Option Investor

Daily Newsletter, Thursday, 2/18/2016

Table of Contents

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

Market Wrap

Short Covering Ends

by Thomas Hughes

Click here to email Thomas Hughes
The three day short covering rally ended today.


The three day short covering rally ended today, what comes next is the question on everyone's mind. The rally and bounce from deep support levels is promising in terms of future rallies but not a guarantee of a reversal or continuation by any means. Until the market decides it really is time to start getting bullish on stocks this move looks a lot like a range bound market hitting the top of the range.

Asian markets may be giving a bullish sign. Indices in the region gained more than 2.25% in Thursday trading driven by what Chris Weston at IG thinks could be the start of a "fear of missing out" rally. European indices followed the lead set by Asian traders, gaining more than 2% intraday only to see those gains cut by the close on weakness in our markets.

Market Statistics

US indices were indicated to open positive all morning, if barely. The SPX was indicated to open with a gain near 0.25%. Better than expected, or at least not as bad as expected, data released at 8:30AM helped strengthen the trade to 0.35% and that is how the markets opened. After the opening bell the mood changed quickly. Within minutes the indices fell to break even levels and below, led by the transports. Intraday low was hit just before lunch, the rest of the day saw the indices hover between Wednesday's closing prices and the early low.

Economic Calendar

The Economy

Initial claims for unemployment was reported as 262,000 this week, down -7,000 from last week's not revised figure and better than the +5,000 increase predicted. The four week moving average also declined, losing -8,000 to hit 273,000. On a not adjusted basis first time claims fell -11.1% versus an expected decline of -8.7% and are now -7% lower than last year at this time. The states seeing the largest increase in claims are Texas and Rhode Island with gains of +1,674 and + 783 respectively. The states with largest decreases in claims are Illinois and Tennessee with declines of -5,503 and -3,067 respectively.

This week's data helps cement the idea that seasonal increases in joblessness are behind us. This week's initial claims are now less than 15,000 above the 43 year low set last summer and consistent with ongoing health in the labor market. Based on these numbers we should see declines in continuing claims and total claims over the next few weeks.

Continuing claims rose by 30,000 to hit 2.273 million from last weeks upwardly revised figures. Last week's data was revised by +4,000. The four week moving average of continuing claims rose 13,500 to 2.262 million, the highest level for the moving average in over 6 months. In the near term view this is a negative, we don't want to see joblessness on the rise, but considering the post holiday surge in initial claims and the recent down turn in those claims this is very likely the peak in continuation claims. And, despite the near term increases, continuing claims remain at low level relative to the recovery and indicative of labor market health.

The total number of Americans receiving unemployment benefits fell -19,218 to 2.720. Total claims has been holding relatively flat near this level for the last four weeks, since hitting the post holiday peak in mid-January. Based on initial claims data and the historical total claims data we should see a down turn in total claims in the next 4 weeks or so. Total claims lags initial claims by 2 weeks so we may see some downward bias as soon as the first week of March. On a year over year basis total claims are down -4.7% and remain consistent with labor market health.

The Philadelphia Federal Reserve Manufacturing Business Outlook Survey was also released at 8:30AM. The headline number was -2.8, better than the -2.9 expected by economists and also better than the -3.5 reported last month. The 6 month forward outlook remains positive but fell to 17.3, a 3.5 year low. Within the report new orders fell -4 to -5.3, shipments remain positive but fell -7, inventories and back log orders declined and the employment index fell -3 to -5.0. What I found interesting about the employment segment was that only 20% of respondents predicted a decline in employment while 63% saw no change and 15% predicted they would be hiring in the near future.

The Index of Leading Indicators was released at 10AM. The headline number was a decline of -0.2% from January, exactly as expected, with a downward revision of -0.1% to December and a +0.1% upward revision for November. The index now stands at 123.2, 23.2% better than 2010 levels. The Coincident Index rose 0.3% and the Lagging Index rose 0.1%. According to Conference Board economists this month's reading does not indicate recession and remains consistent with moderate economic expansion expected for the first half of the year.

The Oil Index

Oil prices were a bit choppy today but not quite as choppy as they have been recently. In the early part of the day what appears to be a growing consensus from OPEC and non-OPEC producers to curb production levels helped to drive prices up by over 3%. Later in the day EIA data showing a larger than expected build in US stockpiles helped to moderate the day's gains to about +0.8%.

While talk of the proposed production freeze is supporting prices the fundamentals remain unchanged. A curb to production would leave supply at current high levels and do little to alleviate oversupply. So long as supply and production outweigh demand expectations oil prices are going to remain low so it looks like what we have brewing is a buy-the-rumor and sell-the-news type of scenario.

The Oil Index made a small gain at the open, just below the 1,000 resistance level, and sold off from there. The index end up losing about -1.75% on the day, created a dark cloud cover and confirmed resistance. The indicators are bullish and rising, but remain consistent with a range bound asset at this time. This range may persist in the near to short term while the market decides on whether oil prices have bottomed or not, and if talk of production curbs are enough to drive prices higher. A break above 1,000 could go to 1,100, support targets are at 950 and 900. No matter what happens I expect to see more volatility out of the oil patch.

The Gold Index

Gold prices rose more than 2% today, gaining more than $25, as risk averse investors fueled the flight to safety trade. Goldman Sachs may be right about shorting gold, but from my perspective the target entry for such a short would be near $1,250. If Goldman is wrong they've added fuel for another round of short covering. Regardless, the technicals support a retest of the recent high at least. Low inflation data and a more dovish than not Fed could help fuel this trade as well, the risk being that ECB QE could devalue the euro and reinvigorate dollar bulls.

The gold miners rose along with the prices of gold. The Gold Miners ETF GDX gained more than 4.5% to break back above $18 and approach the 7 month high set last week. The index is moving up to retest the highs, as indicated by convergences in the indicators, with a target near $18.68. Strength in the indicators, particularly a near 3 year extreme peak in MACD momentum, suggest that the gold miners have reversed, or at least bottomed, from the 5 year down trend. The sector may correct and/or trend sideways from here. It will of course come down to gold prices which appear to have set a new, higher, support level at or near $1200.

In The News, Story Stocks and Earnings

The Dollar Index held steady in today's session, below the shot term moving average and resistance at the $97.50 level. The indicators are bullish and pointing higher but not strongly. Diminished expectation for a March rate hike has the dollar under pressure and could keep it below resistance and range bound until the next round of central bank meeting, about 3 weeks away. Fed hawk James Bullard said just yesterday that it would be unwise for the Fed to continue raising rates at this time.

WalMart released earnings this morning and did not please the market. The company beat on the bottom line but revenue fell short due to weakness in the US the impact of currency conversion. The company also gave weaker than expected guidance, due in part to currency conversion and to the string of store closings announced last month. Today the stock lost more than -5% in the early part of the session but seemed to attract buyers. By end of day the loss was halved leaving a white bodied candle with long lower shadow.

La-Z-Boy reported after the bell on Wednesday and sparked a massive increase in share prices today. The company reported a 7.3% rise in sales, a 26.5% increase in quarterly EPS, a 29.9% increase in operating income and the highest margins in 12 years and all with positive forward outlook. Today the stock gained 20% on 4 times average daily volume.

Boston Beer Company, maker of Sam Adams, reported after the bell. The company beat expectations on the top and bottom line although both were down from the same period last year. The decline from last year's results was due to a 3% decline in shipments coupled with increased advertising and marketing costs that were only partially offset by price increases. Advertising and promotional expenses were up about 9% from last year at this time. Also impacting revenues was a decline in market share attributed to the wave of craft brewers sweeping the nation. (I live in Asheville, NC, we have about 30 microbrewers in town and more pop up every day, the funny thing is that PBR remains the top selling brand). The stock traded down -2.5% during the day, resting on the 30 day moving average, with little to no action in the after hours market.

The Indices

The indices fell in today's session, but other than that the day looked pretty good. The day's declines were relatively small and for the most part left the indices near the highs of the rally which began last week. The one exception is today's loss leader, the tech heavy NASDAQ Composite, which fell a little more than -1.0%. Today's candle is a little ominous, dark cloud cover, so we may see a pull back to test support. The indicators remain bullish in the near term, and consistent with a bottom in the short term, so any such pullback could result in new entry points for bullish positions. Resistance is just above today's open, near 4,600 and the short term moving average, with first target for support near 4,375.

The Dow Jones Transportation Average was the next biggest decliner among the major indices, losing about -0.57% in today's session. The index is taking a breather from the intense rally of the preceeding 3 days but is supported by strong indications of higher prices. MACD momentum is on the rise and at an extreme peak, stochastic is about to cross the upper signal line, both indicative of higher prices or at least a retest of current highs if a test of support occurs. The index is below resistance targets so has a little room left to run in the nearer term. Resistance target is 7,500 with first support target just above 7,000 near the short term moving average, which happens to be moving higher for the first time in nearly 3 months.

The S&P 500 made the third largest decline, nearly -0.5%, and looks like it could go higher. Today's action was more of a consolidation move than a reversal signal, with the decline halted at the short term 30 day moving average. The indicators are pointing higher and stochastic is firing a strong signal with this second bounce from support so a test of resistance looks likely. Resistance target is near 1,950, a break above this level would confirm a reversal from the recent low. If the index pulls back to test support first target to the downside is 1,900.

The Dow Jones Industrial Average made the smallest decline in today's session, only -0.25%. Today's candle is black and may indicate a peak but the close above the short term moving average suggests the market is still moving higher. The indicators are also both still pointing higher, suggesting a move up to the 16,600 resistance target is likely. A break above this level would confirm the reversal and could spark another rally.

The short covering rally is over. Now it's time for the market to decide what is going to happen next. Based on the indicators it looks like there will be at least a test of resistance, if not another move higher. Over the next week earnings and data are going to play a big role in what happens, especially the data due to its impact on FOMC speculation. Tomorrow's data, CPI, could go a long way towards swaying the speculation.

I remain a bull, it looks like the market is bottoming, but I have one concern yet to be alleviated and that is earnings. Earnings expectations for every quarter in 2016 continue to decline, full year expectations are now in the range of only +3.5% (down from +15% last summer), and could easily derail any hopes of a sustained rally.

Until then, remember the trend!

Thomas Hughes

New Plays

Got Fungus?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Having your product show up at the buyers door only to be rejected because of high fungus levels is not conducive to a successful sale. For a company that is already suffering from a decline in revenue the outlook for the future worsened.


No New Bullish Plays


BG - Bunge Limited - Company Profile

Bunge is an agricultural business and food company. They sell food, commodities and fertilizer on a global basis to more than 40 countries. Last week they reported earnings on February 11th and they were not good. Earnings came in at $1.49 compared to estimates for $1.56. Revenue of $11.1 billion missed estimates for $11.6 billion and that was well below the year ago quarter at $13.2 billion.

The company guided lower saying the strong dollar was weighing on revenues and declining economic conditions in countries like Brazil are limiting the available funds to import food. Pricing power is falling as commodity prices continue to decline worldwide.

Adding to Bunge's problems was a cargo of French wheat that was rejected by Egypt because of what they claimed was excessive levels of the ergot fungus. The generally accepted level for fungus is 0.05% and apparently, Egypt decided the content was higher than the standard. Since it is impossible to halt the naturally occurring fungus entirely, it exists in every load. Egypt made the unusual statement that they would have "zero-tolerance" for fungus in the future. If Egypt can get away with that qualification then other countries could try to change their rules as well. Bunge is suing Egypt and the cargo of wheat is still parked off the Egyptian port of Damietta. Egypt subsidizes bread for its population of 88 million.

Reportedly Bunge is trying to resell the wheat but it may be difficult since the rejection has tainted the cargo. The decision by Egypt for zero-tolerance has pressured the prices for wheat to $179 per ton and a five-year low. This hurts future sales by Bunge to any other country.

To recap, Bunge missed on earnings and revenue, guided lower for 2016 and has seen future commodity sales threatened by the Egyptian move and the falling prices of their various commodities.

Shares fell sharply after earnings from $58 to $46. An instant rebound appeared to $53 but that is now fading as the bad news sinks in and the outlook for Bunge's earnings dims even further. I believe that we could see the stock price return to those lows from last week, if not lower. Shares had already been declining since last June.

With a BG trade at $49.75

Short BG shares, stop loss $51.25


Buy April $47.50 put, currently $1.55, stop loss $51.85

In Play Updates and Reviews

Minor Profit Taking

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors took some rebound profits off the table and I am sure some sellers tried to reestablish some short positions but the market damage was minimal.

There were no major sellers and volume was light. There was no big crash after a monster rebound in the S&P over the last week. This was just normal consolidation after a big gain. I was actually surprised there was not a bigger drop. The Dow turned positive in the afternoon but sellers returned at the close.

The opening spike on the upgrade to IBM was just over resistance at 16,500 but it was immediately sold. Once the index went negative the dip buyers appeared to moderate the selling.

Current Portfolio

Current Position Changes

OIH - Oil Service ETF

The short position in OIH was closed 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 fell -4% at the open but buyers defended the $12.25 level. Shares rallied in early afternoon but faded again at the close. After the big gains for the prior two days, a minor decline is actually decent relative strength.

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


I continue to be amazed by the strength in the transports. JBHT barely dipped at the open and returned to positive territory by the close.

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.

LGF - Lions Gate Entertainment - Company Description


This position remains unopened until LGF trades at $21.25.

Original Trade Description: February 17th.

Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.

Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.

The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.

One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.

Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.

The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.

I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.

With a LGF trade at $21.25

Buy LGF shares, initial stop loss $17.85


Buy June $23 calls, currently $1.55, no initial stop loss.

SWHC - Smith & Wesson - Company Description


Another major gain by Smith & Wesson. Shares popped +5% at the open on no news but resistance at $24 came back to haunt us and the gain faded to +2.6% as we approached the close.

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


Saudi Arabia spoiled the party for oil prices after the foreign minister said today that Saudi Arabia is not prepared to cut production to impact prices. "If other producers want to limit or agree to a freeze in terms of additional production that may impact the market but Saudi Arabia is not prepared to cut production."

"The oil issue will be determined by supply and demand and by market forces. The kingdom of Saudi Arabia will protect its market share and we have said so."

The price of WTI rallied to $32 at the open ahead of Monday's futures expiration but faded in the afternoon on the Saudi comments and the rise in inventories in the USA.

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 faded from Wednesday's high and closed near the lows of the day. Our stop loss is $18 and without a rebound on Friday, we could be taken out.

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 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 position was closed at the open this morning. We cannot fight the daily headlines out of the Middle East as the various plays try to talk up prices.

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


Closed: long July $20 put @ $1.92, exit $1.17, -.75 loss

VXX - VIX Futures ETF ETF - ETF Description


Despite the negative market the VXX declined. However, when the indexes rolled over in the last hour we saw some of those VXX losses recovered. 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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