Option Investor

Daily Newsletter, Thursday, 10/13/2016

Table of Contents

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

Market Wrap

And Then There Was China

by Thomas Hughes

Click here to email Thomas Hughes


China fear reared its ugly little head today, depressing already skittish global markets. The latest trade data showed a sharp decline in China's imports and exports, raising fear of China's slowing economy and its affect on the global economy. Asian indices were a bit mixed on the news, the Shanghai index held break-even while others in the region fell more than -1%, those in Europe decisively lower with the addition of falling oil prices and FOMC outlook weighing them down.

Market Statistics

Futures indicated a sharply lower open all morning, in the range of -1%. There was little in the way of market moving earnings news before the bell and the economic data that was released was viewed as rate-hike positive, helping to keep futures near the low of the day. The broad market opened with a loss near -0.5% and quickly moved lower. By 10AM the indices had fallen to an early low, slightly more than -1%, and began a consolidation that lasted for the next hour. By 11AM an intraday bottom had been hammered out, leading to a nearly full reversal of earlier losses. By 3:30PM the indices were hovering close to break even levels and held those levels into the close of the day.

Economic Calendar

The Economy

Today's data was positive for the economy and future outlook yet at the same time reinforced FOMC rate hike expectations, raising fears. Initial jobless claims were reported as unchanged from last week, however that is from a downward revision of -3,000 that puts this week's data closer to the 43 year low. The four week moving average of claims fell by -3,500 and did hit a new 43 year low. On a not adjusted basis claims rose by 18.4%, a tenth hotter than the expected 18.3%, but remains lower on a year over year basis, -7.5%. Based on this data labor markets are experiencing improvements consistent with long term trends and supports the argument that labor markets are tightening and that we have already or soon will reach full employment. FYI, the JOLTs report was released yesterday and shows that job openings fell nearly 7% in August. Combined with initial claims data it looks like people are going to work.

Continuing claims fell by -16,000 to hit 2.046 million, the lowest level since June, 2000. The previous week's data was revised higher by 4,000. The four week moving average of continuing claims fell -25,750 to hit 2.07 million, the lowest level since July, 2000. These figures continue to trend lower and are on the verge of setting ultra-long term secular lows, consistent with ongoing improvement and health in the labor market.

The total number of jobless claims fell by -13,790 to hit 1.781 million, a new long term low. This low is consistent with long term improvement in labor and seasonal trends. Based on those trends we can expect to see it continue to fall for another 1 to 2 weeks although the rate of decline has moderated a bit. Regardless, total claims data is consistent with ongoing labor market health despite lack-luster job creation and a rise in unemployment.

Import/Export data shows a rise in prices for both. Import prices grew at a rate of 0.1% in September following a -0.2% decline in August, year over year import prices are down -1.1% but show what the report calls "upward trajectory" over the long term. Ex-fuel prices remain flat and unchanged over the prior month while fuel prices alone have risen 1.1%. Export prices outpace import prices, up 0.3% in September, but barely recovered from August's -0.8% decline. Ex-Ag items led with an increase in prices of 1.3%, offset by declines in agriculture products.

The Dollar Index

The dollar gave up some of its gains today, the Dollar Index falling -0.35%, but remains strong in the near term. Today's decline reveals possible resistance at the $97.60 level but upside targets are closer to $98.65. I redraw my Fibonacci Retracements today, using the peak set December, 2015 and the low of May, 2016, which is where that target comes from. The indicators are bullish in the near term but not overly strong and still consistent with range bound trading in the longer term. Support target should the index pull back is near $97.20. Tomorrow's economic calendar includes PPI data which could move the index, one way or another. Weak PPI would be seen as rate-hike negative, strong PPI rate-hike positive, with dollar value likely moving in line with each. The CME's Fed Watch Tool shows only a 9% chance of hike in November but a much greater 70% chance in December.

The Oil Index

Oil prices continue to waver at recent highs. WTI traded basically flat in an extremely volatile session which saw prices crash, shoot higher and stabilize in the matter of minutes. Inventory data released today showed a surprise decline in distillate inventories which offset a build in crude that would have otherwise been seen as bearish. WTI ended the day with gains near 0.2% after moving in a range of 2%, just above $50. Resistance is just above this level and may be broken if bullish evidence begins to appear. However, with the latest OPEC data and 2017 outlook I don't see that happening. OPEC's latest report shows output at 33.39 million barrels per day in September, the highest levels in over 8 years and above the recently agreed to production cap. The cartel also upped its non-OPEC supply outlook for 2017 adding downward pressure to outlook.

The oil sector continued to retreat to support today and may have found it. The Oil Index fell just over -1% intraday to hit the short term moving average and find support. Price action created a small but doji like candle, indicative of support but not strongly. The indicators are consistent with a fall from resistance and suggest range bound trading may persist into the near term. The top of the range is 1,180 , just above 1,180, with support targets at the moving average, just below that along the mid point of the range and then below that at the bottom of the range. Oil prices and earnings outlook among the oil companies is my target catalyst. Current outlook is bullish, if that is confirmed the index may break out of the range to the upside. Most of the big oil companies are set to report at the end of the month, 10/27 and 10/28, BP is first on 10/25.

The Gold Index

Gold prices held steady above $1,250 on a slightly softer dollar but gains were muted in light of the strong jobs data. The metal is tied firmly to FOMC outlook and at this time is under pressure. The jobs data reinforces the outlook that one of the Fed's two mandates have been met, tomorrow's PPI will reveal information about the other. Support for gold is just above $1,250, a break below this level would be bearish and could go as low at $1,200 in the very near term.

The gold miners are under pressure as well, their profits tied directly to the value of the dollar and its relation to gold. The miners ETF GDX gained a little in today's session, about 1.30%, but remain in consolidation near the recently set low. The sector is falling in tandem with gold, should gold fall through support this sector will fall right along side it. Support is near $22.50. The indicators are bearish but a bit mixed in their signals. Stochastic is showing weakness by dropping below the upper signal line, MACD potential support at this level through divergence.

In The News, Story Stocks and Earnings

Progressive Corporation reported earnings before the bell. The insurance company reported EPS in line with expectations but beat on net-written premiums. Net premiums grew year over year by more than 11% and helped lift the stock in early pre-market trading. The stock gapped up at the open and continued its rise throughout the day, closing with a gain near 2.65%.

Winnebago announced earnings before the bell as well, beating on the top and bottom lines. The company reported revenue up 4.9% due to higher shipments of vehicles and towables and gross margins which improved 90 BPS due to product mix and lower material costs. Shares of the stock fell on the news but opened at support, above the gap formed two weeks ago when an acquisition was announced, and traded up from there.

Delta Airlines missed revenue expectations but was able to deliver better than expected earnings. Earnings were negatively impacted by the technical outage experienced in early August. Looking forward the company is expected to slow capacity growth into the fourth quarter with revenue falling 3-5% year over year. Shares of the stock fell in pre-market trading but recovered the losses and more during the open session. Gains were capped however by resistance just above the $40 level.

The Indices

The market started today in a near freefall scenario. Data from China aggravated fear of slow global growth and hard landing which, on top of nerves already frayed by FOMC outlook, sent the indices ducking for support. The good news, at least in the near term, is that support was found. Today's action, in most cases, confirmed near term support levels and the bottom of the September/October trading ranges. The Dow Jones Transportation Average led the move, testing and confirming support at the short term moving average, right around the 8,000 level. The index closed the day with gains, about 0.5%, the only index to do so. The indicators have rolled into a bearish signal, consistent with an index trading within a range, and may indicate further testing of support. If broken a move to 7,750 looks likely, if not the index may be setting up to test 8,250.

The NASDAQ Composite posted the biggest loss today, about -0.50%. Despite the loss, the index created a white bodied candle although it is below resistance levels at 5,250 and the short term moving average. Near term, the indicators are bearish and both pointing lower so a deeper correction may be forthcoming. Short term the index remains within the September/October trading range with the lower range boundary near 5,100 as current target.

The S&P 500 made the next largest decline, -0.30%. The broad market traded in a range greater than 1% of its value, testing support at the 2,120 level. Support was found, the index created a small doji-like hammer candle, and the September/October trading range remains intact. The indicators are bearish and pointing lower so support may be tested further but they are very, very weak and remain consistent with range bound trading. If today's bounce continues a move up within the range can be expected with upside target near 2,180 and the top of the range.

The Dow Jones Industrial Average made the smallest decline today, about -0.25%. The blue chip index set a three month intraday low in today's session, testing and confirming support at the 18,000 level. The index has been trading in a tight range since the onset of volatility in early September and that range remains intact. The indicators are bearish and pointing lower so another test of support may be on the way, however, they are also very weak and remain consistent with range bound trading so a break of support does not look likely. If it were to break next target is along a long term up trend line near 17,750.

The market crashed hard on bad news but quickly recovered, but China was just an excuse. The data was bad, sure, but not earth shattering and merely caused a skittish market to make a knee-jerk reaction.

There is reason for the market to be skittish which means that volatility is likely to persist. Fear is growing that earnings, as foreshadowed by Alcoa and a number of negative warnings, may not be as good as we'd like and the FOMC question is still hanging over the market, as is the presidential election.

Today's data did little to indicate inflation but it certainly helps cement the notion that the economy is at or very, very near full employment so now all we need is some inflation to seal the deal on a rate hike. Tomorrow's PPI will affect that outlook for better or worse. On the earnings front nothing today swayed sentiment but tomorrow is another matter, when we get reports from Wells Fargo, JP Morgan and Citigroup. As for the election, that psycho drama will continue to unfold like the well scripted reality program it is. I remain cautious in the near term, wary of correction, not quite ready to commit, optimistic the next long term secular rally is just around the corner, waiting for my signal.

Until then, remember the trend!

Thomas Hughes

New Plays

Sell Yourself

by Jim Brown

Click here to email Jim Brown
Editor's Note

There are very few companies with positive charts in this environment but Mentor Graphics is one of them after being targeted by Elliott Management. That is the reason it is bucking the market trend.


MENT - Mentor Graphics - Company Profile

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Buy MENT shares, currently $27.92, initial stop loss $25.85.

Optional: Buy Jan $30 call, currently $1.35, no stop loss.

We will hold the option as a lottery ticket play if the long stock position is stopped.


No New Bearish Plays

In Play Updates and Reviews

Bearish Conviction Rising

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 fell to 5-week lows and the Dow hit 3-month lows intraday with support levels temporarily broken. Weak economic data from China and election uncertainty weighed on the markets with the Dow falling -185 points at the low of 17,959 shortly after the open. The S&P dipped to 2,114 and the Russell 2000 hit 1,209. All of these levels were under recent support.

The number of decliners far outweighed advancers 2:1 with down volume following the same ratio. The markets recovered significantly off their lows but all finished deeply in the red and under prior support levels. The bearish sentiment is rising with only one day left in the second week of October.

In theory the normal second half of October rebound should begin next week but market sentiment is going to have to improve significantly for that rally to happen.

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

CLVS - Clovis Oncology
The long stock position was opened at $31.97.

FNSR - Finisar
The long stock position was stopped at $29.15.

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BULLISH Play Updates

ALRM - Alarm.com - Company Profile


No specific news. Shares still holding over support with a minor gain today.

Original Trade Description: October 1st.

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for the connected homes in the United States and internationally. It offers multi-tenant software-as-a-service platform that allows home and business owners to intelligently secure and manage their properties, as well as remotely interact with an array of connected devices through a single intuitive interface. The company provides interactive security solutions, which offer intelligent security and awareness services through a dedicated, cellular, and two-way connection to the home or business; and intelligent automation solutions that connects, integrates, and controls the devices in the home or business, such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors, and other connected devices. It also offers video monitoring solutions, which provide live streaming, smart clip capture, high definition continuous recording, and instant video alerts through its mobile app or on the Web; and energy management solutions that offer enhanced energy monitoring and management services. It has approximately 2.6 million residential and business subscribers. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents compared to estimates for 11 cents. Revenue rose 24% to $64.4 million and beat estimates for $58.6 million. Software as a Service (SaaS) revenue rose 23% to $42 million. The company guided for the ful lyear for earnings of 49-51 cents and revenue of $242.3-$245.8 million. Analysts were expecting 48 cents on $241.7 million.

Earnings Nov 8th.

Despite the strong beat and strong guidance shares crashed from the historic high close of $33 before the earnings were released. Shares were up +135% since the February low at $14 and traders took profits. The only ratings change was from Raymond James from outperform to market perform based on value because of the strong gains. At the same time Imperial Capital raised their price target from $24.50 to $30. Since shares closed the day before at $30 that was an implied neutral rating.

Shares collapsed back to $28 and here there for three weeks then fell sharply on September 6th on no news to bottom at $25. That bottom was quickly bought and Friday's gain lifted the shares back over resistance at $28.50.

There is no bad press for Alarm.com. Earnings and revenue are growing, subscribers are growing and shares are back over resistance. If the market is going to rally in late October this should be a tech stock that outperforms.

Position 10/3/16 with a ALRM trade at $29.05

Long ALRM shares @ $29.05, see portfolio graphic for stop loss.

No options recommended because of price.

CLVS - Clovis Oncology - Company Profile


No specific news. Nice gain in an ugly market.

Original Trade Description: October 12th.

Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.

Clovis has been rising on the prospects for the drug Rucaparib. They reported in September the FDA was not planning on holding an advisory committee meeting to discuss the new NDA application. The FDA has accepted the company's NDA for accelerated approval and granted it a priority review. The FDA response is expected to be positive and is expected by Feb 23rd.

However, on October 7th the company released data on a Rucaparib trial that appeared to show it was less effective than a competing drug already on the market from AstraZeneca. Shares were crushed for a $10 drop at the open. Analysts were quick to come to their defense saying there are many trials and making a decision by just one trial with a very narrow patient subset was comparing apple to oranges. Shares immediately rebounded.

Clovis has several anti cancer drugs in final stages and the outlook is very positive. Just seeing that CLVS shares have not declined with the sector over the last couple of days is a very strong indication that portfolio managers are buying and holding.

Earnings Nov 3rd.

Position 10//13/16:

Long CLVS shares @ $31.97, see portfolio graphic for stop loss.

No options recommended because of price.

FNSR - Finisar Corp - Company Profile


No specific news. Shares dipped to prior resistance to sto pus out. I probably had the stop loss too tight but with a $30 stock, I wanted to prevent a material loss in a volatile market. I will recommend it again once the market firms.

Original Trade Description: October 3rd.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

Shares spiked from $23 to $27 on the news even after a big ramp up from $17 at the beginning of the quarter. Shares slowed their ascent but reached $30 last week. That is a five-year high. A move over that psychological resistance at $30 could start a new leg higher. The intraday high last week was $30.19. I am recommending we enter a position with a trade at $30.25.

Position 10/5/16 with a FNSR trade at $30.46

Closed 10/13/16: Long FNSR shares @ $30.46, exit 29.15, -1.31 loss.

NLNK - Newlink Genetics - Company Profile


The biotech sector is broken after the Illumina crash on Tuesday and Clinton surging in the polls. I am cancelling this recommendation.

Original Trade Description: October 10th.

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products to enhance treatment options for patients with cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system; and small-molecule product candidates that are focused on breaking the immune system's tolerance to cancer by inhibiting the indoleamine-2, 3-dioxygenase pathway and the tryptophan-2, 3-dioxygenase pathway. The company's lead product candidate, algenpantucel-L, an investigational immunotherapy, is being studied in Phase III clinical trials for patients with pancreatic cancer; tergenpumatucel-L, is being investigated in Phase IIb clinical trial for patients with advanced non-small cell lung cancer(NSCLC), as well as Phase I/II clinical trial is evaluating the combination of indoximod and docetaxel for patients with advanced NSCLC; and dorgenmeltucel-L, is being investigated in a Phase II clinical trial for patients with advanced melanoma. It is also developing HyperAcute cellular immunotherapies for renal, prostate, and breast cancers. In addition, the company is developing IDO pathway inhibitors comprising indoximod and GDC-0919 for patients with advanced NSCLC, advanced melanoma, metastatic prostate cancer, and other cancers; NLG2101 for patients with metastatic breast cancer; NLG2102 for treating refractory malignant brain tumors; NLG2103 for patients with advanced melanoma; NLG2014 for patients with metastatic pancreatic cancer; and NLG2105 for pediatric patients with refractory malignant brain tumors. Company description from FinViz.com.

Newlink shares have been improving rapidly since late September for multiple reasons. They have an Analyst Day coming up on October 25th and they are expected to present a rosy picture.

Last Tuesday after the bell they announced a $25 million award from the U.S. Dept of Health and Human services to support advanced development of the V920 Ebola Zaire vaccine candidate. The award has an additional $51 million of additional contract options as results stages are met. DHHS has already funded $76.8 million for developing the manufacturing facility and manufacturing process activities along with additional clinical trials.

The FDA has already designated V920 as a breakthrough therapy and the European Medicines Agency (EMA) has given it PRIME (PRIority MEdicines) status.

The new contract will enable accelerated full-scale production of V920, once it is approved. Merck (MRK) has already licensed the drug from Newlink in order to help Newlink accelerate development using Merck's vaccine expertise. Merck will be responsible for distribution and regulatory approvals.

Having a big sugar daddy with deep pockets backing your efforts along with the Dept of HHS is a real plus. This vaccine is going to be produced and could save thousands of lives. In the last outbreak alone more than 9,200 patients died.

Earnings Nov 3rd.

Shares spiked again on the Ebola news and will likely continue rising. Shares closed at $16.41 with resistance at $20, which will be our target in this position.

Recommendation cancelled.

BEARISH Play Updates

TASR - Taser Intl Inc - Company Profile


No specific news. Support broke but one day does not make a trend. We need to see confirmation on Friday.

Original Trade Description: October 8th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection. The company sells its products to military forces, private security, and consumer personal protection markets, as well as to federal, state, and local law enforcement agencies and corrections through its direct sales force, distribution partners, online store, and third-party resellers. Company description from FinViz.com.

Taser shares were crushed last week when the NYPD chose VieVu instead of Taser for its supplier of more than 1,000 body cameras. The camera has become a larger market for Taser than the actual Taser weapon. When Taser sells a camera they also sell a 3-5 year subscription to Evidence.com, which is their video storage and retrieval application in the cloud. While a Taser sale may be in the hundreds of thousands of dollars per police department and the camera sale also in the hundreds of thousands, the subscription to archive the hundreds of thousands of hours of video footage costs millions of dollars.

The $399 camera is just the camel's nose under the tent. Each camera requires its own subscription to Evidence.com which costs $39 to $79 a month before quantity discounts. The 1,000 camera order for the NYPD would have been a minimum of $39,000 a month for five years or $2.3 million to $5.0 million in revenue.

The Safariland VieVu camera system is now deployed in more than 4,000 agencies in 17 countries. With Safariland the camera is holster activated and turns on when the officer's gun is drawn. This is a major competitor for Taser.

Another blow for Taser last week was a Supreme Court decision not to hear a case involving the death of a person stunned by a Taser. The court let stand a ruling that said Tasers amount to an unconstitutional use of excessive force and officers can only use Tasers if they are in immediate danger. This could negatively impact Taser sales, which is still the largest portion of their international revenue.

If Taser sales slow because of the ruling, then body camera sales could also slow since many times they are packaged together. That means Evidence.com subscriptions would also slow.

Earnings Nov 3rd.

Taser shares are in free fall after the dual blow last week. The Supreme Court decision is the one problem that will last.

Position 10/11/16 with a TASR trade at $22.25

Short TASR shares @ $22.25, see portfolio graphic for stop loss.

Long Nov $22 put @ $1.25. See portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


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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