Option Investor

Daily Newsletter, Thursday, 9/22/2016

Table of Contents

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

Market Wrap

Rally On?

by Thomas Hughes

Click here to email Thomas Hughes


The market seems mollified by what the FOMC and Janet Yellen had to say but does this mean it's time to rally on? When you dig into the details it's hard to know what it is she and the committee are really saying, each statement carefully hedged by the next, so confusion remains the dominate result of FOMC clarity.

This is what I heard. The case for a rate hike has strengthened because economic activity has picked up but the rate hike time line flattened because economic activity is approaching a peak. My interpretation; there is more chance of a hike than ever but less chance of getting one, much less chance aggressive hiking, because economic activity is expected to remain tepid for the next 2 years.

Three FOMC members say there is no chance of a hike this year, since growth and inflation are expected to be weak there doesn't seem to be any reason to. According to the CME's Fed Watch Tool there is only a 12.5% chance of hike in November but that goes up to at least 50% in December and hovers around that level far into 2017. Risk is skewed toward the no-hike scenario as far out as the March meeting where futures show a 30% of rates will stand pat until then with a 50/50 chance they will hike once and a 15% chance they will have hiked twice.

International markets were pleased, or at least relieved, by what they heard the Fed deliver. Asian indices were led by the Nikkei's 1.9% gain, European markets were led by the French CAC 30 with gains near 2.5%. In both cases gains were broad based with notable strength in miners and energy.

Market Statistics

Futures trading indicated an up open all morning but not an overly strong one. The SPX was showing gains in the range of 0.5% and held them for most of the morning. The open was positive and after a quick dip to test intraday support led to a morning rally and a new intraday all time high for the NASDAQ Composite. By 11AM the market had topped out for the day, the morning rally having run its course. The rest of the day saw the market drift sideways leaving the indices near the highs of the day at the close of trading.

Economic Calendar

The Economy

Lots of economic data today and little of it supporting the need for a rate hike. The one release that does is the weekly jobless claims which fell an unexpected -8,000 from last weeks not revised figure to hit 252,000. This is the lowest levels in nearly 6 months and just above the long term 43 year low, it is also the 81st week of claims below 300,000. The four week moving average fell -2,250 to hit 258,500. On a not adjusted basis claims rose +6.4% versus an expected +10.1% month to month and are down -6% year over year. Virginia and Oklahoma led with increases of +1,051 and 434. California and Illinois led with decreases in claims of -4,627 and -4,389.

Continuing claims fell by -36,000 to hit 2.113 million from last week's upwardly revised figure. Last week's number was revised higher by 6,000 to 2.149 million. The four week moving average of continuing claims fell -8,000 to 2.140 million. Despite revisions continuing claims have fallen to a multi-month low just above the long term 43 year low and are consistent with improvement in the labor market.

Total claims for unemployment made a substantial drop this week, -106,960, to hit 1.905 million. This is the lowest level since October of 2015 and consistent with long term and seasonal trends. Based on those trends we can expect to see total claims continue to fall for the next 4-5 weeks and hit a low below 1.80 million. Today's data is -8% below this same time last year and consistent with ongoing improvement in the labor market.

The FHFA Housing Price Index was released for July. The index shows a 0.5% month to month increase in July home prices and 5.8% in year over year prices. Gains were made across the board but were strongest in the Pacific region.

Existing Home Sales fell for a 2nd month to a seasonally adjusted 5.33 million. August sales fell -0.9% due to a lack of inventory that NAR economists see as concerning. The August data is the 2nd lowest level of sales this year, the July figure was revised lower. Despite the drop however sales remain up year over year, +0.8%, and expected to remain steady at least.

The Index Of Leading Indicators was also released at 10AM. It declined by -0.2% August after rising 0.5% in July and 0.2% in June. The July figure was revised higher by 0.1%, the June lower by 0.1%. The Coincident Index rose by 0.1%, the Lagging Index rose by 0.2%. Conference Board economists say that despite the decline in August readings the index is pointing to ongoing growth into the end of the year. Looking back over the past 12 months the index has been up 6 times and down 6 times with +1.4% growth on balance.

There is little data tomorrow, a flash PMI reading and US rig counts, and the calendar for next week is pretty light. There are a few important releases thought, including housing data, personal income and spending, the 3rd estimate for 2nd quarter GDP and durable goods.

The Dollar Index

The Dollar Index fell today. No rate hike and low expectations of a hike at the next meeting have weakened the dollar but the index remains range bound. Today it fell about a half percent, below the mid-point of the current trading range and the short term moving average. The index may continue to move toward the bottom of the range in the near term on low FOMC expectations and a lack of confidence in the BOJ. Longer term I expect to see it wind up again on data and Fed expectations going into the November and December meetings. The mid point of the range is near $95.50, the lower range boundary/support target is $94.31, the upper boundary/resistance target is $96.60.

The Oil Index

Oil prices rose more then2% after yesterday's surprise draw of US stockpiles. Today's action added a little more than $1 to WTI to leave it trading near $46.50 at the close of the day. It looks like oil prices are winding up too, driven by supply/demand imbalances and any news to that effect. Yesterday's draw appears to show a swing back to rebalance versus the ongoing imbalance but is not definitive by any means. Product levels remain high, storage levels remain high and there have been some significant events in recent weeks which are likely having an effect on the data. Until a clearer picture emerges oil is could remain range bound near current levels into the indefinite future.

The Oil Index was able to make gains today as well but is also otherwise range bound. The index gapped up at the open, above the mid-point of the range and the short term moving average, but sold off during the day erasing a lot of the early advance. The indicators are mixed and consistent with range bound trading. Upper resistance is near 1,180, the mid point is near 1,120 and lower support is near 1,080.

The Gold Index

Gold prices jumped nicely on the FOMC statements but capped by the longer term outlook. Although outlook is weak it is still rate-hike positive which ultimately will be dollar positive and gold negative. In the near term the no-rate hike decision and low level of expectations into the end of the year have weakened the dollar within its range and strengthened gold within its. Spot prices gained more than 1% to trade near $1,345 and are heading up to test resistance at $1,350. A move above $1,350 is likely to continue higher to test the long term highs near $1,380.

The gold miners naturally got a lift from rising gold prices and outlook. The miners ETF GDX gained more than1% intraday but sold off on profit taking later on to close with a gain closer to 0.3%. The ETF appears to have bottomed following a correction and is now poised to move higher. Today's action left it below resistance levels near $28.50 which, if broken, could lead to further upside. Upside target is the recently set all time high, $32 or 10% above today's close. If resistance holds a drop back to support near $26 is likely.

In The News, Story Stocks and Earnings

Redhat, open source software solution provider and competitor to Oracle, released earnings after the bell on Wednesday and sent shares moving higher today. The company reported top and bottom line earnings that beat expectations and led management to raise guidance. Full year guidance was raised to a range above consensus and the previous guidance, driven by strong demand. Two of the strongest segments, infrastructure and applications, saw growth of 18% and 33% respectively with positive forward outlook. Shares of the stock jumped more than 7% in the overnight session, gapped higher at the open at resistance levels, sold off during the day and closed with a gain near 3.5%.

RiteAid also reported before the opening bell, missing on revenue but beating on the EPS end of things. The company reported income of $14.8 million, $0.01 per share, a drop of roughly 30% from this same quarter last year. Total revenue for the quarter rose however, gaining more than 4% over last year. Shares of the stock tried to move higher on the news but were unable to sustain a rally and closed close to flat line.

The Indices

The indices moved higher for a second day, led by the NASDAQ Composite which set another all time closing high. The tech heavy index posted a gain of 0.84% to close at the high of the day. Despite the new all time high the indicators are mixed and reveal ongoing weakness in the market. In the nearer term MACD momentum is on the rise so the move higher may continue but stochastic is rolling over and showing resistance, and both indicators are showing divergences from the new high in the longer term. At current levels, and with recent price action, the index is looking frothy. It is also about 6.5% above a long term up trend line drawn between two previous bottoms.

The S&P 500 made the 2nd largest gain today, about 0.65%. The broad market created a small white bodied candle, extending yesterday's gains, but did not make a new all time high. Today's action closed near, but not at, the the high of the day and fell short of crossing resistance at the current all time high. The indicators remain weak and more consistent with range bound trading than anything else. Resistance is near 2,185, a break above which would be bullish. Support is near the recent low, close to 2,120, and may be tested again. Looking forward this index is also approaching a long term up trend line that will be intercepted in about 6 weeks if recent trading ranges persist.

The Dow Jones Industrial Average made the 3rd largest gain today, a little over 0.5%. The blue chips created a small bodied white candle with visible upper shadow, indicative of resistance to higher prices. Today's action moved up from the short term moving average, potentially bullish, but was capped by resistance well below the current all time high. The indicators remain weak and consistent with range bound trading so it does not look like the move has much strength. A break above resistance would be bullish and could lead to significant upside if new all time highs can be reached.

The Dow Jones Transportation made the smallest gains today, about 0.4%, and looks the least likely to continue higher. The index created a small doji candle with shooting star potential, indicating resistance at the 8,000 level. The indicators remain weak and consistent with range bound trading and do not support higher prices. A break above resistance would be bullish but faces additional resistance at 8,100. While it looks like the chances of a major correction are diminishing there is also little sign of rally. A continuation of the current range looks more likely.

The FOMC meeting, it came and went and left the market in the same place it was before... listlessly trending sideways within long term trading ranges. Looking forward there is a chance that this action may continue for the next 6 weeks or so. All the major indices are approaching long term up-trend lines that, if price action continues to progress as it has, will be intercepted towards the end of October/first part of November.

Looking to the calendar there are a number of important events that coincide with that time line and will likely contribute to another wind-up of the market. These are, not in any particular order, the peak of 3rd quarter earnings season, the November FOMC meeting (11/2) and the presidential election (11/8). I want to get bullish, I think a major rally is on the way (based on earnings growth outlook) but remain cautious in the near term while the market churns it way forward. In the meantime labor markets continue to show signs of health which will eventually lead to stronger economics and stronger corporate earnings.

Until then, remember the trend!

Thomas Hughes

New Plays

Pressing Our Luck

by Jim Brown

Click here to email Jim Brown
Editor's Note

After two days of big gains, we may be pressing our luck on Friday. All the indexes are up strong along with many individual stocks. All the small cap stocks with bullish charts are up 3-5% over the last two days while many others have remained flat. The stocks we want to buy are up too much to recommend them for tomorrow when there is a good chance we will see some profit taking. I would rather wait for the weekend to recommend new entries where we can profit from the continuation of the rally next week.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Can We Get Three?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market has been up strong for two consecutive days. Will Friday make it three? There is nothing on the horizon to keep the market from moving higher but there is always the potential for profit taking ahead of the weekend event risk. I would expect any minor dip to be bought.

The Dow and S&P made their highs at the open and faded the rest of the day. The Nasdaq rallied all day and closed at a new high. With the small caps and tech stocks gaining the rest of the market should move higher as well.

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

KS - Kapstone Paper
The long stock position was opened with a trade at $19.35.

WFM - Whole Foods Market
The short stock position remains unopened until a trade at 27.75.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

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Iron Condors = Couch Potato Trader

BULLISH Play Updates

AAOI - Applied OptoElectric - Company Profile


No specific news. Minor decline. Still fighting resistance from the 52-week high.

Original Trade Description: September 17th.

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. Company description from FinViz.com.

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25

BOX - Box Inc - Company Profile


No specific news. Only a minor gain but it is still within the gravity well of resistance at $14.50.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.

KS - KapStone Paper & Packaging - Company Profile


No specific news. Only a minor gain but still a 9-month high. Shares were upgraded to outperform by BMO capital.

Original Trade Description: September 21st.

KapStone Paper and Packaging Corporation manufactures and sells containerboards, corrugated products, and specialty paper products in the United States and internationally. The company operates in two segments, Paper and Packaging, and Distribution. The Paper and Packaging segment offers containerboards consisting of linerboard and corrugated medium to manufacture corrugated containers for packaging products; and corrugated products. It also offers specialty paper products, including kraft paper comprising multiwall paper used to produce bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags; specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps; and lightweight paper. In addition, this segment provides saturating kraft paper under the Durasorb trade name for use in construction, electronics manufacturing, and furniture manufacturing industries; and unbleached folding carton board under the Kraftpak trade name to integrated and independent converters in the folding carton industry. Company description from FinViz.com.

On Sept 7th Kapstone announced it was spending $25 million in Q4 to build a new state of the art sheet plant in Ontario, California. They are also investing as a minority partner in a sheet feeder plant in the same city. The facilities will be producing paper by January 2017. The investments will boost Kapstone's annual capacity by over 60,000 tons. They recently completed an acquisition of Central Florida Box, which added 20,000 to 25,000 tons per year.

Kapstone is the fifth largest U.S. producer of containerboard and corrugated packaging products and the largest producer of kraft paper. They have 4 paper mills, 22 corrugated converting facilities and 65 distribution centers.

They reported adjusted earnings of 27 cents that missed estimates for 30 cents. Revenue of $784.9 million missed estimates for $823.8 million. However, revenue rose 17%. The earnings miss was due to the integration costs from multiple acquisitions, and less favorable product mix and the timing of planned maintenance outages. The CEO said this was temporary now that they have achieved the goal of integrating the 115,000 tons of supply from the Victory acquisition into Kapstone's mill and plant system. The company said earnings would now rise over the next 12 months thanks to the higher capacity.

Earnings Oct 26th.

Shares dipped only slightly after the July 27th earnings and have risen steadily in the weeks that followed. On Monday Bank of America upgraded Kapstone from underperform to neutral saying containerboard market conditions are improving and there is limited downside risk for Kapstone. They highlighted the robust revenue growth both in the recent past but expected in coming quarters.

Shares closed at a 9-month high on Wednesday with a breakout over resistance at $18.50.

Position 9/22/16 with a KS trade at $19.35

Long KS shares @ $19.35, see portfolio graphic for stop loss.

No options recommended but the Nov $20 call is $1.30.

PTLA - Portola Pharmaceuticals - Company Profile


No specific news. Resistance at $24 is holding.

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.

Position 9/14/16 with a PTLA trade at $22.25

Long PTLA shares @ $22.25, see portfolio graphic for stop loss.

(Wide stop loss because of the market volatility. I will raise it when it makes sense.)

BEARISH Play Updates

SHLD - Sears Holdings - Company Profile


No specific news. No gain. Time for gravity to return.

Original Trade Description: September 19th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.

The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.

After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced on Friday it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May they warned the total store closings for the year would reach 170 so they are well on their way.

The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter. Moody's warned last week that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

When Sears does go out of business, it will be a windfall for JC Penny. There are 59 malls that have both Sears and JC Penny stores. Any Sears customers that have not already made the switch will immediately move to JC Penny as their general merchandise store of choice. Some people are very faithful to malls they have shopped at for years and that is a boon for JC Penny.

The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long term position.

Position 9/20/16:

Short SHLD shares @ $12.00, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


The VXX is finally back below our entry point. A few more good days in the market and it could be below $30.

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.

WFM - Whole Foods Market - Company Profile


No specific news. No material movement.

On Thursday 9/15, more than 5,500 of the Nov $28 puts were purchased at $1.72 to more than double the open interest of 3,800.

This position remains unopened until a trade at 27.75.

Original Trade Description: September 14th.

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, grocery, and household goods. As of January 28, 2016, the company had approximately 434 stores in the United States, Canada, and the United Kingdom. Company description from FinViz.com.

Whole Foods Market has been known to consumers as the Whole Paycheck Market because of their high prices. That has changed somewhat in recent months because the competition is rapidly accelerating. Sprouts Farmers Market, Walmart and all the various Kroger branded chains are slashing prices on organic products and adding them to their shelves by the hundreds.

Last week Sprouts (SFM) warned that Q3 same store sales would be flat compared to prior guidance of +3.5% to +4.5% that they gave just two months ago. That is a significant decline in expectations. They cited increased price competition and a highly promotional environment that was cutting into profits as well. Their own chart for same store sales tells the tale.

I am choosing to play WFM instead of SFM because the latter dropped significantly on the guidance warning while did drop and is continuing to drop. Since Whole Foods is the most expensive store in the group they have the most market share to lose.

Earnings are Oct 26th and investors should be afraid to hold into that event.

With a WFM trade at $27.75

Short WFM shares, initial stop loss $28.75

Optional: Buy Nov $25 put, currently .60, no stop loss.

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