Option Investor

Daily Newsletter, Monday, 12/5/2016

Table of Contents

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

Market Wrap

Follow Through Or Petering Out?

by Thomas Hughes

Click here to email Thomas Hughes


The broad market climbed higher, the blue chips setting new all time highs. Are we seeing follow through or the last legs of the Trump rally petering out? A look at the charts says it all, the post-election Trump Rally is petering out but this does not mean that the continuation of the greater bull market and longer term rally begun with the Trump election has come to an end, only that near term outlook is a little shaky and no wonder, there are 3 major central bank meetings over the next 2 weeks along another boat load of macro-economic data. And whatever geopolitical tensions Trump can stir up with his tweets.

Today's action was largely influenced by the Italian referendum, shrugged off, while the global market awaits Mario Draghi and the ECB. The EU central bank is set to announce its latest policy decision, no changes expected, this week. The Italian referendum, it mostly means no changes in Italy for another year or two, but also that Italian banks may face hard times in the future. Asian markets were down on the news, having closed long before the rebound staged by EU indices. In the EU markets were happy with the results, opening with a gain from last week's closing low and extending that gain throughout the session. The DAX led with gains in the range of 1.6%.

Market Statistics

Futures trading indicated a positive open all morning, in the range of 0.5%. Trading was a little choppy but held that range into the opening bell, setting a new all time intraday for the Dow as soon as trading commenced. There was a small pop right after the open, taking the indices up to the highs of the day but after that action was very lack luster. The indices tread water near or just below their highs although they did manage to remain in the green across the board up to and until the close of the session.

Economic Calendar

The Economy

Only one economic report today, released at 10AM. The ISM Non-Manufacturing Index jumped an unexpected 2.4% to hit 57.2. The gains were made on strong Activity, New Orders and Employment. Activity came in at 61.7%, New Orders at 57% and Employment at 58.2% and show expanding levels of growth across the industry.

Moody's Survey Of Business Confidence fell -2.9% to 29.6, the lowest level in 6 weeks, as global sentiment takes a hit. Mr. Zandi says that despite a dimming of outlook for both current and future conditions confidence remains high and shows an economy expanding in line with potential.

The 4th quarter earnings cycle is getting closer and closer and in fact begins this week with the first 2 companies will report for the 4th quarter. That being said it is still a few weeks before things really get started. The 3rd quarter is mostly over though too, 99% have reported, the final 5 report this week and next week. The blended rate of earnings is 3.1% and likely to stand through the official end of the season.

Looking forward to the fourth quarter, full year and next year. Fourth quarter earnings growth expectation is 3.3% and likely to rise at least 4% by the time the reporting cycle is all said and done, final target in the range or 7.5% to 8.5% year over year earnings growth. At this time full year 2016 blended rate is 0.1%, also likely to rise by the time the 4th quarter season is wrapped up. Next year, full year 2017 is expected to see year over year growth of 11.4%, 11.5% in the 1st quarter and 10.7% in the 2nd.

There is quite a bit of data out this week and next, the two biggest items the ECB meeting this week and the FOMC meeting next week. In and around all that are reads on CPI, PPI, housing, factory orders, the consumer, retail sales and much much more. Tomorrow the calendar is light with Productivity/Unit Labor Costs, Trade Balance and Factory Orders... nothing market moving here.

The Dollar Index

The Dollar Index saw profit taking and pull back on the heels of the Italy referendum. The referendum itself doesn't really have that much impact on the dollar but it did spark buying in the euro. The index fell a little more than -0.5% to break back below the recently broken long term high and potential support level in favor of stronger support at the short term moving average. The moving average did halt the move and the indicators are, so far at least, consistent with support at this level. If support holds it will be the 2nd of 2 successively higher support levels, the first set early last month at $97.50. For now, support is near the 100 level and looks like it will be tested further, a break could go as low as $98.65, possibly December 8th when the ECB meets.

The Oil Index

Oil prices continue to drift higher on OPEC hopes, I remain skeptical. OPEC production, with caps, is still at a level that contributed to the current supply/demand imbalance and will do nothing to alleviate it, if they even live up to the agreement. Prices may continue to rise into the near term but I think there is more than a 50/50 chance the bottom will fall out sooner or later. The risk is that demand will actually pick up to match production but that is not expected either. WTI settled up 0.25% but fell in the after hours, shedding close to -1% on profit taking.

The Oil Index is trying to sustain a break out and may be gathering strength. The index gained just over 1% in today's session to trade above the 1235 resistance level (the 50% retracement level dating back to 2008 and of importance many times since) but was halted at the 1,250 level. Today's candle is a small spinning top, above potential resistance, with rising indicators. The indicators, both MACD and stochastic, suggest that the index is gaining strength, the caveat is that the MACD peak is not yet showing a lot of strength and stochastic is still below the upper signal line and as yet equally consistent with potential resistance. A break above 1,250 would be bullish and could go as high as 1,300 in the near term, a fall from this level has support targets near 1,200, 1,175 and 1,150.

The Gold Index

Gold prices fell in today's session despite the drop in the dollar. Spot prices fell roughly -1% intraday, closing with a loss near -0.5% and trading near $1170. Despite today's weakness the dollar is getting stronger and has at least a stable if not bullish outlook, so likely to keep pressure on gold. The ECB meeting this week could be a mover, if they do anything to materially weaken or strengthen the euro and by extension the dollar and gold. Support target for gold should it fall is near $1,150.

The gold miners slipped some today but found support, at least in the near term. The Gold Miners ETF GDX opened with a loss, fell lower, and then rebound to create a white bodied candle but still closed with a slight loss. The ETF remains in consolidation near the lower end of a triangle-like range and near the lows of a 4 month down trend. The indicators are consistent with a bullish signal but in light of the short term down trend, and outlook for gold, are more likely indicative of correction/consolidation within a down trend and precursor to further downside. Support is near $20, a break below here could go as low as $16.50 in the near to short term.

In The News, Story Stocks and Earnings

The VIX fell nearly -14%, dropping from the short term moving average and falling below 12.50 once again. The fear index appears to have decided not to spike again, and to retreat back near the long term lows. This is an indication of lower option prices and a good time to buy and/or put on protection in case of unexpected volatility. It may also indicate that the rally in equities isn't as over as it may look.

Apple is in the spotlight again and for a number of reasons, as if it ever really isn't in the spotlight. Not only is Trumps evolving China policy having an impact on the brands penetration into the country the company is experiencing a sharp decline in Watch sales while at the same time entering the world of self driving cars. Today's news is that Watch shipments have fallen -70% and that the company is interested in self-driving software. Shares of the stock fell more than -1.0% intraday and appear to be headed down toward the lower end of a trading range near $105.

Rexnord Corporation, maker of things like ball bearings and gears, came under scrutiny following some tweets from President Elect Trump concerning their proposed move to Mexico. The company is planning on moving a factory from Indiana to Monterrey, shifting 300 jobs to Mexico, but has yet to comment on Trump's attention. Shares of the stock fell more than -1% in today's session.

The Indices

The indices drift higher today but not all are looking to strong at this point. Today's action was led by the NASDAQ Composite which posted a gain of 1.01%. The tech heavy index created a medium sized white bodied candle, bouncing up from support levels near 5,250 and the short term moving average. The indicators do not yet confirm but this is a trend following bounce so has a good chance of leading to something more. Support is 5,250, a break below here is likely to go down to the long term up trend line near 5,000. First target for resistance is near 5,400.

The next biggest gainer in today's session is the S&P 500. The broad market climbed 0.58% and did not, but is coming to close to, set a new a high. The index is also bouncing from potential support levels, near 2,190, and setting up for a move higher. The indicators are not yet rolled over but as yet consistent with a consolidation/test of support within an uptrend and could confirm with only a day or two of further upside. Support is near 2,200, resistance near 2,215, a break beyond either could take the index 50 to 100 points in the near term.

The Dow Jones Transportation Average made the third largest gain in today's session, 0.36%. The transports created yet another small spinning top candle in the slow drift up to test the current all time high. The indicators continue to weaken although there is some renewed bullishness in the stochastic; %K has made a bullish crossover of %D within the upper signal zone, a sign of continued strength within an uptrend. MACD is a bit of a worry, it continues to wind down toward 0, but is at least coming off of a very strong peak and one likely to be followed up by another wave, if past history is any indication. Upside target is near 9,300 and the current all time high.

The Dow Jones Industrial Average made the smallest gain in today's session, only 0.24%. The blue chips created a very small black candle after opening at a new all time high, and then falling slightly from there. The index appears to be drifting higher, confirmed by a bullish stochastic crossover high in the upper signal zone. Momentum is winding down to 0 here as well, but coming off a 2 year extreme peak so prices are likely to continue rising from here, or at least retest these levels if they should fall. The 19,000 looks like a good target for near term support, 18,750 next target. Upside targets are near 19,500 for now, 20,000 longer term.

Today's action look like more upward drift and more sector rotation, led by the NASDAQ. The indications are not real strong but it looks like the post-election Trump rally is not quite over. It is getting extended, it is in danger of correction, there are reason to be wary but for now the near trend is up and long term outlook is positive, for both the economy and earnings growth. Between now and then there will surely be a buyable dip, and that is what I am waiting for. It could come over the next two weeks, sparked by central bank meetings and economic data, but that is TBD. I remain cautious but bullish, letting my winners run, keeping an eye out for correction and looking for the next great entry in the bull market.

Until then, remember the trend!

Thomas Hughes



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New Plays

Transports Breaking Out

by Jim Brown

Click here to email Jim Brown
Editor's Note

Optimism about a suddenly improving economy and the chances for another boost in 2017 has powered the transports on a 1,000 point rally since early November and it is not slowing down.


YRCW - YRC Worldwide - Company Profile

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2015, this segment had a fleet of approximately 8,500 tractors comprising approximately 7,300 owned and 1,200 leased; and approximately 32,000 trailers consisting of approximately 27,300 owned and 4,700 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, and other specialized offerings; expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates my.yrcregional.com and NewPenn.com, which are e-commerce Websites offering online resources to manage transportation activities. As of December 31, 2015, this segment had a fleet of approximately 6,600 tractors, including approximately 5,500 owned and 1,100 leased; and approximately 13,000 trailers comprising approximately 11,300 owned and 2,000 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. Company description from FinViz.com.

YRCW shares were crushed in early November after they reported earnings of 42 cents compared to estimates for 53 cents. Revenue of $1.22 billion missed estimates for $1.23 billion. The CEO said the results were impacted by a soft industrial backdrop and lower fuel surcharge revenue compared to the prior year. Who would have thought that low fuel prices would hurt earnings for a trucking company. Apparently, they have engineered their fuel charge program to profit from the fluctuations in the rates. Many companies do this since fuel prices are very volatile. Instead of changing the rates monthly and confusing customers, they project a quarterly rate. If they guess right they make a few cents on the fluctuations. If they guess wrong they lose a few cents but the customer rate is fixed for the quarter. With fuel rates relatively low and stable over the last couple quarters, the rate fixers probably assumed too low a base.

The CEO also said the less than truckload (LTL) sector remained steady despite the recent economic headwinds. With the economy ticking up for late Q3 and Q4, and this being a holiday shipping quarter, the Q4 earnings should be significantly better.

Earnings Jan 26th.

The transportation sector as evidenced by the Dow Transports ($TRAN) is on the verge of breaking out to a new high. Trucking is leading the charge.

With a YRCW trade at $14.05

BUY YRCW shares, currently $13.89, initial stop loss $12.50

Optional: Buy Jan $15 call, currently 61 cents. No initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Weakness Over?

by Jim Brown

Click here to email Jim Brown

Editors Note:

It may be too soon to say the profit taking is over but the time remaining in 2016 means funds will still be in buy mode. With the market rally to new highs, fund managers will be under pressure to keep up the window dressing right through the end of December. The lack of a sell off on the Italian vote suggests the Fed meeting next week is the only rally hurdle.

I seriously doubt the Fed will cause problems but they will raise rates. The market has already priced in a rate hike so any nervousness should be limited.

The continuing problem is the afternoon selling. This suggests no conviction by the bulls and active sellers looking for bounces as a selling opportunity. We need the markets to return to closing on their highs rather than their lows.

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

FIT - FitBit
The short stock position was entered at the open.

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BULLISH Play Updates

BOJA - Bojangles Inc - Company Profile


The company said it was going to participate in two investor conferences. The first is on Tuesday at a Barclay's event. The second on Wednesday will be a KayBanc Capital Markets event. Shares gained 3.5% to $18.75.

The company announced the pricing of the secondary offering at $17.25. The offering will close on December 6th.

Original Trade Description: November 30th.

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.

On Wednesday 11/30 shares dropped with the market to stop us out of the initial position. I still believe the company will set a new high once the secondary is priced.

Position 12/2/16 with a BOJA trade at $18.65

Long BOJA shares @ $18.65, see portfolio graphic for stop loss.

TRN - Trinity Industries - Company Profile


No specific news. Shares still fighting resistance at $28.25.

Original Trade Description: November 30th.

Trinity Industries, Inc. provides various products and services for the energy, transportation, chemical, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and couplers, axles, and other equipment, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2015, this segment had a fleet of 76,765 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other protective barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Company description from FinViz.com.

Trinity reported earnings of 56 cents that beat estimates for 52 cents. Revenue was $1.11 billion. They guided for full year earnings of $2.10-$2.20 per share. They currently have a trailing PE of only 8.94. Liquidity is currently over $2 billion.

They booked orders for 1,260 railcars in the quarter. Their order backlog is $3.7 billion representing orders for 34,870 railcars. The inland barge segment has an order backlog of $177.3 million. The order backlog for wind towers was over $1.0 billion.

Earnings Jan 25th.

Trinity has a good business. They have received fewer orders because of the energy slowdown but they have plenty of backorders to work through as the energy sector rebounds.

Shares rose nearly $1 today in a weak market and are holding right at 52-week resistance at $28. A breakout here could run to $35.

Position 12/1/16 with a TRN trade at $28.25

Long TRN shares @$28.25, see portfolio graphic for stop loss.

Optional: Long Jan $30 call @ 60 cents, see portfolio graphic for stop loss.

UIS - Unisys Corp - Company Profile


President Obama appointed Unisys CEO Peter Altabef to the National security Telecommunications Advisory Committee. With only 46 days left in office, I wonder if this appointment continues into the next administration?

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.

Position 11/30/16 with a UIS trade at $15.25:

Long UIS shares @ $15.25, see portfolio graphic for stop loss.

No options recommended because of price and spreads.

XLF - Financial SPDR ETF - ETF Profile


New 8-year high for the XLF.

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

FIT - FitBit - Company Profile


IDC said shipments of Apple watches fell -70% in Q3. Samsung shipments increased 90% compared to +11% for FitBit. Xiaomi and Garmin were also taking market share. Shares of FIT fell to a new historic low.

Original Trade Description: December 3rd.

Fitbit, Inc. provides wearable health and fitness tracking devices. It offers various products, including Fitbit Zip, an entry-level wireless tracker that allows users to track daily activity statistics, such as steps, distance, calories burned, and active minutes; Fitbit One, a clippable wireless tracker, which tracks floors climbed and sleep, as well as daily steps, distance, calories burned, and active minutes; Fitbit Flex, a wristband-style tracker that tracks steps, distance, calories burned, active minutes, and sleep; and Fitbit Charge, an activity and sleep wristband, which tracks steps, distance, calories burned, active minutes, floors climbed, and sleep. The company also provides Fitbit Alta, a customizable wristband that offers call, text, and calendar notifications when paired with the user's phone and SmartTrack automatic exercise recognition; and Fitbit Charge HR, a wireless heart rate and activity wristband. In addition, it offers Fitbit Blaze, a smart fitness watch that provides multi-sport functionality, tracks outdoor cycling activity, and provides run cues; Fitbit Surge, a fitness watch that features a GPS watch, heart rate tracker, activity tracker, and smartwatch; Aria, a Wi-Fi connected scale that tracks weight, body fat percentage, and body mass index; and Fitbit accessories that include bands and frames for Fitbit Blaze, bands for Fitbit Alta, colored bands for Fitbit Flex, colored clips for Fitbit One and Fitbit Zip, device charging cables, wireless sync dongles, band clasps, sleep bands, and Fitbit apparel. The company offers its products through consumer electronics and specialty retailers, e-Commerce retailers, sporting goods and outdoors retailers, and wireless carriers; and corporate wellness channels, as well as directly worldwide. Company description from FinViz.com.

FitBit is finding it is hard to move from the "nice to have" category to the "have to have" category. Quite a few of the millennial generation already have a FitBit but the majority are stuck in the back of a dresser drawer never to be worn again. The fitness watch is a fad. How many of us have bought a treadmill, stair climber, "insert your device name here" and it is either gathering dust in the corner or was eventually sold off in a yard sale to make room in the house?

The fitness watch is a great device if you are really into fitness. Since America is the most obese population on the planet, apparently the fitness crowd is in the minority.

When FitBit reported earnings, they guided for a bleak Q4 shopping season. There are too many competitors and not enough buyers. Last week FitBit offered between $34 and $40 million for Pebble, a smartwatch pioneer that has also fallen on hard times. Considering Pebble turned down an offer for $750 million in 2015, that shows you how tough the sector has become. Pebble has been laying off workers and trimming the product line. FitBit wants Pebble because of their unique operating system.

FitBit revenue rose at triple digit percentages in the prior three years. Over the last three quarters revenue has risen 50%, 47% and 23% in Q3. FitBit is only expecting 5% growth in Q4. Net income has posted double digit percentage declines in each of the last three quarters.

FitBit is in trouble. Some of the major watchmakers are now offering fitness watches and Apple is also chipping away at that market segment. FitBit closed at a historic low on Friday at $8 and it is almost a sure bet they will hit $5 without a surprise acquisition announcement by somebody else.

Earnings Feb 1st.

Position 12/5/16:

Short FIT shares @ $8.18, see portfolio graphic for stop loss.

Optional: Long Feb $7 put @ 50 cents.

VXX - Volatility Index Futures - ETF Description


The lack of a decline on the Italian vote caused nearly a $2 drop in the VXX to a new historic 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.

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