Nobody knows exactly how many shares he has but it is a lot. At $5 for the April $75 puts that would be a big insurance payment.

Brokers like Ameritrade claim liquidity is leaving the market. Baby Boomers are moving to cash and bonds for safety after more than a year of volatility and no gains. Millennials are 55% in cash and most of their equity investments are in IRAs or 401Ks and are not traded. High frequency trading has averaged 49% of the volume for the last three months. That means of the 9.3 billion shares traded on Friday 4.55 billion shares were high frequency churn. They never hold anything for more than a few seconds to a few minutes and they can stop trading in an instant. That is really scary except that highly directional market are highly profitable for them so they are not likely to go away. In the real flash crash from a couple years ago many did halt trading for a few minutes because the bid/ask spreads and lack of quotes put the programs into panic mode.

We hear every day that low oil prices are good for the economy. U.S. consumers are saving billions from low gasoline prices. We also hear that low interest rates are great for the economy because it reduces borrowing costs for consumers and businesses. We have both low oil prices and low interest rates but the economy grew at only +0.7% in Q4 and jobs appear to be slowing. Why? Enquiring minds want to know. You know the Fed is going crazy trying to figure out the answer.

Occidental Petroleum (OXY) reported last week that the all in cost for oil production in the Permian Basin in Texas was $22-$23 a barrel. Producers in that area can still make a few bucks on new production. However, that is the only area of the country that is profitable. Wood Mackenzie said 3.4 mbpd of global production was cash negative at $35 per Brent barrel. That means they actually lose money on every barrel produced.

Wood Mackenzie said not to expect many producers to actually shut in production. After factoring in the cost to shut off production, the cost to restart, the lost cash flow, negative or not and the danger to future production, prices would have to go a lot lower before producers would bite the bullet and shutdown the wells. When a well is shutdown, things happen underground. Producers spend millions of dollars to get oil to flow towards the pipe so it can be extracted. As long as that oil is flowing, it remains liquid. If production stops that oil can thicken and clog up the pores in the rock and when production is restarted, it may only be a fraction of what it was when it was halted. Wells need to continue running even if they are turned down to a very low rate just to keep the flows moving.

T. Boone Pickens has capitulated. He said on Friday he has closed all of his energy positions and he will not get back in until inventories begin to decline. That is normally in late April and early May. He started reducing position late last year, some of which he had held for three years. He thought prices had reached a bottom in August when they rebounded for two months. He added new positions in Q3 and then closed those in Q4 as well.

He believes we saw the lows for WTI in January but wants to wait until inventories begin to decline before rebuilding his portfolio. He warned that we could still see some extreme volatility in the weeks ahead.

From 1,000 to as many as 1,500 private jets are expected to deliver passengers to the Super Bowl causing serious congestion in the various airports around the stadium. Fortunately, the game is in Santa Clara, about 45 miles south of San Francisco. There are plenty of local airports to park the planes.

Private jet flyers are expected to spend between $75 - $85 million just getting to the game. FlexJet has as many as 100 flights coming to the game. FlexJet is offering regional food in flight from elk and other big game meats for Denver flights and ribs, pulled pork and other barbeque from the Carolinas.

NetJet is holding a special "Super Bowl BBQ" for its customers and this year will have entertainment from the band Maroon 5. Wheels Up is hosting a private party with tons of celebrities and Grateful Dead's Bob Weir is the rumored entertainment.

PrivateFly, a private charter company said a Gulfstream G550 from New York will cost $85,000 or about $6,000 a person. From Denver a 13-seat Falcon 2000 costs $35,000. BlackJet is selling single seats on private jets for $6,200 from New York of $3,700 from Chicago.

The average Super Bowl ticket was selling for $4,750 on Friday with the most expensive at $23,400 for a box.

If you want to know how the 1% lives the above is a good description. The rest of us fly coach and watch the game on TV.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"A prudent person forsees the danger ahead and takes precautions. The simpleton goes blindly on and suffers the consequences."

Proverbs 27:12


New Plays

Insiders Dumping Stock

by Jim Brown

Click here to email Jim Brown
Editor's Note

When insiders are selling at a 20:1 ratio over purchases it suggests they know something that everyone else does not. This stock was on a solid path higher until the end of December and since then it has been a straight dive lower.


No New Bullish Plays


FGEN - Fibrogen Inc - Company Profile

Fibrogen is a small research-based biopharmaceutical company that discovers, develope and commercializes therapeutic agents to treat serious unmet needs. At least that is what their profile says about them. Their stock chart suggests they are not successful in this field.

The do have some novel drugs in the pipeline but the clinical studies are taking forever and the results of the latest study was limited at best. Their current drug under development is roxadustat, a "first in class anemia treatment" according to the company. However, they have only been able to enroll 80% of their targeted enrollment. If everything goes well they may get approval to market it in China by the end of 2016 but it will be 2018 before it can be marketed in the USA.

The FDA has more than 3,000 drug applications in the pipeline and it takes forever to get one through the system from start to finish.

For the last quarter they reported a loss of 74 cents. They had $365 million in cash and their burn rate is high. AstraZenaca has agreed to fund up to $116.5 million in research after the drug reaches certain clinical test levels. Only $11.8 million remained unspent at the end of the quarter meaning Fibrogen is going to see its own cash disappear even faster.

Shares of the company have been falling like a rock since the start of 2016. While I hate to short a stock already oversold the decline on Friday closed at a new historic low. They went public in October 2015. The decline appears to be accelerating.

The decline began in early January when Miguel Madero, a board member for 20 years resigned unexpectedly. He sold half his stake the week before he resigned. Insiders have been selling shares like crazy with no buys in the last three months and 29 sells. In the last 12 months, there have been 80 sales and only 4 insider buys.

There are options but the volume is too thin and the spreads too wide to play.

With a FGEN trade at $16.45

Short FGEN shares, initial stop loss $18.65

In Play Updates and Reviews

Tech Reset

by Jim Brown

Click here to email Jim Brown

Editors Note:

It was not a good day for tech stocks after multiple companies warned on guidance and shares imploded. Is this the start of something worse?

The Nasdaq lost -146, Russell 2000 -29, S&P -35 and the Dow -211. As bad as those numbers are they do not show the severity of the declines. Multiple stocks fell 20-50% and the carnage was broad based. The problem was not specifically the earnings but the guidance warnings. Investors can accept weak earnings in some cases but only when they expect something better in the future. When the weak earnings are accompanied by lowered guidance it is the perfect 1-2 punch.

The market cap on tech leaders declined about $100 billion on Friday. Linkedin lost $12 billion, Tableau Software -$2.5 billion, Amazon -$16 billion, Google -$8 billion, Netflix -$3 billion, etc. Across the entire market the damage was much worse.

Only a few stocks caused the carnage but it spread like wildfire to anything with profits attached. If the stock had been up recently or was a big winner from last year with some investor profits still intact it was sold hard. Investors were so shocked at the magnitude of declines in stocks like Linkedin they just pushed the sell button on everything. Decliners were nearly 4:1 over advancers and volume was high at 9.3 billion shares.

The key question today is whether this will continue next week. Some analysts believe we are going to retest the January lows on the S&P at 1,812. Others believe we are going to retest the 200-week moving average at 1,787. There is another scenario. It is possible portfolio managers could come back to work on Monday with a calmer mind and recognize the oversold conditions and buy the dip.

We will not know how next week will shape up until probably Wednesday. There will be some follow on selling on Monday in the form of margin calls and any short term rebound will probably be sold by those who missed their opportunity on Friday.

I would be cautious about entering any new positions until the market calms.

Current Portfolio

Current Position Changes

BAC - Bank of America

The new long position in BAC remains unopened.

INO - Inovio Pharma

The new long position in INO 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


I am going to give BAC one more day to move up towards $14.25 to confirm an uptrend. The banking sector weakened again on Friday.

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.

INO - Inovio Pharmaceuticals - Company Description


No material move on INO. It was relatively unscathed in the Friday market meltdown.

Original Trade Description: February 4th

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 INO shares, currently $6.25 with a potential holding period of a month. Earnings are March 14th.

With an INO trade at $6.45

Buy INO shares, stop loss $4.45

SWHC - Smith & Wesson - Company Description


Good relative strength. Still holding at short term support and waiting for the market to recover.

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


Venezuelan oil minister scheduled to meet with Saudi Arabian oil minister on Sunday. This could cause a sharp drop if Saudi says "no production meeting" or a huge rally if they agree for OPEC to hold an emergency 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


DB declined slightly on Friday after CS collapsed on Thursday. This is a long term position so expect some volatility.

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.

Position 2//3/16:

Short DB shares @ $16.66, See portfolio graphic for stop loss.


Long April $15 put @ 85 cents, no stop loss.

INSY - Insys Therapeutics - Company Profile


The only news for INSY is bad news. Dozens of lawsuits trying to gain class action status. Shares down slightly.

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


Regional banks weakened on Friday as recession worries increased.

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 declined ahead of the Saudi/Venezuela meeting on Sunday. That will drive prices next week.

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.

VXX - VIX Futures ETF ETF - ETF Description


Market down, VIX up, should be no surprise to anyone. 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

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now