Option Investor

Daily Newsletter, Tuesday, 11/29/2016

Table of Contents

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

Market Wrap

Much Ado about Nothing

by Jim Brown

Click here to email Jim Brown

The markets were tame despite strong economics. Today was a nothing day and sometimes that is the best kind.

Market Statistics

The big cap indexes dipped at the open but recovered in the afternoon to close mildly positive. It was touch and go at the close as a sell program appeared about 2:45 to knock -6 points off the S&P but it still squeezed out a 3-point gain.

Tuesday was a consolidation day where the buyers and sellers were almost evenly matched and it gave traders a chance to take a breath and decide what they are going to do the rest of the week.

On a 15 min chart the broadest market index shows how choppy the market has been the last two days. This is normal in a consolidation and it normally resolves to the upside.

The economics started strong when the Q3-GDP revision rose to +3.2% growth. That is the highest quarterly growth in two years. I discussed at length in the original release that it was a function of the pull forward of several billion dollars in soybean exports that normally occur in Q4. This was a onetime event and is not reflective of the actual growth.

Consumer spending declined from 2.88% in Q2 to 1.89% in Q3. Fixed investment declined -0.15% with inventories adding 0.49%. Corporate profits soared +6.62% after a -0.61% decline in Q2.

Over the prior three quarters, growth was 0.9% in Q1, 0.8% in Q2 and 1.4% in Q3.

Consumer confidence for November exploded higher from 100.8 to 107.1 and the highest level since July 2007. The Trump victory has apparently energized consumers. The present conditions component surged from 123.1 to 130.3. The expectations component rose from 86.0 to 91.7.

The rise in confidence after the election has not translated into new buying plans. Consumers planning on buying an appliance rose from 51.8% to 52.4% of respondents. Homebuyers increased from 5.5% to 6.5% but prospective auto buyers declined from 13.4% to 12.5%.

The idea of lower taxes, replacing the Unaffordable Care Act and creating more jobs seems to have caught fire. Now Trump only needs to do the impossible and make those things happen.

The Texas Service Sector Survey rose from 3.0 to 12.6 and a five-month high. The current conditions component rose sharply from 0.3 to 15.6 but the big gains were in the expectation component. The respondents are looking at the future through rose-colored glasses with a spike from 12.2 to a whopping 32.6. The general business activity index jumped from 9.1 to 29.1.

Economic expectations are busting out all over thanks to the election results and just the fact that it is now behind us.

The first big report of the week is out tomorrow with the ADP Employment. Unless jobs fell under 100,000, which is not likely, the actual number will have no impact on the Fed rate hike decision in December. They will hike and it is already priced into the market.

The bigger event for Wednesday is the OPEC production decision. That could impact equities in a big way depending on the outcome. If they fail to come up with a credible agreement that is verifiable the oil market is likely to crash back to $40.

Regardless of what they decide or fail to decide, they will more than likely announce an agreement of some sort to save face after three months of promising they would cut production. If it is readily seen as just a token announcement, the prices will likely fall and take equities down with oil.

Even if they do announce a credible agreement, there are so many facets that we could still get a sell the news event. The Saudi Oil minister said this week that Iran, Libya and Nigeria would be exempt. That means the three countries with the largest potential increases in production will not be bound by the agreement. That alone makes any agreement nearly worthless.

On Thursday, the ISM Manufacturing Index is the most important of the manufacturing reports for the month. It is expected to show a minor gain.

The Nonfarm Payrolls on Friday will be less important than normal because the Fed's mind is already made up. About the only real danger would be an extremely hot report over 250,000 that could create concerns about a half point hike in December rather than a quarter point. I am not sure the market would even care since the rate trajectory is already accelerating.

There was very little stock news since the earnings cycle has slowed to a trickle. Specialty pharmacy company Mallinckrodt Plc (MNK) reported earnings of $2.04 that 15.1% and beat estimates for $1.98. Revenue of $887.2 million rose 13.9% to beat estimates for $851.5 million. They ended the quarter with $280.5 million in cash and generated $140.8 million in free cash flow for the quarter. The company appears to be in good shape with a strong drug portfolio seeing double-digit sales increases. Apparently, I am the only one that saw that because shares fell -9% to $52. The company did say it saw a double-digit decline in generics revenue after an 18% decline in fiscal 2016. Analysts seized on that one point and shares crashed.

Tiffany (TIF) reported earnings of 76 cents compared to estimates for 67 cents. Revenue increased only 1.2% to $949.3 million and beat estimates for $923.7 million. This was the first quarterly sales increase in eight quarters. Same store sales declined -2% but that was better than the -3% analysts expected. They warned that sales could be impacted by the security cordon around 5th Avenue and Trump Tower. The company said there were very few shoppers because of the mob scene, protestors, heavy police presence and TV camera crews. Shares rallied 3% on the earnings.

Autodesk (ADSK) reported an adjusted loss of 18 cents compared to estimates for 24 cents. Revenue of $489.6 million beat estimates for $476.8 million. However, shares fell -$2 in afterhours when they guided to a loss of 32-39 cents for Q4 on revenue of $460-$480 million. Analysts were expecting 31 cents and $488.5 million. Autodesk is in the middle of a transition away from a software sales model to a subscription model, which will make earnings more regular in the future. Their "new model" recurring revenues rose 88% to $414 million. This was their first quarter of selling only subscriptions and no longer selling the software. New cloud subscriptions rose to a record.

Splunk (SPLK) reported earnings of 12 cents that beat estimates for 8 cents. Revenue of $244.8 million also beat estimates for $230.4 million. They guided for Q4 revenue of $286-$288 million and analysts were expecting $285 million. License revenue rose 34% to $140 million. Shares spiked to more than $63 in afterhours after closing at $57.41. Late session selling saw the stock sink back to $59.

Apple shares traded flat despite KGI Securities claiming iPhone sales in 2018 will set records. The analyst said Apple is testing more than 10 different models of iPhone 8 beta phones. He said the iPhone 8 plus two additional reiterations of the iPhone 7 could power record sales. Suppliers have been told to plan on 120-150 million units in order to avoid the problems Apple is having with the model 7. They cannot make phones fast enough after having cut component orders twice leading up to the model announcement. Apple is expected to sell 78 million phones in Q4, up from 75 million in the year ago quarter.

Online sales are setting records this year. Black Friday sales set a new record at $3.34 billion even though "Black Friday" has somehow morphed into a ten-day period surrounding the day after Thanksgiving. We do not have numbers for the other 9 days but from the look inside the UPS truck when it delivered today, there was plenty of buying. My driver knows I write about package demand and his truck was still fully loaded when he arrived at 3:PM. Starting next week he will have a holiday helper for the rest of the year. The vast majority of the packages had Amazon tape on them.

On Cyber Monday, sales rose 12.1% to $3.45 billion according to Adobe Digital Insights. They track over 80% of the major online retailers. Estimates were for 9.4% growth. Analysts believe the surge in post election buying will compensate for the slowdown the weeks before the election. The online shopping estimates for the full holiday season are currently $91.6 billion and 11% growth. ShopperTrak said actual visits to brick and mortar retailers declined on Black Friday weekend by more than 1%. The National Retail Federation said 3 million fewer shoppers visited stores over the weekend, while 5.5 million more shopped online. In total 108.5 million shopped online compared with 99 million that shopped in stores. For the entire retail sector, the November/December total is expected to rise 3.6% to $655.8 billion in sales.


If I were going to report any more stock news, I would have to make it up because there was nothing happening. The same is true on the market news. Nothing happened.

The markets opened slightly lower, dip buyers appeared and the losses were erased. A sell program hit at 2:45 that knocked 6 points off the S&P but all the big cap indexes closed slightly positive.

This was a textbook example of consolidation. There was not enough conviction on either side to extend either the gains or the losses and the contest ended in a draw.

While this type of consolidation will take longer than a sharp V bottom sell off and rebound, it is preferable. Those of us with stop losses may avoid being stopped out and be able to keep existing positions. On the V bottom method, everyone is forced to take profits and stock ownership is transferred to new buyers. We could still have a sharp decline at any time but so far, there are no signs of a pending collapse.

The S&P slipped back to 2,200 but held over that psychological level. It would not be unreasonable for a drop back to 2,175 but that would be a little more painful.

The Dow traded in a narrow 82-point range with most of the movement in the opening dip. UnitedHealth Group (UNH) added about 40 points to the Dow and along with Goldman's 14 Dow points they kept the index in positive territory. The advancers and decliners were about even and there was no sign about future direction. However, I doubt UnitedHealth is going to gain another $5 on Wednesday.

The Dow is holding well over psychological support at 19,000 and closed only 30 points below the historic high. It would be a hard argument to say the Dow is weak when it is holding the high ground on a consolidation day.

The Nasdaq Composite traded at new intraday highs in early afternoon but gave back 25 points with the late day sell program. The big cap tech stocks are still weak with Facebook and Netflix closing flat and Amazon losing 4 points. Google managed to remain positive but a $2 gain for an $800 stock is still flat.

The 5,400 level remains resistance but we have a solid pattern of higher lows so I do expect an eventual breakout.

The small cap indexes closed fractionally lower with the Russell 2000 losing -1.60 and the S&P-600 losing 68 cents. Given their massive gains over the prior three weeks, they could lose a lot more and still remain in a bullish uptrend. The Russell has closed negative for two days. Let's hope it is not starting a 15 day streak in the opposite direction.

I would not be surprised to see a new move higher begin at any time OR for the current consolidation process to continue the rest of the week. We had three weeks of massive gains. It only makes sense that it will take more than two days of mediocre selling to remove those overbought pressures.

Remember, Wednesday is month end window dressing. It is also MSCI index rebalance and the OPEC decision. Volume will be very high and normally there is no change in direction. However, normal may be the wrong word to use for Wednesday.



Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


New Plays

Heads or Tails

by Jim Brown

Click here to email Jim Brown
Editor's Note

Calling market direction for Wednesday is a coin toss. I do not believe we have determined market direction for the rest of the week. While I expect the market to resume its upward movement in the days ahead, the severity of the declines has been misleading. We could be setting up for a move in either direction.

Wednesday is month end. It is also the MSCI rebalancing and the OPEC production decision. I am recommending we wait until Wednesday night to consider new positions.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Small Caps Weak

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell closed down for the second day but the damage was minimal. However, I looked at a lot of small cap charts and quite a few were fractionally lower. Only one of our positions posted a gain and that was the XLF ETF.

The big cap indexes closed barely positive. There was weakness at the open but buyers appeared to lift the indexes higher in the afternoon. Unfortunately, a large sell program hit at 2:45 that knocked -6 points off the S&P. We have to expect this choppy trading until the profit taking runs its course.

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

FTK - Flotek
The long stock position was stopped with a trade at $12.00.

OCLR - Oclaro
The long stock position was stopped with a trade at $9.35.

UIS - Unisys
The long stock position remains unopened until a trade at $15.25.

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

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

BOJA - Bojangles Inc - Company Profile


No specific news. The play opened exactly as recommended. Shares fell to $18.05 at the open on the secondary offering headline and then rebounded 60 cents. It should move sideways until the offering is priced and completed, then return to rally mode.

Original Trade Description: November 28th.

Bojangles', Inc. operates and franchises limited service restaurants in the United States. Its restaurants serve chicken items, made-from-scratch buttermilk biscuits, flavorful fixin's, and iced tea. As of September 25, 2016, the company had 699 system-wide restaurants, including 301 company-operated and 398 franchised restaurants primarily located in the Southeastern United States. Bojangles', Inc. was founded in 1977. Company description from FinViz.com.

In early November they reported earnings of 25 cents that beat estimates for 21 cents. Revenue of $133.2 million missed estimates by only $200,000. They guided for the full year to earnings of 92-95 cents and revenue of $530.5-$533.5 million.

Earnings February 2nd.

Shares spiked $1.50 on the earnings and continued to make solid progress until today's minor bout of profit taking. However, after the bell they announced that certain existing shareholders had filed to sell six million shares in an underwritten public offering. Nearly every broker on the street is participating in the offering so there will not be a problem selling the shares. The company will receive none of the proceeds with everything going to the shareholders.

Shares fell to $18.30 in afterhours after closing at $19.70. Typically, when a company gets hit on a secondary, it rebounds almost immediately to the original price unless the shares are sold significantly under the market, which is not expected in this case.

I am proposing we try to buy the shares at the open on Tuesday. If there is any additional decline at the open to support at $18 or so, that would be a $2 discount to where they traded on Friday.

Position 11/29/16:

Long BOJA shares @ $18.05, see portfolio graphic for stop loss.

No options recommended because of the wide spreads.

FTK - Flotek - Company Profile


No specific news. Crude prices fell nearly $2 ahead of the OPEC meeting on fears they will not announce a credible agreement. Energy stocks declined sharply. We were stopped out for a minor gain.

Original Trade Description: November 12th.

Flotek Industries, Inc. develops and supplies oilfield products, services, and equipment to the oil, gas, and mining industries in the United States and internationally. The company's Energy Chemistry Technologies segment designs, develops, manufactures, packages, and markets chemistries under the Complex nano-Fluid brand for use in oil and gas well drilling, cementing, completion, stimulation, and production activities, as well as for use in enhanced and improved oil recovery markets. This segment also constructs and manages automated material handling facilities; and manages loading facilities and blending operations for oilfield services companies. The company's Drilling Technologies segment inspects, manufactures, sells, markets, and rents down-hole drilling equipment that are used in energy, mining, and industrial drilling activities through direct and agent-based sales. Company description from FinViz.com.

In the Q3 cycle they reported a loss of 5 cents on revenue of $73.7 million. That was slightly more than the estimates for a 3-cent loss. Revenue estimates were for $79.5 million. The company explained their 16.2% decline in revenue saying there was a 43.2% reduction in the active rig count in Q3 compared to Q3-2015. In other words, their available business was cut nearly in half but they only recorded a 16% decline in revenue. That was actually a 1.0% increase sequentially from Q2.

Flotek services oil wells and especially new wells with their down hole products including their patented Complex nano-Fluid (CnF) technology that is used in fracking wells. Unlike fracking chemicals used by others, the Flotek CnF chemicals are completely non-toxic and have been proven to provide a slippery surface in the reservoir so that oil flows freely. This nontoxic chemical mix made from citrus oils is seen as a plus for producers constantly under fire for potential ground water contamination.

With rigs going back to work and drilled but uncompleted wells being brought online, the company said they were seeing signs of recovery in the sector. The drop in crude prices to $43 last week failed to depress the stock.

FTK has put in a bottom at $11 and could be ready to move towards the September highs at $16.

If OPEC actually announces some kind of production agreement on Nov 30th, the sector could respond aggressively.

Earnings Feb 1st.

Position 11/14/16:

Closed 11/29/16: Long FTK shares @ $11.72, exit $12, +.28 gain.

GNC - GNC Holdings - Company Profile


No specific news. Fell fractionally to support at $14.45.

Original Trade Description: November 15th.

GNC Holdings, Inc., operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

Just over a month ago there was a contingent of Chinese buyers circling GNC when it had a market cap of about $4 billion. When they reported earnings and lowered guidance that market cap fell to about $1 billion. Shares fell from $22 to $13 making the company even more attractive for the Chinese buyers.

The key here is not the U.S. or European business. The key point in a Chinese acquisition is the health conscious Chinese consumer. In China there are plenty of health products but most are scams or poorly processed with large amounts of unknown fillers. The health food and vitamin market is not well managed and all sorts of scary products exist.

GNC as a global brand is the answer. Chinese consumers would feel comfortable buying the brand and knowing there were no harmful ingredients.

Over the last several days, GNC shares have started ticking up again. GNC has hired Goldman Sachs to find a buyer and it is only a matter of time before that happens. The uptick in the shares could be due to rumors leaking out about a potential transaction. Option prices have also escalated suggesting something in progress.

Earnings Jan 26th.

Position 11/16/16:

Long GNC shares @ $14.75, see portfolio graphic for stop loss.

No options recommended because of price.

IDTI - Integrated Device Technology - Company Profile


No specific news.

Original Trade Description: November 14th.

Integrated Device Technology, Inc. designs, develops, manufactures, and markets a range of semiconductor solutions for the communications, computing, consumer, automotive, and industrial end-markets worldwide. It operates in two segments, Communications; and Computing, Consumer, and Industrial. The Communications segment offers communication timing products, such as clocks and timing solutions; flow-control management devices comprising Serial RapidIO switching solutions; multi-port products; telecommunications products; static random access memory products; first in and first out memories; digital logic products; radio frequency products; and frequency control solutions. The Computing, Consumer, and Industrial segment provides clock generation and distribution products, programmable timing devices, computing timing solutions, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, and signal integrity products, as well as sensing products for mobile, automotive, and industrial solutions. Company description from FinViz.com.

IDTI reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $184.1 million barely edged ahead of estimates for $184.0 million. Revenue rose 8% making the 12th consecutive quarter of revenue growth.

They announced multiple new products for the quarter including a new 5G product in corporation with IBM for the connected car. They also obtained certification for their second production facility for automotive capabilities.

Earnings Jan 30th.

Shares spiked from $21 to $24 on the earnings then settled in for two weeks of post earnings depression. Over the last two days shares has ticked higher again and closed at $23.60 on Monday. This has been resistance from early October and from back in June. With the positive earnings and a positive market I expect the stock to breakout this time.

Position 11/15/16:

Long IDTI shares @ $23.69, see portfolio graphic for stop loss.

No options recommended because of price.

OCLR - Oclaro Inc - Company Profile


No specific news. Support at $9.30 broke to stop us out for a 51 cent loss.

Original Trade Description: November 19th.

Oclaro, Inc. designs, manufactures, and markets lasers and optical components, modules, and subsystems for the optical communications, industrial, and consumer laser markets worldwide. The company's products generate, detect, combine, and separate light signals in optical communications networks. It offers client side transceivers, including pluggable transceivers; line side transceivers; tunable laser transmitters, such as discrete lasers and co-packaged laser modulators; lithium niobate modulators to manipulate the phase or the amplitude of an optical signal; transponder modules for transmitter and receiver functions; and discrete lasers and receivers for metro and long-haul applications. Company description from FinViz.com.

Oclaro posted strong earnings of 14 cents compared to estimates for 10 cents. Revenue of $136 million also beat estimates for $132 million. The company raised guidance for Q4 to revenue in the $146-$154 million range.

Piper Jaffray said Oclaro will be the only company shipping products in volume in the next two quarters. They cited a lack of price competition today that will appear in mid 2017 as new competitors enter the market in volume. The industry is currently under capacity constraints. PJ also said there was strong demand from China and traction in the U.S. was accelerating due to the surge in IoT devices and video streaming.

Earnings Jan 31st.

Shares surged after earnings then faded the prior week in the Nasdaq uncertainty. Last week the stock broke over resistance at $9.25 and is now breaking out to five-year highs. I believe the rally will continue now that it is in breakout mode.

Position 11/21/16:

Long OCLR shares @ $9.86, see portfolio graphic for stop loss.

No options recommended because of price and spreads.

UIS - Unisys Corp - Company Profile


No specific news. Shares only declined a nickel and the high was $15.15 to miss our entry point by 10 cents.

This position remains unopened until a trade at $15.25.

Original Trade Description: November 26th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. Company description from FinViz.com.

The information technology sector is undergoing a transformation and older companies are becoming renewed as they change focus to the new cloud services offerings. Unisys was founded in 1886 making it 130 years old. You can imagine how many times they have changed products and focus over that period.

The company is focusing on cloud-based products and software as a service. They also offer physical security for data centers both physical security and software security. They offer a broad range of outsourcing services for building managers and clients. They have been selling their noncore assets and focusing their skills to build specialized capabilities to win industry specific projects.

They reported adjusted earnings of 41 cents compared to estimates for 29 cents. Revenue of $683.3 million beat estimates for $664 million.

Earnings Jan 24th.

Looking at a daily chart is scary since shares have risen from $10 to $15 since the election. However, the rise has been calm and without any material volatility on the days the market was weak.

On the weekly chart, resistance at $14.50 was broken on Thursday and there is nothing else to slow it down until $20.

Just in case the market tanks on Monday morning, I am putting an entry trigger on the position.

With a UIS trade at $15.25, buy UIS shares, initial stop loss $13.50.

No options recommended because of price and spreads.

XLF - Financial SPDR ETF - ETF Profile


Minor gain with support holding.

Original Trade Description: November 16th.

The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.

The ETF is comprised of 44% banks, 20% capital markets, 19% insurance, 11% diversified financial services and 6% consumer finance.

All of those sectors will do better as rates rise. As of today the CME FedWatch Tool shows a 91% chance of a rate hike in December as well as a 91% chance for the February meeting and 92% for March. If they do hike in December the odds will decline for February but depending on their commentary the March meeting will still be on the table. Multiple Fedwatchers have speculated there could be 3-4 rate hikes in 2017 if the economy continues to improve.

The Fed has to hike rates in 2017 in order to have some room to maneuver if the business cycle rolls over and a recession appears. We are in the third longest expansion in history and we are due for another recession soon.

The banks rallied on the rise in treasury yields and the expectations for the December rate hike as well as the potential for decreased regulation. President elect Trump has said he would kill regulations harming the banking industry. There is even talk of modifying Dodd-Frank.

Banks have rallied significantly and I would not suggest buying the actual ETF after the big gain. However, I do not believe the gains are over. The gains last week spiked the ETF to a 7-year high but the 2007 highs were over $30.

On Tuesday, somebody bought 300,000 contracts of the March $23 call at an average of 55 cents. That was $16.5 million in option premiums. That takes some serious conviction. I am recommending we follow them and buy the same call option. That way our risk is limited to $50 per contract. I am willing to bet $50 that the ETF will be over $23 by March. This is a long term position and there will not be a stop loss.

Position 11/17/16:

Long March $23 call @ 29 cents. No stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


New intraday low.

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 done 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.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now