Option Investor

Daily Newsletter, Monday, 7/18/2016

Table of Contents

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

Market Wrap

Quiet Market Waits On Earnings

by Thomas Hughes

Click here to email Thomas Hughes


The market hovered at newly set all time highs waiting the first full week of earnings season. Today's action set a new high for the S&P 500 but the range was tight, less than 0.4%, and the gain was only worth half that. Even so the market appears to be resilient following a weekend of geopolitical and domestic violence, looking ahead to earnings. So far earnings have been better than expected, just not enough to reverse year over year declines.

Asian markets were flattish today as well. Japan was closed for a holiday, action was light everywhere else. The coup in Turkey did not appear to have much impact on trading and there was little news otherwise. European markets were choppy and ended the day little changed. Early trading saw them up about a half percent or so only to fall back to flat line or below by the close. Turkey was one reason for jittery markets, a fall in oil prices was another.

Market Statistics

Futures trading indicated a flat to positive open for the US market all morning. The S&P 500 was expected to rise by 2 -3 points and this is what happened. The market held above flat line for the first 10 minutes and then briefly fell into negative territory. The move was without conviction, by 10AM the indices were moving back above flat line and then up to the highs of the day. By 11:15AM the indices had hit those highs and proceeded to trade sideways within a narrow range until late afternoon when another new high was hit, about a tenth above the previous high. The market pulled back slightly from this level going into the close but finished the day very near the high of the session.

Economic Calendar

The Economy

There was no economic data released before the opening bell. The National Association Of Home Builders Home Builder's Confidence Index was released at 10AM. The index shows a decline of 1 point to59 from a downward revision to last month. Over the last 13 months the index has held a range of 58 to 65, median of 61. The present conditions index fell -1 point to 63, 6 month outlook fell -3 points to 66 and traffic fell -1 to 45. Sentiment remains positive but at the lower end of the 13 month range.

Moody's Survey Of Business Confidence fell -0.9 points to hit another new low, 24.9. Mr. Zandi says the US remains strong but most other areas of the world are affected by geopolitical events. Last week the China/Phillipine ruling over the South China Sea stirred up tensions in Asia, compounding issues already present; South America is dealing with political unrest and a growing Zika problem and the Brexit.

This week there are 140 S&P 500 companies expected to report. That is 28% of the index and added to the 7% already reported a fair indication of what to expect the rest of the season and into the end of the year. So far 66% of those reporting have beaten earnings expectations, however earnings growth remains negative. The blended rate of earnings growth for the quarter rose slightly in the last week, up a tenth to -5.5%, but this was offset by declines in forward outlook. The index P/E multiple is also expanding, up to 17.1 and well above the 5 year average.

Looking forward earnings growth is still expected to return with the 3rd quarter but the amount continues to decline. The third quarter estimate fell 0.3% to 0.4%, nearly cutting the previous estimate in half, and setting a new low for the series. At the rate it has been falling it could very easily turn negative in the next week or two. The fourth quarter estimate also fell by 0.3% and is now 6.9%. Full year 2016 estimates fell to 0.3% and very close to turning negative for the year as well. Full year 2017 remains strong in terms of outlook at 13.4%, down a tenth from last week, but so did full year 2016 until it didn't.

The Dollar Index

The Dollar Index lost a little ground today but remains near the top of the 1 month consolidation range. Today's action was light and created a very small black candle moving down from resistance at the top of the range. The indicators are a bit mixed but momentum remains bullish while stochastic fires a weak bullish crossover so resistance could be tested again. Resistance is at the $96.60 level, a move above here would be bullish and could take it up to $97.50 or higher. A failure to break above resistance could send the index down to $95.60, the bottom of the range, or lower to $94 if support is broken. Such a move could come this week, there is a bit of data due out over the next few days and three important central bank meetings on the horizon. One possible catalyst is Thursday when the ECB meets, another next week when the FOMC meets and then another the following week with the BOJ. There is not expected to be much change at any of the meetings, it will come down to what they say and how the data comes in.

The Oil Index

Oil prices fell more than -2% intraday to trade below the $45 level. The price of WTI continues to consolidate above $45 as supply and demand remain out of balance. Moving the market today was news of a build at the Cushing storage depot that raises concerns production remains too high for current demand. Should WTI fall below $45 next downside target is near $40.

The Oil Index continues to trend within its trading range and gives no sign of breaking out. Today the index fell about -0.5% to close with a loss near -0.25% and created a very small spinning top candle near the center of the trading range. The indicators are rolling over and very weak, consistent with range bound trading. First target for support is the short term moving average, below that the middle of the range near 1,120 and then below that near the bottom of the range near 1,080.

The Gold Index

Gold prices held steady near $1,330 today despite widespread global woe. Even so prices remain well above $1300 on safe haven plays. Today's move was small, the market quiet, as traders eye news and wait on the round of central bank meetings that begins this week. Central bank policy over the next 2 weeks will be a big mover of prices but it is possible the correlation with currency isn't working like usual due to the underlying flight-to-safety that has gotten prices up to these levels in the first place. A shift in the value of the dollar may not move gold as expected.

The gold miners continue to trade near their multi-year highs. The Gold Miners ETF GDX just below $30. Today is the 10th trading in a tight range around this level, a consolidation that is looking more and more flag-like. Although the indicators have peaked both MACD and stochastic are convergent with the current highs, indicative of higher prices. If this pattern plays out the miners could move up as much as $5 in the short term to reach a target of $35. This move has potential to be strong, gold prices are 10% higher now than during the preceding quarter inflating profit outlook and possibilities for returning cash to shareholders.

In The News, Story Stocks and Earnings

Bank Of America reported earnings before the bell and became the third of four big banks to beat profit estimates. EPS of $0.36 beat by 3 cents but is down $0.09 or 20% from last year. Revenue also beat but was also down from last year. Company CEO says their responsible growth strategy has been working. Looking forward, he also says that if rates remain low the bank will still be able to make money but will likely have to reduce its work force. Shares of the stock were one of todays' leaders, gaining more than 3.5% but met resistance at the 150 day moving average.

So far JP Morgan, Wells Fargo, Citigroup and Bank Of America have all met or beaten estimates. They also all reported revenue and earnings below that of the same period last year. Shares of the sector have risen on the news, outlook remains stable to positive, but no one of these banks looks like it is on the cusp of breaking out into a major rally. The Financial Sector SPDR XLF is the same. The ETF was able to gain about 0.4% in today's action but is still trading well below resistance targets at the $24 level. The indicators are on the rise so resistance may be reached but they are also showing some signs of rolling over and weakness.

Netflix reported after the bell, beat EPS estimates but failed to please investors. The company reported EPS of $0.09, consensus was $0.02, but shortfalls in subscribers and new subscribers weighed on share prices. According to the CEO the company "is not growing as fast as we would like". Shares of the stock fell -15% in after hours trading.

IBM also reported after the bell. The company reported a top and bottom line beat on strength in the cloud computing business. Despite the beats eps and revenue fell on a year over year basis, the 18th consecutive quarter of falling revenue. Shares gained about 3% on the news.

Yahoo reported revenue ahead of expectations but a miss on earnings. Shares fell -3% on the news.

The Indices

The market drift higher today but not all indices were able to make gains. The Dow Jones Transportation Average was today's laggard and the only to close with a loss. The transports fell about -0.11% in today's session, closing a small gap opened last Thursday. The index appears to be taking a breather mid-rally and the indicators are consistent with this. The current MACD peak is strong and stochastic %D is crossing the upper signal line so a test of resistance at the 7,800 level is likely. A break through is possible, if so next target would be 8,250.

The Dow Jones Industrial Average made the smallest gains in today's session, setting a new all time high. The blue chips drifted higher, creating a very small spinning top candle, in a move that could be signaling the rally is reaching a peak. MACD momentum is weak and retreating from its peak, stochastic is high in the overbought range, both suggestive the rally is vulnerable to correction. A correction could actually be a good thing for the bulls, if it confirms support in the 18,000 to 18,250 range. If not a further fall may follow.

The S&P 500 made the 2nd largest gain in today's session, about 0.30%. The broad market created a small white candle, closing near the high of the day, and set a new all time high. Today's action is a positive for the bulls but should still be approached with caution. The indicators are starting to show some sign of rolling over, suggestive of resistance. If resistance does set in at this level a pull back to 2,120 is likely. If however, earnings impress the market the rally could continue.

The NASDAQ Composite made the largest gains in today's session, about 0.55%. The index did not set a new all time high but it did break above a resistance line and set a new 6 month high. It looks like the index is creeping higher with the all time high in sight although the movement is not too strong at this time. Momentum is falling off as the index breaks resistance which makes stochastic look more overbought at its level than not. Should it continue to move higher next upside target is near 5,200.

Today's action was very light but hopeful. The market is eagerly awaiting earnings and so far it looks like the season will be better than expected. The question is how much better than expected, and will forward outlook every begin to improve. This is going to be a pivotal week, there are a lot of earnings reports on tap, by Friday we know should have a better idea what to expect with the next quarter. Sure, growth is in the forecast but the way estimates are falling I wouldn't count on it for the 3rd quarter just yet. If outlook falls into negative territory the rally could easily fade. I am hopeful but remain cautious, if the rally has legs there will be another chance to get in without chasing prices now.

Until then, remember the trend!

Thomas Hughes

New Plays

Got Pain?

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company has a billion dollar drug to fix that and it will be coming to market soon. More than 5 million people in the U.S. take corticosteriod injections for knee pain every quarter. Millions more rely on over the counter remedies that do not last and are not very effective.


FLXN - Flexion Therapeutics - Company Profile

Flexion Therapeutics, Inc. is a specialty pharmaceutical company that focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain.

In clinical trials the drug Zilretta reduced knee pain by 50% from the baseline from week 1 through week 12. The FDA said the results were enough to support a filing for U.S. approval. The current treatment is a corticosteriod injection that wears off quickly so Zilretta has a good chance of becoming the treatment of choice for current sufferers. Those over the counter drug patients would also be candidates.

Flexion said they can price the drug at $2,000 a year and that is well within normal insurance guidelines so getting insurance payments should not be a problem. Once Zilretta is in the market place and advertising has begun they expect it to produce more than $1 billion in annual revenue very quickly.

Last week they hired three new executives to prepare marketing plans and advertising so Flexion will be ready to go when the drug is approved. While there is no guarantee the drug will be approved, the FDA rarely suggests the clinical results are sufficient to apply for approval if it is not going to happen.

Recently hedge funds Millennium Management and Renaissance Technologies both bought 125,000 share positions.

Earnings are August 4th.

Shares spiked on May 26th to $17.35 on the news the FDA said they could submit the drug for approval. That excitement faded in June to $13 but shares have returned to a positive trend. If we only saw the shares return to $17.35 that would be a 10% gain but I believe they will pass that level on the potential for the approval of a billion dollar drug.

Buy FLXN shares, currently $15.91, initial stop loss $14.50.

No options recommended because spreads are too wide.


No New Bearish Plays

In Play Updates and Reviews

Compressing the Spring

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow posted only a minor gain of 16 points and has remained under resistance at 18,550 for three days. The rally spring is compressing and a breakout over that resistance could be strong. It will all be due to earnings. After the bell tonight IBM beat and rallied $5 in afterhours. That is good for nearly a 40 point gain in the Dow at the open and the Dow futures are up +52 but it is still early.

The major indexes with the exception of the Nasdaq have moved sideways over the last four days. With 11 Dow components reporting this week we have the potential for a new leg higher if the earnings are at least decent.

Current Portfolio

Current Position Changes

AAOI - Applied OptoElectronics
The long position in AAOI was opened at $12.00.

DDD - 3D Systems
The long position in DDD was stopped at $13.90 on the gap down open.

Profit Targets

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

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

AAOI - Applied Optoelectronics - Company Profile


No specific news. No gain. Dead stop on resistance.

Original Trade Description: July 16th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide.

This is a small but growing company. The share price has been volatile over the last year with a big drop on Q1 earnings that knocked it down from $16 to $8. They had a problem with lower than anticipated yields on a new 40 Gb light engine and had to redesign it and modify the manufacturing process. That was a onetime event that cost them 30 cents a share in Q1 despite record shipments. They saw a 30% increase in shipments of 100 Gb products.

Immediately after the earnings drop shares began to recover and reached $11.80 last week, which is decent resistance. With expectations for a return to profitability in Q2 I expect the $12 level to be broken and some short covering begin.

Earnings are August 4th. They did not warn for this quarter. We have a short window of about two weeks in this position.

Position 7/18/16 with an AAOI trade at $12.00

Long AAOI shares @ $12, initial stop loss $10.85.

No options recommended because of short duration trade.

DDD - 3D Systems - Company Profile


Downgraded by Piper Jaffray to sell from hold with a price target at $10.25. The analyst said channel checks showed a notable slowdown in 3D printer demand in Q2. He also warned the introduction of the new HP Multi Jet Fusion 3D printer would be negative for DDD and SSYS. We were stopped out for a minor loss on the gap down open. Downgrade Note

Original Trade Description: July 9th.

3D Systems Corporation, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, metal, nylon, rubber, wax, and composite materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, colorjet printing, and plasticjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications.

The 3D printing sector crashed and burned in 2014 when the expectations for the technology got way ahead of reality. Shares of DDD peaked at $97.28 before starting the long slide to $6 in January 2016. Shares recovered from that low as the sector began to actually provide some amazing technology. Shares rebounded to $19.50 in April before another round of weakness pushed them back to $12. After chopping around in the $12-$14 range they appear ready to breakout.

The new CFO was given a compensation package of $2.1 million a year. He must be really good. If the stock rises to $30 and maintains that level for 90 consecutive days he can exercise options to buy shares at $12.92, which will give him $10.4 million if sold. If the stock prices rises to $40 for 90 days he has another bonus that would give him shares he could sell for a $8.9 million profit. Another bonus awards him $9.4 million if shares reach $30 in year one of his contract and $40 in year two and holds it for 90 days. He has an extreme incentive to get that stock price moving higher.

Hardly a week goes by that 3D does not announce some new process or software enhancement that comes closer to achieving the original expectations for the 3D printing technology. The ability to print parts out of metal has revolutionized the manufacturing environment. Many large corporations are buying printers by the dozens to print parts that previously had to be ordered from the source with long lead times.

Earnings August 3rd.

Shares closed at $14.12 on Friday and that is a two-month high and slightly over resistance. The next resistance level is the April highs at $18.25. If DDD is about to breakout like it did in Feb/Mar then we want to go along for the ride.

Position 7/11/16 with a DDD trade at $14.25

Closed 7/18/16: Long DDD shares @ $14.25, exit $13.90, -.35 loss.

EXAS - Exact Sciences - Company Profile


No specific news. The uptrend has definitely slowed. I raised the stop loss again. Earnings are next week and we need to be out.

Original Trade Description: June 25th.

Exact Sciences Corporation, a molecular diagnostics company, focuses on developing products for the early detection and prevention of various cancers. The company develops the Cologuard, a non-invasive stool-based DNA screening test for the early detection of colorectal cancer and pre-cancer. Its Cologuard test includes a protein marker to detect blood in the stool, utilizing an antibody-based fecal immunochemical test. The company has a collaboration, license, and purchase agreement with Genzyme Corporation, as well as with MAYO Foundation for Medical Education and Research for developing tests to detect lung, pancreatic, and esophageal cancers.

Shares of EXAS fell from $18.50 to $7 in October after the U.S. Preventative Services Task Force, an independent panel of health care experts, issued preliminary screening test recommendations that did not include Cologuard as a recommended product. The draft listed Cologuard as an "alternative" screening test. Exact Sciences protested strongly about the classification.

On June 14th, the same task force issued its final cancer screening recommendations and clarified the inclusion of Cologuard. The information was accidentally leaked and the panel had to release the report earlier than the planned June 21st date. With the final recommendation for Cologuard the company has begun advertising strongly and sales should increase. Cologuard is now an A-rated preventative service under the Affordable Care Act.

Earnings July 26th.

Shares have broken out of their 9-month consolidation base and could close the gap back to $18 in the coming weeks.

Position 6/27/16:

Long EXAS shares @ $11.50, stop loss $9.45.

No options recommended.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. HPE cannot seem to hold over the $20 level but at least it is not declining.

Original Trade Description: June 2nd.

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.

For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.

The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.

They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.

Earnings Aug 23rd.

HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.


Position 6/28/16: Long HPE shares @ $17.50, see portfolio graphic for stop loss.

Position 6/3/16: Long August $20 call @ 40 cents. No stop loss.

Previously closed 6/24/16: Long HPE shares @ $18.40, exit $18.61, +.21 gain

SCTY - Solar City - Company Profile


SCTY raised $345 million in tax equity from four separate partners in June to finance new solar projects. The money will be used to fund new installations. The company also increased its operating line by $110 million by adding two new lenders to the facility. The SCTY capital team has raised more than $1.5 billion in project financing in 2016. They now have more than 30 different banks and corporate partners with financing available for customers.

This is another reason Tesla will have to pay more than the $26-$28 it has offered to buy the company. I am still expecting a counter offer in the $30-$32 range.

Original Trade Description: June 27th.

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; mypower loan agreements; grid control/energy storage systems; zep solar mounting systems; and proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.

SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.

SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.

Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.

Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.

Earnings August 8th.

Position 6/28/16:

Long SCTY shares @ $23.40, see portfolio graphic for stop loss.

TWTR - Twitter - Company Profile


Twitter shares saw a 3% spike after former Yahoo CEO Ross Levinsohn said Twitter would not be a public company two years from now. He believes Twitter will be acquired for the important news site it is. Twitter had Turkish coup alerts 25 minutes before CNN ever had a headline.

Original Trade Description: July 6th.

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Position 7/7/16:

Long TWTR shares @ $17.24, see portfolio graphic for stop loss.

I am not recommending an option because of the recent history of slow movement. However, a long-term option may be the correct way to play this position. Your risk is known in advance and the cost of entry is very low. Here are some examples.

Sep $19 Call $1.04
Dec $20 Call $1.51
Jan $20 Call $1.64

BEARISH Play Updates

JKS - Jinko Solar - Company Profile


No specific news. Minor rebound but $19 should now be resistance. The SCTY news lifted the entire sector.

Original Trade Description: July 13th.

JinkoSolar Holding Co., Ltd., engages in the design, development, production, and marketing of photovoltaic products in the People's Republic of China and internationally. The company operates through two segments, Manufacturing and Solar Power Projects. It offers solar modules, solar cells, silicon ingots, silicon wafers, and recovered silicon materials. The company is also involved in the solar power generation activities; engineering, procurement, and construction of solar power projects; connecting solar power projects to the grid; and operation and maintenance of the solar power projects, as well as provides solar system integration and processing services.

For Q1 the company reported earnings of $1.68 that easily beat estimates for $1.11. revenue of $848 million also beat estimates for $714 million. Shares spiked to a new two month high and immediately began to slide and that slide is continuing. Operating expenses rose 80.3% to $91.8 million. Interest expenses rose +101% as the company took on more debt to finance projects.

Only 4 analysts have current recommendations on JKS. Those are Jefferies, Roth capital, Morgan Stanley and Zacks. All are strong buys. The consensus price target is $31. If they begin to change their recommendations because of the falling stock price that should cause further declines.

Earnings August 18th.

In theory Jinko is positively positioned to continue growing. However, solar capacity in China is very over supplied. Selling prices are falling and new processes constantly make old manufacturing techniques outdated and overly expensive. Constant upgrading to new manufacturing requires capital and time that constrains output from the old processes.

Short interest is over 15% on JKS. Shares appear poised to break below support at $19. They traded as low as $14 last August. I am suggesting we short JKS but buy an August $21 call option just in case the analyst recommendations suddenly cause a reversal in the trend. If JKS shares do break under $19 we will recover the 75 cents paid for the option very quickly. If the stock reverses sharply we have upside protection.

Position 7/14/16 with a JKS trade at $19.35

Short JKS shares @ $19.35, see portfolio graphic for stop loss.

Long August $21 call @ 70 cents, no stop loss.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX closed at 11.48 and a new historic low.

We are probably going to be in this position for a long time as it declines to new lows well under $12 this summer. Around $10 and they will do another reverse 1:4 split. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

Original Trade Description: June 22nd.

The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.

On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.

I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.

Because this is a flawed product, it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.


6/24/15: With a VXX trade at $17, now short VXX @ $17, no stop loss.

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