Option Investor

Daily Newsletter, Thursday, 2/25/2016

Table of Contents

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

Market Wrap

Oil News Moves The Market

by Thomas Hughes

Click here to email Thomas Hughes


Oil prices moved higher on news, and the market followed. The market moved higher today, primarily driven by rising oil prices although economic data was good as well. Oil prices began the day in retreat, giving up most of if not all of the gains made yesterday, but ended higher by nearly 2.5% after another supportive headline hit the market. The new news is that the Venezuelan oil minister says a meeting has been set for March to discuss proposed production caps.

Other positive factors supporting the market today was economic data; the labor market remains stable and durable goods order rose much more than expected. While good in terms of growth the question of how the FOMC will react to this data remains to be answered. Today at least good news was good news.

Market Statistics

The international markets were mostly up in Thursday trading, the one exception was China which saw a -6% decline led by the mainland Shang Hai index. Tightening liquidity and a lack of confidence in regulators helped to spark another round of profit taking in China's small cap sector.

In Japan the Nikkei rose by nearly 1.5%, perhaps supported by BOJ governor Kuroda's assurance to parliament that negative interest rates were having the intended affect. European indices moved higher on positive earnings and an upgrade to UK 4th quarter GDP.

Futures trading here at home indicated a positive, if barely, open for most of the morning. There was a little give and take during the early hours but little noticeable impact from today's data or the early weakness in oil. The opening was as expected, the indices posted small gains within the first minutes of trading and then proceeded to trade in a tight range around break-even levels until shortly after lunch. The Russia/OPEC headlines hit the market just before 1PM which is when today's rally got underway. The indices made steady gains throughout the afternoon, hitting their highs shortly before the close of the day.

Economic Calendar

The Economy

We got some fairly promising economic data today in the form of Durable Goods orders. New orders for durable goods rose by 4.9%, nearly double the expectations and a positive tailwind for 1st quarter GDP. Within the number durables ex-transportation rose by 1.8%, more 9 times better than the 0.2% expected and a sign that more than just auto sales is driving the numbers. Shipments rose 1.9%, unfilled orders rose by 0.1% and inventory fell by -0.1%; all pointing to a pick up in demand. In terms of capital goods, new orders rose a stunning 21.6%.

Jobless claims remain steady and at levels consistent with healthy labor markets. Initial claims rose by 10,000 from last week's not revised figure to hit 272,000. The four week moving average of initial claims fell -1,250 to hit 272,000. On a not adjusted basis claims fell by -3.8% versus an expected decline of -7.4% as predicted by the seasonal factors. On a year over year basis not adjusted claims are now down -11.4%.

The states with the biggest increase in claims were Wisconsin and Minnesota with increases of +387 and +106. The states with the biggest decreases in claims were Pennsylvania and Texas with declines of -3739 and -2342. No reasons were cited by those states showing increases but a couple of common themes emerged from those showing decreases; most states saw a decline in layoffs in construction, manufacturing and F&B.

Continuing claims fell by -19,000 to hit 2.253 million, last week's figure was revised lower by -1,000. The four week moving average of continuing claims fell 5,250 to hit 2.257. Continuing claims have been hovering around this level for the past month and appear to be topping out following the declines we've seen in the initial claims numbers in that same time frame.

Total claims fell -12,802 to hit 2.707 million. This is the fifth week total claims have been at/near this level following the post-holiday spike we saw in the first week of January. Total claims are now down -5.5% from last years level at this time and remain consistent with the historical perspective, as well as labor market health. Based on the historical data we should start to see the total number of Americans begin to fall within the next month or so as we enter the spring hiring season.

Tomorrow's data could be a real market mover. Most important will be the GDP revision even though it is a lagging indicator and 2 months out of date. Expectations are for 4th quarter GDP to fall to 0.4% from the previous estimate of 0.7%. Other data due out tomorrow includes Personal Income and Spending, expected to rise 0.4% and 0.3% respectively, and Michigan Sentiment.

The Oil Index

Oil prices were, you guessed it, volatile in today's session. WTI flirted with the $32.50 level during the early part of the session, moving lower by 3% or so. Later in the day the Russia/OPEC news helped push prices higher and left WTI with a gain of near 3%, closing above $33 at settlement time.

The good news, at least in the near term, is that prices seem to be holding above $30 on the hopes that prices have bottomed, and that output/supply will be coming down over the next year or so. The bad news is that prices are still range bound, driven by rumors more than anything else and subject to quick reversal.

The announced meeting is good news for prices but at this time there is no real sign of a change in fundamentals so any uptick in prices remains highly questionable. At best we may see prices continue to stabilize at or near current levels until a clearer picture of the supply/demand outlook emerges.

The Oil Index fell about -1% in today's session, falling just below the 30 day moving average, only to regain the loss following the OPEC/Russia news hitting the market. Despite the late day rally the index remains range bound in consolidation waiting for a more concrete signal that supply/demand imbalance is stabilizing. The indicators, particularly stochastic, are consistent with a range bound asset and suggest the index will be testing support again in the near term. First target for support is the 950 level with 900 next target should 900 fail. Resistance is the 1,000 level and likely not to break unless oil prices make a significant move higher, or the earnings projections for the energy sector begin to move higher.

The Gold Index

Gold prices were a little volatile in today's session. Spot gold moved down by about -1% in the early part of the day only to regain the loss and a little more by early afternoon.

The bull case for gold seems to be gaining strength. First, safety seekers around the world are moving into gold. Second, fund inflows are supporting gold prices as managers buy to match demand, a report today detailed how year to date inflows to the GLD have already surpassed outflows for all of 2015. Third, spot prices are approaching a significant technical signal, a bullish crossover of the 200 day moving average by the 50 day moving average, the golden cross. Fourth, low expectation for additional or aggressive FOMC rate hiking it putting pressure on the dollar. Resistance is at $1250 as evidenced by yesterday's action, aA break above resistance, could easily attract momentum players (and short covering, don't forget about the Goldman Sachs call to short gold) and send prices up to $1300.

The miners moved higher in today's action, the Gold Miners ETF GDX gaining about 1.5%. The move may be loosing steam in the near term, momentum is waning, but the strength of the rally and extreme peak in MACD suggests a pullback will be another entry point for the bulls. The ETF is trading near the mid point of two support/resistance targets, $18 to the downside and $20.50 to the upside, leaving plenty of room for the sector to move up or down before hitting strong support or resistance.

In The News, Story Stocks and Earnings

The Dollar Index is caught in an incredibly narrow range between resistance and support while the market waits on economic data. Support is the 30 day moving average, resistance is just above the moving average, at the 38.8% retracement level near $97.50. Strong data will likely increase the expectations for a rate hike and strengthen the dollar, weak data the opposite. At this time the Fed Funds Futures are predicting the chance of a March hike at 6%, not very high, but this could change quickly if the data is better than expected.

Domino's Pizza released earnings before the bell and confirmed their dominance in the global pizza delivery business. The company beat on the top and bottom lines driven by strong comp store sales domestically and abroad, as well as a growing store count. US comp sales rose 10.7% for the 4th quarter, 12% for the year. International comp store sales rose 8.6% extending the trend of consecutive quarters of positive comp growth to 22 years. Aiding the results, and setting them up for yet another strong year, was the addition of 901 new location in 2015. Shares of the stock jumped on the news, gaining more than 13% on 5 times average daily volume.

Shares of Williams Cos and Energy Transfer Equity were halted briefly this afternoon when a report hit the wires that the latter was trying to pull out of a deal to acquire the former. According to the NY Times report ETE has considered offering a $2 billion payment to Williams Cos to back away from the deal, which has lost significant value in the 5 months since it was closed. Williams Cos fell more than -10% on the news, triggering circuit breakers, while ETE briefly surged higher. Both companies closed the day with a loss but off of the lowest levels of the day.

Weight Watchers reported earnings after the bell, disappointing investors. Although the company says the partnership with Oprah is progressing nicely earnings came in at -$0.03, $0.05 below consensus. Guidance is also on the weak side and helped to send the stock down by nearly -20% in after hours trading.

The Indices

The day began rather quietly, the indices opened flat and traded flat for more than half the day. By early afternoon things had changed dramatically, rising oil prices helped the bulls gain control and send the indices up by 1% or more. Today's leader was the Dow Jones Industrial Average which gained 1.29% to close at the highest levels in nearly 2 months. Today's action created a long white candle that broke above the 16,600 resistance level with bullish indicators. Both MACD and stochastic are pointing higher with today's action suggesting a move to next resistance at 17,000.

The S&P 500 was the next biggest gainer in today's session, adding 1.14%. The broad market created a long white candle moving up from the short term moving average and broke the 1950 resistance line. The move looks bullish and the indicators are confirming so a move up to next resistance near 1980 looks likely.

The Dow Jones Transportation Average made the third largest gain today's session and is the only of the four major indices not to make a new high. The transports gained 1.08% and appear to be on the way to retest the 7 week high set on Monday. Momentum remains strongly bullish, although it is also waning, and stochastic has begun to show some strength with a cross of the upper signal line. Upside target here is at least 7,500 as indicated by the most recent peak in the MACD. This peak is convergent with the index high and a long term extreme, indicative of a retest of the high if not higher prices.

The NASDAQ Composite brings up the rear in today's action with a gain of only 0.87%. The tech heavy index moved up after testing support at 4,535 and the short term moving average to set a new one month high. Along with the index high is a new high in the MACD, an extreme peak, that suggests growing momentum and higher index prices. Stochastic is also moving higher although it is still near the middle of its range. Next upside target is near 4,635 with a possible move to 4,750.

The market wants to move higher and has some fairly strong momentum behind it. Based on the charts it looks like they will continue to move higher in the near term at least, although there are some risks present.

The first is that today's rally was based largely if not entirely on the move in oil prices, a move sparked by the suggestion of a meeting to curb production and not an actual change in fundamentals. The news could turn out to be real, there could be an actual meeting and production could be curbed but until it happens is little more than rumor. Oil prices could just as easily give up today's gains as build on them, and just as easily sand bag the equities market.

Another risk is the data, and the FOMC. There is a lot of data due out over the next week including tomorrows release of GDP. It's hard to say how the market will react but I think it safe to say that if it is too strong the specter of higher interest rates will reemerge to weigh the market down.

I'm hopeful, still bullish, but also still very cautious. No matter what happens with oil, the data or the FOMC I still think it is earnings we need to be worried about and we have yet to see an uptick in expectations.

Until then, remember the trend!

Thomas Hughes

New Plays

Four Month High

by Jim Brown

Click here to email Jim Brown
Editor's Note

After reporting great earnings and a 25% increase in sales, this company is shaking the dust off their running shoes and preparing for a breakout.

Skechers has had a rocky four months after a 3:1 split back in October and saw some weakness in the retail sector. That is behind them now and shares are on the verge of a breakout.


SKX - Skechers - Company Profile

Skechers designs, develops, markets and distributes footwear for men, women and children, as well as performance footwear for men and women under the Skechers GO brand. They currently operate more than 1,340 retail stores.

On Wednesday, the company was named the Brand of the Year for the second consecutive year by the Footwear Industry Awards. They were also named Ladies Brand of the Year.

In the 25,000 runner LA Marathon on February 14th, performance athlete "Meb" finished second in the event wearing the custom Skechers GOmeb Speed 3 shoe. Meb secured his place in the 2016 Olympics with the second place finish. The first place finisher, Weldon Kirui, was also wearing the Skechers GOmeb Speed 3 shoes.

They reported Q4 earnings of 20 cents that matched estimates. Revenue rose +27% to $722.7 million and easily beat estimates for $648 million. The CEO said they saw high single digit sales gains in the domestic business and a 41% increase in the international business. The goal is to grow sales 50% over the next couple of years.

The positive earnings and continued positive headlines lifted shares from the $26 level two weeks ago to $33 today. The $33.25 level is strong resistance. If SKX can close above $33.50 they should be off to the races, pardon the pun.

The next material resistance is near $46.

With a SKX trade at $33.55

Buy SKX shares, initial stop loss $30.85


Buy April $35 call, currently $1.15


No New Bearish Plays

In Play Updates and Reviews

Not Yet a Trend

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big gain in the markets today on the back of the big rebound on Wednesday is exciting but it is not yet a trend. We need to see several days of gains with minimal profit taking before we can determine if the trend changed. I am not going to complain about a +212 point day but it does us no good if tomorrow is -212.

We do not need a bunch of triple digit gains back to back. Just having some 50-75 point days back to back would do wonders for market sentiment. Investors are still cautious because of the triple digit days in alternating directions.

On the positive side the Dow closed above resistance at 16,665 and could be ready for a real breakout to eventually test the 17,150 level. The Russell gained another 9 points to close nearer to resistance at 1,035. Once over that level we could see some decent short covering to lead the broader market higher.

Current Portfolio

Current Position Changes

SGI - Silicon Graphics

The long position in SGI remains unopened.

DWRE - Demandware

The long position in DWRE remains unopened.

ACAT - Arctic Cat

The long position in ACAT remains unopened.

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

ACAT - Arctic Cat - Company Profile


Shares inched higher with a 48 cent gain but have yet to reach our entry point of $17.25. We want the stock to get completely over that resistance at $17 before making an entry.

The position remains unopened until ACAT trades at $17.25.

Original Trade Description: February 24th

Arctic Cat makes snowmobiles, all terrain vehicles (ATVs) and recreational off-road vehicles (ROVs). They reported a bad quarter because of the exceptionally warm weather and lack of snow. Sales declined -14.3%. Of that 4.9% was due to the strong dollar. The brand is one of the most wildly recognized brands of off-road equipment.

Arctic Cat has been in a restructuring program for several quarters to revamp their dealer network, eliminate debt, reduce inventory and produce new cutting edge vehicles.

In Q4 they reduced long term debt by $15.8 million. They suspended the quarterly dividend to save $6.5 million in cash for the restructuring. Inventory decreased -$25 million sequentially. They generated approximately $27 million in free cash flow.

The company expects to see the benefits of their restructuring in the next two quarters with sales expected to rise +40% in the current quarter. New models and new products coming out this summer are expected to boost sales as well. They are announcing a new "single ski" snow bike at the snow dealer show in March.

While the outlook is far from exciting the company shares have rebounded from the low of $9 on January 28th to $16.45 today. The stock momentum is strong and it reached primary resistance at $16.50 this week. If the stock breaks through this resistance it could trigger additional short covering with the next resistance at $22.25. I am recommending a long position on a resistance break and an exit before we reach that higher resistance at $22.

Earnings are May 12th.

With an ACAT trade at $17.25

Buy ACAT shares, initial stop loss $15.00


Buy June $20 call, currently $1.40, stop loss $15.00

DWRE - Demandware - Company Profile


DWRE posted another mediocre gain but it was still a gain. We are waiting for a move over resistance.

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

LGF - Lions Gate Entertainment - Company Description


The rebound on Wednesday did not stick after early reviews suggested the new movie "Gods of Egypt" may not be the success the studio was expecting.

I raised the stop loss to $18.85 in case there is a drop after the weekend opening.

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.

Update 2/24/16: LGF and MGM have taken an equity position in Asian based Fifth Journey, a company founded by former executives from LucasArts, Universal Pictures and Gameloft. The company develops next-generation Hollywood games and interactive entertainment. The partnership and equity stake will allow LGF and MGM to break into the highly lucrative Asian gaming market with an eventual translation into Asian movies.

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


Another minor gain on no news. The rebound from last week is fading and the resistance at $6 is holding. If we do not get a decent move on Friday I may cancel this position in the weekend newsletter.

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


We finally got the breakout over $24 and the stock is closing in on our exit target of $25.25. That could come as early as Friday.

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


Continued headlines about limiting production are providing support. Every day that passes beings us closer to April and the end of the crude oil inventory build cycle.

This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.

Original Trade Description: January 27th

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

2/1/16: Position entered with a USO trade at $9.00:

Long USO shares @ $9.00, no stop loss.


Long USO July $10.00 calls @ $.85. No stop loss.

BEARISH Play Updates

BG - Bunge Limited - Company Profile


Still chopping around over support at $48.75. 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


Decent dip to $24.16 in regular session but it closed in the afterhours session at $24.01. We need a couple more days of a positive market to push it to two-month lows.

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

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now