Option Investor

Daily Newsletter, Saturday, 1/7/2017

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

The Dow came very close to the 20,000 level only to miss it by 0.37 of a point.

Weekly Statistics

Friday Statistics

If only one Dow stock had gained 5.6 cents at exactly the top in the market, the Dow would have hit 20,000. The total dollar value of all 30 Dow stocks at 12:43 PM on Friday was $3,021.80. That was 5.6 cents away from the $3,021.86 that would have equaled Dow 20,000. That is about as close as you can get without actually winning the prize. The prior resistance at 19,950 moved up to 19,975 during the week and then stepped up again to 19,990 but it was rock solid.

The initial effort lost momentum when the headlines broke about the airport shooting in Florida and then fear of the weekend increased in late afternoon. While there was $900 million in market on close buy orders, it was not enough to overcome the weekend worries. Retail investors were not going to buy a market top just before a Friday close. The potential for an overseas or geopolitical event was too strong to take the risk.

The morning began with a sharp market drop after the Nonfarm Payrolls for December came in at +156,000. That was down from 204,000 in November and less than the 175,000 analysts expected. The economy needs job growth of 150,000 per month to keep pace with the number of new job seekers fresh out of school or newly immigrated.

The November number was revised up from 178,000 to 204,000. The October number was revised down from 142,000 to 135,000. The three-month moving average is now 165,000, down from 182,000.

Manufacturing payrolls gained 17,000 and service industries gained 144,000 jobs. Government jobs rose 12,000. The unemployment rate ticked up slightly from 4.6% to 4.7% because the labor force rose 184,000. That pushed the labor force participation rate up one tenth to 62.7%. The broader U6 unemployment rate declined slightly to 9.2% and a post recession low.

Average hourly wages rose 4 cents but is now up 2.9% year over year and that is a big plus. However, it is the result of new laws lifting the minimum wage rather than steady earnings growth.

The report was neutral and everyone was focused on the Dow rather than the economics. In the February report for January, the government will release the benchmark revisions for all of 2016 and they are normally a major event.

On Thursday, the ADP Employment report also missed estimates. The report showed a gain of 153,000 jobs, down from 216,000 in November. Analysts expected 172,000.

Factory Orders for November declined -2.4% after a +2.7% gain in October. Durable goods orders fell -4.5%. Core capital goods orders rose +0.9%. The report was ignored.

The trade deficit increased to -$45.2 billion for November after a -$42.6 billion deficit in October. This was the largest deficit over the last 12 months and the third largest since 2012. Analysts expected -$42.5 billion. Imports increased from $228.6 billion to $231.1 billion and exports declined from $186.3 billion to $184.8 billion. Petroleum imports rose 5.9% by volume and 6.5% by value. Exports are being depressed by the strong dollar. The report was ignored.

The calendar for next week is tame compared to last week. The Producer Price Index on Friday is the most important report but it will not move the market.

The Fed heads are back in action with eight speeches including Yellen's on Thursday evening. Now that we are in a new year, the focus will be on determining how many rate hikes we should expect in 2017. The market has priced in two hikes but the Fed suggested there could be three. Some analysts believe a hyperactive administration that actually gets some things done early in the year could potentially allow for four hikes.

The big news for next week is the start of the Q4 earnings cycle. There are just a few brand name companies reporting early in the week but Friday is the key day. With several of the big banks reporting on the same day, we have the potential for a major market move. They are expected to beat current estimates but there is always the potential for a sell the news event since that expectation is widespread. The big dog in the Dow, Goldman Sachs, does not report until the following Wednesday along with Citigroup. These bank earnings will set the stage for expectations for the financial sector for the rest of the year. Analysts will try to factor in the earnings forecasts along with the Fed rate hike forecast to predict their own earnings revisions for 2017. Citigroup stands to earn an extra $3 billion a year if the Fed hikes rates four times. That is how important those rate hike forecasts are to bank earnings.

In stock news, Sears Holdings (SHLD) sold the Craftsman brand to Stanley Black & Decker (SWK) for roughly $900 million. Sears had hoped to get $1.5 to $2.0 billion for the brand. This shows how desperate they were to raise the cash. Sears acquired the brand for $500 in 1927.

The problem with the deal is twofold. Sears only gets $525 million at closing and then $250 million at the end of three years. They also get 2.5% of Craftsman sales through 2020 and 3% through Jan 2023 and 3.5% thereafter. After 15 years they have to pay a royalty of 3% on all future sales.

The problem for SWK is that 90% of Craftsman sales are made through Sears and Sears-related retail stores. That breaks down to 65% from Sears, 20% from Sears Hometown and 5% from Kmart. All of the Sears stores are on deathwatch. Sears announced the closing of 150 stores earlier in the week. That was 109 Kmart stores and 41 Sears stores. The company is raising $1 billion, $500 million in a secured loan against real estate and $500 million in a standby letter of credit facility guaranteed by the CEO, Eddie Lampert and his company ESL Investments. They need the money because they are losing about $800 million a year. Analysts claim they need to raise $1.5 billion to make it through 2017. Their pension obligations are underfunded by more than $2 billion. Same store sales were down more than 12% in the first two months of Q4. Sears is also considering selling the Kenmore and Diehard brands.

Stanley is not going to get much from the declining sales at Sears. They are going to have to remarket the brand at every outlet they can find like Home Depot, Lowes, etc.

Amgen (AMGN) won a permanent injunction against Sanofi and Regeneron selling drugs related to the cholesterol drug Repatha (evolocumab) in the USA. Amgen won a jury trial on the patent case back in March. The injunction begins in 30 days so the two companies can seek an expedited review. Repatha is already approved in 40 countries. Shares of Amgen rallied $4 on the news.

Illumina (ILMN) announced plans to spin off its joint venture named Grail. Ilumina currently owns more than 50% and will reduce its ownership to 20%. Grail also intends to raise $1 billion in a series B financing handled by Goldman Sachs. By reducing its ownership, it will be able to remove about 30 cents per share in costs, which will greatly improve Illumina's earnings post spin. Grail will also become a major customer of Illumina. Grail is developing a blood test to screen for cancer using Illumina's gene-sequencing process. When Illumina's former CEO announced the creation of Grail a year ago, he called it "The single largest opportunity for sequencing today." Apparently, either the thought process has changed or they have decided they will be more profitable selling their services to Grail rather than owning Grail. Shares of ILMN spiked $7 on the news.

Boeing (BA) reported deliveries of 185 passenger jets in Q4 and 748 deliveries for the year. They also delivered 40 military planes/satellites in Q4 and 185 for the full year. Those included F-18s, F15s, AH-64 and CH-47 helicopters C-17 Globemasters and other aircraft.

They also received orders for 668 aircraft worth $94 billion at list prices. Boeing had guided for 745-750 planes. The company booked 198 new orders since December 20th suggesting they were pressing hard and increasing discounts. Boeing was at a disadvantage to Airbus in aircraft sales because of the strong dollar. Wide body sales have slowed but sales of narrow body aircraft like the 737 have increased. The totals do not include any aircraft for Iran. Boeing has an order backlog of 5,715 commercial jets, with the majority various 737 models.

Disney (DIS) scored another upgrade with RBC Capital Markets raising them from sector perform to outperform and hiking the price target from $101 to $130. Evercore upgraded them earlier in the week saying the current trends will extend well past 2017. RBC said Disney would sign a new round of affiliate deals in 2017 that will see revenue growth accelerate.

Teva Pharmaceutical (TEVA) warned on guidance for 2017. The company now expects earnings of $4.90 to $5.30 and analysts were expecting $5.40. Revenue is now forecast in a range from $23.8 to $24.5 billion. Analysts were looking for $24.8 billion. Teva said currency fluctuations (strong dollar) would reduce revenue by $800 million. Shares declined -8%.

It was not a good week for retailers. Macy's (M) announced it was closing 68 stores and cutting 10,000 workers as the online retail trend is killing in store shopping. JC Penny's (JCP) joined the club of those reporting a decline in holiday sales with a -0.8% decline compared to analyst estimates for 3.0% growth. Of the 11 retailers that have reported holiday sales, eight of them saw sales declines. Only PVH and The Gap showed positive sales although Gap sales were weaker than expected. The Limited said they are closing all 250 of their stores as of Saturday. Chalk up another market share gain for Amazon.

Kohl's (KSS) warned full year earnings were now expected to be $2.92-$2.97 compared to prior guidance of $3.12-$3.32. Same store sales were down -2.1% in the holiday period.

However, MasterCard SpendingPulse said holiday sales at brick and mortar stores rose 4%. The International Council of Shopping Centers polled 1,000 consumers and they claimed they spent an average of 16% more than last season.

The problem is the increased promotions to maintain market share. Stores are selling more items but at a cheaper price, so total sales dollars tend to decline. The only stores that seemed to do well were the extreme discounters like T.J.Maxx and Ross Stores and the high-end stores like Nordstroms (JWN). Stores with a niche market like Ulta beauty and brands like Lululemon and Adidas did well. Costco (COST) had a good season with a 3% rise in same store sales.

Once all the numbers are tallied e-commerce sales are expected to have risen between 16%-19% for the holiday season. Desktop spending rose 12% but mobile sales have not yet been released.

The FANG stocks were responsible for most of the market gains last week. Netflix (NFLX) rallied to a new high close on Thursday at $131.81 on solid analyst chatter. Facebook shares rallied to a two-month high with an $8 gain for the week. The last four analyst price targets have averaged $152. The company hired former NBC anchor Campbell Brown to lead a news partnership team. She will "help news organizations and journalists work more closely and more effectively with Facebook." Facebook has been under fire lately for publishing fake news that got more impressions than the real news.

Amazon (AMZN) rallied $47 for the week to a two-month high after news broke at CES that Chinese firm Huawei Technologies, which makes Android phones, said its flagship phones will come with an app that gives users access to Alexa, the intelligence behind Amazon's Echo device. Since the Android OS is a Google product that suggests Alexa is extending her lead over the competing Google Assistant product. However, the Assistant is still expanding. Nvidia announced a major upgrade to Shield TV and it will feature the Google Assistant app.

According to Nvidia, "Shield TV is a 4K HDR Android open-platform media streamer built on bleeding-edge visual computing technology that delivers unmatched experiences in streaming, gaming and AI." The TV also supports Netflix, YouTube, Google Play Movies, Amazon Video and VUDU. "The SmartThings Hub Technology integration can turn Shield into a smart home hub that can connect to hundreds of smart home devices." To do this they have created the Nvidia Spot. This is a golf ball sized microphone that you put in every room of your house to allow your entire house to be connected. This video of a piece of the CEO's keynote address at CES is well worth watching. Nvidia AI Video Explanation or Complete CES Keynote

If you only buy one stock to hold for several years, Nvidia is that one stock.

Crude prices were somewhat responsible for the Dow failing to hit 20,000. Crude prices rallied to $54.32 at the open but then declined to $53.32 and that caused Dow components Chevron and Exxon to dip into negative territory. That produced a drag on the Dow. That could also be a challenge for next week if crude prices begin to fade.

Oil prices have stalled at the $54 level because of the lack of new headlines out of OPEC. The next focal point will be the meeting of the monitoring committee on the 21st. Theoretically, they are monitoring the production of the producing countries and will know if they are following through on their commitments. What we do not know is whether they will report on their findings OR whether their findings will match reality or merely be wishful thinking.

Last week was still a holiday week so rig activations were slow. Only 4 oil rigs were added with an addition of 3 active gas rigs. Over the next three weeks, we should see activations increase as long as oil holds over $50.




We may have reached a tipping point in the market. With the Nasdaq and S&P breaking out to new highs and the Dow more than likely going to hit 20K next week, we may have escaped the anticipated early January sell cycle. Of course as soon as I begin to focus on a breakout over 20K that will be the day the correction appears.

Everything appears bullish except for the Russell 2000 with two days of declines to push the index back towards support. The Russell has been trading almost perfectly sideways for the last three weeks between 1350-1390. There is no immediate indication of a potential breakdown except for the oscillators. The MACD and RSI are both negative. The Russell normally functions as the market sentiment indicator and it is suggesting all is not well. The index is not declining but except for the big rally on Wednesday, it is not moving up either.

Market breadth has been negative the last two days with decliners 4:3 over advancers. Even on Friday with the Nasdaq and S&P positive at new highs, the down volume of 3.4 billion shares was higher than the up volume of 2.8 billion.

The rally is being powered by the big cap tech stocks. Those are the same stocks that were unloved during most of December. This appears to be rotation back into the techs and out of the stocks that produced the November rally. On Friday, Nasdaq decliners of 1,427 beat advancers of 1,201. There were only 91 new highs and the second lowest day since the election. The lowest was 83 on Friday before New Years. The highest was 551 on December 8th with an average of about 175 per day for December. Despite the new index high the breadth is shrinking.

The winners list is all the well-known big cap names. Since the FANG stocks plus Apple make up more than 25% of the Nasdaq weighting, the big gains in those few stocks drive the index.

The Composite index closed over 5,500 for the first time in what would appear to be a valid and convincing breakout.

The Dow has moved sideways for three weeks with every attempt to move to 20,000 thwarted by resistance above 19,950. After three weeks of distribution selling at this level, those that wanted to sell have had their chance and every dip was bought. Markets do not have to drop 5% to consolidate gains. They can consolidate in place with a sideways movement, which is what we have been seeing since December 13th. Calls for a January correction have now faded and it would appear the next move could be higher.

Goldman Sachs never dipped below support at $235 despite multiple attempts to sell the stock. Goldman closed at a new high at $245 on Friday and a new breakout appears imminent. That $3.58 gain on Friday was worth about 27 Dow points. Any breakout from here could easily drag the Dow over the 20K level.

The S&P pushed through resistance at 2,275 to close at 2,277 and a new high. Two points is hardly a breakout but it is a step in the right direction. The big cap tech stocks were pushing the S&P higher. Advancers were 287 to 184 decliners so the tech support tilted the scales into positive territory for the S&P.

With the failure to see a big sell off in early January the worry now is the potential for pre inauguration selling in order to avoid a potential terror attack and hit to the market. That would seem to suggest a successful inauguration would be the all clear signal for additional buying. However, there is also an analyst contingent that is warning to expect a sell the news event because all the excitement will be over and the hard work will begin.

If we continue to worry about what might happen, we could miss out on what will happen and that could be a continued rally. I know there is never any certainty but the markets failed to decline last week when they had the perfect chance and plenty of reasons. It is entirely possible the promised hope and change could continue to entice investors into the market until there is a policy setback in congress.

There is also the risk that a weak earnings cycle could derail that hope. We have seen numerous earnings warnings over the last couple weeks and that could increase as companies get closer to reporting. I view this as a limited risk because the "strong dollar" excuse is already known and companies are no longer being punished for that excuse.

Markets making new highs tend to continue making new highs. Breakouts bring additional buying because nobody wants to miss out on the potential gains of a new bull phase in the market.

Touching 20,000 on the Dow is no longer the key. With the Nasdaq and S&P making new highs, the Dow needs to bust through 20,000 and close significantly higher to really fire up investors. If we see that this week, the rally could ignore any potential inauguration fears.

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Random Thoughts

No material change to sentiment last week. Apparently, everyone was just watching and waiting. This survey ended on Wednesday.

Last week results

Even the big CEOs have problems. Apple CEO Tim Cook saw his compensation package take a hit after Apple missed sales and earnings targets. His salary rose by $1 million to $8.75 million in total compensation but that was down from the $10.28 million he earned in 2015. The reason was a lowered incentive bonus. Apple executives received only 89.5% of their targeted annual incentive bonus because of the sales declines. I am sure they cried all the way to the bank.

The company took a hit when they removed the earphone jack from the iPhone 7 and then could not ship the AirPods because of technical problems. The new MacBook Pro was not well received and Consumer Reports failed to give it their seal of approval. That was a first for Apple.

Sales fell -4% to $215.6 billion, well below their target of $223.6 billion. Operating income declined -0.5%. Net sales were down -7.7% and earnings were down -15.7% from 2015 levels.

Apple shares are nearing a breakout to a 52-week high at $120.

There is some mind-blowing stuff being announced at CES this year. More than 200,000 people attend and analysts claim more than 200,000 new products will be announced.

LG was showing off their new 77 inch OLED TV that is an unbelievably thin 3.85 mm including the wall mount. The actual panel is only 2.57 mm thick. That is like hanging a piece of poster board on the wall. It also offers Active HDR and 4K resolution. The W7 model will begin shipping in March. No price was disclosed for what I would assume were obvious reasons. If you have to ask, you cannot afford it.

Dell announced its first 8K monitor. That is four times the pixels of a 4K monitor. The Dell UltraSharp 32 inch Ultra HD 8K Monitor starts at $4,999 and will be available on March 23rd on Dell.com

Microsoft demonstrated their Windows 10 Virtual Reality headsets that will be available from Dell, HP and Acer. The entry-level product will start around $300.

Remember Polaroid? Their back! The 80-year old company demonstrated their Polaroid Pop instant digital camera that produces classic 3x4 inch prints.

Qualcomm displayed its new 10-nanometer Snapdragon 835 processor for mobile phones. It is 35% smaller and uses 25% less power in order to extend battery life. The processor has (8) 64 bit CPU cores. It has an X16 LTE modem that is 10 times faster than 4G LTE with 1 Gb per second speeds. It supports a 32-megapixel camera with zero shutter lag and can record in 4K Ultra HD. It obviously supports a 4K Ultra HD display as well. The included Adreno GPU delivers graphics 25% faster and with 60 times more display colors. This processor is so far ahead of 2015 technology it is like comparing a Tesla Model X to a 1999 Buick.


Enter passively and exit aggressively!

Jim Brown

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New Plays

Drug Approved

by Jim Brown

Click here to email Jim Brown
Editor's Note

Horizon will present next week at the JPM Healthcare Conference. Hopefully the presentation will explain the gains in their orphan and rare disease drug programs.


HZNP - Horizon Pharma - Company Profile

Horizon Pharma plc, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; DUEXIS and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis; and PENNSAID for the treatment of pain of osteoarthritis of the knees. Its products also include MIGERGOT to treat vascular headache; RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus and multiple other indications; and KRYSTEXXA to treat chronic refractory gout. The company has a collaboration agreement with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer. Company description from FinViz.com.

Horizon recently received approval to sell the drug Quinsair in Canada. It was already approved in the EU. This is a drug for the management of chronic pulmonary infections in adults with cystic fibrosis. Only about 75,000 people around the world are candidates for the drug and 4,500 in Canada. They acquired the drug when they bought Raptor Pharmaceutical Corp in October.

The company also announced they had received a Notice of Allowance from the U.S. Patent office on the drug Ravicti. This will result in a patent being issued to Horizon that is good to 2030. Horizon has seven patented drugs and 11 drugs currently available for sale.

Shares of Horizon declined in early December after a late stage trial on another drug failed to achieve the desired result. Shares have been moving up steadily since that December drop. Friday's close was a 4-week high.

Horizon will present next week on the 10th at the JPM Healthcare Conference.

Earnings Feb 6th.

I am putting an entry trigger on the position just in case the market decides to roll over on Monday.

With a HZNP trade at $17.75

Buy HZNP shares, initial stop loss $15.85.

No options recommended because of wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Small Cap Divergence

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 declined again despite the new highs on the Nasdaq and S&P. The Dow failed again to hit 20K despite a full day of trying. The Nasdaq big caps powered the index to a new high but the Russell is going in the opposite direction. The small caps are normally the market sentiment indicator and they are telling us to remain cautious of the narrow breadth on the breakout.

The market turned slightly more bullish and a positive day on Monday with the Dow breaking out could lead to significant short covering.

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

VXX - VIX Futures ETF
The short position remains unopened until a trade at $29.50.

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

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BULLISH Play Updates

No Current Bullish Plays

BEARISH Play Updates

AKS - AK Steel - Company Profile


AKS announced a $40 per ton price increase for carbon steel and shares declined slightly. That would be good for profits but could reduce some sales.

Original Trade Description: December 17th.

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

The steel sector rallied on expectations for Trump to place additional tariffs on imported steel and make American steel more competitive. While I am all for fair trade changes, that is likely to take many months if not a year or more to implement any changes what will help the U.S. steel companies. It will be months or quarters after that before the changes actually begin to show up in the earnings of these companies.

Earnings January 24th.

AKS rallied from $4.93 before the election to $11.39 for a +131% gain. Shares faded somewhat last week but still closed at $10.38 on Friday. When the post election balloon bursts, this stock could decline significantly. I would expect that to happen in the first week in January. I definitely do not expect the stock to be making higher highs.

Position 12/19/16:

Short AKS shares @ $10.17. See portfolio graphic for stop loss.


Long Jan $10 put @ .69 cents. No initial stop loss.

IWM - Russell 2000 ETF - ETF Profile


The Russell is moving in the opposite direction of the large cap market. This suggests the bullish breakout by the big caps could be false.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,150 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


No material decline because of the mixed indexes. No harm, no foul because we are not yet in the position. We should get a market direction on Monday. The first week of the year can be choppy.

Original Trade Description: December 28th

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 began.

We exited the last short at $26.65 for a $7 gain back on December 13th. I am expecting the January volatility to lift the VXX back to $30. That will give us a great entry for the expected market rally in Feb/Jan where the VXX will crash again.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. 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. We may have to rotate in and out a couple times but it will eventually go to $10. Once we are in the position and profitable I will put a trailing stop loss on it. If the stop is hit 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.

I am putting an entry trigger on the position at $29.50, a level we saw on December 1st. I would expect this to be hit in early January. The VXX could rise well over $30 if the market really corrects so I am not putting a stop loss on the position until the correction is over.

With a VXX trade at $29.50

Short VXX shares, currently $24.62, no initial stop loss.

No options recommended because of price.

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