Option Investor

Daily Newsletter, Tuesday, 2/23/2016

Table of Contents

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

Market Wrap

Turnaround Tuesday

by Jim Brown

Click here to email Jim Brown

The +221 gain on Monday was nearly erased by the -189 decline on Tuesday. The Dow closed at 16,431 and back under previously strong resistance at 16,500.

Market Statistics

The morning started negative after European markets posted an average decline of about -1.5% with Asia only slightly negative. The major driver for the U.S. markets was the drop in oil prices. The April futures contract became the front month and traded as high as $33.50 overnight after the March contract expired at $31.48 on Monday. That $2 difference was quickly erased after the Saudi Arabian oil minister Ali Naimi repeated more than once that there would be no production cuts. He said there will be no cuts because everybody would cheat. He also said a limit to production would have a minimal impact since limiting to the January level of 32.6 mbpd by OPEC would still leave a surplus of up to 2.0 mbpd on the market and Iran is not going to limit production. They plan to increase production by 700,000 bpd in 2016.

After the bell, the American Petroleum Institute (API) said U.S. crude inventories rose +7.1 million barrels and twice what analysts had expected. This further pressured WTI prices after the close and could weigh on the equity markets on Wednesday.

The Existing Home Sales for January came in stronger than expected but provided no lift to the market. Annualized sales came in at 5.47 million units and well above estimates for 4.35 million. That was also above the 5.45 million rate in December despite the monster snowstorms in January. Months of supply remained low at 4.0 months although up just slightly from the 3.9 months in December. The average for the prior six months was 5.0 months.

Bad news came in the form of the Richmond Fed Manufacturing Survey, which dropped back into contraction at -4 after a mediocre +2 in January. The Richmond area has now been in contraction 4 of the last 6 months. The order backlogs fell from +4 to -14 and new orders from +4 to -6.

The services sector also fell into contraction with a drop from +10 to -2 and the lowest level since 2013.

Consumer Confidence for February declined from 98.1 to 92.2 and the lowest level since July. The present conditions component declined from 116.6 to 112.1 and the expectations component declined from 85.3 to 78.9. Income expectations declined on both metrics. Prospective homebuyers declined from 7.4% to 5.3%, appliance buyers from 53.9% to 46.8% and auto buyers rose from 12.1% to 12.3%. The sharp decline in buying plans for homes and appliances suggests the retail sector is in for more pain.

The rapidly falling gasoline prices had no impact on confidence. I suspect the sharp decline in the equity markets took away the implied wealth effect making consumers more conservative in their plans. Also, with the presidential election cycle heating up there is a lot of complaining about the weak economy and that makes people focus on their lot in life instead of looking at the positive side.

The calendar for Wednesday has New Home Sales but that is not likely to be a market mover. The GDP on Friday along with Personal Spending will be the most likely reports to weigh on the market.

The earnings for Wednesday from LOW, GPS, BBY, ABBV and BIDU will have a lot more impact than the New Home Sales.

Home Depot (HD) tried to resurrect the Dow this morning by reporting earnings of $1.17 compared to estimates for $1.10. Revenue of $20.98 billion beat estimates for $20.39 billion. Same store sales were up +7.1%. Net earnings were $1.5 billion. Full year sales rose +6.4% to $88.5 billion with earnings rising to $5.46 from $4.71. The board authorized a 17% increase in the dividend to 69 cents. The company expects to earn $6.12 to $6.18 in 2016 on $88.08 to $88.84 billion. Analysts were expecting $6.16 and $93.12 billion so that is a huge revenue shortfall. Investors did not seem to care with shares rising $4 at the open. That faded in the negative market to +1.68 but still a gain. Analysts said those earnings projections target $140 in HD shares.

Over the last five years, Home Depot has bought back $30 billion in shares or 24% of the outstanding shares. Earnings have risen +167%.

Builder Toll Brothers (TOL) reported earnings of 40 cents that missed estimates by a penny. Revenue was $928.6 million that did beat estimates for $916.8 million. The company said orders rose +17.6% to 1,250 homes in their quarter ended January 31st. The CEO said the stock market seems to be pricing in a recession but we see no signs. Our business is strong. They narrowed their guidance for homes to be sold in 2016 from 5,600-6,600 to 5,700-6,400. Shares rallied $1 on the news. Shares are down sharply since December.

Macy's (M) reported earnings of $2.09 that beat estimates for $1.89. That was a -31.5% decline. Revenue fell to $8.87 billion but still beat estimates for $8.3 billion. Same store sales fell -4.3% but that was less than the -4.7% expected. They blamed the weak sales on warmer weather and the strong dollar. The company said there was a high degree of interest among parties they had approached about spinning off some of their real estate into some external vehicle including outright sale. Starboard Value estimates those assets to be worth about $21 billion. Shares rose +$1 on the news.

After the bell First Solar (FSLR) reported earnings of $1.60 compared to estimates for 80 cents. Revenue of $942.3 million beat estimates for $930.9 million. The company forecast full year 2016 earnings to be $4.00 to $4.50 per share with revenue in the $3.88 to $4.08 billion range compared to $3.58 billion in 2015. That was down slightly from their prior guidance for $3.9-$4.1 billion. Shipment guidance of 2.9 gigawatts to 3.0 gw was unchanged. Shares rose $2 in afterhours to $63.80.

Dreamworks Animation (DWA) rose 10% in after hours after reporting earnings of 55 cents that beat estimates for 15 cents. Revenue rose +34% to $319 million and beating estimates by 16%.

Avis Budget Group (CAR) reported earnings of 18 cents compared to estimates for 17 cents. Revenue of $1.9 billion missed estimates for $1.94 billion. They guided for 2016 full year earnings of $2.70-$3.30 compared to analyst estimates for $3.46. The company said that included a 17-cent impact for currency rates. They currently operate 11,000 locations. Shares were down -$4 in afterhours to $26.

Etsy Inc (ETSY) reported a loss of 4 cents compared to estimates for a loss of a penny. For the full year, they lost $54.1 million or 59 cents per share. Revenue of $87.9 million beat estimates for $86.6 million. They forecast revenue growth of 20% to 25% over the next three years. That forecast lifted shares $1 in afterhours to $8.47.

Western Digital (WDC) shares fell -7% after China's Unisplendor and Unis Union Information System dropped plans to acquire a $3.78 billion, 15% interest in the company. The deal was under review by CFIUS under the Defense Production Act and that gave either party a 15-day window to exit the deal. The CFIUS committee was worried that a new form of super fast flash memory under development by SanDisk (SNDK) may have been a prohibited product for transfer to China. WDC is buying SanDisk for $19 billion. CFIUS stands for Committee on Foreign Investment in the United States. They can block any transaction that may be contrary to national security.

Valeant Pharmaceutical (VRX) shares rose 4.4% after the company said it was going to restate earnings for 2014 and 2015 because of errors in the way it accounted for sales to former distributor Philidor. Earnings in 2014 are expected to decline by 10 cents and 2015 earnings are expected to rise 9 cents. The company said $58 million in sales to mail-order pharmacy Philidor were improperly recognized. The company said they should have been recognized when the patient received the drugs not when Philidor received them. Valeant had been criticized for accounting surrounding Philidor with analysts claiming that dumping drugs on Philidor was equivalent to stuffing the channel and it could be years before Philidor actually sold the drugs. Valeant cut ties with Philidor last year after it was learned that Philidor had created a network of phantom pharmacies to misdirect pharmacy benefit managers into buying Valeant drugs.

Shares rallied on the news but remain depressed because the CEO has been in the hospital for over a month and there is no date for his return.

JP Morgan (JPM) held an analyst day and was generally upbeat but the headlines that came out of the meeting were on energy. The bank said it would take another $600 million charge to reserves in Q1 for questionable energy loans bringing the total to $1.6 billion. If prices remain in the mid $20s for oil, they would have to double that to $3.1 billion. The bank has committed to $25 billion in investment grade loans on energy and $5 billion has been drawn. They have $19 billion in high yield energy commitments of which $9 billion has been drawn. CEO Jamie Dimon said he has been through these energy busts before and they are always tough but the bank always gets through them. Dimon was credited with creating the "Dimon Bottom" in the market on February 11th when he said he was personally buying $25 million of JPM shares. The stock immediately rebounded along with the market. Today he said he would buy more at this level if he could but there was a limit to his finances. Shares fell -$4 on the energy reserve news.


We were due for some serious profit taking. The only question was whether it was just profit taking or the return of the concentrated selling we have seen in 2016 and another retest of the lows.

It is far too early to make that call but there were quite a few stocks in the green today. My screen list of about 800 stocks was about one-third in the green. That is not concentrated selling and suggests today was just profit taking.

The recession proof stocks like PG and JNJ were not positive but their losses were minimal. The hard-core safety stocks like MO and RAI were positive as investors look for a high dividend and relative safety in times of economic stress. They have been up for a couple weeks so today was just the continuation of a trend rather than a sudden surge in buying. However, both closed at new highs.

The problem we are facing other than strong resistance is the lack of a catalyst to move stocks higher. We have downside catalysts like declines in oil and terrible earnings but nothing really major to push stocks higher. We are still a couple months away from the "sell in May" cycle but investors may be thinking this is a good time to exit in an election year that is normally rocky.

According to FactSet the S&P earnings for Q4 have declined -6.5% and that is down from expectations for a 15% gain back in January of 2015. For today there were 17 companies issuing positive guidance, 30 issuing in line guidance and 19 that issued lower guidance. Most of these were very small companies that do not move the market because we are late in the earnings cycle.

We get ourselves all excited about six days of gains when the long-term charts are still very negative. We are too focused on the short-term cycles rather than the long-term outlook. I believe everyone looking at the weekly chart below would develop a bearish bias that could last until the S&P is well over the resistance at 1,950 and 2,000.

However, if we look at a shorter term daily chart the main focus is on that strong resistance at the 1,950 level and not on the longer term view.

The 1,950 level is critical because the market cannot continue to heal until the index moves over that level. Right now, we are trapped in a 140-point range between 1810-1950 and nothing material is going to happen until we break out of that range. If we break to the downside then everyone will expect a bear market and a full 20% decline from the 2,130 high to roughly 1,704. If we break above that 1,950 level, we are still in danger of making a lower high only at a higher level around 1,990 or 2,020. Personally, I would rather face that problem than a target of 1,704.

The 24-point decline today is immaterial in a 140-point range. What will be material is whatever happens the rest of the week. We have traveled that range four times now and investors will be watching to see if initial support around 1,900 will hold and will we retest 1,950. If we do move under 1,900 I think we will fail at the 1,810 level on the third attempt.

The Dow broke through resistance at 16,500 on Monday but failed at 16,665. Today we broke back below the 16,500 and that level will return as weakened resistance on the next rebound. The new number to watch on the Dow is 16,665.

JPM, GS, CVX and AAPL were the biggest drags on the Dow. Apple is expected to lose the fight with the FBI and that could damage their potential sales overseas.

The continued decline in oil prices could weigh on Exxon and Chevron and cause them to drag the Dow lower. The same pressures will weigh on the banks because of their energy loans.

The Nasdaq Composite failed to return to the resistance at the 4,600 level and declined -67 points. The Biotech Index declined -2.3% and that hurt the Nasdaq and the Russell. Initial support on the Nasdaq is today's close at 4,500. A breakdown there could quickly retest the lows because it would damage sentiment for tech stocks.

The long-term chart for the Nasdaq looks worse than the S&P. The rebound off support at 4,330 was lackluster and that level has been penetrated multiple times. A continued move lower would target the clustered support around the 4,000 level.

The Russell 2000 has failed to return to the resistance at 1,040 but the -9 point drop today was only -0.9% and a smaller decline than the other indexes. Less selling in the small caps is always positive but one day does not make a trend. This chart is negative until we are over 1,040 and moving higher.

Despite the gloom I portrayed above there are some bright spots that suggest Tuesday was just profit taking and the flush in oil prices. The volume was very low at 7.0 billion shares. Declining stocks were 3:2 over advancers. Monday's volume was also very low at 7.1 billion shares and advancers were 3:1 over decliners.

The low volume means no conviction. With a third of the market posting gains today, the selling was not severe. This suggests the portfolio managers are in a wait and see period just like we are. Nobody has the conviction to buy or sell. On the negative side there was no dip buying at the close. The Nasdaq, S&P and Russell 200 closed at their lows for the day but on low volume.

I think Wednesday is a coin toss for direction. According to Bank of America, fund managers are sitting on a lot of cash and they want to buy a rally but they are afraid. There is no catalyst for direction. Until the market picks a direction and sticks with it for several days, we are all in a wait and see mode.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Passing Time

by Jim Brown

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Editor's Note

The low volume this week suggests fund managers and investors are just passing time until a market direction appears. With the Dow down -189 today, Nasdaq -67 and S&P -24 it would appear the selloff has returned. However, the volume was very low at 7.0 billion shares on both Monday and Tuesday. There is no conviction until the market picks a direction.

As I said in my market commentary today, the direction for Wednesday is a coin toss. The long-term charts are bearish and the short-term charts are bearish until key resistance levels are broken. There were some positives in today's market such as 1/3 of the stocks posting gains rather than declines. Somebody is bargain hunting but they are doing it on low volume.

With the market down hard today and futures down this evening and no directional clues, I am not adding any new plays today. We have three that are not yet triggered. I do not want to end up with a big portfolio of positions only to have a repeat of the prior week when the S&P dipped to 1,810.

There is always another day to trade as long as you still have money to invest.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Rain on Our Parade

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow reversed its breakout over strong resistance at 16,500 and closed back below that level as banks and oil stocks weighed on the index.

I wrote yesterday the markets were overbought and we should expect some profit taking soon. Having oil prices collapse -6% on comments from the Saudi oil minister and bank stocks crashing after JPM said they would have to add to reserves because of energy debts, tanked the market more than a little profit taking.

On the Dow that 16,500 level will become resistance again although weaker than it was previously. The resistance at 16,665 where the Dow stopped and failed on Monday will now be stronger.

The negative comments from the Saudi oil minister are likely to weigh on oil prices for the rest of the week and that could put a cloud over the market.

Current Portfolio

Current Position Changes

LGF - Lions Gate Ent

The long position in LGF remains unopened.

SGI - Silicon Graphics

The long position in SGI remains unopened.

DWRE - Demandware

The long position in DWRE remains unopened.

WU - Western Union

The long position in WU was stopped out.

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

DWRE - Demandware - Company Profile


DWRE lost 77 cents in a bad market. There was no news so the decline was purely market related.

The position remains unopened until DWRE trades at $34.15.

Original Trade Description: February 22nd

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

With a DWRE trade at $34.15

Buy DWRE shares, initial stop loss $31.35


Buy April $35 call, currently $2.60, initial stop loss $28.75

GPRO - GoPro - Company Profile


GoPro fell victim to the declining market to give back 75 cents and close at $12.05 and only 20 cents above our stop loss.

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.

LGF - Lions Gate Entertainment - Company Description


LGF posted only a minor decline of 14 cents in a bad market. I said I would cancel the recommendation if we saw another decline but given the bad market this is actually a sign of relative strength. I am holding it open to see what Wednesday brings. No change in play.

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.

SGI - Silicon Graphics Intl - Company Profile


SGI posted a minor loss of 24 cents on no news in a bad market. The resistance at $6 is holding.

This position remains unopened until SGI trades at $6.05.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

With SGI trade at $6.05

Buy SGI shares, stop loss $5.25

SWHC - Smith & Wesson - Company Description


Relative strength in a bad market with a 33-cent gain. I am still expecting a new move higher on the next gun headline.

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


4% rally on Monday, -4% decline on Tuesday as the comments from the Saudi Arabian oil minister in Houston three cold water on possibility for production cuts and downplayed any gain from a production limit.

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 declined to $18 today to stop us out of the position. We broke even on the short stock and gained a whopping 11 cents on the option. The good news, we did not lose any money.

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

Closed 2/23/16: Long WU shares @ $18, exit $18, breakeven


Closed 2/23/16: Long May $18 call, entry .79, exit .90, +.11 gain.

BEARISH Play Updates

BG - Bunge Limited - Company Profile


The Monday rebound was erased with a -$1.63 decline. No change in the position.

The long put is still open with a stop loss at $51.85.

Original Trade Description: February 18th

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

Stopped 2/22/16: Short BG shares @ $49.75, exit $51.25, -1.50 loss.


Still open:
Long April $47.50 put @ $1.80, stop loss $51.85

VXX - VIX Futures ETF ETF - ETF Description


Oops! The multi-day downdraft in the VXX reversed with a $1.21 gain in a bad market. It could have been worse. There were enough traders bargain hunting to slightly reduce the possible volatility hit.

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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