Option Investor

Daily Newsletter, Wednesday, 11/9/2016

Table of Contents

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

Market Wrap

Global Markets Get Trumped

by Thomas Hughes

Click here to email Thomas Hughes


I go to bed thinking Hillary is probably going to win, I wake up at 1AM to feed the baby and the world has gone all topsy turvy after getting Trumped. After seeing the results it's very hard to believe the media, the race wasn't even close. Now it's time, as Jamie Dimon so eloquently put it in a memo to his staff, for all American patriots to come together in open dialogue while we navigate these uncertain times. America will survive and there is hope for the future. Now that Mr. Trump is President-Elect Trump the pundits are seriously talking about his plans and the chances he just might be able to kick the economy into a higher gear.

Asian markets closed lower, they were closed before the relief portion of today's price action set in, but I do expect to see them rise in the overnight session tonight. European market action more closely matched our own, falling sharply in the early hours only to reverse those losses and turn them into gains near 1.5%.

Market Statistics

The news was shocking to say the least. The global market sold off hard on TrumpenFear, the Dow futures hitting a low greater than -800 points in the overnight session, but it didn't last. I'd suspected there could be a Brexit-like bounce following the election, I just didn't think it would happen on the first day. By 9:30AM eastern time the market had largely recovered the early losses and was able to open with barely a tick of movement from yesterday's close. The first two hours of trading was a bit volatile as traders scooped up bargains where they could, the indices hovering around break even. By 11AM the market had fully shrugged off the early bearishness and committed to extending the week's rally. The market rose the rest of the day, gaining more than 1%, to close near the highs of the day.

Economic Calendar

The Economy

Economic data was light today and probably a good thing, it would have been lost in the election story. The mortgage index fell -1.20% for the second week in a row as prospective home owners shy away from higher rates. Over the past 4 weeks the index has fallen a little more than -11%, the rate on a 30 year fixed is hovering around 3.75%

Wholesale inventories were revised down to 0.1% from 0.2% for the September reading. Ex-Auto's, an important factor in GDP, rose 0.4%. Investment in inventory rose by 0.6% while sales at the wholesales rose 0.2%.

There are only two economic reports of any importance left this week, the jobless claims data tomorrow and Michigan Sentiment on Friday.

The Dollar Index

The Dollar Index went on a wicked wild ride just like the equities markets and seems to be confirming support and a return to recent highs. The index fell more than -5% in the overnight session as the Trump news washed over the market only to rebound and close with gains near 0.75%. Price action fell to touch the 50% retracement line where they bounced, creating a large white candle with extremely long lower shadow. This candle qualifies as a hammer and confirms support at level. The indicators are rolling over into a buy signal, in line with the generally bullish outlook for the dollar, but have not confirmed so there could be some more sideways movement within near term trading ranges. Support looks strong at $97.20, resistance may come into play around the $99 level.

The CME Fed Watch Tool is still showing a 76% chance of rate hike at the next meeting.

The real story is the Mexican peso which fell -7.5% to a record low, if you have any desire to go to Mexico, buy anything from Mexico or buy into Mexico now is a really cheap time to do it.

The Oil Index

Oil prices were as volatile as anything else in today's session, making a 5% swing in the early hours to test support and then bounce back and move into positive territory. Support appears to be in the $44 range for WTI which closed above $45 with a gain near 1%. $45 may be the sweet spot for WTI, be on the lookout for news that may swing it one way or the other.

The Oil Index gained nearly 1.5% and created a long white candle. Despite this, and the rise in oil prices, the index remains range bound. Today's action looks bullish and may take the index up to the upper range boundary near 1,180 but will likely not break through unless oil prices are able to break above $50. The indicators are consistent with a shift of momentum within the range, and with the trading range in general, but are not strong or indicative of imminent break out.

The Gold Index

Gold prices skyrocketed on a weakened dollar only to slam into resistance above $1,300 and come crashing back to earth. Spot price went as high as $1,338 in the overnight session but fell back to $1,276 by settlement time. Today's action created an incredibly long upper shadow, confirming resistance at the $1,300 level, and could lead to further downside. Considering that FOMC outlook looks firm for a December rate hike the dollar is likely to remain firm if not move higher and pressure gold back to support. Support target is near $1,250, a break below that could go as low as $1,200 in the near term.

The Gold Miners ETF managed to close today's session with a gain but the candle and indications are all bearish. Today's candle is a long black candle and the third confirmation of resistance at/near the $25 level. The indicators are mixed; stochastic has confirmed with a strong signal while MACD has yet to reach and cross the zero line. Today's close is below support targets at the short term moving average and the 50% retracement level, next downside target is near $22.50.

In The News, Story Stocks and Earnings

Fear has left the market, more or less. Now that the election is over a certain amount of uncertainty has left, there is still some because the Trump administration is a wild card, and the VIX has responded. The index fell -20% after a moderately higher opening to hit the lowest level since before the 11th hour FBI email revelation. Today's action left it sitting just above the $14.75 level and looking like it will continue to fall back toward low levels near $12.50.

The Health Care Sector got a big pop, nearly 4%, on the hopes that the unaffordable care act will get fixed, repealed, corrected or something. Matching this was a similar move in the health insurers which gained 3% to 4% on average, led by Cigna's near 5% gain. The real star of the health care complex was Magellan which also happened to report earnings before the bell. The Company reported earnings that beat on the top and bottom lines and raised full year guidance to range whose low end is 4% above the previous guidance and 20% above the consensus estimate. Shares of the stock soared nearly 18% on the news.

Mylan reported after the bell. The company was expected to report year over year growth in both revenue and earnings and delivered one out of two. Revenue grew 13% year over year while adjusted earnings came in down -3%. Headline GAAP earnings per share was a loss of -$0.23 due mainly to epipen issues, and some other issues plaguing the company. Shares had been up as much as 7% during the day, closed with a gain near 5%, and then fluctuated around those levels in the after hours.

The Indices

Today's action really was a tale of two markets. The early, overnight, preopening session was nothing but bloodshed and carnage; the indices fell more than 5% and looked like the onset of serious selling. The surprising thing was that it just didn't last, as soon as the Trump victory was secured futures began to rise and kept rising into the open of the session and throughout the day. The star of today's show was the Dow Jones Industrial Average which gained about 1.70% and tickled a new all time high. The blue chips created the longest white candle in many many years. Today's range was nearly 800 points and that is not counting the deepest of the overnight losses. The candle is strong, moving up from the long term up trend line, breaking through to a new high, and is confirmed by both indicators. Looks like a pretty strong buy signal to me although tomorrow may not be the best day to go rushing in.

The Dow Jones Transportation Average made the smallest gains in today's session, only about 1%, but managed to make a new high relative to its recently broken trading range. The transports extended their break to new long term highs and are confirmed by the indicators. Next upside target is near 8,500.

The S&P 500 made the second biggest gain today, nearly 1.25%, after losing more than -5% in the pre-opening session. The index created a large white candle moving up from the 2,120 support line and a long term up trend line. Today's action took the index up above the short term moving average to approach the current all time high and is confirmed by the indicators. The all time high is less than 1.5% above today's close and could be easily reached this week if upside momentum continues.

The tech heavy NASDAQ Composite made the third smallest gain today, near 1%, but is also quickly approaching the current all time high. The index created a long white candle and close above the short term moving average and a previous all time high. The indicators are rolling over and beginning to confirm the move although it is not complete. Next target is the current all time high, near 5,340, a break above that would be bullish.

Today wasn't so much about Trump as it was about the election. The uncertainty is mostly over, instead of two wildly different agendas that may or may not be the future, we've got one agenda to focus on the possibilities it brings. In terms of the market, business and the economy... I'm hopeful.

From a business perspective I can understand how the thought of tariffs on goods returning to the States is concerning. Mitigating that I think is the chance to repatriate off-shore earnings at a reasonable tax rate and a more competitive corporate tax rate here at home, both of which will help free up cash for investment and growth. At the same time, a more competitive tax rate and the possibilities of tariffs would preclude the need for inversions and may even entice some US businesses to bring production of goods intended for the US market back to the US. I just heard a fellow on TV estimate that a 15% corporate tax rate could boost S&P 500 earnings growth by 18% all by itself, think about that for a minute.

Today's action was very positive in my opinion and just may be the signal I've been waiting for. The indices are making a strong bounce from support levels near/at long term trend lines, supported by economic trends and earnings outlook with the very real possibility Trump could unlock the economy and unleash growth. I'm still cautious but it's time for me to start nibbling when the opportunities present themselves.

Until then, remember the trend!

Thomas Hughes

New Plays

Solid Trend

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company is recovering from an unfortunate event. Rent a Center posted weak earnings after a roll out of a new software system caused capacity issues in Q3.


RCII - Rent a Center - Company Profile

Rent-A-Center, Inc., leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. It offers durable products, such as consumer electronics; appliances; computers, including tablets; smartphones; and furniture, including accessories under rental purchase agreements. The company also provides merchandise on an installment sales basis; and offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks within retailer's locations. It operates retail installment sales stores under the Get It Now and Home Choice names; and rent-to-own and franchised rent-to-own stores under the Rent-A-Centre, ColorTyme, and RimTyme names. As of December 31, 2015, the company owned and operated approximately 2,672 stores in the United States, Canada, and Puerto Rico, including 45 retail installment sales stores; 1,444 Acceptance Now kiosk locations in 40 states and Puerto Rico; 532 Acceptance Now direct locations; and 143 stores in Mexico, as well as franchised 227 rent-to-own stores in 31 states under the Rent-A-Center, ColorTyme, and RimTyme names. Company description from FinViz.com.

For Q3, the company posted earnings of 11 cents compared to estimates for 9 cents. Revenue of $693.9 million missed estimates for $698.4 million. Same store sales fell -8.4% but that was actually better than the 9.8% estimates. For the full year they guided to earnings of $1.05-$1.15 and revenue of $2.07 to $2.10 billion.

On the surface those results were terrible. The CEO said the "Q3 earnings were negatively impacted by unexpected capacity-related system outages following the full implementation of our new store information management system within our core U.S. stores" and he was "terribly disappointed." Fortunately, the problem is now behind them and Q4 is normally a strong quarter.

Earnings Jan 25th.

Shares crashed from $13 to $8 on the earnings and have now rebounded over the last four weeks to $11. The trend over the last month has been steady and there is no reason to expect that to change over the next month. If the market is going to be positive now that the election uncertainty has passed, then the stock should do well.

With a RCII trade at $11.25

Buy RCII shares, initial stop loss $10.15

Optional: Buy Dec $12.50 call, currently 20 cents, no stop loss.


No New Bearish Plays

In Play Updates and Reviews

Oversold to Overbought

by Jim Brown

Click here to email Jim Brown

Editors Note:

In a period of only three days, the markets have completely reversed their oversold conditions. That is good news and bad news. Just like we do not want to short the market after nine days of declines, we do not want to buy the market after three days of monster gains.

The market rebound stopped us out of two positions with no news on either of the stocks. It is going to be tough to add new plays until the market digests these gains. The analyst consensus is for a continued rally but not necessarily on Thursday. The market needs to consolidate and then pick a direction. There were $1.4 billion in market on close sell orders on the NYSE today. That represents a lot of portfolio managers deciding to exit winning positions because they are not expecting further gains in those stocks.

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

SHLD - Sears Holdings
The short stock position was stopped out at $11.75.

SSYS - Stratasys
The short stock position was stopped out at $19.45.

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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

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BULLISH Play Updates

MENT - Mentor Graphics - Company Profile


No specific news. Minor gain in a positive market. 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


No specific news. New 3-month intraday low. Big rebound from the opening dip but only a minor gain for the day.

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


Shares spiked on the market rebound to stop us out. It was not company related. There was a new article saying that multiple suppliers to Sears and Kmart have reduced shipments and are seriously restricting the amount of outstanding invoices because they fear a bankruptcy in early 2017. Once this market hysteria passes I will add this back to the play list.

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:

Closed 11/9/16: Short SHLD shares @ $10.92, exit $11.75, -.83 loss.

SSYS - Stratasys Ltd - Company Profile


No specific news. Market rebound stopped us out. It was not a stock specific rebound.

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:

Closed 11/9/16: Short SSYS shares @ $19.97, exit $19.45, +.52 gain.

VXX - Volatility Index Futures - ETF Description


The VXX is going back to a new low if the market remains positive.

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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