Option Investor

Daily Newsletter, Tuesday, 2/16/2016

Table of Contents

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

Market Wrap

Is the Worst Behind Us?

by Jim Brown

Click here to email Jim Brown

The 1,810 low on the S&P on Thursday is far below the close at 1,895 today. Is the worst behind us or is this just another bear market bounce?

Market Statistics

Strong rebounds in the Shanghai Composite and Nikkei 225, comments from Mario Draghi and an early morning rebound in oil prices all combined to boost the S&P futures on Monday and lift the U.S. markets to open the week. The Nikkei rallied more than 7% on Monday and held those gains today. The index finished well off its highs but still positive for the day. The Shanghai Composite added +3.2% to its rebound that started in early February. The gains in both of these indexes calmed investor worries about a continued Asian meltdown.

Oil futures rallied to $31.53 overnight after Russia, Saudi Arabia, Qatar and Venezuela said they would freeze production at January levels. The agreement came after a meeting in Doha, Qatar to discuss production levels. However, freezing at the January levels represents record OPEC output at 32.67 mbpd and a 2.0 mbpd surplus over demand. That is hardly a meaningful agreement to solve the oil price problem. Venezuelan production has been declining so they would be lucky to exceed January levels even if they wanted. It has been rumored that Saudi Arabia has been over reporting their production so any future agreement would freeze them at a higher level than their actual production.

Iran and Azerbaijan immediately announced their intentions not to join in the agreement. Iran said it was not fair to limit their production right at the point where they were returning to the market. They said once they resumed full production they would "consider" capping production at that level. The last time Russia agreed to cooperate with OPEC in 2005 they never actually implemented their production cuts. Russia, like members in OPEC tend to promise one thing and then do whatever they want. Kuwait said they would watch production levels for three months to see if there was any change and then consider a production limit.

Crude prices rallied on the initial headlines but once all the qualifications and denials began appearing the prices crashed back to $29 and negative for the day.

Over the weekend, PBOC governor Zhou Xiaochuan, reiterated in an interview with Caixin that there was no basis for continued yuan depreciation. Analysts had been expecting China to devalue the yuan by as much as 20% in 2016 before the yuan was included in the SDR basket of currencies late this year. The currency hit its highest level against the dollar on Monday. China said new loans hit a record high of 2.51 trillion yuan, ($385.4 billion), in January. Total financing nearly doubled from December to 3.42 trillion yuan.

The removal of the yuan devaluation cloud helped lift the Asian and U.S. markets.

ECB president, Mario Draghi, reiterated his claim that the ECB is "ready to do its part" to make "the euro area more resilient" suggesting there were further stimulus measures to come. There were some rumors the ECB could begin buying bad loans from banks in an effort to provide some capital for those banks to begin lending again.

The positive market forces lifted the S&P by nearly 31 points to 1,895 but that is still well below the resistance at 1,950. The quadruple bottom at 1,810 is bullish but the chart is still negative until that 1,950 level is broken.

The U.S. economics did not contribute to the rebound. The NY Empire State Manufacturing Survey for February came in at -16.6 and much worse than the consensus forecast for -10.0. The headline number is still better than the -19.4 from January. The February rebound was still the second lowest reading since 2009.

The new orders component improved from -23.5 to -11.6 and the backorder rose from -11.0 to -6.9. On a comparable ISM basis, the headline number would have been -47.4. Two weeks ago, the ISM Manufacturing came in at 48.2.

Empire Chart

The NAHB Housing Market Index for February declined from 61 to 58. This was the lowest level since May 2015. The buyer traffic component declined sharply from 44 to 39 but there were two snowstorms in the survey period. The report was ignored because this part of the year is normally weak.

Treasury international capital flows were negative in December by -$29.4 billion after a $31.4 billion inflow in November. This was only the fourth month out of the last 18 that international cash flowed out of treasuries although foreign investors have been net sellers for 14 of the last 15 months.

Foreign investors were also net sellers of U.S. equities for the 7th time in the last 8 months with sales of $35.9 billion. There were sales of $4.6 billion to foreign investors.

FYI, in 2016 the Fed will buy $216 billion in treasuries to offset those in their portfolio that will mature this year. This should keep yields low most of the year.

There are a lot of reports due out on Wednesday but the FOMC minutes will be the only market mover. This is the minutes for the January meeting and analysts will be looking for clues that tell us what the Fed was thinking about future rate hikes.

Apollo Global Management (APO) agreed to buy home security company ADT Corp (ADT) for about $6.94 billion in cash. That values ADT at $42 and represents a 56% premium over Friday's close. Apollo is going to merge ADT with their Protection 1 subsidiary. ADT has a 40-day "go shop" period to hunt for a better deal. I wonder if Tyco (TYC) is listening? Investors appear to have been happy about the deal because APO shares rallied 5.4%.

Groupon (GRPN) rallied +41% after Alibaba (BABA) said they acquired a 5.6% stake in the marketer. That equates to about 33 million shares. Alibaba reported the position in an SEC filing after Groupon beat earnings estimates. Alibaba shares also spiked +9%.

Freeport McMoran (FCX) shares rallied +15% after announcing the sale of a 13% stake in the Morenci copper mine in Arizona for $1 billion in cash. The buyer was Japanese miner Sumitomo Corp, which already held a 15% stake in the mine. Freeport will now own 72%. Freeport said in the Q4 earnings call they were actively involved in discussions with multiple parties over sales of various noncore assets. The $1 billion will be used to repay borrowings from its bank term loan and revolving credit facility. We should expect further sales announcements in the coming weeks.

Community Health Systems (CYH) reported a loss of -28 cents compared to expectations for earnings of 95 cents. Revenue of $4.8 billion missed estimates for $4.99 billion. Total hospital admissions declined -3.6%. The CEO said the results were measured against a strong Q4-2014 when there were significantly more emergency room admissions attributed to respiratory illnesses and the flu. The results were also impacted by increased reserves for doubtful accounts. CYH shares fell -22%. Their earnings rippled through the sector with Lifepoint (LPNT) felling -6% and Tenet Healthcare (THC) -2%.

Fossil (FOSL) reported earnings of $1.46 compared to estimates for $1.30. Revenue of $993 million easily beat estimates for $924 million. The company guided for full year to earnings of $2.80-$3.60 and for net sales to a range of -3.5% to -1% decline. Shares rose +16% to $40 in afterhours.

Shares of Kinder Morgan (KMI) spiked +6.5% after hours after Berkshire Hathaway (BRK.B) announced a 26 million share position. This ranks as Buffett's 30th largest holding so it is way down the list but another new energy position. Buffett holds a $5.0 billion, 14.3% position in Phillips 66 (PSX). Kinder Morgan was Buffett's only new position in Q4. KMI recently cut its dividend by 75% and Goldman Sachs said that could be the first of many by MLPs.

Shares of Rackspace (RAX) declined after the bell after the company said revenue would be in the range of $517-$521 million for the current quarter and well below estimates for $531.8 million. Full year guidance ranged from $2.08-$2.16 billion compared to analyst expectations for $2.21 billion.

Earnings of 24 cents narrowly beat estimates for 23 cents. Revenue was $522.8 million compared to estimates for $521 million. Shares fell -9% in afterhours.

Despite the intraday rebound in oil prices, more than 35% of the world's exploration and production companies are at high risk for bankruptcy according to John England from Deloitte. That represents 175 firms around the globe. England said another 160 are also at risk if prices remain lower for longer. These companies are suffering from high debt and low cash flow. When they borrowed money to drill the price of oil was significantly higher, near $100 in most cases. With production costs near $30, it was a simple decision. Now with prices flirting with the mid $20s and production costs still in the $30 range they are losing money on every barrel they produce. Cash flow has declined -70% but debt payments remain at the high levels from two years ago. Of those 175 companies with the highest risk about 50 are in the most trouble because their assets are worth less than their debts.

Wood Mackenzie said E&P companies have postponed or cancelled more than $380 billion in projects since oil prices crashed.


The quadruple bottom around 1,810 on the S&P would normally be an all clear signal for buyers to rush back into the market. Some did that today but the gains were mostly short covering because of the spike in the Asian markets on Monday. The futures were up strongly and those traders short over the weekend hoping for another Chinese meltdown were caught off guard and a short squeeze was born. Add in those investors that believe 1,810 was the bottom on Thursday and the index nearly made it to 1,900.

The 1,880 to 1,920 range has been resistance since January 22nd with only 3 days seeing a temporary move over the 1,920 level that was immediately sold. That means today's close at 1,895 is right in the middle of that range and we could see another strong day of gains before testing that 1,920 mark.

We are not out of trouble yet but the various factors are lining up on the bullish side at least temporarily.

The Dow did not make a lower low. The 15,503 on Thursday was above the 15,450 low on January 20th and the 15,370 low from August. That does not guarantee a continued rebound but higher lows are always positive. The 16,425 and 16,500 levels remain strong resistance. The Dow has rebounded for +700 points since the Thursday low. That is approaching overbought once again.

The earnings from Dow components are over so the potential for big headlines are also over. For the next two months, it will be powered by the fundamentals and sector movement. Boeing was the exception today with a +$4 gain on negative news. The GAO denied Boeing's protest of the $80 billion bomber contract to Northrop Grumman (NOC). Boeing has until February 22nd to file a second protest and after that date their remedies will be limited to suing the GAO.

JP Morgan (JPM) upgraded Goldman Sachs from sell to buy and that gave Goldman a $3 gain.

The Nasdaq Composite was hot today with a +2.26% gain of +98 points. Most of that was pure short covering. I have a screen of about 800 stocks that I watch daily. More than 25% of them had gains from $2 to $14 and the majority of those were Nasdaq stocks. Quite a few were biotech stocks with the Biotech Index gaining +3.1% today and +9.8% since the Thursday lows.

I would note in the winners and sinners list below the number of stocks with gains over $4 compared to the 6 losers with losses over $2.

The Nasdaq has a long way to go before major resistance around 4,600 and the congestion range from 4450-4600 is also decent resistance. If biotechs continue to outperform we could make it through that patch but I suspect the short squeeze in that sector is about over.

The Russell 2000 found support in the 950 range and rebounded to close at 995. That is just under long-term resistance at 1,007 and stronger resistance at 1,035 and 1,050. The Russell has got a long way to go before it can turn skeptics into believers over 1,050.

I do not want to pour cold water on this rally and I would love to see it continue higher. Nearly every major market rally begins as a short squeeze and then continues once fund managers begin to chase prices higher.

Bank of America strategists claim it is a buy signal when cash levels at equity funds reach 4.5% and a sell signal when those levels decline to 3.5%. The current level is 5.6% and that should mean the market is a strong buy. However, fund managers hoard cash because they expect lower lows and it may take a few more days of gains to get them to part with that pile of money. Money markets took in $24.3 billion last week alone compared to $31.5 billion year to date. That one metric should tell you exactly how scared investors were as the markets hit the lows last week. Bank of America cut their 2016 price target on the S&P from 2,200 to 2,000. Fund managers have reduced net long positions from 21% in December to 5% at the end of January.

We can conclude from that data that there is a lot of money that needs to come back into equities and a move in the S&P over 1,950 could be explosive. Between our current level and 1,950 could be choppy as buyers and sellers try to test the highs and lows intraday.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Tuesday Surprise

by Jim Brown

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Editor's Note

The market has rallied for two days on a significant short squeeze from the Thursday lows. Investors were so bearish on Thursday that everybody was leaning to the short side and the Friday rebound caught them off balance. Those that held over the weekend in hopes of a Chinese market meltdown when they reopened from the Lunar New Year on Monday were also trapped in their shorts.

The S&P futures were up more than 20 points on Monday night thanks to a 7% rally in the Japanese Nikkei and a gain in the Shanghai Composite.

Tuesday's short squeeze pushed the S&P to 1,895 and 80 points off the Thursday low of 1,810. The market has gone from oversold to overbought in only two days.

I prefer not to enter new longs just as the S&P approaches resistance. I would also rather not enter new shorts just in case the short squeeze has farther to run.

I am not recommending any new plays today. Let's watch the market on Wednesday and then pick a direction.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Surprising Gains

by Jim Brown

Click here to email Jim Brown

Editors Note:

Several of our positions posted surprising gains for the day thanks to the short squeeze.

Smith & Wesson surged to a new six week high after the FBI reported a 44% increase in background checks to buy a gun in January. GoPro surged 12% on short covering after their cameras were used to produce a live stream at the Grammy Awards.

We do not care what lifts our stocks and short squeezes are always welcome!

I am recommending caution about entering any new positions until after Wednesday.

Current Portfolio

Current Position Changes

WU - Western Union

The new long position in WU was entered at the open.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

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 are back at resistance at $11.70 after a +12% spike today. The company announced it had embedded GoPro cameras in six gramophone statues at the Grammy Awards to capture different views of the live event. The collaboration with the Recording Academy was good publicity regardless of whether the cameras captured any significant videos. The black Hero4 cameras were HeroCast enabled. Last year more than 7.5 million people watched the Grammy live-stream.

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.

Position 2/9/16

Long GPRO shares @ $10.65, no stop loss.

Long March $10 put @ 99 cents, no stop loss

Net debit $11.64.

JBHT - JB Hunt - Company Description


JBHT had another nice move and is close to breaking over initial resistance at $76. I raised the stop loss to $73.75 and added an exit target.

Target $78.50 for an exit.

Original Trade Description: February 10th.

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.

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%.

Buy the May $80 call with a trigger price of $74.00.

Position 2/12/16 with a JBHT trade at $74

Long JBHT shares @ $74. See portfolio graphic for stop loss.


Long May $80 call @ $2.25, see portfolio graphic for stop loss.

SWHC - Smith & Wesson - Company Description


We waited out the volatility over the last two weeks and were nicely rewarded. S&W broke out to a six week high this morning to test resistance at $24. I raised the stop loss to $21.25.

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


Multiple headlines out of the Middle East spiked crude to $31.50 this morning but reality returned before the close. Eventually one of these headlines will stick and crude prices will begin to trend higher. The inventory build season is over in late March, early April so we have plenty of time.

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.

WU - Western Union - Company Description


WU broke over initial resistance this morning to trigger the position. I raised the stop loss to $17.75 and added an exit target at $19.15. The company released the results of a study showing nearly half of U.S. and Canadian business owners expect business conditions to improve.

Original Trade Description: February 12th

Western Union is one of the more recognizable names in the market. Although the mode of transport has changed from stagecoach to digital the basic business model has remained the same for 165 years, the transfer of wealth. Western union is money transfer and payment solutions provider operating in 34 countries with 3 business segments; person to person, person to business and business solutions.

The company reported earnings earlier this week and results were good. Despite the negative impact of currency conversion, the company was able to meet expectations and provide forward guidance in line with expectations. Merely meeting expectations is not really enough to get the market excited but the inclusion of a -$0.15 impact into the forward guidance and the recent decline in dollar value is reason enough to think guidance could be low.

Speaking of the dollar. I don't mean to completely discount the impact of currency conversion. Merly to point out that the projected impact for 2016 may be too high. Looking at the chart of the DXY it is clear that the dollar is declining in value and trending in the average range we saw in 2014. If it continues to fall back to the bottom of the range negative impact in 2016 should be no worse than 2015.

Results for the 4th quarter and full year 2015 were good. The company reported earnings of $0.42 on revenue of $1.38 billion; earnings were in line with estimates, revenue was short by 0.02 billion. In constant currency this is a 3% gain in revenue for the fourth quarter and a 4% gain for the full year. There were a couple of other red flags in the report but all related to currency conversion. One was margin. Margin improved from 20% to 20.9% in 2015 but is expected to fall back to 20% in the coming year.

Any reduction in earnings due to narrowing margin should be more than overcome by increased revenue. Economies in North America and Europe, the two largest segments by region totaling more than 40% revenue, are both strong and growing. Speaking solely of the US labor trends and earnings point to strength and should fuel person to person transactions, 80% of total business.

Another reason to expect revenue expansion is the expanding footprint. The company operates in over 200 countries, 34 added in the past year, including 100,000 kiosks and ATM's and is planning to continue expanding into 2016. At the same time the company is expanding its services and has recently added a 3rd payment solution, the WU Connect, which enables users to offer Western Union services on their platforms.

On a technical basis the stock looks like it is in reversal and heading higher. The stock is moving up off of a double bottom with increasing volume. Volume has been on the rise for the last month, the last week has been more than 2X average daily. Today the stock jumped 4% to break above the short term moving average. MACD momentum is bullish and on the rise, confirming the break. Stochastic is still weak but consistent with a signal early within a bullish movement. Today's action saw prices hover around $0.85 with a Delta of 0.48. The average analyst estimate for the stock is just over $18.79, not high, but the data pool is skewed to the upside with low outliers dragging down the mear. The high target is $24.

The option is cheap so I chose the May expiry to give the stock time to move.

Position 2/16/16 with WU trade at $18

Long WU shares @ $18, see portfolio graphic for stop loss.


Long May $18 call, entry .79, see portfolio graphic for stop loss.

BEARISH Play Updates

OIH - Oil service Index - ETF Description


The OIH is chopping around at multi-year lows but not declining thanks to the constant stream of headlines out of the Middle East promising some sort of production modification. I am beginning to wonder if they will actually get something accomplished. Inventory levels this week could provide a shock after last week failed to show a gain.

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 two-day short squeeze knocked $3 off the VXX. If the market gains continue the decline should accelerate. Investors are still cautious. Be patient. The volatility will eventually die.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82

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