Indexes rebounded to recover 50% of their intraday decline. That is a good sign but it is not a guarantee we are going higher tomorrow.
The Nasdaq dipped to its October 2014 lows at 4,212 but rebounded to close at 4,284. That +62 point rebound was encouraging BUT not convincing. I would like to think that we are going to see buyers come back into the market on Tuesday but the charts are still negative. In the Option Investor newsletter I recommended a speculative long using the QQQ ETF just in case we do go higher and a short squeeze is born.
After the bell today, the earnings and guidance caused the S&P futures to drop -8.50 in the afterhours session. There is a lot of darkness before morning so anything is possible.
The banking sector continued to decline after the European markets and banks fell sharply. The declines in the European banking sector suggests they are expecting a Lehman type event in the near future. With the major European markets down over -3% on Monday that poisoned the U.S. market open.
I would be cautious about entering any new positions until the market calms.
Current Position Changes
BAC - Bank of America
Cancel the potential entry on BAC.
INO - Inovio Pharma
The new long position in INO remains unopened.
FGEN - Fibrogen
The new long position in FGEN was triggered at the open.
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 giving up on Bank of America as a long. The entire banking sector has imploded over the last week. With European banks crashing and yields on treasuries at 52-week lows and dropping there is no future for the banks.
Cancel the recommendation on Bank of America.
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.
No current recommendation. Cancel potential entry.
INO - Inovio Pharmaceuticals - Company Description
No material move on INO. Shares declined only a penny today. President Obama is asking Congress for $1.75 billion to fight the Zika virus. Waiting on the next headline on INO.
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
Still showing good relative strength with a nice rebound off the market meltdown lows this morning to lose only 11 cents. 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.
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 -
No news out of the Venezuela - Saudi Arabia meeting on Sunday. The Saudi news said it was a "productive" meeting and the Venezuelan oil minister said the tone was positive. Obviously, if there was anything to say it would have been blasted across the headlines and crude would have exploded higher.
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.
Short DB shares @ $16.66, See portfolio graphic for stop loss.
Long April $15 put @ 85 cents, no stop loss.
FGEN - Fibrogen Inc - Company Profile
Really nice drop at the open to get the day started off with a bang. The $14.76 close is a new historic low. I lowered the stop loss to $17.25.
Original Trade Description: February 5th.
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.
Position 2/8/16 with a FGEN trade at $16.45
Short FGEN shares @ $16.45, see portfolio graphic for current 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 to a new closing low.
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 continued to weaken on falling treasury yields and collapse in the money center banks.
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 slightly but was stronger than expected after the Saudi/Venezuela meeting on Sunday. We even had sub $30 oil and headlines out of Chesapeake Energy (CHK) over bankruptcy worries and the ETF did not decline materially. This is unusual.
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.
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.
Short VXX @ $21.82, no stop loss.
Second Position 9/2/15:
Short VXX @ $29.01, no stop loss.
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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