Option Investor

Daily Newsletter, Wednesday, 2/10/2016

Table of Contents

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

Market Wrap

Janet Yellen Disappoints

by Keene Little

Click here to email Keene Little
The stock market had a nice rally going this morning but once Janet Yellen began her Congressional testimony the market started to pull back. The techs held up while the others sunk back into the red.

Today's Market Stats

The stock market got a lift out of the gate this morning, thanks to an overnight rally in the futures, but after the first hour of trading the rally was given back and it happened after Janet Yellen started talking. The market appears to be losing faith in what the Fed can accomplish for the market, I mean economy. Also negatively affecting the stock market is what's happening in the political arena.

The stock market is not happy with the prospects of having either Bernie Sanders or Donald Trump as president (although Wall Street would prefer Trump over Sanders), both of whom are doing well in the polls. The frustration and anger of the electorate is showing up in the rejection of the status quo in the political system and they're voting for the two that have a different message (it's that hope and change thing all over again). The same level of frustration is showing up in the stock market, one of the best reflectors of social sentiment. When social mood turns sour it is always accompanied by a bear market in stocks. It really is as simple as that.

The problem for the market is that Yellen is not showing signs, yet, of helping the market recover from its January decline. In her prepared remarks to the House Financial Services panel, she said financial conditions "have become less supportive to growth." Like so many are now doing, she pointed the finger at China and effectively said "they did it!" She warned that "downside risks" tied to the health of the Chinese economy could weigh on our economy.

Yellen shared with the committee that the Fed had considered negative interest rates back in 2010 but decided it was not the right way to go. Besides, according to Yellen, there are some legal and regulatory issues that haven't been fully researched yet (after all, it's only been 5 years since then and these things take time, wink). As she told the committee, "We got only to the point of thinking it wasn't a perfect tool...we were concerned about the impact it would have on money markets, we were worried it wouldn't work in our institutional environment." My guess is that when they do implement NIRP, all those concerns will be swept under the rug as they continue to experiment on us. It will be a Hail Mary pass and according to Yellen she doesn't believe the Fed will have to resort to it unless the stock market drops by 50%, real estate loses 25% and the labor market significantly softens.

One of the problems with negative interest rates, which is essentially a tax on the banking system, is that banks start to underperform. We can see that already in the relative poor performance by banks this year compared to the S&P 500 index. It's not likely the banks will absorb the higher costs all by themselves out of the goodness of their hearts. I doubt Jamie Dimon will give up his $27M bonus (on top of his multi-million salary) to help his JPMorgan Chase company cover some of those costs. Instead, the banks will pass along those costs to its customers, which will include lower rates of returns on savings (can't get much lower) and charging more for services, such as for holding your money.

The problem with negative rates charged to banks is that it could actually do the opposite of what the Fed hopes to achieve. As some European countries are finding out, negative rates result in less lending by banks, thus negatively affecting the credit cycle. Money tends to leave the banking system of countries with negative rates and flows to countries providing better returns. Or Mom and Pop simply withdraw their money and put it in a safe deposit box or under their mattress. They put their money into U.S. Treasuries (one of the better places to park your money if you want to be in cash) and the result is the same -- money leaves the banking system. Banks with less money to lend then results in a contraction in credit, which then slows the economy further.

Emerging markets tend to offer higher yields to compensate for the higher risk and that's where much of the money from Europe has been flowing. The risk to the emerging markets is when the money flow reverses, which tanks their economies and stock markets. Their companies then start defaulting on loans and that starts to ripple through the global financial system -- a butterfly flapping its wings in Africa causes a hurricane to hit the U.S. (chaos theory).

So why are central banks resorting to NIRP policies? As explained in an article in the The Economist:

The best hope for success, however, lies in foreign-exchange markets. Negative rates might send investors in search of better returns abroad, leading to depreciation of the currency. That would raise the price of imports, helping to combat deflation and giving a growth-enhancing boost to exporters. Since the ECB introduced negative deposit rates the euro has fallen against the dollar by nearly 20%.

The Fed is deathly afraid of deflation, as are all Keynesian-trained economists (and practically all central bankers think the same way as they've been trained the same way). Fighting deflation is their first priority and that makes the NIRP decision easier to understand. The problem is when other countries match each other, effectively negating the effects. The only thing it accomplishes is a race to the bottom in currency devaluation. We have been and continue to be in a currency war and unfortunately they tend not to end well for anyone.

The rally in the stock market from 2009 has been built primarily on a booming credit cycle and nearly 100% of the corporate borrowing has been to buy back stock. This of course improves the earnings per share and drives stock prices higher. But it hasn't resulted in any productive use of the money and now many of those companies are finding it more difficult, with lower earnings, to service their debt. Lower earnings, higher debt and the inability to "massage" their earnings per share will result in lower stock valuations (prices). This is just one example of the QE efforts have simply distorted money flow and as with all distortions, the corrections tend to move faster and more violently than the distortion itself.

Yellen mentioned several times that she does not see evidence of slowing in the global economy or the U.S. economy. I'm not sure what numbers she's looking at but it sure seems obvious to me. One are that's been slowing is retail sales, starting with the disappointing holiday sales between Thanksgiving and Christmas. It appears many shoppers are tightening their belts and keeping their wallets closed. Paying down debt would be a good thing for most people but we also know that doing so will hurt our consumer-dependent economy. If it's not a necessary item we tend to buy less of them when things get tighter, such as electronic goodies, vacations, eating out, etc. What doesn't tend to slow down as much are those items we use most every day, such as toothpaste, toilet paper and other consumables, which are placed into the consumer staples category. Johnson & Johnson is a consumer staples company and it has done better than others this year.

It's often said when we're entering a recession, when it comes to which stocks to own, "if you can smoke it, drink it or eat it, buy it." But companies involved with discretionary items will suffer more in an economic downturn. The spending between consumer staples and consumer discretionary items will determine the profitability of those companies associated with each and therefore comparing these two groups is a way to provide a clue about how consumers are feeling about the economy and their financial position. These two groups are represented by the Consumer Discretionary ETF, XLY, and the Consumer Staples ETF, XLP.

I'll start tonight's chart review with a weekly chart of SPX and on the chart I also show the ratio of XLY to XLP, which I'll discuss further, below the chart. This chart is using the arithmetic price scale and the first thing to notice is the parallel up-channel for the rally off the March 2009 low. The January decline broke below the bottom of the up-channel, which is a very important signal that says the leg up from 2009 has now completed. The bounce off the January low into the February 1st high resulted in a back-test of the bottom of the broken up-channel and the selloff from the February 1st high leaves a bearish kiss goodbye.

S&P 500, SPX, Weekly chart

Back to the discussion above about the XLY/XLP ratio, which is shown in blue on the chart above, you can see this week's break of support at the lows since 2014 and I think that's a big deal. The consumer is moving more into hibernation mode and not willing to spend money on discretionary items. Just as we've seen the utility sector outperform other sectors in the market lately (people still need to buy electricity and water), now we're seeing people focus their spending more on staples than discretionary items. Being a consumer-driven economy, this is another sign of a coming slowdown in the economy, otherwise known as a recession. Stock markets don't do well in recessions.

The SPX daily chart below shows today's rally attempt above price-level S/R at 1867 (the August 2015 low) but the failure to hold above that level is at least short-term negative for the market (today's shooting star candlestick is bearish since it reflects the day's inability to hold onto the rally attempt). But it remains possible we'll get a larger rally up to the price projection shown at 1963.37, which is where the bounce off the January 20th low would achieve two equal legs up for an a-b-c correction to the January decline before heading lower. SPX would also likely test its broken 50-dma at the same time. A rally above the February 4th high near 1927 would confirm a break of its downtrend line from December 29th and that would be good confirmation that a rally to at least 1963 is likely. But a failure to rally above this morning's high near 1882 points to lower prices and those are at 20-point increments, starting with 1820 and down to 1760.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1927
- bearish below 1767

When I look at the short-term pattern for the decline from February 1st I see the possibility for a sharp decline this week and into next, which would mean a decline could quickly break below 1760.. From an EW perspective, the decline from February 1st could be a 1-2, 1-2 to the downside (because of the overlap between the current bounce and the February 3rd low), which suggests the selling is about to pick up speed if it can't rally above 1885-1892. Today it struggled at the top of a parallel down-channel for the decline from February 1st, as well as price-level S/R at 1867 (the August 2015 low), and the bearish wave count suggests the next leg down will be a strong one that will drop price below the bottom of the down-channel and likely below 1760 (the February 2014 low near 1738 would become a downside target). This bearish interpretation is not supported by the techs and the RUT, whose patterns suggest only one more minor new low, and therefore I show this only as a warning of what could happen. Be careful about trying to catch a bottom in the next selloff, if it starts down from here and drops quickly.

S&P 500, SPX, 60-min chart

The Dow held price-level support at 16K on a closing basis on Monday and Tuesday but it lost the battle today, closing at 15914. I see the possibility for only a minor new low below Monday's, at 15803, but if price-level support at 15666 doesn't hold then there's a good chance we'll see price-level support at 15340-15370 tested. Those are the lows in February 2014 and August 2015, resp., and following the completion of the leg down from February 1st I'll be looking for another multi-week choppy bounce correction. There is additional downside risk in a stronger breakdown but I'd want to see a strong decline below 15300 before thinking more bearishly.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,486
- bearish below 15,803

The Nasdaq has been fighting to hold onto support near 4300 and today's bounce has the potential to build something more bullish. But it needs to get above its broken uptrend line from October 2014 - August 2015, near 4395, about 25 points above today's high, and then break out of its down-channel for the decline from December, currently near 4425. The sellers drove the Naz back below the August 2015 low at 4292 on a closing basis today, after holding above that level all day. This has it looking more bearish and I think we're looking for another leg down, in which case the downside target would be the October 2014 low at 4099. A drop below that level would suggest a decline to the bottom of its down-channel could be next, which will be near 3890 next Monday.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for NDX:
- bullish above 4546
- bearish below 4099

Over the weekend I had mentioned the biotech index, BTK, and said it looked like it could be ready for a bounce. It's been hammered this year and actually since its high in July 2015. I had mentioned we might see it find support slightly lower than Friday's low and then we got the move down into Tuesday's low at 2575. This is good for two equal legs down from July 2015, at 2642, a test of its uptrend line from November 2008 - October 2011, near 2600, and a test of its 200-week MA at 2655. This is a dangerous sector to play but it looks like a good setup for at least a bounce. If you're a disciplined trader (be honest with yourself), this is an opportunity to try the long side (pick an ETF, such as BBH). Just don't let it go below Tuesday's low without you pulling the ejection handle. The next support level is not until 2260-2270.

Biotech index, BTK, Weekly chart

Like the other indexes, the RUT remains inside its down-channel for the decline from December and nearly tested the top of the channel with today's high at 983. A rally above today's high would be more bullish but short against that high looks like the right place to be at the moment. If we get another leg down watch to see how it does at the price projection shown on its chart at 941.15. This is where the 5th wave in the decline from December would equal the 1st wave down. At the moment the RUT is fighting to hold support at its trend line along the lows from February - October 2014, near 959 and it would show significant bullish divergence if it turns back up from here (a reason not to be short if it rallies above this morning's high). If the RUT drops below 940 we could be looking at a more significant decline and potentially down to the next price projection at 881.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1040
- bearish below 940

Treasuries have rallied strong while the stock market has sold off as a flight to relative safety continues. As mentioned at the beginning, in the discussion of NIRP and the flight of money, buying in Treasuries could be coming from Europe and Japan as well. This has resulted in Treasury yields dropping and the 10-year yield (TNX) has now dropped back down near its January 2015 low at 1.65%, with Tuesday's low at 1.70%. The small bounce pattern off yesterday's low looks like a correction and should be followed by another leg down, which means the January 2015 low will likely be tested, if not broken. This week's decline has TNX breaking its uptrend line from July 2012 - January 2015, near 1.76%, but there's still the potential for another bounce back up to the downtrend line from June 2007 - December 2013, which was last tested in November-December 2015. Another leg up inside a descending triangle would be a setup for a stronger decline but at the moment, if support at 1.65% doesn't hold then we'll likely see the decline continue to at least the July 2012 low at 1.39%. What it does from here will help clarify the next likely move for the stock market as well.

10-year Yield, TNX, Weekly chart

The banking index has outperformed the broader market but unfortunately that means it has outperformed on the downside. BKX has already broken well below its 2014-2015 lows and is now testing its April 2013 high at 58.83 (Tuesday's quick low was 58.42 and then it traded around 58.83 for most of the day). Today's low at 58.93 looks like it's going to be followed by lower lows and that should have BKX testing its uptrend line from March 2009 - October 2011, which this week crosses its 50% retracement of the 2007-2009 rally, at 57.25. That should set up a multi-week bounce correction into April before continuing lower. Below 57 would suggest the next support level near 52.50 would be next.

KBW Bank index, BKX, Weekly chart

More talk about negative interest rates further depressed the US$ this week but so far it's just continuing to trade inside a 94-100 trading range, which is not expected to change until later this year when I'm expecting another rally leg out of the consolidation. I'll change that opinion, which I've held since its high in March 2015, when price tells me to.

U.S. Dollar contract, DX, Weekly chart

Who lit a fire under gold bugs' butts? Last week gold broke above its downtrend line from October 2012 - January 2015 and then price-level S/R at 1142 and then blasted higher from there. I had mentioned it would be bullish above 1142 and that turns out to be no lie. The strength of the rally has it looking like a c-wave of an expanded flat correction, which is when the b-wave pullback (the October-November 2015 decline) drops below the previous low (July 2015). When that happens and it's followed by a strong spike up, as we see here, the c-wave generally achieves 162% of the a-wave, which is the 3-wave move up from July 2015 to the October 2015 high. That projection is shown on the weekly chart below at 1238.59, which closely aligns with previous price-level S/R at 1235. Once the leg up from December 3rd completes, assuming for now up near 1235-1238, it should get completely retraced as gold heads to a new low. That would obviously be extremely depressing for gold bugs and might finally dissuade them from trying to buy a low, which is what we need to see before a longer-term bottom will be in place. But a rally above 1240 would have me thinking a longer-term bottom might already be in place so we'll see what happens if and when it reaches that area.

Gold continuous contract, GC, Weekly chart

The pattern for oil's decline from June 2015 would look best with one more new low and that could be coming sooner rather than later. A downside projection for a new low is near 23 if it happens by the end of the month. Following a new low, if we get it, we should see a stronger bounce/rally in the coming months. The commodity index also supports this idea.

Oil continuous contract, CL, Weekly chart

There are no significant economic reports on Thursday but we'll export and import prices on Friday (to check how the inflation/deflation battle is going) and retail sales. Michigan Sentiment will be out after the open on Friday but none of the reports are likely to be market moving. If retail sales come in much different than expected (relatively flat for January) we could see a pre-market move so watch for that possibility.

Economic reports


The stock market looks like it has another leg down before we can look for a larger bounce (in time if not price). It could be just a minor new low or a significant drop and unfortunately it's not clear at this point which we should expect (assuming we'll get a new low). If we get a minor new low and a reversal with bullish divergence against the January 20th low I'd be more inclined to try the long side, especially if a minor new low is followed by a rally above today's high. But a sharp decline that breaks through the close-by support levels would have me sticking with the short side until we see some kind of ending pattern to the downside, with bullish divergence. We have a vulnerable market and that means downside surprises. Long trades should be considered counter-trend trades but the short side could be short-lived if we're nearing a tradeable bottom, which I think we are. That means small base hits for sides while we watch to see how the larger pattern is setting up.

Good luck and I'll be back with you for the weekend wrap (filling in for Jim).

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Plays

Oil Roils Market Again

by Thomas Hughes

Click here to email Thomas Hughes
Editor's Note

Oil prices went on yet another wild ride, falling nearly -2.5% to hit a new low.

The support garnered from rumor seems to have worn off, now it looks like the slide in energy prices will deepen. If the market does not disconnect from oil prices hopes for a bounce back, rally or reversal may evaporate into thin air. The silver lining is that the more oil prices decline the more talk we'll hear about a deal to support prices, and maybe we'll even get one.

What I'm waiting for is for more obvious signs that low oil prices are helping the consumer and business. Earnings so far this season, while bad overall in terms of S&P 500 earnings growth, are much better than expected.


JBHT- JBHunt Transportation - Company Profile

While the majority of the transportation sector has been in decline in response to lower energy costs trucker JBHunt has been expanding its fleet, hiring new drivers and increasing load volumes across the country. In its most recent earnings report the company produced EPS in line with estimates but it is the internal data that is most promising.

JBHunt Transport services and its wholly owned subsidiaries is a diversified transportation and logistics company operating throughout North American. Operations are centered in the United States with some portions operating in Canada and Mexico. The company operates in the intermodal space using its own fleet and to some extent third party operators in 4 sub-segments.

Why We Like It

Fourth quarter results were good. Earnings were in line with expectations on flat revenue but as mentioned, it is the internals that are most interesting. Q4 operating income was up 5% over the previous year with a 9% increase in EPS. Full year results include a 13% increase in operating income with a 16% increase in EPS. Full year revenue was flat, not something we necessarily want to see, but when taken in light of lower fuel surcharges is not the red flag it would seem to be. Remember, in recent years revenues among the entire transportation sector have been inflated due to surcharges related to what were then record fuel prices.

Three of the four business segments showed notable increases. The Integrated Capacity Solutions segment, management of third party transportation services, showed a 4% decline in revenue due to decreased spot market activity and lower revenue per load. The other three segments; Intermodal, Dedicated Contract Services and Trucking all showed notable increases in revenue of 1%, 2%, and 3% respectively for a total operating revenue increase of 9%.

Drivers of the gains, no pun intended, include increases in new customers, revenue realizations from previous rate increases, improved fuel economy, lower maintenance costs attributed to newer equipment, less reliance on third party shippers, increased fleet size and improving margins. These were offset by higher wages and increased costs of recruitment and retaining employees but those cost are ultimately a sign of ongoing improvement in the labor market and the consumer that will eventuall spill over into this and other segments of the economy.

Earnings results are all well and good but the reason why we really like this stock is two-fold; a recent dividend increase and a couple of analyst upgrades. The board of directors approved and announced a 5% increase to the dividend on January 28th. According to the board earnings and free cash flow warrant the increase. As for upgrades there were two; one in early January and another just after the earnings report was released. The stock was upgraded from hold to buy at BB&T and from peer perform to outperform by Wolfe Research. Based on the average analyst target of $87.14 there is still a minimum upside potential of 16%.

Our play; buy the May $80 call with a trigger price of $76.00.


No New Bearish Plays

In Play Updates and Reviews

Crazy Mixed Up Market

by Thomas Hughes

Click here to email Thomas Hughes
The market wants to move higher but Fed uncertainty and sliding oil prices keeps holding it down.

Editors Note:

The indices moved as much as 1% higher and more in today's session. Earnings and anticipation of Janet Yellen's testimony both played a part. By end of day however, another sharp decline in oil prices had them moving lower, erasing most if not all of today's gains.

The S&P 500 moved up off the 1850 support level, support that has been holding so far. The move is encouraging but the decline in oil prices is a concern. To date, we can attribute most of the recent market decline to falling oil prices and their impact on earnings, if this holds true the much anticipated bounce we've all been looking for may evaporate.

Tesla reported after the bell today, reporting a large loss versus a projected small profit. The stock surged 10% in after hours trading anyway, due to robust deliveries guidance for the coming year. Cisco Systems and Whole Food Market also gave positive reports and strong guidance, maybe it'll be enough to take the markets mind off of oil prices.

Current Portfolio

Current Position Changes

BAC - Bank of America

Cancel the potential entry on BAC.

INO - Inovio Pharma

The new long position in INO remains unopened. After hours action saw a big jump in share prices that may trigger entry at the open tomorrow.

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

GPRO - GoPro - Company Profile


GoPro shares fell a little more than -6.5% in today's session . The stock price is being squeezed between the downtrending short term moving average and the $10 support level. When this level fails... look out below. No changes to current position.

Original Trade Description: February 8th

GoPro is the number one action camera maker and created the current market. They moved from a simple camera maker to a content creator over the last couple years. At least that is what they wanted people to believe so that their sky high PE would be based on something other than simply a hardware company.

Fast forward to 2015 and 5-6 companies began to compete with action cameras of their own. GoPro's market share began to dwindle. A botched roll out of a new model in Q3 and two prices cuts in Q4 has knocked their share price down from $65 in August to $9 on Thursday.

One of the problems that GoPro has been unable to conquer is the relatively hard method to recover, edit and publish videos produced by the cameras. They have promised new software for a couple years and it never seems to arrive or fails to satisfy when the updates appear. This is a drag on future camera sales because you have to be a geek to produce any quality videos.

News broke today that GoPro had licensed its video technology, certain file storage and other system technologies. While the details are still unclear this could be a Hail Mary pass to Microsoft for help with their software problems. If it is not related to that then there is something else going on that could provide a boost for GoPro in the future.

Lastly, the drop in market cap from $8 billion to $1 billion makes them a very attractive acquisition target for somebody like Sony or even Under Armour. Microsoft could buy them with their pocket change.

Shares appear to have bottomed at $10 but just in case we can buy a March $10 put as protection for 97 cents. This means we have unlimited upside and almost zero downside risk. If somebody makes an offer for GoPro I would expect it to be $15 or more simply because the company is not in financial trouble. They currently has no debt and $474 million in cash. They just need to get over this technical problem and they will be fine.

Buy GPRO shares, currently $10.99, no stop loss.

Buy March $10 put, currently 97 cents.

Net debit $11.96.

INO - Inovio Pharmaceuticals - Company Description


No move on INO shares in the open session but an afterhours pop could trigger an entry at the open tomorrow.

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


Smith&Wesson gained 3.85% today and regained the upper side of the short term moving average. The stock closed near the high of the day despite the late day broad market decline. Momentum is weak but stochastic is on the rise, no change to this position.

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


Rumors of a deal to cut production and support prices helped to lift oil prices today but supply and demand pressures outweighed the rumors and drove oil prices to new lows. The USO is testing it's lows and looks like a break below them may brewing. If so we may see a quick drop but buyers are expected to step in.

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 got a small pop on talk it may be buying back some of its bonds. Despite this the longer term outlook for European banks remains poor, no change.

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.

FGEN - Fibrogen Inc - Company Profile


This one is consolidating at a historic low, no changes at this time.

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 stock made a small rebound today but remains in down trend with weak indicators and below our stop target. No change at this time.

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 opened with a gap but fell throughout the day and closed it. The indicators are rolling into a new bearish signal, no changes at this time.

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 tried to rally early in the day ... but the late day sell off in oil drug it to a new closing low for the month. No changes at this time.

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


The VIX is retreating from a peak, indicators are weak, the anticipated slide could be starting. No changes at this time.

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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