Option Investor

Daily Newsletter, Tuesday, 9/13/2016

Table of Contents

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

Market Wrap

The Trend Has Changed

by Jim Brown

Click here to email Jim Brown

The sudden appearance of volatility and the Dow falling 4 out of 5 days is a not so subtle warning.

Market Statistics

I write often that one day does not make a trend. However, five days is a good indication that the prior trend has changed. It does not mean we are about to experience a 5-10% correction but the implications of the recent market action suggest we should consider that potential.

The Dow has posted alternating 200+ point moves over the last three days. Three alternating 1% or move moves are very rare. One analyst said it has happened only a handful of times in the last 20 years. Typically when a trend breaks and a decline begins there will be rebounds but not of this magnitude. Normally there will be several days of declines and then a big short squeeze before the decline resumes.

Having three alternating 200-point moves back to back suggests there is significant uncertainty that has escalated rapidly. There are multiple reasons being tossed around for this increased volatility. They blame the uncertainty over a September rate hike as well as the potential for an accelerated rate hike bias because the chatter from half the board has become increasingly hawkish. North Korea's nuclear test, submarine launched ballistic missiles, Iran threatening to shoot down U.S. planes and China warning countries not to approach their newly built islands in the South China Sea are also causing uncertainty. Investors worry we are close to a flash point where one or more of those events could erupt into a shooting confrontation.

There is also the election. With the polls tightening and the lead changing in some of the critical swing states, Clinton is no longer being projected as the likely winner. A Clinton win was already factored into the market and with republicans in control of the House and Senate, analysts were projecting four years of relative calm because of the divided government. If Trump wins, there is significant potential for an upset to the status quo. In theory, there would be republican control of all three branches although Trump is only barely considered a republican. Also, the House and Senate would definitely not be rubber-stamping any of his requests. There could be a deadlock of a different sort but as we have seen in the primary, it is foolish to count him out. He is a force to be reckoned with similar to a runaway bulldozer.

The potential for a Trump win, upset the historical trend in the market. I have written before that a lopsided contest in August tended to pull the Q4 rally forward because the uncertainty had been removed. We saw that in August when the polls were showing a double digit lead for Clinton. Now that it is a dead heat, that uncertainty has returned and the volatility spiked.

Lastly, over the last week the feeling over the path of the global central banks has changed. With $13 trillion in bonds with negative yields and $15 trillion on the balance sheets of the major central banks, the outlook has turned to uncertainty. The current global stimulus policy is not working. Economies are not growing and monetary policy is at record levels of stimulus. Central banks are suddenly reconsidering their plans and that suggests the global economy as we know it is about to change.

Today, the yield on the ten-year treasury spiked +3.7% to 1.73% and a three-month high but the outlook for the Fed did not change.

On Friday, the chance of a September hike spiked to 24%. On Monday after the three Fed heads spoke, the odds fell back to 15%. Those odds held that same level today. The spike in yields was not directly related to the Fed but an overall worry that global stimulus was about to tighten.

On Tuesday, equities, bonds, oil and gold all sold off. This is a classic sign of worries over the global economy. If stimulus is about to tighten then economic growth, which is already minimal, could slow as well. One analyst said "We need a good recession to reset expectations." That recession may not be that far off and that is why the Fed is panicked about adding a couple more rate hikes so they have some breathing room when it finally arrives. Some analysts believe 2-3 rate hikes over the next 9 months could actually cause a recession so what is the point in hiking rates just so you can lower them again?

The only material economic report on Tuesday was the NFIB Small Business Survey. The headline optimism index fell from 94.6 to 94.4 in August. The report proved the points I made above. The survey found that 39% of respondents cited political uncertainty as a reason not to expand their businesses or hire additional employees. During August 2015 only 20% cited political uncertainty.

The calendar for Wednesday is lackluster with nothing that should move the market. Cracker Barrel earnings will probably produce more headlines than the Import & Export prices.

Thursday is the big day with the Philly Fed Manufacturing Survey, Producer Prices and Retail Sales. Thursday will be a busy day but the quadruple witching on Friday will be the main factor in any market move.

With the Fed meeting starting on Tuesday, we could see some selling into the close on Friday. It will be interesting if the normal pre-Fed rally appears on Tuesday. Typically, the day before a Fed announcement is positive.

There was not much news to move the market on Tuesday. With very few earnings and the headlines mainly about the Fed there was little in the way of single stock news.

Freeport McMoran (FCX) shares gave back their gains from Monday after they said they were selling their deepwater Gulf of Mexico assets to Anadarko Petroleum for $2 billion plus the assumption of $500 million in abandonment expenses. Anadarko is selling $2 billion in a secondary offering to pay for the acquisition. This was a bargain for Anadarko and analysts said the price was way too cheap and that weighed on FCX shares. Freeport will use $582 million of the proceeds to pay off preferred shareholders and the rest will go to debt repayment.

Anadarko will add about 80,000 Boepd of production consisting of 80% oil. It will increase their ownership in the Lucius development to 49% from 35%. The Lucius spar is in 7,100 feet of water and can produce up to 80,000 Bopd and 450 million cubic feet of gas. Capital One Securities said Anadarko paid only 2 times EBITDA, which was exceptionally cheap considering the cash flow will pay out the deal in only two years without any additional development. Seaport Global Securities said the acquisition would add $2-$3 billion in free cash flow over the next five years. Anadarko is only paying for reserves that have been proven and acquired everything else is free. Anadarko's Gulf projects will produce 155,000 Boepd by year-end of which 85% is oil.

The company is raising its capex budget to $2.8-$3.0 billion. Onshore they are adding 2 rigs to the Delaware and DJ Basin later this year and will increase activity in 2017 as well. They plan on doubling production to 600,000 Boepd over the next five years. I have always liked Anadarko and I would not hesitate to enter a new position on any future dip.

While on the topic, oil prices fell -3% on Tuesday to $44.97 and could continue to fall. Prices gained 30 cents in afterhours trading after the API inventory report showed a minor 1.4 million barrel build. The more closely watched EIA report on Wednesday is expected to show a significantly higher build this week and next to offset the -14.5 million barrel decline last week as a result of the hurricane on shipping and the closure of oil production platforms. Tankers avoided the Gulf while the hurricane was active. They should have arrived at their destinations in Louisiana and Texas last week and this week and that will boost inventory levels.

Compounding the problem the International Energy Agency (IEA) warned that rebalancing demand and supply would take longer than originally thought. They warned that 2016 demand would rise 1.3 million barrels per day and -100,000 bpd less than originally projected. For 2017, they are predicting a further slowing of demand growth to 1.2 mbpd and a reduction of -200,000 bpd from their prior forecast. The IEA said the slowing global economy made "underlying macroeconomic conditions more uncertain."

The IEA said non-OPEC supplies in August declined -300,000 bpd but OPEC production rose to offset that decline. Global oil production was 96.9 mbpd and 300,000 bpd lower than August 2015. Near record OPEC supplies offset any declines in other countries. The IEA said the stimulus effect from cheaper oil prices is fading and economic worries in developing countries are weighing on forecasts. Demand growth has declined from 1.4 mbpd in Q1 to only 800,000 bpd in Q3. "Refiners are clearly losing their appetite for more oil." "Supply will continue to outpace demand at least through the first half of 2017." Current global stockpiles are at record levels over 3.1 billion barrels.

Tesla (TSLA) and SolarCity (SCTY) received a lot of headlines after short seller Jim Chanos said Tesla could go bankrupt. He said the proposed merger between SolarCity and Tesla would bankrupt Tesla because of the major cash drain to support the solar effort. The combined companies are burning cash at the rate of $1 billion a quarter. They will constantly need to return to the capital markets to generate more cash. Some believe Tesla may need to raise up to $5 billion over the next two years just to fund its manufacturing process. If you add in another $1 billion cash drain from SolarCity, soon investors are going to stop giving Tesla any additional money.

Currently SolarCity is selling solar installations for $3.01 a watt after allowances for debt costs. Those installations are costing the company $3.05 a watt. While that may not sound like a big loss, a typical installation can be 5,000 to 10,000 watts. When they do several thousand installations a quarter, those pennies add up to a loss of $55 million last quarter. That was up from a loss of $33 million in the comparison quarter.

Chanos does not think the merger will happen. According to the merger documents being passed around, the Tesla board refused to give SolarCity a $100 million bridge loan until the merger could be consummated. If the board actually thought the deal were going through it would have been a natural loan. Instead, SolarCity had to go outside the company to acquire $305 million in additional debt at 7.4% interest.

SolarCity was trading at $27 when they agreed to the merger. The stock is now at $17.06 because of the decline in TSLA shares and the expectations for the deal to collapse. SolarCity shareholders are to get 0.11 TSLA share for every SCTY share. That is $21.50 today with the actual share price significantly lower.

If the deal collapses, Tesla shares should rebound but SCTY shares could collapse further with their cash burn rate increasing and no sugar daddy to cover their overdrawn checking account.

Apple (AAPL) shares exploded higher to gain +$2.51 after carriers began to release order information on the iPhone 7. Apple said it was no longer going to release order numbers for the first few weeks of sales because those numbers were normally artificially low because of production limitations. However, carriers began spreading the good news this week.

T-Mobile said preorders for the last four days were up nearly 400% over the orders for the iPhone 6. "The first four days of the iPhone 7 launch are by far the biggest ever for T-Mobile" according to CEO John Legere. T-Mobile said existing customers can get a 32GB version for free or an iPhone 7 Plus 32gb model for $120 when they trade in their existing iPhone 6.

Sprint immediately fired back saying orders were up +375% and they would give the basic iPhone 7 for free with any trade in of a smartphone including the Samsung Galaxy S7. Sprint is also discounting the 256gb phones by $100.

The headlines on the surge in orders lifted Apple shares in a bad market. Shares hit a low of $102.43 on Monday and closed at $108 today.

After the bell, Carl Icahn said he had asked the SEC for the option to increase his stake in Herbalife (HLF) from 35% to 50%. He currently owns just over 20% of the outstanding shares and the company has given him permission to own up to 35%. He said Herbalife would be better off as a private company and be rid of Bill Ackman. Herbalife shares rose 2.5% in afterhours.

I believe most of Icahn's comments are just publicity designed to support the stock price. Icahn is enjoying the pain he is inflicting on Ackman's $1 billion short. They snipe at each other weekly but in this particular street fight, Icahn has the hammer. Ackman's carrying costs rise every month as the stock continues to trade above $55. The time is running out on Ackman's put options that he owns in addition to the stock he is short. If Icahn can keep the price over $55 through January, it could cost Ackman a lot of money.


This is shaping up to be a September to remember. After a return to the lows on Tuesday, the S&P futures are up more than 6 points and steadily rising in the afterhour's session. While that could be reversed before morning, another short squeeze bounce is always possible.

The key for me is not the major indexes but the prior leaders in the S&P-400 and S&P-600. The S&P-600 closed at a two month low with a nearly -2% decline. There was a minor rebound but it closed very near to a potential support break.

So far, the S&P-600 has not broken out of the consolidation pattern since mid July. The uptrend is still intact. If the 730.50 support is broken it could spoil market sentiment. The small cap indexes have been the strongest performers and breaking that support would be kryptonite for the broader market.

The S&P-400 Midcap Index was the other performance leader and the decline there has already broken below similar support. The market is collapsing one index at a time.

On the S&P-500 the prior support at 2,150 returned as resistance on Tuesday with the high for the day at 2,150.47 and the opening print. The S&P has flirted with the light support at 2,130 for the last three days but it has not been convincing. The 2100-2105 level could be tested on any further decline and that should be decent support.

However, with the return of volatility we could see major moves in either direction that disregard established support and resistance levels. For instance, the rebound on Monday blew through the 2,150 level to the upside but as soon as that short squeeze cooled that level returned as strong resistance.

The Dow was crushed by declines in financials and energy stocks. Apple was the only component in positive territory and that gain helped lift the Dow from the -297 point intraday low. There is nothing on the horizon to lift the Dow from a single stock perspective but it will be very reactive to further Fed rumors.

Thank you Apple for not letting the damage be worse. Yesterday the winners list and losers list were an almost exact opposite of today's lists. Amazon, Google, Biogen, PriceLine, Tree were all in the top ten on the winners list. Today they are the biggest losers. This is a crazy representation of portfolio managers trying to throw money at the market on the way up and then quickly removing that same money from the market on the way down. They want to be exposed if a real rally appears but they do not want to take on any extra risk this close to October.

The 5,100 level is now support and that is the critical level to watch.

If we have another 200+ day on the Dow on Wednesday, I may pull my hair out, what little I have left. We need the market to pick a direction and stick with it for more than 6.5 hours. Every reversal shakes out a few more trader/investors and that adds uncertainty to the market. Investors really do not care which way the market goes in the short term because they can make plans as long as it moves in one direction. If the market goes down for 3-4 consecutive days, they can watch for the support levels to be hit and jump in with some counter trend trades. If the market is moving higher, they can look for resistance levels to jump out. These alternating 200+ point days do not work for anybody but the futures traders.

I would continue to refrain from being overly long or short just in case the market continues to alternate directions. There is always another trade waiting as long as you have capital to invest when the volatility ends.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Passing Time

by Jim Brown

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Editor's Note

After three days of alternating 200+ Dow moves, it looks like another one tomorrow. The S&P futures are up over 6 points after a -258 point Dow decline. That could reverse by morning or grow worse. I spent a long time looking for potential plays today but I could not find anything that could withstand another market whipsaw. With the volatility rising, any new long position would have to be bullet proof and I could not find any. Any new short position could be wiped out minutes after entry if we get another +200 point day. The S&P-600 closed at a two-month low and right on the edge of a support break. Small cap stocks are not doing well in this market. I am recommending we pass on adding a new position today.

If you have to have something to trade you might look at shorting Sears Holding (SHLD). The chart is moving lower but there is only $1.50 before decent support at the old low. The market rebound yesterday did not affect the decline.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Triple 1%

by Jim Brown

Click here to email Jim Brown

Editors Note:

Three days of alternating 1% moves suggests there is trouble ahead. The Dow has had three back to back 200+ days in alternating directions. Today was the 4th loss in five days. The S&P-600 Small Cap Index closed at a 6-week low. The outlook has changed from buy the dip to raise cash.

We were stopped out of our last two longs and small caps are being sold hard. We need to look for a bottom before we start adding new replacement positions. Adding new shorts after the market action for the last four days is also not a good move. We could short right into the next short squeeze like we saw on Monday. It is time to be patient rather than aggressive.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

CC - Chemours
The long stock position was stopped with a trade at $12.50.

UNT - Unit Corp
The long stock position was stopped with a trade at $16.50.

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Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

CC - Chemours Co - Company Profile


No specific news. A 6% decline on Friday, 4% rally on Monday and -4% decline on Tuesday to sop us out at $12.50 by 3 cents.

Original Trade Description: September 3rd.

The Chemours Company provides performance chemicals in North America, the Asia Pacific, Europe, the Middle East, Africa, and Latin America. It operates in three segments: Titanium Technologies, Fluoroproducts, and Chemical Solutions. The Titanium Technologies segment produces and sells titanium dioxide (TiO2) under the Ti-Pure brand name to deliver whiteness, brightness, opacity, and protection in various applications, such as architectural and industrial coatings, flexible and rigid plastic packaging, PVC window profiles, laminate papers, coated paper, and coated paperboard used for packaging. The Fluoroproducts segment provides fluoroproducts, such as hydrofluorocarbon refrigerants, and fluoropolymer resins and downstream products and coatings under the Teflon brand name. The Chemical Solutions segment offers industrial and specialty chemicals used in gold production, oil refining, agriculture, industrial polymers, and other industries in North America. This segment provides cyanides; and performance chemicals and intermediates, such as clean and disinfect chemicals, aniline, methylamines, glycolic acid, Vazo free radical initiators, and reactive metals. Company description from FinViz.com.

This company has had a hard life since going public. Back in June Citron Research released a report critical of Chemours saying it was a "zero" because of lingering liabilities they inherited when DuPont spun them off. According to Citron they had liabilities for the manufacture of PFOA while it was part of DuPont. Citron said the company was "designed for bankruptcy" to rid DuPont of those lingering liabilities. Chemours issued a strong rebuttal. Bloomberg researched the background and said Chemours might have $800 million to $1.5 billion in risk. Anyone suing for contamination has to sue DuPont first and they have deep pockets. Chemours agreed to share some of the risk in the event of a judgment. In any event, it will be years before there is any real liability to Chemours.

Shares collapsed but at the same time David Einhorn raised his stake from 5.44 million shares to 8.44 million. If Einhorn is not worried, we should not be worried for a 30-45 day trade. We will exit before earnings. Argus upgraded them to a buy saying they had a significant competitive advantage becaus of their size, vertically integrated structure and rapid cost cutting.

Earnings Nov 3rd.

When they reported for Q2 they earned 27 cents compared to estimates for 17 cents. Revenue was $1.38 billion and missed estimates for $1.42 billion because of the sale of a division. The company said it was delivering $350 million in cost reductions and add $150 million in adjusted EBITDA through 2017. The prior quarter they earned 6 cents compared to estimates for a penny. They have history for strongly beating estimates.

They announced the sale of their sulfur business for $325 million and the sale of the Clean and Disinfect business for $230 million. The company is shedding noncore assets to improve profitability.

Zachs said analysts they follow are raising estimates but they still believe Chemours will post another beat. Based on Sach's proprietary indicators companies with the Chemours profile beat 70% of the time. Over the prior week the 2016 consensus estimate rose from 63 cents to 77 cents. For 2017 the estimates rose from $1.10 to $1.27, which is 64% over 2015 levels.

A week ago, a large investor sold 2,000 October $10 calls for $2.90 and reinvested the gain into 4,200 January $15 calls for $1.

Position 9/6/16 with a CC trade at $13.75

Closed 9/13/16: Long CC shares @ $13.75, exit $12.50, -1.25 loss

PTLA - Portola Pharmaceuticals - Company Profile


No specific news. Shares declined with the market at the open but rebounded in the afternoon. Good relative strength.

Original Trade Description: September 12th.

Portola Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes therapeutics for patients in the areas of thrombosis, other hematologic disorders, and inflammation. The company is developing Betrixaban, an oral, once-daily Factor Xa inhibitor, which is in Phase III clinical trial for treating venous thromboembolism prophylaxis in acute medically ill patients in-hospital and post discharge; and Andexanet alfa, a recombinant protein that is designed to reverse the anticoagulant activity in patients treated with a Factor Xa inhibitor. The company is also developing Cerdulatinib, which is in Phase I/IIa proof-of-concept study, an orally available kinase inhibitor that inhibits spleen tyrosine kinase (Syk) and janus kinases enzymes, which regulate signaling pathways, as well as for hematologic, or blood, cancers, and inflammatory disorders. In addition, it is involved in the development of PRT2607, a selective Syk inhibitor. Portola has collaboration agreements with nearly a dozen major pharma companies including Bristoll Myers, Pfizer and Bayer to name a few. Company description from FinViz.com.

The billion dollar drug is Andexxa (Andexanet Alpha). In February, Portola licensed the rights in Japan to Bristol-Myers and Pfizer for $15 million in upfront payments, $90 million in milestone payments and double-digit royalties. This is just for Japan. Portola is planning on submitting the MAA for approval in Q3.

In the U.S., Portola suffered a setback in August when the FDA rejected its BLA submission for Andexxa. The FDA asked for some manufacturing information and a change to the labeling. Portola plans to meet with the FDA in the coming weeks to resolve any outstanding questions. Once the drug is approved we could see the shares spike significantly. There is almost zero risk of non-approval based on the remaining questions posed by the FDA. Shares fell from $28 to $18 on the news in late August and the rebound is starting to accelerate.

Shares only lost $1 in the Friday crash and recovered 50% of that on Monday. Support is $21 and shares closed at $22.

Earnings Nov 9th.

Because the futures are down so sharply tonight I am going to put an entry trigger on the position. I hate to say buy something and then have the market gap down -100 points at the open on its way to a repeat of Friday.

With a PTLA trade at $22.25

Buy PTLA shares, initial stop loss $19.75.

(Wide stop loss because of the market volatility)

UNT - Unit Corp - Company Profile


No specific news. A 3% decline in oil prices plus a major market reversal caused Unit to fall -5% to stop us out.

Original Trade Description: September 7th.

Unit Corporation, operates as an oil and natural gas contract drilling company primarily in the United States. The company operates through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream. The Oil and Natural Gas segment acquires, explores, develops, and produces oil and natural gas properties primarily located in Oklahoma and Texas, as well as in Arkansas, Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, and Wyoming. As of December 31, 2015, this segment had approximately 65 gross proved undeveloped wells. The Contract Drilling segment is involved in the contract drilling of onshore oil and natural gas wells for its own account, as well as for a range of other oil and natural gas companies primarily in Oklahoma, Texas, Wyoming, and North Dakota, as well as in Louisiana and Kansas. As of December 31, 2015, this segment had 26 operating rigs. The Mid-Stream segment buys, sells, gathers, transports, processes, and treats natural gas for third parties and for its own account. This segment operates 3 natural gas treatment plants, 13 processing plants, and 25 gathering systems, as well as approximately 1,464 miles of pipeline. Unit Corporation was founded in 1963. Company description from FinViz.com.

For Q2 the company reported an adjusted loss of 15 cents compared to estimates for a loss of 22 cents. Revenue was $138.3 million. They recorded record production of 97 million cubic feet per day from the Wilcox play, a 25% increase year over year and a 9% increase from Q1. Seven of eight of their highly features BOSS rigs were currently operating under contract to other producers compared to six in Q1. The Midstream segment volumes rose 15%.

Earnings Nov 3rd.

Since oil and gas prices have declined they have reduced drilling of new wells and used their rigs to recomplete existing wells to boost production. An example of the production increase came from four Wilcox wells that were producing 700 Mcfe per day before the recompletion and 17,000 Mcfe after the work over. They anticipate putting additional rigs to work on new wells in early 2017.

Unit has been using the weakness in oil prices to reduce costs and streamline operations rather than try to continue drilling new wells during glut conditions. They are poised to increase production on demand because they own their own fleet of rigs and are not paying high lease fees for drilling equipment.

Oil prices are in rally mode this week because of a unique agreement announced on Monday where Russia and Saudi Arabia will form a joint venture to stabilize oil prices among OPEC and non-OPEC producers. It remains to be seen if it will ever happen but prices are rising on the expectations.

Unit has been relatively calm during the ups and downs in oil prices in 2016 and are poised to break out to a new high for the year.

Position 9/8/16:

Closed 9/13/16: Long UNT shares @ $18.38, exit $16.50, -1.88 loss.

BEARISH Play Updates

ACAT - Arctic Cat - Company Profile


No specific news. Monday's rebound nearly erased. New 4-month closing low.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

Position 8/31/16 with a ACAT trade at $14.15

Short ACAT shares @ $14.15. See portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Major increase in volatility only a couple days after we entered the position. There will be ups and downs. Just hang in there and the long-term trend will always be down.

If you are not already in this position the spike today would be an excellent place to enter a new short.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.

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