Option Investor

Daily Newsletter, Monday, 5/8/2017

Table of Contents

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

Market Wrap

Macron Wins, Market Falters

by Thomas Hughes

Click here to email Thomas Hughes


An expected and market soothing win by France's Macron failed to move the market. At least appreciably, there was some volatility across asset classes but it left stocks relatively unchanged at the end of the day. Now that's over the market can reaffix its attention on earnings, economic data and the FOMC. This week is a bit light on market-moving data save for CPI and PPI but there is another ~9% of the S&P 500 reporting earnings to keep us busy.

International markets were equally unmoved by the Macron win, all that is except Japan. The Nikkei gained a little more than 2.3% to hit a new multiyear high while others in the Asian theater hovered closer to break-even. European indices were more muted, hovering near break-even but most posting small losses.

Market Statistics

Futures trading was flat to slightly negative for most of the morning and suffered some weakness going into the open of today's session. The SPX opened the day with a gain of roughly 0.03%, held that for about 5 minutes and then moved quickly below break-even to trade near -0.3%. The next hour was choppy but relatively steady until just before 11AM when the market moved down to set a new low by 11:30, about -0.2%. This low turned out to be the intra-day bottom, the market began moving higher within minutes of hitting it and spent the next 2 hours trading up to and then along the break-even line where it stayed until the close of the session.

Economic Calendar

The Economy

No economic data today and not a lot this week but what we will get is fairly important. Tomorrow is JOLTs and Wholesale Inventory, Wednesday Import/Export Prices. Thursday gets a little hotter with weekly jobless claims and PPI, Friday rounds out the week with CPI, Retail Sales, Business Inventories Michigan Sentiment. The big numbers of the week will of course be the PPI and CPI, hot numbers here will seal the deal in terms of market expectations for a June interest rate hike. Retail sales will also be important and for at least 2 reasons. The first is for signs of life within the tepid retail space, the second is for signs that the consumer is coming back to life.

Moody's Survey Of Business Sentiment fell -0.6% in the last week but remains high relative to historic and near-term levels. The index came in at 33.9%, just off the recent high and trending near 18 month highs. Mr. Zandi says the numbers indicate global business sentiment is strong and stable, led by the US. The number one concern for businesses globally is regulation/legal while labor/labor cost comes in second.

First quarter 2017 earnings season is coming in hot and well above expectations. The blended rate of earnings growth for the S&P 500 with 83% of the index reporting is 13.5%. This marks the fourth weekly increase in the blended rate since the reporting season began. Of those who have reported 75% have beaten earnings estimates and 66% have beaten revenue estimates, both above average.

Looking forward earnings growth remains positive but the outlook is not as rosy as it has been. Growth expectations for the 2nd , 3rd and 4th quarters have fallen noticeably over the past few weeks but not enough to drag down full year 2017 expectations. Full year 2017 outlook has in fact risen to 10.0%, +0.4% in the last week. On a quarter to quarter basis growth will fall to 7.2% and 7.7% in the 2nd and 3rd quarters with that expanding to 12.5% in the 4th. Full year 2018 estimates have also fallen losing -0.2% to hit 11.8% in the last week.

The caveat with earnings outlook is two-fold. Based on recent trends we can expect to see estimates continue to fall as we approach the onset of each reporting season, we can also expect the final rate of growth to be higher at the end of the season than it is at the start. The question now is what the expected rate of growth will be at the start of each quarter, and just how much better than expected the quarter may end up. Regardless, earnings outlook is positive into the long-term and supportive of bull market conditions.

The Dollar Index

The Dollar Index fell in early trading as the euro gained strength on Macron's win. The strength did not last however as profit-taking and sell-the-reality took hold of the market. The Dollar Index reversed those early losses by midday gaining nearly 0.5% and closing above the $99 level. The $99 level has been support over the past two weeks and looks like it will continue to provide support into the near-term. Speculation has now turned to the ECB meeting June when the bank is expected to do something (?) hawkish, possibly reduce bond purchases again. Balancing that out is this week's economic data, CPI and PPI are already trending at or above the 2% YOY, numbers equal-to or greater-than would be rate-hike positive in my view. A break below $99 would be bearish near-term, the indicators are mixed. Both MACD and stochastic are bearish showing evidence of support and an over extension of bearish sentiment.

The Gold Index

Gold prices were choppy in today's trading and closed the day relatively unchanged. Spot price hit a new low in today's trading, just above $1221, and is sitting on a support target. Today's candle is suggestive of support but not definitive, another test is likely and could come Thursday/Friday with the CPI/PPI if not sooner.

The Gold Miners ETF GDX held steady in today's action as well, but below resistance target. The ETF has fallen to and made a small bounce from a four month low but now below my resistance line at $21.76. This line is coincident with the December break of a short-term down trend line and the bottom of the near-term trading range. The indicators are mixed and suggest that there may be support at this level, if so I'll need to see a break of the $21.76 line. A failure to break, perhaps due to dollar strength/FOMC outlook, will be bearish with downside target near $20 and then $18.50.

The Oil Index

Oil prices were also choppy in today's session. Rising US production and rig counts, high storage, rising global output and global capacity are all weighing on prices while OPEC is trying to talk them back up. The new news is that the production cut they enacted will continue into 2018. If so it will be another near-term solution with little impact on fundamentals. WTI closed with a gain near 0.50% after trading in a range around break-even.

The Oil Index gained a little more than 0.55% in an extension of support bounce begun last Thursday. The index is moving up from within a range of support after hitting the mid-point of that range near $1,225. This range is coincident with the range in which oil was trading last year before the current production cut and so a fitting place for it to bounce from now. The indicators continue to diverge from the new low and suggest support with the chance of bottoming and reversal. I remain bullish on the sector based on long-term earnings outlook, an OPEC extension could be the catalyst to get the trade moving.

In The News, Story Stocks and Earnings

Sysco, the nations largest restaurant purveyor, reported earnings this morning before the bell. The company reported EPS of $0.51, missing by a penny, on a 12.7% increase in revenue. Profit increased more than 18% regardless the miss. The company saw strong case growth in existing markets as well as expansion into new territory driving the results. Shares of the stock fell more than -1% on the news but found support at $54. This stock was on the move even before earnings were released and looks like it will go higher.

Coach made the news this morning with the announced purchase of rival Kate Spade. The deal is worth $2.4 billion and is a premium of nearly 28% to share price at the time the deal was first speculated. The news drove shares of Coach up by nearly 5% to close with a gain near 2.5%, shares of Kate Spade gained nearly 10%.

The VIX fell despite today's lackluster market session. The fear index fell a little more than -7.25% to hit a new low of 9.80. The index is now trading below the 10 mark and looks like it may attempt to test all-time low just above 9. At these levels the S&P 500 is indicated higher, and options are cheaper than ever.

The Indices

The indices were choppy today but managed to eek out gains in most cases. The one to buck the trend is the Dow Jones Transportation average. The index fell a little more than -1% while the other indices were more or less unchanged. Today's candle is a medium sized red candle breaking below the short-term moving average. This move is suggestive of near-term weakness, weakness that is echoed by the indicators. Both stochastic and MACD are pointing lower in the near-term, consistent with the break below the moving average, but also both suggestive of support at or near current levels. If the index continues to move lower downside target is the 150 day moving average near 8,920. This moving average has provided support several times in the recent past and likely to do so again.

The other indices all closed positive, 2 at new all-time highs, although gains were marginal at best. The S&P 500 gained just enough to be positive, .003%, but enough to set a new all-time closing high and match the current all-time intra-day high. Today's candle is small and doji-like, does not suggest strength and yet is supported by the indicators. Today's action is a continuation, if a small one, of a trend-line bounce begun last week and confirmed by both indicators. A move higher is trend following with upside target near 2,480.

The NASDAQ Composite and Dow Jones Industrial Average both closed with gains of 0.03%, the tech heavy NASDAQ setting a new all-time high. The index created a small doji candle in the process and is in a near-term consolidation that is beginning to look like a potential flag pattern. The indicators are both bullish and set up to reconfirm near-term bullishness with a bullish stochastic crossover and uptick in momentum. A definitive move up and out of this pattern would be bullish and trend-following with upside target near 6,400.

The Dow Jones Industrial Average also made a small doji candle but did not set a new high. The index is hovering just below the current all-time high and looks like it could go higher. It is trying to bounce up and off of a long-term trend line. The indicators support this move and stochastic at least is showing some strength with not one but two bullish crossovers. The first crossover is the %D line crossing the upper signal line, the second is %K crossing above %D. A move up from here would be bullish and trend-following with upside target near 21,600.

Today's action was, for the most part, completely directionless. The transports are firing a warning sign, assuming they will continue to fall and lead the market lower, but the other indices all appear to want to move higher. This week is another big one for earnings and filled with retailers so another chance to extend the gains should results in the sector come in better than expected. Based on earnings this season and the outlook I am leaning toward moving higher but remain cautious in that outlook without a definitive break to the upside. With the season coming to a close, and growth expected to slow for the next two quarters, there is a chance the market could enter a trading range and sector rotation. I remain bullish in the long-term, keeping a close eye on near and short-term positions, waiting for the next good long-term signal.

Until then, remember the trend!

Thomas Hughes

New Plays

Ugly All Over

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some companies develop a negative trend others redefine the term negative. Nearly every metric for ERA is negative including the stock price.


No New Bullish Plays


ERA - Era Group - Company Profile

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Sell short ERA shares, currently $10.62, initial stop loss $11.75.

No options recommended because of wide spreads.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.

In Play Updates and Reviews

Small Cap Weakness

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap averages managed to close in the green thanks to Apple but the small caps are back in their losing trend. The Russell lost 5 points and the S&P-600 3 points. Those are not big losses but each one is negative to sentiment. The Russell just barely closed over 1,388 again and the S&P-600 failed at 850 resistance for the fourth consecutive day.

Small caps are sentiment indicators for the market. This suggests portfolio managers are afraid of the future and they are lightening up on small caps.

The big cap indexes were only up because of Apple's 4-point gain. That added 28 points to the Dow and 18 points to the Nasdaq 100.

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

STM - STMicroelectronics
The long stock position was entered at the open.

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

BBRY - Blackberry - Company Profile


No specific news. Only a minor decline from Friday's 52-week high.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.

FNSR - Finisar Corp - Company Profile


No specific news. Only a minor decline as it fights resistance at $24.

Original Trade Description: April 24th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Update 5/5/17: Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

Position 4/25/17:

Long FNSR shares @ $23.10, see portfolio graphic for stop loss.


Long June $25 call @ $1.20, see portfolio graphic for stop loss.

STM - STMicroelectronics - Company Profile


No specific news. Only a minor decline from Friday's new high.

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Position 5/8/17:

Long STM shares @ $16.34, see portfolio graphic for stop loss.

Optional: Long July $17.50 call @ 65 cents, no initial stop loss.

USO - US Oil Fund ETF - ETF Profile


The headline spam has begun. Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season. Hopefully those declines will begin soon and the repair process can begin.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.

WLL - Whiting Petroleum - Company Profile


No specific news. Nice 5% gain thanks to improving oil prices.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Optional: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


New historic low close. The VIX closed at a 24 year low. If the market bullishness continues, the VXX should continue to bleed points. Long term, the VXX always goes down.

Original Trade Description: April 12th.

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.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

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 market 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 know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.

WLB - Westmoreland Coal - Company Profile


WLB announced their new earnings date would be May 15th before the open. That is next Monday. Close the position at the open next Friday. I lowered the stop loss to prevent a loss.

Original Trade Description: May 3rd.

Westmoreland Coal Company, through its subsidiaries, operates as an energy company. The company operates through Coal - U.S., Coal - Canada, Coal - WMLP, and Power segments. It produces and sells sub-bituminous coal and lignite to power plants. The company owns and operates coal mines in Montana, North Dakota, Ohio, and Texas, the United States; and Alberta and Saskatchewan, Canada. It has total proven or probable coal reserves of approximately 888,202 thousands of tons. The company is also involved in the production of electricity. It operates two coal-fired power generating units with a total capacity of approximately 230 megawatts in Weldon, North Carolina. Westmoreland Coal Company was founded in 1854. Company description from FinViz.com.

Westmoreland shares spiked from $8 to $20 post election and the excitement has left the stock in the recent months. Westmoreland was trading below $4 when Trump began his rise in the polls talking about putting coal miners back to work. Now that the excitement is fading I would not be surprised to see shares return to $4.

The coal sector is on life support. Cheap natural gas burns cleaner, is easier to transport and there is no storage required. Coal is dirty, requires long trains traveling halfway across the country and large rail yards and storage yards to hold the inventory. As long as gas remains under $5, currently $3.22, that will be the fuel of choice.

Westmoreland has a little more going for it because it owns two power plants but it is still losing money on coal.

They recently reported a loss of 41 cents on revenue of $392.7 million. For the full year they lost -$1.47 per share. They are being forced to restate earnings because of past problems.

They guided for a weak 2017 and said two supply contracts had expired. Warmer weather was also weakening demand.

Earnings June 27th. (revised to May 15th)

Shares are $10.25 with support at $8.50 but that support was based on expectations for Trump to win the election. The expectations that coal use would somehow miraculously rebound have now evaporated.

Position 5/4/17:

Short WLB shares @ $10.16, see portfolio graphic for stop loss.

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