Option Investor

Daily Newsletter, Thursday, 11/3/2016

Table of Contents

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

Market Wrap

Three Days To Go

by Thomas Hughes

Click here to email Thomas Hughes


The market has weathered a busy three weeks rather well; with only three days left until the election volatility is on the rise as investors seek shelter from a growing storm. Earnings growth has returned to the market, economic data continues to trend positively and the FOMC stood pat on interest rates, the only thing left to rattle the market is the election and the chances it will rattle the market are only getting stronger. Tomorrow's NFP report will no doubt be an important one but the big market move, I suspect, won't come until next Wednesday.

Election jitters, the FOMC and falling oil prices weighed on Asian markets in the overnight session. The Nikkei led with a drop near -1.75%, followed by the Heng Seng's decline of -0.56%. European indices fared no better and were further depressed by a new ruling from British courts regarding the Brexit. Apparently, even though the referendum passed, the new PM must wait on a vote from parliament before beginning the Brexiting process. The ruling has raised questions about when or even if the Brexit will actually happen, meanwhile the Bank of England held rates steady and says that the vote has had no apparent impact on the British economy. They upped their GDP target for 2016 to 2.2%, with that moderating to 1.4% in 2017. European indices held flat for most of the day but sold off in late day trading, led by the FTSE.

Market Statistics

Futures trading indicated a flat to positive open for the US indices all morning, a raft of economic data and earnings reports having little impact on the trade. The open was quiet, fallout from the FOMC meeting was minimal, and the market was able to hold just above break even for the first half of the day. Just after lunch bearish sentiment prevailed and sent the indices down to an intraday low, about -0.25% for the S&P 500. This low held for a bit, sideways trading ensued, only to have a new low set in the early afternoon and then another shortly before the close of the session.

Economic Calendar

The Economy

Lots of data today, first up on the list is the Challenger, Gray&Christmas report on planned layoffs. This reports is released at 7:30AM and is for October. The number of layoffs planned in October fell by -31% month over month and -39% year over year to the second lowest level this year and the lowest October reading since 1999. The year to date total is now -14% below last year's YTD total with the energy and computer sector leading with the highest number of layoffs. Energy alone is up 15% YOY on a YTD basis. Despite continued weakness in the energy sector and ongoing restructuring with the computer sector job losses are trending lower in the near and long term, consistent with labor market improvements.

Initial claims for unemployment jumped by 7,000 from a not-revised figure to hit 265,000 in the past week. The four week moving average of claims gained 4,750 to hit 257,750. This is the 87th week for claims to trend below 300,000, the longest streak since 1970. On a not adjusted basis claims increased by 3.7% versus an expected increase of only 1.0% and are down -5.1% over this same week last year. My home state of NC leads gainers with an increase of 2,389 new initial claims, Kentucky leads decliners with a drop in claims of -4,073.

Continuing claims fell -14,000 to hit 2.046 million and a new low dating back to June, 2000. The four week moving average of continuing claims also fell, shedding -9,000, to hit 2.040 million and a new low dating back to July, 2000. The continuing claims figures has resumed its long term down trend, is making new lows on a week to week basis and consistent with improvement in the labor market.

The total number of Americans claiming unemployment rose for the first time in nearly 3 months, gaining 36,000 to reach 1.780 million. This increase is not unexpected (seasonal trends) although I thought there may have been one more week of decline before bottoming. Regardless, we can now expect to see the total number trend higher into the end of the year as staffing levels are cut in efforts to meet year-end budget targets and seasonal workers are laid off.

Third quarter productivity and labor cost data was also released at 8:30AM, both much better than expected. Productivity jumped 3.10% versus an expected gain of 1.80% and much better than the Q2 decline or -0.2%. Within the data there was a 3.4% increase in hourly wages, positive for the consumer, and a 3.4% increase in output, positive for the producers. Total unit labor costs only increased by 0.3% versus an expected jump of 1.2% and the much better than the 3.90% reported for the 2nd quarter.

New Orders for factory goods was released at 10AM and came in a tenth hotter than expected. September factory orders came in at 0.3%, up a tenth from expectations but down a tenth from the previous month. The dark cloud in the data is a sharp downturn in new orders, led by a -1.1% decline in transportation equipment. Surprisingly though, automobile production jumped to a level not seen since July of last year, suggesting the recent down tick in auto sales may be a short lived thing.

The Services Sector ISM index was also released at 10AM and shows a slowing of expansion in the services sector. The headline reading of 54.8 is expansionary but slower than the previous months 57.1 and below expectations. Within the report activity and new orders are both strong at 57.7 while employment levels show a more modest expansion at 53.3. Regardless the slowdown services are expanding.

The Dollar Index

The Dollar Index extended its correction in today's session. The Fed's decision to hold rates steady set the stage for near term weakness in the index that is being compounded by election fears and a surge in pound value driven by today's BOE/Brexit news. I say near term weakness because the longer term outlook continues to support higher rates, expanding US economy and a stronger dollar. Today's action carried the index down by -0.25% to test support at the 61.8% retracement level. The indicators are bearish and pointing lower so support is likely to be tested further. Tomorrow's NFP report could help provide support, or not, with next Wednesday a likely target for a much bigger move. Support is at today's closing level, just above $97. A move lower could go as low as $96.20 before meeting support, a move higher could go as high as $98.65 before hitting resistance. Longer term I am still anticipating a retest of highs near $100.50.

The Oil Index

The oil market continues to slide on rising fear, or acceptance I should say, of a market glut. Yesterday's record breaking injection of US crude supplies was followed up today by an above expectations injection of natural gas supplies and the realization that OPEC just isn't doing anything substantial to actually support the market. An attack on Nigerian oil infrastructure helped to support prices in early trading but that faded throughout the day, leaving prices for WTI down more than -1.4% on the day. WTI has now broken below the $45 support target and could easily head to $40.

The Oil Index is treading water within a trading range, today's action another day of sideways drift within that range. Price action created a small doji like candle, below the short term moving average, just about dead in the center of 7+ month trading range. The long term outlook is bullish, the sector is expected to see earnings growth next year, while the nearer terms are dominated by oil prices and volatility in the oil pits. The indicators are consistent with a test of support near 1,120 or possibly as low as the bottom of the range near 1,100. A break below support does seem likely at this time, not unless there is a serious deterioration in oil prices and/or earnings outlook.

The Gold Index

Gold held steady in a day of choppy trading. The metal is trading hovering around $1,300, driven by an election fear driven flight to safety, compounded by the dollar correction. It looks like $1,300 is providing resistance at this time and may hold, the longer term outlook is for dollar strength so any upside at this time is likely to be limited. A break above $1,300 may find next resistance at $1,320. A fall from $1,300 may find support in the $1,275 range.

The Gold Miners ETF moved up over the past few days, in tandem with the rise in gold prices, but have also hit a potentially strong resistance level coincident with the gap that opened during the first week of October. Today's action was positive, the ETF gained a little more than 1.75%, but was capped by resistance below yesterday's high and within the aforementioned gap. The indicators are rolling over, consistent with resistance levels, and firing an early/weak sell signal in line with the 3 month down trend. Support is currently at the short term moving average, just below today's opening price, a fall from this level could go as low as $22.50. A move up will require a break of resistance to move more than a nominal amount.

In The News, Story Stocks and Earnings

Today may have been the single biggest day of the earnings this cycle, I'm not exactly sure, there are a lot on the list. Despite this the news of the day was not earnings but politics, the election and the future of the economy, the stock market and the country. The amount of concern that, whatever the outcome, the election will result in a major market slide is growing. The VIX has risen for the last 8 days straight and today added more than 16% to hit a new 4 month high. The indicators look strong, the index is moving up with conviction, so this move could easily continue into the election and beyond. Next upside target is near $25, another 10% and more above today's close.

Another shock wave, completely unrelated to the election but not politics, that hit the market today was the announcement of a congressional inquest into the generic drug market and price fixing with the possibility of charges being filed. The news hit the sector hard with names like Mylan and Teva plunging -8% to -10%.

After hours action was busy, quite a few heavily traded names reported earnings and not all delivered what the market wanted to hear. To start it off, Starbucks reported EPS of $0.56, a penny above consensus, on revenue also above consensus. Results were driven by a 4% increase in global comp sales, 6% in China, and led the board to approve a 25% increase to the dividend. Shares gained more than 6% on the news.

CBS also beat top and bottom line consensus estimates, adjusted earnings beat by 17%. CEO Moonves says that "political spending is ramping up nicely" so we can expect to see that impact on the current quarter's results. This stock gained more than 2% in after hours trading.

Las Vegas sands also beat top and bottom estimates, as did Weight Watchers. GoPro however, did not meet expectations. Their results were so bad that the stock was halted before the release and did not reopen for trading until 30 minutes later. Due to declining demand for its ever more expensive, which have turned out to be a kind of novelty item and not the must have they once were, products the company reported a net loss of -$0.74, a little more than double what the market was expecting. Along with this comes weak guidance for the current quarter and CEO Nick Woodman's assurance that demand for the new line is strong and that the company will return to double digit earnings growth next year. The stock dropped nearly -30% on the news.

The Indices

Today's action was largely to the downside but there was one notable exception. The Dow Jones Transportation Average closed with a gain of 0.34% after trading much higher during the session. Today's action was bullish but weak and capped at the top of the recent trading range. The indicators remain consistent with range bound trading and do not show strength. At best this index looks like it will continue to move sideways, trending below the 8,100 level. At worst it may in for a correction to trend, target near 7,750.

The tech heavy NASDAQ Composite posted the largest decline, weighed down by Facebook which lost nearly -6% due to poor forward growth outlook, just over -0.92%. The index created a medium sized black candle, the third one in a row, and appears headed down to test support in the 5,000 to 5,050 range. The indicators are bearish and moving lower, consistent with lower prices, but not yet showing strength so a deeper move may not be forthcoming.

The S&P 500 made the next largest decline in today's session, just shy of -0.50%. The broad market index created a small-to-medium sized black candle, moving down from broken support, and appears like it is moving down to the next support target, possibly 2,050. The indicators are pointing lower, consistent with a test of support, but not showing any kind of strength at this time.

The Dow Jones Industrial Average posted the smallest decline in today's session, only -0.16%. The blue chips had the wildest ride in today's session, opening with a nice upward gap only to sell off hard throughout the day to close at the low. Today's action is the second day to close below the bottom of the September/October trading range and a sign that lower prices may be on the way. The indicators are still consistent with range bound trading but pointing lower so further testing of support at current levels is likely in the least. A move down from here, near 17,930, could go as low as 17,500 before finding next support.

It looks like the market is going to pull back to a stronger support level before the election. The growing chance that a possible criminal or egomaniac will get elected is becoming more of a certainty. What happens after the election is less of a certainty. On the one hand Hillary supports the establishment, so the status quo is likely to be maintained, if you can believe her. On the other hand Trump is threatening to do all kinds of things that are scaring lots of folks, but just might be the tough love America and the world needs. What I know for certain is that market will survive whatever happens; if we go into next week with our positions secure and some cash on hand we will be able to weather the storm, and maybe even make some money. I'm cautious, wary, and still see the makings of a long and sustained bull market rally that could begin, if not before the end of this year then really soon thereafter.

PS, don't forget what happened with the Brexit. All that pent up fear gave us a buying op that delivered an 8.6% rally in the SPX over the course of only a few weeks.

Until then, remember the trend!

Thomas Hughes

SAVE $50 on your EOY Subscription - ONE WEEK ONLY!

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New Plays

Friday Follies

by Jim Brown

Click here to email Jim Brown
Editor's Note

The small caps continue to lead the market lower and with only 3 trading days left until the election, Friday could be very volatile. The S&P has been down for 8 consecutive days and Friday could be the ninth. The election uncertainty is growing and there is a very strong potential for high volatility over the next three days. Friday could be the worst. Monday and Tuesday could see some bargain hunting. I am recommending we continue to wait patiently at least until Friday passes. Anything we could add on Friday could be stopped out before the day is over. We should never trade unless there is a reasonable assumption of market direction and today there is no way to judge that. We are very oversold and there could be a monster short squeeze. OR, the payroll report on Friday could be weak like the ADP report and see the market decline even faster on economic worries. There is simply no reason to put money at risk on Friday.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Selling Continues

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 remains our canary in the market and it is still pointing lower. The Russell remains the only chart you need to watch but the S&P-500 is racing to catch up. The S&P has now closed negative for 8 consecutive days and a streak not seen since 2008. The election and economic uncertainty continues to escalate with the polls tightening and payrolls falling. The ADP Employment yesterday only showed a gain of +147,000 jobs compared to estimates for +165,000. If the Nonfarm Payrolls decline on Friday it could further upset the market.

The Russell closed near the low for the day and it remains unsupported until the 1,100 level. That does not mean it cannot rebound because a headline generated short squeeze can happen at any time. There are three trading days left before the election is over and the market is locked in a decline. I would expect further weakness on Friday but possible bargain hunting on Mon/Tue.

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

No Changes

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BULLISH Play Updates

MENT - Mentor Graphics - Company Profile


No specific news. Minor gain but a new closing high.

Original Trade Description: October 13th.

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.

Position 10/14/16:

Long Jan $30 call @ $1.35, see portfolio graphic for stop loss.

Previously Closed 11/1/16: Long MENT shares @ $28.54, exit $28.25, -.29 loss

BEARISH Play Updates

EBAY - Ebay Inc - Company Profile


After the close Ebay raised guidance for the quarter and full year because of the sale of the 8.125 million shares of MELI. They now expect $1.15-$1.25 in earnings for Q4 and $2.32-$2.42 for the full year. The stock did not rally in afterhours but the announcement was not made until 5:15 PM. I doubt many traders saw it. If we get a big spike at the open on Friday we will probably be stopped out. I considered removing the stop loss because I believe any potential spike will be temporary. Our stop is $29.25 and resistance is $29. The stock closed at $28.05. I decided to keep the stop because we have an optional December $28 put that does not have a stop.

Original Trade Description: October 31st.

eBay Inc. operates e-commerce platforms that connect various buyers and sellers worldwide. Its platforms enable sellers to organize and offer inventory for sale; and buyers to find and buy it virtually anytime and anywhere. The company's Marketplace platforms include its online marketplace at ebay.com and the eBay mobile apps; and StubHub platforms comprise its online ticket platform at stubhub.com and the StubHub mobile apps, which enable fans to purchase tickets to the games, concerts, and theater shows. Its Classifieds platforms include a collection of brands, such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds, and others that offer online classifieds and help people find whatever they are looking for in their local communities. The company platforms enable users to find, buy, sell, and pay for items through various online, mobile, and offline channels, which include retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants, shopping channels, and networks. Company description from FinViz.com.

For more than a decade Ebay has been the primary sales hub on the web but as Amazon and others grew, Ebay fell out of favor. There are very few new items left for sale on Ebay because you can buy they cheaper from Walmart, Target or Amazon. That left Ebay to struggle to increase sales on mostly used items.

In Q3 Ebay earnings fell from $545 million and 45 cents to $418 million and 36 cents. For Q4 they expect revenue of $2.36-$2.41 billion and earnings of 52-54 cents. Analysts were expecting $2.4 billion and 54 cents. For the full year, they are now guiding for $1.85-$1.90 and $8.95 to $9.0 billion. Analysts were expecting $1.89 and $8.95. For both Q3 and the full year analysts were expecting more than the Ebay guidance.

Shares fell 18% on the news to $28.61 then rebounded two days later to $29.71. That rebound has faded and EBAY closed at $28.51 on Monday with support well below at $24.

There is just no excitement surrounding EBAY today. Since they spun off PayPal they have been struggling to grow the business. I believe shares will retest the $24 level unless we get a runaway tech rally after the election. I am not holding my breath.

Position 11/1/16:

Short EBAY shares @ $28.51, see portfolio graphic for stop loss.


Long Dec $28 put @ .72, see portfolio graphic for stop loss.

SHLD - Sears Holdings - Company Profile


No specific news. Rumors continue to surface that toy distributor Jakks is no longer shipping to Kmart. This is going to be a rough holiday season for Kmart/Sears.

Original Trade Description: October 26th.

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 in mid September 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 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.

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.

In late September, Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notice of termination for 17 stores totaling 1.7 million square feet at the end of January.

Last week Detwiler Fenton warned that Sears was apparently working on monetizing its real estate. DF said the number of Kmart closures was going to accelerate in order for Sears to raise cash and offset the burn rate. DF said Sears had sent directives to a large number of stores telling them to clear backroom inventories. They also began cutting prices on appliances by 50% and using heavy promotions to reduce inventory. They also noted that Sears was moving appliance inventories from Kmart stores into certain locations suggesting a new round of store closures was coming.

Also making headlines last week was Jakks Pacific halting shipments of much needed toys to Kmart for fear of not being paid. Multiple reports suggested a potential post holiday bankruptcy filing. BMO Capital Markets said it had been asked repeatedly by other suppliers if they should continue shipping merchandise to Sears and Kmart. This news could not come at a worse time for Kmart ahead of the holiday shopping season. Once the news spreads of one supplier halting shipments, it is sure to spread to other suppliers as well. This could be Kmart's last Christmas.

Earnings December 1st.

Shares bounced on a suggestion they might be preparing a real estate sale but are returning to the lows. A trade under $10.50 would be a 13-year low.

Position 10/27/16:

Short SHLD shares @ $10.92, see portfolio graphic for stop loss.

SSYS - Stratasys Ltd - Company Profile


No specific news. Shares spiked to $19.42 to miss our stop loss by 3 cents but immediately fell back to negative territory. Shares did end the day with a minor gain. The spike was on a story by Investopedia that Safilo Eyeware was making frames on SSYS 3D printers.

Original Trade Description: October 22nd.

Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. Its 3D printing systems utilize its patented fused deposition modeling (FDM) and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. The company offers entry-level desktop 3D printers to systems for rapid prototyping, and production systems for direct digital manufacturing under the Dimension, Objet, Fortus, Polyjet, SolidScape, and MakerBot brands, as well as MoJo and uPrint product families, and Dental Series products. It also provides 3D printing consumable materials, including FDM, cartridge-based materials, Polyjet cartridge-based materials, Smooth Curvature Printing inkjet-based materials, and non-color digital materials, as well as provides color variation services. In addition, the company offers customer support, basic warranty, and extended support programs; leases or rents 3D printers and 3D production systems; produces prototypes and end-use parts for customers from a customer-provided CAD file; and provides plastic and metal parts for rapid prototyping and production processes, as well as related professional services. Further, it operates Thingiverse, an online community for sharing downloadable, digital 3D designs; and GrabCAD Community for mechanical engineers and designers. The company's products and services are used in aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry, and other industries. Company description from FinViz.com.

Stratasys does not report earnings until Nov 15th. Piper Jaffray believes they will miss on revenue because of a recent survey of 68 firms showed "extremely discouraging" demand for SSYS and 3D Systems (DDD) products. Stratasys is expected to post its first year over year profit in 8 quarters because of extensive cost cutting but revenue is expected to fall short of the $174.5 million consensus estimate.

The challenge is the entry of the 800 pound gorilla into the 3D market. That gorilla is Hewlett Packard. They announced their entry into the market five months ago and will begin shipping products over the next two months. Piper and some other analysts said buyers are waiting to commit to purchases until they actually see the HP products. The HP product line is expected to be robust and priced competitively. Another manufacturer, privately held Carbon 3D, is also drawing attention and suddenly buyers have an entire array of 3D printers and manufacturers to choose from. GE just bought a 3D printing company in Europe and is expected to expand the offering in a big way given their available cash and manufacturing experience. Because of the expense on some of these printers, buyers are taking the extra time to make sure they buy the one that fits their needs the best.

Shares are trading at a 3-month low and only about 50 cents above an 8-month low. If support at $19.35 fails we could see $15 in a hurry as investors flee before the mid November earnings.

Position 10/14/16:

Short SSYS shares @ $19.97, see portfolio graphic for stop loss.

No options recommended because of distance from the strike and short time frame.

VXX - Volatility Index Futures - ETF Description


Shares broke over resistance at $36 after an 8 day drop by the S&P. They will fall faster than they went up once a positive market returns.

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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