Option Investor

Daily Newsletter, Saturday, 3/5/2016

Table of Contents

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

Market Wrap

Resistance Returns

by Jim Brown

Click here to email Jim Brown

For the last week, several resistance levels were broken across the major indexes but the one that counts returned to cause trouble on Friday.

Market Statistics

Friday Statistics

The S&P rallied through strong resistance at 1,999 on Friday morning to trade as high as 2,009 before falling back to earth to close at 1,999.99 and exactly where it will cause the most indecision over the weekend.

I have been showing the following chart for the last two weeks with the Fibonacci retracement levels. We fought the battle at the 38% level and 1,927 two weeks ago. The prior Friday the S&P rallied exactly to the 50% retracement level at 1,963 before dropping back to close at 1,948. This Friday the S&P rallied through 1,999 before falling back to close at that level. Coincidentally the 100-day average is 1,999.82 so there was double resistance at that level.

I received this email from a reader on Thursday.

I realize analysts can have different opinions but I thought things like resistance levels were fact based. Last night Keene said that above 1992 on the SPX would suggest heading to next resistance at 2024. Tonight Thomas seems to be similar but looking at 2020. But you see trouble at 1999. Do you all just read the charts differently or are you saying the same thing and I am just missing it?
Officially Confused.

If that reader was confused, I am assuming there are other readers confused. I pulled up Tommy's chart and the 2,020 level he was referring to was the horizontal support/resistance from the September high and the November low. This is a valid resistance level and I highlighted it with arrows.

In my regular S&P chart that I have been showing for months that 2,020 level has been clearly visible as resistance for a long time.

In Keene's chart from Wednesday he mentions the 50-week moving average (WMA) in blue at 2,033 on the weekly chart and the 200-day moving average at 2,024 on the daily chart (not shown). Both of these are valid resistance levels. Keene was looking for a continued rebound through the resistance at 1,992 to the 50-wma and then a failure at that level. On my chart above, I have been referencing that horizontal resistance as 1,990 for several months but Keene was more accurate at 1,992 from July 2014. I try to use round numbers in my descriptions when possible because humans tend to focus on round numbers and it makes the text easier to read.

As you can see from the various charts above we are all talking about the same levels but we are using different time frames and different focus points. At any given time, there are probably 20 different technical analysis tools that an analyst can use. We each use the ones we like the best. I find it best to use the KISS principle in my descriptions. (keep it simple stupid)

During certain periods in the market the S&P tends to react differently to various technical levels. For instance, the moving averages have not been much use to me recently because the big market moves have been well away from the averages. It was not until Friday that the slowest of the majors (100, 150, 200, 300) the 100-day came back into play. All the daily averages were well above the current market. Also, you can tell by the congestion in Nov/Dec the S&P was ignoring them at that time. The moving averages only work well in a calmer market like the Mar-May 2015 period where the S&P was using the 100-day as support.

With all the technical tools available to us as analysts, it is our job to determine which ones are working in the current market conditions. For the last two weeks I changed my default S&P chart to the one with the Fibonacci retracements because that was the technical levels "I" thought were the most appropriate at the time. Once we move over the 1,999 level for several days, I will discard that tool because it will no longer be relative to the current market and I will focus on other tools that are more appropriate.

I hope that helped readers to understand why each of us is reporting the same thing only in a different way. You can always email me at the link at the link at the top of the page and I will try to answer any questions.

The market stumbled out of the gate on Friday after the February Nonfarm Payroll report showed a gain of +242,000 jobs. That was well over estimates for +193,000 and the initially reported +151,000 gain in January. The January number was revised up by +21,000 to 172,000 and the December number was revised up by +9,000 to 271,000.

The labor force participation rate actually rose by 0.2% but the unemployment rate remained unchanged at 4.9% (7.8 million). The labor force rose by 555,000 workers as more people began looking for a job again. The manufacturing sector lost -15,000 jobs and the service sector gained +257,000 jobs. The energy sector lost -18,000 jobs. The average hourly earnings declined -0.1% after a +0.5% gain in January.

Healthcare added 57,000 jobs and education 29,000. Retail payrolls increased 54,900, hospitality +48,000 and restaurants and bars 40,200. The bad news in the report was that the majority of jobs were low paying service jobs in food service and hospitality. That means cooks, wait staff and hotel maintenance. Since February 2015 the U.S. has created 360,000 food service jobs and only 12,000 manufacturing jobs. Since 2007 about 1.6 million food service jobs have been created and 1.4 million manufacturing jobs lost. Charts

The larger U6 unemployment number declined 2 tenths to 9.7% and a low for this cycle. The number of part time workers rose by 304,000 to 20.615 million so a significant number of the new jobs in February were part time jobs.

Despite the low quality of the jobs created in February there was a flurry of analysts claiming the big jobs number put the Fed rate hikes back on the table. Former Philly Fed president Charles Plosser said a rate hike at the March meeting would be a "close call" if he were voting. He also said the Fed might have to accelerate their hikes in 2016 with some of them being 50 basis points instead of 25 bps.

However, the Fed funds futures are not predicting a material change in Fed posture. The first chart below was the implied probability of a Fed funds rate at 75 basis points after the June meeting at 29.6%. This was the picture on Thursday night. The chart below it is the same chart as of Friday night showing only a 2.4% increase in that probability to 32.0%. That is hardly a big jump.

Charts from the CME FedWatchTool

Thursday Futures

Friday Futures

If we step out farther on the curve to the December meeting, the futures were showing a 40.7% chance of a hike to 75 bps by the December meeting. The second chart shows the probability as of Friday night and the 75 bps probability did not change but the probability of the rate remaining at 50 bps actually declined from 37.3% to 33.1%. However, the chance of it rising to 100 bps rose from 17.7% to 20.2% based on the futures contracts out to December.

From my point of view, the outlook did not change appreciably and the futures are showing very little chance of future rate hikes in 2016. The equity market should not be fearing a rampant Fed.

Thursday Futures

Friday Futures

The economic calendar for next week is relatively light other than the ECB rate decision on Thursday morning. That could impact the markets and the Fed decision the following week. Mario Draghi has repeatedly implied the ECB could make additional changes at that meeting. However, Draghi has a history of trying to talk the markets around without actually doing anything. The markets are expecting some additional stimulus this time so doing nothing could be market negative.

In stock news, Yahoo (YHOO) shares gained +3% after the company said it was exploring the sale of $1 to $3 billion in patents, property and other non-core assets. The CFO told investors at the Morgan Stanley Technology Conference that the committee tasked with planning the sale/spinoff of the core business is also looking at a quick sale of some assets. Yahoo has sold or licensed more than $600 million in patents over the last three years. Shares are at a two-month high after the company hired JP Morgan and Goldman Sachs to explore strategic alternatives, which is code for "find us a buyer."

Big Lots (BIG) reported earnings of $2.00 that beat estimates for $1.98. Revenue of $1.58 billion missed estimates for $1.6 billion. The company also announced a $250 million buyback plan. Shares rallied 2.4%.

Staples (SPLS) reported earnings of 26 cents that missed estimates for 28 cents. Revenue declined -6.9% to $5.268 billion and also missed estimates for $5.4 billion. The company expects sales to continue to decline in the current quarter. Shares fell -3%.

Ambarella (AMBA) reported adjusted earnings of 64 cents that easily beat estimates for 47 cents. Revenue of $68 million beat estimates for $64.8 million. They guided for revenue in the current quarter of $55-$57 million, down -21%, which was below estimates for $62 million. That will be Ambarella's first quarter over quarter revenue decline in 18 quarters. Sluggish sales to GoPro (GPRO) was said to be the reason. A Needham analyst said Ambarella could be forced to cut its revenue outlook by 10-20% for the current year because of GoPro.

Ambarella said it was seeing strong corporate demand in IP security applications and drone sales. However, consumer sales of those items were flat. Shares declined -9% on the news.

Smith & Wesson (SWHC) reported earnings that rose +293% to 59 cents and beat estimates for 39 cents. Revenue rose +61.5% to $210.8 million and easily beat expectations for $174.93 million. The company raised guidance for the current quarter and the full year. For Q1 they expect earnings in the 51-53 cent range and revenue around $210-$215 million. For the full year, they expect earnings of $1.68-$1.70 and well over analyst estimates for $1.42 and their own guidance of $1.36-$1.41 they gave in early January. Smith said they were increasing production rates because inventories had been depleted. There was a record 2.613 million firearms background checks for the month in February. While a record for February that was down from an all time record of 3.31 million in December.

AMC Entertainment (AMC) agreed to purchase Carmike Cinemas (CKEC) for $1.1 billion and assumption of debt. AMC currently operates 5,426 screens and Carmike operates 2,954 screens. Carmike investors will receive $30 a share. Carmike posted earnings on Monday of 27 cents that beat estimates for 10 cents and shares jumped $3 on the news. The announcement of the deal with AMC added another $4. Sellers who tried to short the earnings spike were killed with the new announcement. This is a great deal for AMC because Carmike screens are suburban and rural while AMC screens are mostly urban based. There will be very little overlap. AMC shares rallied on the news so investors saw the possibilities.

The private equity acquisition of Keurig Green Mountain was completed last week and GMCR was removed from the S&P-500. Taking the place of GMCR in the S&P will be UDR Inc (UDR), an independent real estate investment trust. The company owns, operates, acquires, renovates, develops and manages multifamily apartment communities. They have an ownership position in 50,646 apartments and 3,222 homes under development. In conjunction with S&P notifying them of their inclusion into the S&P they immediately announced a secondary of 5 million shares. Goldman Sachs and Bank America are the underwriters. UDR traded 54 million shares on Friday compared to average daily volume of just over 1 million.

A lot of analysts have a lot of different reasons for the rally last week. Some are blaming it on economics, China, etc but I believe a lot of it was due to the spike in crude prices and the expectations for the Fed to hike rates sooner rather than later. The banking sector moved sharply higher after the ISM Manufacturing report came in higher than expected on Tuesday and the auto sales for February came in very strong at 17.54 million units, in a month that is typically weak. Expectations for future rate hikes moved bank stocks sharply higher. That is the heaviest weighting in the S&P.

The second highest weighting is energy stocks. Crude oil rallied 10.6% for the week on absolutely no changes in fundamentals. The S&P Exploration ETF (XOP) rallied +21% since Tuesday's low at $23.97.

The rebound in oil prices came on hopes for a production freeze in the Middle East that will lead to a production cut when OPEC meets on June 5th. These hopes are significantly misplaced. There is a remote chance that a freeze will be honored simply because everyone is already producing at maximum output and cannot produce any more. There is also a remote chance OPEC will come to their senses and cut production quotas at the June meeting but that is three-months away and not a reason for oil prices to spike nearly 11% last week.

However, the oil market has been heavily shorted for more than a year. It was the easy trade for portfolio managers and hedge funds. When the double bottom was formed at $26, a lot of those shorts began covering. Stimulus out of China in the form of another reserve ratio cut helped to accelerate that short covering because China is the largest importer of oil.

As portfolio managers began to cover their oil shorts the price of energy equities also began to rise and suddenly those needed to be covered as well. Energy equities have been shorted even more than crude itself. Worries about defaults and bankruptcies made the sector very attractive to the bears. Suddenly those heavily shorted companies were rising again. Console Energy (CNX) spiked 58% in a week. Why? Because short interest in Console was 29%. Offshore driller Transocean (RIG) spiked 76% last week because their short interest was 36%. Nobody can look at the Transocean chart below and blame that spike on investors suddenly wanting to own Transocean after they reported additional rig cancellations the prior week. That was pure short covering.

Multiply that short squeeze across more than 200 energy stocks and add in the spike in the financial sector and you have a major reason for the market rally. The real question we need to be asking is will it last.

Long contracts on WTI are at record levels after shorts were obliterated. How many more investors will suddenly decide to buy crude oil when the fundamentals have not changed? In fact, the 10.4 million barrel build in crude inventories last week to 518 million barrels is another record high. Why would anyone want to buy crude oil with inventories expected to continue climbing for the next four weeks? You buy crude in April not at the beginning of March. The recent flurry of headlines triggered a monster short squeeze and that caused speculators to buy the bounce.

Without another headline flurry, this bounce in crude prices should fail. While I do not expect it to retest the lows, we could easily return to the low $30s and energy equities should decline with crude.

Longer term as in 2-3 months I do expect crude prices to rise as refiners begin depleting inventories as they build up gasoline and diesel supplies ahead of the summer driving season. It is entirely possible speculators jumped in early this year for the anticipated spring rebound in prices because of the headline flurry about the production freeze. If that is the case then much of the normal spring rise in oil prices is now priced into the market.

There is a little improvement in fundamentals in the U.S. energy market. The sharp rise in inventories has reduced the available storage space. Cushing Oklahoma only has about 3 million barrels left of its 70 million barrel capacity and they need that for operational capability. This means upstream producers are facing a slowdown in pipeline capacity headed into Cushing. Nothing can go into Cushing unless an equal amount is pushed into pipelines heading for the coastal refineries.

Because of the crisis caused by $26 oil last month many producers are actually cutting production. They have decided not to drill any more wells or only drill their very best locations. U.S. production has declined from 9.235 mbpd in late January to 9.077 mbpd last week. That is a decline of -158,000 bpd in the last six weeks. That is down from 9.61 mbpd at the peak last June or a -533,000 bpd decline from the peak. The EIA expects another 500,000 bpd decline in 2016 and another 200,000 bpd decline in 2017.

Active rigs fell another -13 last week with oil rigs falling -8 to 392. That is below the 400 rig low in Dec 2009. Gas rigs lost 5 to 97 and a new 30-year low. Total rigs declined to 489 and only 1 above the historic low of 488 in April 1999 after oil prices fell below $10.

The massive drop in active rigs will lead to a massive decline in U.S. production in years to come since shale wells deplete about 85% over the first three years. However, should oil prices spike back to $45 or higher we could see those rigs be reactivated at a very high rate. Shale production has declined slowly but it could be restarted very quickly. Analysts estimate there is as much as 2.0 mbpd of production that could be brought online within 24 months because the fraclog (wells drilled but not fracked) is continuing to grow. Once prices begin to rise those wells can be completed very quickly.

I went too much in depth about why oil prices are likely to decline after last week's spike but it should only be short term. That means the equity market could also decline with falling crude prices but only in the short term. If for some reason oil continues to rise then equities could follow. The correlation between oil and equities is very strong.

An even stronger correlation is the relationship between the High Yield market and equities. In the chart below, the HYG ETF is in red. Last week the high yield bond funds saw record inflows of $6.5 billion. Rising oil prices removed some of the concern about defaults in high yield debt, which contains a lot of energy debt. The sector spiked and relieved the downward pressure on the S&P. Since the low on February 11th, the HYG is up 7.6% and the S&P is up +10.5%.


So how much is too far too fast? Is a 10.5% rebound in the S&P in 15 trading days something we should be concerned about? Absolutely! We have gone from oversold to overbought and the various factors that gave us lift, oil, energy stocks, financials and the high yield rally, may have run their course.

However, I believe market sentiment has changed. For the first two months of the year, the rallies were sold and volatility was high as we fell into correction territory. After a short term double bottom at just over 1,800 three weeks apart the sentiment has changed to buy dips rather than sell the rips.

March and April are normally good months after a weak start to the year. At the end of April the "Sell in May" cycle begins. I would like to believe that whatever amount of profit taking we could see next week is limited and the sentiment remains bullish into the Fed meeting the following week.

In the chart below the S&P stopped at exactly the 61.8% Fib retracement level and the 100-day average. If we see any material profit taking, we could see a decline back to the 1,963 level or even to the 1,950 level where we battled for a week. Both of those should now be support. If we move higher from here, the high from Friday at 2,009 and the resistance from September at 2,020 should come into play. Note that the downtrend resistance from December is almost exactly 2,020 as well. On the bottom of the chart, the RSI is solidly into the oversold area but as you can see from October, it can remain there for sometime before the pendulum swings back in the opposite direction.

The Dow stopped at exactly the same 61.8% retracement level as the S&P and with the 100-day average at 17,045. These are critical resistance levels and it could be a challenge for the Dow to move much higher. However, the Dow is not as overbought as the S&P as you can see by the RSI at the bottom. The Dow is approaching those levels but could reach that downtrend resistance at 17,300 before the overbought begins to be a problem.

Remember, if energy and financials begin to take profits it will drag the Dow lower.

The Nasdaq Composite is lagging the prior two indexes and just closed over the 50% retracement with a lot of effort over the last couple of days. Friday's 9-point gain was a challenge with a higher open then a drop back into negative territory in the afternoon. A burst of buying at the close put it back in the green. The Nasdaq traded in a 59 point range to end up with only a 9 point gain. The intraday high was 30 points higher than the close.

If the rally were to continue the next material resistance is 4,806 and that is the 61.8% retracement level followed by 4,822 and the 100-day average. A breakout there could see another 100-point gain to 4,926. It would take several very bullish days to push the Nasdaq that much higher. If profit taking does arrive, we are probably looking at a drop back to support at 4576-4600.

The Russell 2000 was the strongest index last week with a 4.3% gain. The Russell has a significant number of financial, energy and biotech stocks. Those were the hottest sectors and therefore the Russell was strong. The index closed just over the 38.2% retracement at 1,078 and that is a critical level. Note also that the index has respected the 100-day average currently at 1,102. Any serious profit taking probably knocks the index back to 1,050 or possibly 1,035. I believe it would take a major market event to knock us back that far but anything is possible. The strength in the Russell has helped stimulate bullish market sentiment and I would sure hate to see that fade.

Note the extreme overbought level in the RSI.

While I would like to see the bullish trend continue next week, I would be surprised if we did not see some backing and filling before moving higher. Until proven wrong I would be a buyer of any dips in expectation for the historical trend for March and April to be bullish. Obviously, anything can derail that trend at any time. The ECB decision on Thursday would be either a boost or a bust for the market. However, the Fed meeting the following week typically produces a positive market on Monday and Tuesday.

Despite our best efforts, analysts cannot predict market movement with a high degree of accuracy. There are simply too many external variables that cannot be predicted on a daily or weekly basis. Investors short oil and energy stocks lost billions over the last two weeks because the rebound was unexpected. Once traders begin to expect something it is normally too late. We just need to trade what the market gives us and always be prepared for the unexpected. In this case the "expected" would be some profit taking and the "unexpected" would be a continued rally.

If you like the market commentary 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

Random Thoughts

Where did all the gold go? Blackrock temporarily suspend issuance of new shares in the IAU Gold Trust. The trust has seen inflows every day in 2016 and the ETF has been trading above its net asset value (NAV) for most of the year. IAU has more than $8 billion in gold and has expanded by $1.6 billion year to date. The trust said February marked its largest creation activity in the last decade.

When the demand for shares exceeds the supply the trust can create new shares by buying gold to back them. The trust ran out of authorized shares and they had to request a new registration from the SEC before they could create more shares. For the IAU this is just a paperwork approval process that occurred because demand has surged so suddenly and has nothing to do with the actual gold. However, the press coverage did turn up some troubling facts that may not go away.

I have reported in these pages multiple times over the last several years about the imbalance of "paper" gold compared to "real" gold. Paper gold is where somebody sells shares or ownership in gold that is supposedly stored in their vaults. You get a piece of paper that says you own so many ounces of gold. In reality quite a few of those firms that sell paper gold only have a fraction of the gold required if everyone suddenly wanted to turn in their paper for real gold. This is similar to owning a futures contract on gold. When the contract matures, you can either sell it in the market or file to take delivery.

Just like with any futures contract in oil, gasoline, copper, etc, you buy you are assuming the gold will be there when the contract expires because the company behind the contract has put up some guarantee in order to be able to sell those futures. However, if I wanted to short gold, oil, copper, etc today I would just login to my brokerage account and sell a contract short. That obligates me to deliver that commodity if I do not close the position before expiration. Millions of traders around the world are short gold, oil, etc and could not supply the commodity if required.

As of a couple weeks ago, there were 542 ounces of gold claims (paper gold) for every ounce of "deliverable" registered gold in a warehouse. Presently there are only 72,000 ounces of registered gold in Comex delivery warehouses in the USA. In December, there were only 275,000 ounces. Link At the same time open interest in gold futures is about 40 MILLION ounces. There is no way to cover even a small percentage of those contracts if everyone suddenly decided to take delivery.

Dealers claim they are having trouble finding gold for sale. This gold "shortage" has lifted gold prices from $1,050 to $1,260 at Friday's close. Just imagine if only a small percentage of those holding paper gold contracts decided to take delivery. Gold prices could be several thousands of dollars per ounce in a matter of days.

The paper gold problem has been around for several years. People selling gold "investments" for gold stored in our vaults do not have all that gold stored. They know that everyone they sold to is not going to demand conversion to hard gold at the same time. They can deal with a small percentage of customers requesting their gold in any month because they are constantly selling new investments. Instead of physically holding all the required gold they hold futures contracts for the balance. They are holding paper gold contracts to back up the paper contracts they sold.

Eventually some economic or geopolitical event is going to occur that will have millions of holders of paper gold contracts wanting to take delivery in a short period of time and the paper gold market will collapse. Millions of investors are going to lose a lot of money when it happens. If you own paper gold or silver, I would highly recommend you convert it to real gold and put it in your safe. Not a safe deposit box but a real safe in your home.

The chart setup below has been called the best market indicator ever by John Carlucci. The chart itself is the percentage of S&P-100 stocks over their 200-day average. Currently there are 50% and approaching the rebound levels from October. On this chart, the 55% level would be seen as initial resistance with the 65% level critical resistance.

More importantly, the RSI, MACD and Slow Stochastic indicators are all at very overbought levels. As with all "indicator" systems they tend to over react when the market moves strongly in one direction in a short period of time. The S&P has rallied more than 10% in the last 15 trading days and that would definitely be considered "strongly in one direction." Source

That means the indicators could become even more overbought in the days ahead.

For a market that would seem to be strongly bullish, the investor sentiment numbers did not move very much last week. Bullish sentiment only rose +0.8% while neutral gained +1.3%. The bears are starting to fade with a -2.2% drop. That could all change over the next several days.

Marc Faber, the author of the Gloom, Doom and Boom newsletter said last year he did not think he would ever see another market rally in his lifetime. He is 69 years old. Last week he said "the market is extremely oversold, and from this extremely oversold position we can have a relatively strong rally." However, "this rally is part of the economic cycle and will eventually crest into recession." He projected the S&P would rally to 2,050 but not make it to new highs.

Faber has been wrong far more often than he has been right. As a contrarian indicator this call could be seen as a sell signal.

I reported last week that I thought the majority of the rally was a short squeeze. At the end of February NYSE short interest had risen to more than 18 billion shares and near the record high of July 2008. Short interest has risen for 7 of the last 9 months. We will not know for a couple more weeks how much of that short interest has been erased but it was definitely a factor in the rebound. You can bet that on a percentage basis the decline in short interest has been minimal. You cannot erase an 18 billion share short in just a week or two of reasonable short squeezes. If we were to have some totally unexpected event that sent the market significantly higher, that kind of short interest would be explosive for several weeks. One can only hope for that to come true.

JP Morgan speculated that the current short squeeze has room to run. They said the short interest on the SPY had declined from 5.43% to 4.75% but remains elevated from the 3.54% in early January. Equity ETFs saw $30 billion in selling in 2016. CTAs, which have been partially responsible for the 2016 selloff, are still short equities and have only covered one third of the short positions they opened in January. Source


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Some people's idea of free speech is that they are free to say what they like, but it anyone says anything back, that is an outrage."

Sir Winston Churchill


New Plays

Headlines Fading

by Jim Brown

Click here to email Jim Brown
Editor's Note

The outlook for this company's success is fading faster than the recent headlines. There is a saying, "all hat, no cattle."


No New Bullish Plays


NLNK - Newlink Genetics - Company Profile

Newlink is a biopharmaceutical company focused on discovering, developing and commercializing immunotherapeutic products to treat cancer patients. Newlink has had some challenges with recent trials and shares are declining.

Shares recently bounced slightly when they said they were researching a vaccine to prevent the Zika virus. Unfortunately they have some serious competitors including GlaxoSmithKline (GSK), Sanofi (SNY) and Inovio (INO). The Zika virus scare blossomed into the U.S. headlines a month ago and then faded.

The virus is transmitted by mosquitoes and sexual contact with someone that already has the virus. People that catch the disease rarely even know they have it but a byproduct for pregnant women is severe birth defects.

Newlink partnered with Merck in 2014 to develop a vaccine for Ebola. An eventual vaccine was developed but Newlink did not discover it. They licensed it from the Public Health Agency of Canada. Since Newlink did not develop it but merely discovered the PHAC compounds would work, they passed it on to Merck and the headlines faded.

Newlink has not developed any infectious disease vaccines so they were quickly ignored once the Zika headlines began to fade.

Shares have declined from $23 and are falling steadily. Earnings are May 30th.

I am recommending we short Newlink shares with a decline below Friday's low at $18.04 which was a 16 month low and nearly a 3-year low. I am not recommending an option because they are expensive.

With a NLNK trade at $17.85

Short NLNK shares, initial stop loss $19.25

In Play Updates and Reviews

No Changes

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's market action resulted in positive indexes but there was little movement in individual stocks. Most of the moves in our portfolio were in the 40 cent range with the exception of Gamestop, which lost $1.

With the small cap Russell 2000 index the biggest gainer for the week you would have expected our small cap portfolio to do well. However, the Russell move was powered by energy stocks, financials and biotechs and we do not have any of those in the portfolio other than the USO. That means those big short covering moves on the Russell passed us by.

I am not complaining. Low volatility is a blessing because it means we do not get stopped out as much. Low volatility is one of the things I look at when choosing a PI play.

The challenge for next week is the S&P, which stopped right at strong resistance at 1,999.99. Without some catalyst to propel us higher we could be looking at some decent profit taking this week. A drop in the S&P could take us back to 1,963 or even 1,950 but I am hoping the dip buyers are alive and well.

Current Portfolio

Current Position Changes

CUDA - Barracuda Networks

The long position in CUDA was entered with a trade at $14.25.

HDP - Hortonworks

The long position remains unopened until HDP trades at $12.35.

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


Decent gain to break through resistance at $18. That should be the last speedbump until about $20.50.

Target $21.45 for an exit.

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.

Position 2/26/16 with an ACAT trade at $17.25

Long ACAT shares @$17.25, see portfolio graphic for stop loss.


Long June $20 call @ $1.70, see portfolio graphic for stop loss.

AMLP - Alerian MLP ETF - ETF Profile


Decent +2.6% move for a $10 stock. I expect the ETF will continue minor gains as long as oil prices to not crash again. The 11.4% yield on the dividend is a powerful attractant for dividend investors.

Original Trade Description: March 2nd.

The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.

The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.

I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.

There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.

AMLP Holdings

I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.

There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.

This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.

You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.


Long July $12 call, entry 55 cents. No stop loss.

CDW - CDW Corp - Company Profile


Very minor 2 cent drop after a $1 gain on Thursday. The interesting factoid is that the stock came to rest almost exactly on the 150-day average at $40.87 for the second consecutive day. There must be a high frequency trading program that is focused on CDW because the almost perfect respect for each of the moving averages is too precise for a day trader to manipulate the stock. Volume is 800,000 a day so it has to be a computer program. I looked at the time & sales and the vast majority of the trades, probably 85% or more are even 100 share lots. There are dozens of sequential trades with only a penny difference and sometimes less than a penny. Then dozens of trades a penny higher. That repeated all day long. That suggests a break over the 150-day average will run to the 100-day at $41.34.

Original Trade Description: February 29th.

CDW distributes IT solutions in the U.S. and Canada through its website CDW.com. They offer hardware and software products to integrated IT solutions including mobile, security, data center optimization, cloud computing, virtualization and collaboration. They offer a full line of IT products of every size, shape, brand, model and configuration. They also offer customization, installation, warranty and repair services as well as infrastructure as a service. This is the IT distributor for the home office, company datacenter or the datacenter as a service for those companies that do not have an extensive IT staff.

CDW has more than 250,000 corporate customers and 1,000 supply partners.

They reported Q4 earnings of 73 cents that rose +23% and matched estimates on revenue that rose +12.1% to $3.42 billion, which beat estimates slightly. For the full year they earned $2.35 on revenue of $12.99 billion.

They also announced a quarterly dividend of 10.75 cents to be paid on March 10th to holders on Feb 25th.

Shares rebounded from the earnings and are trading at $39.50. CDW has a very clear relationship with moving averages, especially the 200-day and the 300-day. Every break of either average has resulted in a significant move. On Monday CDW closed 9 cents above the resistance of the 200-day after trading between the 200-300 for the last two weeks. A breakout over that 200-day should target the $43 level if not higher.

CDW shares posted a 77-cent gain today in a weak market.

The high today was $39.76 and I am going to use an entry trigger at $39.85. That will mean the option price could be a little higher than expected since I am using the $40 strike. The $45 strike is too far away and has no open interest.

Position 3/1/16 with a CDW trade at $39.85

Long CDW shares @ $39.85, initial stop loss $37.85.


Long Apr $40 call @ $1.50, no initial stop loss.

CUDA - Barracuda Networks - Company Profile


CUDA spiked to $14.74 intraday but rolled over with the markets to end the day with a minor 7-cent loss. We were triggered on the position when the stock hit $14.25. I believe the intraday loss was profit taking ahead of the weekend from the gains over the last two weeks. There was no news.

Original Trade Description: March 3rd

This is going to be a simple play description because the main objective is to be long CUDA when the buyers begin making offers.

Barracuda Networks designs and delivers security and storage solutions for clouds and corporate data centers. They protect against unwanted intrusions, malicious activities, they provide spam filtering to prevent phishing schemes to gain access to the internal networks. They are especially active in protecting websites from hackers and providing load balancing solutions for high volume websites.

Shares have been declining since June at $40 to trade under $10 in January. The company promised some new initiatives and restructuring that has not worked out to investor satisfaction.

On February 1st, Bloomberg reported that Barracuda had retained Morgan Stanley to "seek potential buyers" citing unnamed sources. While the process is ongoing BWS Financial reported there could be a number of companies interested in the Barracuda brand. BWS also said a complete turnaround if no buyers emerged would take 1-2 more quarters but it would be completed as subscribers transition to a cloud based product. They have a $20 price target on the shares.

Ahmet Okumus, Okumus Fund, reported in a 13G a couple weeks ago they had established a new position in CUDA of 3.73 million shares or 7.03%. Apparently they believe a bidder will appear.

Shares have rallied from $10 to $14 over the last four weeks. With the share price near $20 in early January any acquisition price would likely be in that range. If a bidding war emerges it could be higher. There is always the possibility that no bidder emerges and Barracuda continues on its restructuring path.

Earnings are April 25th and I would plan on exiting before that report. I am not recommending any options because the spreads are too wide.

The high on Thursday was $14.11 and I am putting a $14.25 entry trigger to open the position. If by chance we are late to the party the position will not be opened.

Position 3/4/16 after a CUDA trade at $14.25

Long CUDA shares @ $14.25, initial stop loss $12.65

DWRE - Demandware - Company Profile


DWRE spiked $2.41 intraday but rolled over with the market to end the day with only an 83 cent gain. This was a monster move that came on an upgrade to Salesforce.com (CRM). There was no news for DWRE.

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.

Position 2/26/16 with a DWRE trade at $34.15

Long DWRE shares @ $34.15, see portfolio graphic for stop loss.


Long April $35 call @ $2.70, see portfolio graphic for stop loss.

GME - Gamestop Corp - Company Profile


The $1.42 gain from Thursday was nearly erased by a -$1.11 loss on Friday. The company said they upsized the $400 million debt offering to $475 million because of high demand and the money would be used for acquisitions and buybacks. I believe Friday's drop was profit taking from the two-week rally. Prior resistance at $30.85 should not be support.

Original Trade Description: February 26th.

Gamestop was originally a reseller of used video games. As the business model matured they moved into new games, game consoles and recently into smart phones, tablets, MP3 players, headphones and manner of consumer electronics. They are a certified Apple consumer electronics reseller, an authorized AT&T reseller and Cricket Wireless seller of prepaid cell phones. As of January 31st, they operated 7,100 stores in 14 countries.

Gamestop's death has been reported prematurely numerous times and they just keep reinventing themselves in the expanding market. When more games became downloadable rather than cartridge or CD based everyone thought that was the death knell for the company. Instead they ramped up their sales of consoles and consumer electronics to increase their customer base and store traffic.

Recently they even ramped up their quarterly dividend to 37 cents ($1.44 annually) to yield 5%. Very few companies paying a 5% dividend are in danger of going out of business. The current dividend will be paid on March 22nd to holders on March 9th.

Gamestop will report earnings March 24th after the close and hold a conference call at 5:PM ET. They will also host an investor conference on April 13-14 and feature presentations from the leadership team and tours of the retail brand family. They are doing everything possible to be recognized as a growing business. They are a Fortune 500 and S&P 500 company.

All of these initiatives are foiling the plans for those traders holding the 37.7% short interest. That represents 39.5 million shares and the average daily volume is 1.69 million. That equates to a very bad week for the shorts if prices were to suddenly spike higher.

Other traders have been selling puts on GME at a record rate. Selling puts on a stock is a bullish strategy with expectations for the stock to go higher. On one day last week, more than 4,000 March $28.50 puts were sold at $1.40 each. Two days later another 4,000 $29.50 puts were sold at $1.38 on average.

There is resistance at $30.85 and I am going to recommend an entry at $31.10 because there may be some new traders waiting to sell at that $31 level. Once the stock moves over that resistance level we could see a flood of short covering.

Position 3/1/16 with a GME trade at $31.10

Long GME shares @ $31.10, see portfolio graphic for stop loss.


Long April $32 call @ $1.40, see portfolio graphic for stop loss.

HDP - Hortonworks Inc - Company Profile


HDP posted a minor gain and remained in the trend channel. It needs to bounce over $12 next week or I will cancel the recommendation.

The play remains unopened until HDP trades at $12.35.

Original Trade Description: March 2nd.

Hortonworks is a software provider that focuses on development, distribution and support of the Hadoop open source project. Hortonworks Data Platform (HDP), an enterprise-grade data management platform that enables its customers to capture, store, process, and analyze increasing amounts of existing and new data types without the need to replace their existing data center infrastructure.

Whether or not you have heard about this platform is immaterial because it is the up and coming thing for big data users. Hortonworks and Hewlett Packard Labs announced a collaboration this week to enhance Apache Spark. Hewlett & Hortonworks

They also announced new streaming analytics capabilities utilizing Hortonworks DataFlow (HDF) powered by Apache Kafka, Storm and NiFi. I hope you know what that means because I do not. DataFlow HDF

I could go on with dozens of new features and functions but the point I am making is that Hortonworks is not dormant and they are a bleeding edge software provider for big data customers.

In the Q4 earnings release they reported subscription revenue growth of +146% and a doubling of customers to more than 800. HDP was founded by a group of ex Yahoo engineers. Revenue in the quarter nearly tripled to $37.4 million. They guided for full year 2016 to revenue of $188 million and gross billings of $261 million.

This is a small company but one that is likely to explode higher or be acquired. Since their earnings on Feb 11th the uptrend has been steady with almost no volatility. Shares are currently at resistance at $12. A move over $12.25 should trigger some short covering as investors project the next resistance at $16.

Earnings are May 12th.

With a HDP trade at $12.35

Buy HDP shares, initial stop loss $10.85.

I am not recommending an option because of wide spreads.

LGF - Lions Gate Entertainment - Company Description


No weakness here with another decent gain. LGF is poised for a run to $26 but I recommend we exit early.

Target $24.75 to exit.

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.

Position 2/24/16 with a LGF trade at $21.25

Long LGF shares @ $21.25, see portfolio graphic for stop loss.


Long June $23 calls @ $1.50, see portfolio graphic for stop loss.

SGI - Silicon Graphics Intl - Company Profile


Thursday's gain was partially erased with a 9-cent decline. That is hardly a big loss and the uptrend is still intact.

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.

Position 2/26/16 with SGI trade at $6.05

Long SGI shares @ $6.05, see portfolio graphic for stop loss.

SKX - Skechers - Company Profile


SKX traded 61 cents higher intraday but rolled over with the market. Shares are still holding above prior resistance. We need one more big gain to break free.

Original Trade Description: January 21st.

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.

Position 3/1/16 with a SKX trade at $33.55

Long SKX shares @ $33.55, see portfolio graphic for stop loss.


Long April $35 call @ $1.10, see portfolio graphic for stop loss.

USO - US Oil Fund ETF - ETF Description


Short covering in WTI continues to lift energy stocks. WTI closed at $36.33 today. Investors are holding a record number of long contracts in WTI futures. Every day that passes brings 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

VXX - VIX Futures ETF ETF - ETF Description


Another minor drop at the open to 21.25 but the Dow fell -116 points from its high intraday to reinflate the VXX. If we can just get 2-3 more days of market gains, even small gains, as long as there are no triple digit losses in the middle, we could see a return to $20.

The exit target is 19.50 to close the position.

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