Option Investor

Daily Newsletter, Monday, 11/7/2016

Table of Contents

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

Market Wrap

The FBI Bounce

by Thomas Hughes

Click here to email Thomas Hughes


FBI Director Comey says no new evidence and the market cheers. The news came late Sunday afternoon, in time for global markets to rally, but doesn't seem to have moved the needle very much in terms of the polls. The only thing I can say to that is that the pollsters said England wouldn't Brexit up to and until the polls closed. Today's action was extreme to say the least, a knee jerk reaction to non-news news, and on such tepid volume all of today's gains could be reversed with ease. Aside from that, news was centered on the election in general, the debate of which candidate is really better for the economy and to some extend earnings and economic data expected out later this week.

International were very moved by Comey's ringing endorsement of Secretary Clinton and rallied just about across the board. Asian markets were up in the range of 0.5% to 1.5% give or take, European markets were more vigorous and rallied in the range of 1.5% to 2.5%.

Market Statistics

Futures indicated a substantial rally at open, nearly 1.5% for the S&P 500, all morning and nothing in the early hours of the day dampened the mood. There was little in the way of earnings, only 31 S&P 500 companies are expected to report this week, and no economic data to speak of. The indices gapped up at the open and then proceeded to climb throughout the morning, although as I said volume was no better than average. The rally continued all day, more likely due to a lack of sellers than a hoard of buyers, and left the indices at the top of the day's range with gains in the range of +2%.

Economic Calendar

The Economy

No economic data today and very little this week, about 10 reports including oil and natural gas inventories. What we do have is fairly inconsequential; JOLTs tomorrow, wholesale inventory on Wednesday, jobless claims Thursday and Michigan Sentiment Friday. Next week is a different story; CPI, PPI, housing data, manufacturing indexes, Fed surveys, the works.

Moody's Survey Of Business Sentiment made a whopping jump of 1.4% last week despite the email curve-ball thrown to us. The index is now reading 31.8%, the highest level since early May. Mr. Zandi says that global business sentiment is holding up well and is steadfast. The US leads, South America lags, but all in all the global economy is expanding at a pace on par with expectations.

A little more than 85% of the S&P 500 has reported earnings so far this cycle and the results are better than expected. The caveat is that forward outlook continues to decline, although it remains positive and showing earnings growth into the end of next year. Of those that have reported 71% have beaten EPS estimates, above average, while only 54% have beaten revenue estimates, a little below average. The blended rate of earnings growth for the quarter is now 2.7%, up more than 1% from last week. At this rate we could easily see the final rate of earnings growth come in above 3%.

Looking forward growth is expected to continue in the fourth quarter but those expectations have fallen by -0.7% in the last week to 3.9%. Full year 2016 estimates remain firm at 0.2% and will likely rise before the end of the 4th quarter cycle. Full year 2017 estimates have also fallen, another -0.4%, with all index growth projected to be 11.6%.

The Dollar Index

The Dollar Index jumped 0.75% in the biggest move since late June. Today's action, if in line with longer term dollar outlook, was driven entirely by the FBI revelation and market relief, however misplaced. Long term outlook remains dollar positive, the FOMC is on track to possibly raise rates in December while other central banks remain locked into QE programs. The Fed Watch Tool shows a 76.5% chance of hike at the December meeting First upside target is the $98.56 level, a break above that could go as high as $100.50.

The Oil Index

Oil rebound somewhat today on remarks from OPEC that it was really going to cut production levels at the next meeting. The news helped to lift prices by nearly 2% but failed to carry WTI above the $45 mark. The OPEC news is bullish but met with skepticism, what have they been able to do so far?, so it's impact on prices is likely limited in the face of high supply, high production and tepid demand. The $45 is one possible level for resistance, $46 and $48 look more likely targets for pullbacks should bullish sentiment persist into the end of the week.

The oil sector remains trapped within recent ranges with little hope of breaking out, to the upside, while oil prices remain below $45. The Oil Index itself remains range bound within the upper half of the 7+ month trading range and shows no signs of imminent exit, in either direction. The indicators remain firmly weak and consistent with range bound trading, trending near/around the mid-points of their respective ranges. Oil prices may continue to rebound, the index may follow, but resistance at the upper boundary near 1,180 is likely to hold.

The Gold Index

Gold prices tanked today on a rising dollar and risk on appetite. The price of spot gold fell -1.75%, nearly $23.00, to trade just above $1,280. Today's action confirms resistance at the $1,300 level and could take the metal down to longer term support levels near $1,250.

The Gold Miners ETF GDX fell -3.5% in today's action, falling from the short term moving average and below the 38.2% retracement level. This move reconfirms resistance at the moving average and the gap formed October 4th, if not a continuation of the short term down trend. The indicators are confirming resistance and indicating a buy in line with the prevailing short term down trend so a move lower to retest for support looks likely. The $23.50 level is a possibility but $22.50 looks like a firmer target to me. A drop below support would be bearish and could lead the ETF down to $19.75.

In The News, Story Stocks and Earnings

The VIX fell sharply in response to today's rally, shedding just over -17.25%. The so called fear index in retreat from a short term high but not necessarily heading back down to previous low levels. First target for possible support is near $17.50 with additional targets just below that near the short term moving average. Considering the earnings environment, a still spotty economic recovery, Fed uncertainty and tomorrow's election results it is very possibly we could be entering a period of increased, prolonged, volatility regardless of the ultimate direction of the equity market.

Sysco, the nations largest purveyor of restaurant supplies, reported earnings before the bell and delivered a positive surprise. The company reported adjusted earnings of $0.63 per share, better than expected and excluding the addition of a recent acquisition. On a not adjusted basis sales grew 11.2% over the comparable quarter with a 20% increase in gross profit and a 146 increase in margins. Shares of the stock rose nearly 10% to trade near the recently set all time high.

Priceline reported after the bell beating on the top and bottom line. The bad news is that total revenue fell roughly 50% from the year ago quarter and forward guidance is on the weak side. Despite the mixed news shares of the stock rallied in after hours trading, extending today's gains to nearly 10% and setting a new all time high.

The Indices

The indices moved up and up and up today, closing at the highs of the day. The move was led by the Dow Jones Transportation Average which gained more than 3% and broke out to a new 1 year high. Despite the break out the index remains below potential resistance and well below the all time high. Resistance is at 8,350, a resistance zone set at the end of last year, and may be strong. The indicators are bullish and pointing higher so a test of resistance at this new level is likely. A break beyond this could be quite bullish and lead the entire market higher.

The next biggest gainer in today's action was the NASDAQ Composite. The tech heavy index gained nearly 2.4% and created a small white candle after gapping up more than 1.5% at the open. Today's action is bullish and looks like a bounce in line with the long term up trend. The indicators are a bit spotty, bullish in the near term but not showing strength or even really confirming support at this level, so I am not fully convinced the bounce is for real. First target for resistance is at the 5,200 level and the short term moving average, a break above that more bullish but still in need of breaking resistance near 5,350. If the index falls back in tomorrow's session support is near the 5,000 level.

The next biggest move was made by the S&P 500. The broad market gained a little more than 2.25% in a move that regained the upper side of 2,120 but fell short of the short term moving average. The move looks like a bounce from a long term trend line but is yet to be confirmed by the indicators. The indicators remain mixed and on the weak side so I would not be at all surprised to see another test for support, possibly as low as 2,100 or just below.

The Dow Jones Industrial Average brings up the rear in today's session with a gain of only 1.87%. The blue chips created a long white candle that appears to be confirming support at and bouncing up from the long term up trend line. The caveat is that today's action is really just a volatile swing within the 2 month trading range, and one driven by an extreme swing of sentiment (Comey releases email news and market falls, Comey says emails are no big deal and market surges). If the index breaks out of the range to the upside we could see a test of the all time high.

The market made a nice swing today but I'm afraid that is all it might be, a swing. The move was driven by a wild shift in sentiment that could easily swing the other way tomorrow. Aside from the transports the indices remain trapped within recent ranges and waiting for the election results with little indication of which direction they will go once the results are in. I still see the signs of a long term rally in the making, there may be a correction post-election but in my view it will most likely be a buy-on-the-dip opportunity for long term positions.

Until then, remember the trend!

Thomas Hughes

New Plays

Not Looking Good

by Jim Brown

Click here to email Jim Brown
Editor's Note

Volatility is likely to return with a vengeance on Tuesday. The markets rallied over 2% today because the FBI decided there was a lot of smoke but no fire in the new batch of Clinton emails. There was a monster short squeeze and everything rallied right to short-term resistance. Tonight the S&P futures are down -6.50 and falling.

The FBI news may have spiked the market but it did not guarantee a Clinton victory. We could very easily have a Brexit type of reaction if Trump were to pull a late victory from the jaws of defeat. I think it would be unwise for us to make any new entries at these levels in a market that could go 300 points or more in either direction on Wednesday. We just need to be patient and a market direction will emerge. The object of the game is to trade when it makes sense to trade and not trade just because the market is open.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

November Surprise

by Jim Brown

Click here to email Jim Brown

Editors Note:

The FBI news spiked the market on expectations for a Clinton win. Unfortunately, this reminds me a lot of the market rally before the Brexit vote when the polls showed a 5% lead for the remain camp. When the vote was actually taken and the leave camp won, there was a monster -125 point decline in the S&P over the next two days. I know all the polls give Clinton a 2% to 4% lead but it is not over until it is over. Wednesday could be really exciting.

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

SABR - Saber Group
The short stock position was entered at the open.

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

Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

MENT - Mentor Graphics - Company Profile


No specific news. New intraday 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


No specific news. Only a minor market related rebound. That suggests the path is still lower.

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.

SABR - Sabre Corporation - Company Profile


No specific news. Big gap open spike to give us a great entry into the position.

Original Trade Description: November 5th.

Sabre Corporation provides technology solutions to the travel and tourism industry. The company operates through two segments, Travel Network, and Airline and Hospitality Solutions. The Travel Network segment operates a business-to-business travel marketplace that offers travel content, such as inventory, prices, and availability from a range of travel suppliers, including airlines, hotels, car rental brands, rail carriers, cruise lines, and tour operators with a network of travel buyers comprising online and offline travel agencies, travel management companies, and corporate travel departments. The Airline and Hospitality Solutions segment offers a portfolio of software technology products and solutions through software-as-a-service and hosted delivery models to airlines, hotel properties, and other travel suppliers. This segment provides SabreSonic Customer Sales & Service, a reservation system that provides capabilities around managing sales and customer service across an airline's diverse touch points; Sabre AirVision Marketing & Planning, a set of airline commercial planning solutions; and Sabre AirCentre Enterprise Operations, a set of solutions for the holistic planning and management of airline, airport, and customer operations. In addition, this segment offers software and solutions to hotel properties comprising central reservation system, property management solution, and marketing and consulting services. Company description from FinViz.com.

Sabre Corp is a service company that was spun off from American Airlines and the company appears to be struggling with earnings misses and lowered guidance. They reported earnings of 27 cents that missed estimates for 33 cents. They posted revenue of $839 million that rose +6.9% but missed estimates for $852 million.

They guided for revenue to grow to $758 million in Q4 but analysts were expecting $834 million. For the full year they guided for earnings of $1.34-$1.40 on revenue of $3.37-$3.40 billion and analysts were expecting $1.43 on revenue of $3.39 billion.

They blamed the bankruptcy of a travel agency business for a 2 cent impact to earnings but they missed by 6 cents. Revenue rose 6.9% but earnings declined 6.9%. Those ratios are not moving in the right direction. Their Travel Network revenue increased by 2.3% to $582.4 million but operating income fell -11.1% to $182.5 million. Operating margins fell from 36.1% to 31.3%. It was not a good report.

Shares were already declining before the report and they gapped down another $3 after the news. Friday's close at $23.18 was a new 52-week closing low and it appears to be poised to make a new two-year low.

Position 11/7/16:

Short SABR shares @ $23.85, initial stop loss $24.25.

SHLD - Sears Holdings - Company Profile


No specific news. Only a minor 30 cent rebound in a bullish market.

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. Decent 4% spike but is stopped right at resistance.

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 only gained 6 cents after a 9 day drop by the S&P. They will fall faster than they went up once a positive market returns. Look at the drop after the spike in September for an example.

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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