Option Investor

Daily Newsletter, Thursday, 1/12/2017

Table of Contents

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

Market Wrap

Trump Slump

by Thomas Hughes

Click here to email Thomas Hughes


Indices fell in the wake of Trump's 1st press conference post-election. Whether or not this is the onset of a deeper correction or just another of news driven volatility is yet to be seen. We've still a number of major catalysts at hand including earnings season, the ECB, the inauguration and the FOMC so I'm leaning toward the idea today's action is day to day news driven volatility and not the start of correction, at least not yet. The specific reason for today's slump, a lack of fiscal clarity in yesterday's press conference, could be easily rectified by Tweet at any time and likely clarified as early as minutes post-inauguration.

International markets sold off on the Trump press conference too. Asian indices were led lower by the Nikkei which lost nearly -1.25%, a stronger yen, another result of yesterday's presser, adding downward pressure to Japanese equities. European markets started the day in negative territory if barely, and then fell further on cues from our own. The DAX was one of the days biggest losers, closing with a loss slightly greater than -1% after hovering near break even for most of the early part of the day.

Market Statistics

Futures trading was relatively flat all morning, if in the red. The indices were indicated to open with losses in the range of -0.25% and that held into the open of trading. There was a little bit of data, jobless claims and import/export prices, but neither piece was enough to move the market. The open was a little hectic, the indices opened with losses as indicated and then proceeded to sell-off into the morning. The SPX hit it's low just after 11AM, slightly more than -21 points below yesterday's close and at the support of a long term up trend line, confirmed by the short term 30 day moving average, where it began a bounce that had, by the close, recovered nearly all of the day's losses.

Economic Calendar

The Economy

Initial jobless claims rose a less than expected 10,000, in addition to an upward revision of 2,000, to hit 247,000 in this week's data. The 4 week moving average of claims fell -1,750 to hit 256,000. This is the 97th week of claims below 300K, the longest streak since 1970. On a not adjusted basis claims rose by 16.9% versus an expected 12.2% but the numbers continue to diverge from last years data. YOY not adjusted claims are now -18.4% below last years levels and present a couple of possibilities. The first is that this year's data isn't tracking exactly in line in a day to day year over year comparisons and will soon catch up with last years spike in claims. The second is that the labor market has made a substantial improvement over last year, at least in terms of post-holiday labor force reductions.

Continuing claims fell -29,000 to hit 2.087 million, last week's figures were revised higher by 4,000, and the four week moving average of claims rose by 1,650. The recent rise in continuing claims has begun to subside but remains near 3 month highs. Despite this rise claims remain low relative to the long term trends and consistent with labor market health.

The total number of Americans claiming unemployment has begun to spike, as expected. This week's data, for the period ending 12/24, saw claims rise by 140,578 to hit 2.294 and a 10 month high. This spike in claims needs to be monitored but so far is as expected, in line with seasonal and long term trends. Based on the historical data we can expect to see claims spike again next week, possibly as high as 2.75 million, and then begin to subside going into the spring. If the data skews from expectation it'll be time to take a deeper look to see what may be happening. In related news Amazon and Taco Bell each announced today the intent to create 100,000 new jobs in the coming years.

Import/Export Prices data was released at 8:30AM, both rising on a month to month and year over year basis. Import prices are up 0.4% the November to December period and 1.8% year over year. Export prices are up 0.3% month to month and 1.1% year over year. Rising fuel prices drove the gains in import prices, non-agricultural goods the rise in export prices.

The Dollar Index

The dollar fell today on an absence of news pertaining to Trump's plan for the economy. The Dollar Index shed a little more than -1% intraday, falling below the short term moving average and the near term trading range to approach support targets near $100.50. The index was able to bounce back from the lows, confirming support at the previous long term high, but may test those lows again in the near term. Near term action is driven by a lack of news and a cooling of expectations, this leaves the index ripe for rally in the event of positive data, Trumponomic developments, ECB action, BOJ action or FOMC action. Tomorrow we'll get PPI data as well as retail sales and a couple of regional reports, next week it's the ECB, more data and the inauguration, the week after is clear and then the FOMC. Long term outlook remain dollar strong.

The Gold Index

Gold prices remain elevated on weaker dollar values. Today spot prices moved up to another new short term high, testing resistance at $1,200. The metal was able to move above $1,200 intraday but was capped at that level, closing with a loss of -0.10% at $1,195. $1,200 is likely resistance. This resistance is likely to hold while the dollar remains above support, a break above this level would be bullish in the near term with upside target near $1,235. In the near term uncertainty of FOMC intent and Trumponomics has softened the dollar and strengthened gold, short to long term remains skewed toward dollar strength and weaker gold as the economy strengthens and the FOMC raises rates. Tomorrow's PPI is an opportunity for sentiment to be reinforced, for good or bad.

The gold miners tried to move higher but hit resistance, just like the underlying metal. Today's action create a small to medium sized black candle that may be indicative of near term reversal. The bearish argument is that the candle looks like the 2nd of 2 tops in a near term double top pattern that would be trend following, and supported by gold outlook. The caveat is that the market could continue to lose faith in the FOMC or Trumponomics and cause a further decline in the dollar and rise in gold. The indicators are consistent with a peak within a downtrend, stochastic for one confirming resistance with a bearish crossover at the upper signal line, while %D is confirming resistance at the upper signal line. Near term support is just below today's close at the 50% retracement level and the short term moving average, a break below here is bearish and trend following with downside targets near $19.75 and $18.50.

The Oil Index

Oil prices rallied for a second day, extending a bounce from the bottom of a near term trading range, and gained more than 1.6%. WTI closed with a gain of $0.84 to trade above $53 for the first time in a week. The bounce is driven on rising demand in China and further signs the Saudis and OPEC are serious about production cuts. China's state run oil company says that demand will grow in 2017 to hit a record high with net imports rising more than 5.25%. On the OPEC front the Saudi's have announced further cuts, to be enacted in February, in compliance with the OPEC deal. Others have also shown signs of compliance but this is tempered by rising production in the US.

The Oil Index did not rise, falling instead to post a loss near -0.5%. The loss is not major, merely sideways drift within the 1 month trading range, and above support. Support is at the bottom of the range, near 1,260, and confirmed by the short term moving average. The indicators are consistent with range bound trading and leave open the possibility for another test of support. A break below the short term moving average is not necessarily bearish, additional support may be found along at 1,235 and the 50% retracement line. The short and long term outlook for this sector remains bullish.

In The News, Story Stocks and Earnings

Delta Airlines reported earnings before the bell and beat expectations. Earnings and revenue fell from the year ago period, primarily due to the new pilot agreement, but both came in better than expectations. Along with this the company provided upbeat outlook that helped to lift the stock in pre-opening trading. The stock opened flat however and had a volatile day as profit taking set in. The indicators are set up in a strong buy signal, a break above resistance would be bullish for the near to short term.

Earnings season gets a kick in the pants tomorrow morning when 3 of the nations largest banks report earnings; JP Morgan, Wells Fargo and Bank of America. Their reports will set the tone for the entire season and could spark a big move. In terms of expectations, this is their chance to come in better than expected and possibly raise full year outlook in response to the elevated rate-hike environment we now find ourselves in. If they fail to meet expectations, or give only tepid outlook, we could see them lead the market lower. The Financial Sector SPDR XLF shed more than -1% intraday but was able to recover most of those losses before the close. Today's action was light, another day in a month of sideways trading within a tight consolidation band as the market gears up for earnings, the indicators are incredibly neutral and could go either way. A break below $23.25 is bearish, a break above $23.75 is bullish, either could result in a move of $3 to $4 in the near to short term.

The VIX moved higher in early trading, tested the short term moving average, and then retreat to close with a loss. The fear index is trending sideways at long term lows, indicative of an unencumbered market and a high potential for rally. The indicators have rolled over into a sell signal, consistent with a long term reduction in volatility, and suggestive of an extension of the current rally. The index is at/near long term historical lows so I'm not sure it can go lower, trending near these levels is good enough.

The Indices

The bears tried to take control but it was not much of an effort. The move did nothing more than take the indices down to near term support levels and provide entry for the bulls. Today's leader was the Dow Jones Transportation Average with a loss of -0.46% and may also be the most bullish looking of the charts today. The index tested support at the short term moving average, just below the recently broken previous all time high, with indicators rolling into a strong trend following entry. Stochastic has already fired the trend following bullish crossover and confirmed with the strong signal, MACD is close behind. Resistance is at the previous all time high and current all time high and look like they will be tested at least, a break above is bullish in the near to short term.

The Dow Jones Industrial Average is runner up in terms of loss having shed -0.32% in today's session. The index created a small bodied candle with long upper and lower shadows forming a spinning top of more substantial size. The index is trending sideways within a range and while not overly bearish, does not look overly bullish either. The indicators are listless and consistent with range bound trading and have not formed the kind of signal as seen on the DJT chart. Near term support is the short term moving average near 19,675, resistance is 20,000. A break past either will have near term implications at least with possible moves in the range of 500 to 1000 points.

The NASDAQ Composite fell -0.29% but created a near perfect hammer doji, opening and closing at almost the exact same price. This doji confirms near term support at 5,500, further confirmed by the indicators. Both indicators have confirmed support with trend following bullish crossover that could lead the index higher into the short term. Near term resistance is the new all time high, set yesterday, with upside targets near 5,750.

The S&P 500 posted the smallest loss in today's session, only -0.21%. The broad market created a small doji candle testing support along a long term up trend line. Support is at 2,250, confirmed by the short term moving average and the indicators, a break below which would be bearish. The indicators are consistent with a trend following entry, stochastic has already fired the early signal, is in process of confirming with a stronger signal with MACD following close behind. Upside target is 2,300 in the near term and 2,500 in the short to long.

I am very encouraged by how things are developing. The charts are setting up nicely, earnings and economic outlook are both positive and expansionary, the only thing keeping me from getting really excited and going full-bull is the fact that there are still a few hurdles ahead. Those include earnings, the inauguration and the FOMC and of those, earnings and the inauguration are the more important and the earnings question could be answered tomorrow. Once past those hurdles I see the long term secular bull market continuing on to new highs. I'm bullish but still a bit cautious, waiting to see what the next week will bring.

Until then, remember the trend!

Thomas Hughes

The advertising for the End of Year subscription special is over. However, we will leave the link open until midnight Sunday in case anyone else wants to take advantage of the savings.

New Plays

Acquisition Ahead?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Are competing drug companies about to join forces? News on Monday suggests the RNA field is about to narrow.


ARWR - Arrowhead Pharmaceuticals - Company Profile

Arrowhead Pharmaceuticals, Inc. develops novel drugs to treat intractable diseases in the United States. Its pre-clinical stage drug candidates include ARO-HBV to treat chronic hepatitis B virus infection; ARO-AAT to treat liver disease associated with alpha-1 antitrypsin deficiency; ARO-LPA to reduce production of apolipoprotein A; ARO-AMG1, which is developed against an undisclosed genetically validated cardiovascular target; and ARO-F12, a potential treatment for factor 12 mediated diseases, such as hereditary angioedema and thromboembolic disorders. The company also develops ARO-HIF2, a drug candidate for the treatment of clear cell renal cell carcinoma. Arrowhead Pharmaceuticals, Inc. has collaboration and license agreements with Amgen, Inc. The company was formerly known as Arrowhead Research Corporation and changed its name to Arrowhead Pharmaceuticals, Inc. in April 2016. Company description from FinViz.com.

Arrowhead shares were crushed back in November on bad news but have been rebounding since December 23rd. On Monday Silence Therapeutics announced it has acquired six million shares and an 8.4% stake in ARWR. Silence is developing its own RNA technology that could be a competitor to Arrowhead or synergistic to Arrowhead.

Arrowhead said it was not informed of the stake until just a few minutes before Silence made the public announcement. Arrowhead said there have been no discussions about a potential transaction. Now that Silence has an 8.4% stake and has proven it is serious, those discussions could begin.

There is no guarantee the stock will continue moving higher on this news but I am sure there are other investors also following the headlines and willing to bet a couple bucks a share that something will happen and there will be further headlines.

Earnings March 15th.

Buy ARWR shares, currently $2.17, no initial stop loss.

I am not recommending them but the March $3 calls are 25 cents.


No New Bearish Plays

In Play Updates and Reviews

Sellers Pressing

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sellers are lowering the resistance levels with each passing day but buyers are still active. The Dow rebounded from a -181 point drop as dip buyers rushed into the market. However, the rebound came to a dead stop at 19,900 when resistance was 19,950 on Wednesday and 19,975 on Tuesday. Sellers are becoming more aggressive but there appears to be plenty of dip buyers just waiting for an opportunity. Eventually one side or the other will lose its conviction. The afternoon rebounds are bullish but lacking in total volume. The early surge runs out of volume once resistance levels are hit.

However, Friday's before 3-day weekends are notorious for late day selling rather than risk potential headline events overseas while our market is closed. There is also the headline risk surrounding the inauguration next Friday. While the market appears to be turning more bullish, there are still potential potholes in our path.

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

BAK - Braskem
The long stock position was entered at the open.

VXX - VIX Futures ETF
The short position remains unopened until a trade at $24.50.

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

BAK - Braskem S.A. - Company Profile


Moody's said the sale of the quantiQ division to GTM Holdings was credit positive. Braskem will receive $172 million for the non-core asset. Shares opened higher but faded with the weak market.

Original Trade Description: January 11th.

Braskem S.A., together with its subsidiaries, produces and sells thermoplastic resins. Its Basic Petrochemicals segment offers olefins, such as ethylene, polymer and chemical grade propylene, butadiene, isoprene, and butene-1; BTX products comprising benzene, toluene, ortho-xylene, para-xylene, and mixed xylenes; fuels, including automotive gasoline and liquefied petroleum gas; intermediates, such as cumene; and other basic petrochemicals, which include ethyl tertiary butyl ether, solvent C9, and pyrolysis C9. This segment also supplies electric energy, steam, compressed air, and other products to second-generation producers. Its Polyolefins segment produces polyethylene, including LDPE, LLDPE, HDPE, ultra-high molecular weight polyethylene, and EVA; green polyethylene from renewable resources; and polypropylene. This segment's products are used in plastic films for food and industrial packaging; bottles, shopping bags, and other consumer goods containers; automotive parts; and household appliances. Its Vinyls segment produces polyvinyl chloride, caustic soda, chlorine, hydrogen, caustic soda flake, and sodium hypochlorite. The company's USA and Europe segment produces polypropylene in the United States and Germany. Its Chemical Distribution segment distributes solvents, including aliphatic, aromatic, synthetic, and ecologically-friendly solvents; engineering plastics; hydrocarbon solvents and isoparafins; and general purpose chemicals, such as process oils, chemical intermediates, blends, specialty chemicals, and pharmaceuticals. The company also imports and exports chemicals, petrochemicals, and fuels; produces, supplies, and sells utilities, such as water and industrial gases; and provides industrial services. The company was formerly known as Copene Petroquimica do Nordeste S.A. and changed its name to Braskem S.A. in 2002. Company description from FinViz.com.

In early December, Braskem announced a potential settlement in a probe that was started in 2014 when controlling shareholders Odebrecht and Petrobras (PBR) became a target in a corruption scandal. Between 2006-2014 the company had paid $250 million into an account created by Odebrecht to pay bribes to politicians and political parties in Brazil.

The potential settlement would allow those shareholders to eliminate their ownership and the money collected be divided between the USA, Switzerland and Brazil. The deal would formally erase any potential liabilities for Braskem. On December 14th Braskem said it was paying $920 million in fines over six years with half paid now and the rest paid in annual installments starting in 2018 Source

JP Morgan immediately upgraded the company from neutral to overweight.

Braskem is the largest petrochemical in South America.

Shares have been moving up steadily now that it is free from the probe that has weighed on shares for the last two years. The prior high was $32.

Earnings Feb 9th.

Position 1/12/17:

Long BAK shares @ $23.11, see portfolio graphic for stop loss.

No options recommended because of the wide spreads.

HZNP - Horizon Pharma - Company Profile


Shares tried to rebound from the Trump comments but the weak market keep pharma stocks to minor gains. No specific news.

Original Trade Description: January 7th.

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.

Position 1/9/17 with a HZNP trade at $17.75

Long HZNP shares @ $17.75, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

BEARISH Play Updates

IWM - Russell 2000 ETF - ETF Profile


The Russell ETF rebounded nearly $2 as the broader market saw a huge recovery on dip buying. They can keep the indexes off their lows but they cannot seem to return to the highs. Resistance levels are dropping.

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.

SHLD - Sears Holdings - Company Profile


No specific news. An article in the Wall Street Journal said Sears is one "sick puppy" and the only alternative may be bankruptcy. The author said closing stores, cutting workers and selling off brands is only decreasing its ability to recover. It is a cancer that is eating away at every part of the Sears operating model. Shares declined 30 cents.

Original Trade Description: January 9th

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short several times before. We were stopped out on Dec-30th when the CEO arranged a bridge loan to get them out of trouble temporarily. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is eventually expected to file bankruptcy.

In November, they posted a GAAP loss of $748 million and an adjusted loss of $333 million. Gross margins fell to 19.2% compared to JC Penny at 37.2%. Sears is forced to severely discount items to attract what few shoppers they have. Same store sales at Kmart fell -4.4% and -10% at Sears. Revenue fell -12.5% to $5.0 billion.

Earnings March 9th.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Dec-28th and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in 2017 once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the sale of the Craftsman brand to Stanley Black & Decker for $900 million but they get less than half of that in cash. The rest is paid out over the next 3-5 years. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

With the Craftsman sale and the loan from the CEO and a new $500 million loan secured by real estate, they have developed about $1.5 billion in Liquidity. Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

When they announced the Craftsman sale at less than expected terms, the stock fell back from the early January gains. The outlook is grim despite the short-term cash inflows.

Update 1/11/17: In an OP-ED piece Forbes said the sale of Craftsman signaled the opening of the final chapter for Sears. They said the Craftsman sale and the potential sale of the Kenmore and Diehard brands represented a "going out of business" sale.

Position 1/10/17:

Short SHLD shares @ $8.97, see portfolio graphic for stop loss.

No options recommended because of price.

VXX - Volatility Index Futures - ETF Description


The VXX spiked to $22.50 at the open but the market did not sustain its decline. Once the dip buyers began lifting the indexes the volatility began to decline. We could still get a spike around the inauguration.

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 $24.50

Short VXX shares, currently $21.40, 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