Option Investor

Daily Newsletter, Wednesday, 7/5/2017

Table of Contents

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

Market Wrap

A Split Market and Split Opinions

by Keene Little

Click here to email Keene Little
In the past few weeks we've seen some strong splits between major indexes and it's making it much more difficult to determine what the market is going to do next. The result has been a choppy market that's either consolidating for another bullish run or is in a topping pattern.

Today's Market Stats

The market has been chopping mostly sideways for weeks as money sloshes around from one sector to the other but without enough liquidity to get all boats rising again. A fractured market is usually not a good sign for bulls because it's usually a sign of a loss of liquidity that will soon turn to stronger selling. But there have been very few signs that the market is in a topping pattern.

Other than the noise from the White House and CNN and bellicose N. Korea, it's been relatively quiet on the political and geopolitical front. That and the lack of performance indications from companies has kept the stock market looking for something to spark a movement (we know what kind of "movement" the bears would like). The stock market continues to be resilient in the face of any kind of news and until we see selling on good news we should assume the bulls will remain in control of the tape.

This morning's economic reports included only the morning's Factory Orders and this afternoon's FOMC Minutes. The Factory Orders report showed a slowdown that was greater than expected -- down -0.8% vs. expectations for -0.5%. April showed a slowdown of -0.3%, which was a revision lower from the previously reported -0.2%. There was virtually no reaction to the news and if anything you could say the market rallied on the disappointing news. But it was the usual turnaround at 10:00 following the brief decline from the open.

There was also little reaction to the FOMC minutes since there were no surprises in the minutes. We'd already heard it before.

As for the market, there are some topping signs here and there but the bulls can easily argue there are enough signs that indicate another leg up is coming, one of which is the lack of impulsive (strong) selling. It's been hard to take a strong stance with either side and that simply means it's not a good time to make aggressive trades.

The bulls certainly can't complain about the lack of progress by the "sell in May" crowd. SPX might not have tacked on a lot of points since the beginning of May but it's about 50 points higher than it was at the end of April and that's nothing to sneeze at in a period that's supposed to be weak. If for no other reason, considering the uptrend remains in progress, we should be staying long the market until we're told otherwise.

The May lows are probably the line in the sand for the bulls -- those lows must be protected in order to maintain the uptrend. The Dow is the strongest index in regards to the price pattern following its May 18th low while NDX is the weakest. The NDX has come close to dropping below its May 18th low at 5568 with Monday's and today's lows near 5593.

As a comparison to the weak NDX, the Dow's May 18th low was 20553, which is 925 points below today's close. That's a real split in the market and the bears will argue it's been a flight to the safety of the blue chips while the bulls will argue the relative strength in the RUT, which says there's not been a flight from higher-beta stocks.

There are many other statistics that are not helping us figure out this market. I read an interesting article found on schaefersresearch.com that discussed the results from the first half of this year and what that could mean for the second half of the year. The first point in the article was bullish while the second point suggested caution by the bulls, of which there are many.

The author of the article, Rocky White, pointed out that in the first half of 2017 SPX gained 8% and the max drawdown was -2.8% between March 1 and April 13. Going back to 1929 this was only the second time the SPX has had less than a 5% drawdown. The last time was in 1995 when SPX pulled back only -1.7%. And the record is good for the bulls based on this statistic -- the second half of 1995 saw a gain of +13%. When the first half of the year has seen less than a 5% drawdown the average gain in the second half has been nearly +8%. Negative second halves have been trivial.

So is it time to load up on long positions for the second half? Unfortunately there's another statistic that urges caution -- bullish sentiment. When the weekly Investors Intelligence, a measure of bullish vs. bearish sentiment among stock advisors, is above 50% after the first half of the year the second half tends to be negative. While 81% of the years with good first halves (as measured by a drawdown less than 5%) were positive in the second half, it changes significantly if the Investors Intelligence gets above 50%, in which case it's a craps shoot (50%). In other words, too many bulls can spoil the party for the bulls and that's the situation we have currently with the II at 56.2%

One other statistic is that the Millennials have been increasing their stake in the stock market game. And it's not just stocks -- they're playing the derivatives market, just as traders did into the 2000 and 2007 highs. The Millennials have been staying out of the market and with the huge increase in new trading accounts by the Millennials it's an indication that the high-flying market is finally pulling them in. This could drive the market much higher in a melt-up but it's also another caution sign that things could be getting too frothy.

Normally this kind of confusion can be settled by the charts, which can normally provide at least some decent clues to follow. That's not the case at the moment, especially with the split between the indexes. The best we can do is follow the patterns on the charts and keep each one separate from the others and trade what you see on your chart, not what you think should happen. If nothing else you should be able to get some good trigger levels (to get in or out).

Dow Industrials, INDU, Weekly chart

Not much has happened with the market in the past 1-1/2 weeks and that can been seen in the small weekly candles as it has consolidated the previous month's gains. There continues to be upside potential to at least the trend line along the highs from December 2014 - May 2017, near 21750. The weekly uptrend remains intact until the Dow drops below its April 13th low at 20379, which would be an 1100-point decline (-5.1%).

Dow Industrials, INDU, Daily chart

You can see on the daily chart below how choppy price action has been since the high on June 19th. Today marks the 11th trading day since that date and the Dow still trades below the 21535 high on June 20th, but it hasn't been for lack of trying. The choppy consolidation/pullback keeps it potentially bullish for a run higher into early July. The first sign of trouble for the bulls would be a drop below price-level support at 21169 (the March 1st high). In the meantime, there's a confluence of trend lines at roughly 21700-21750 that provides us with an upside target zone.

Key Levels for DOW:
- bullish above 21,535
- bearish below 21,169

Dow Industrials, INDU, 120-min chart

The 120-min chart of the Dow shows a rising wedge pattern for the rally from April. It has the requisite 3-wave moves inside and we could get another 3-wave move up from June 29th to finish the 5th wave of the wedge. We might see a little further pullback from Monday's high and then head higher again but in any case watch for a rally to the top of the wedge, maybe a little throw-over, and then a collapse back down. A rally to the top of the rising wedge, which will be near 21715 early next week, would put it inside the 21700-21750 target zone mentioned above.

S&P 500, SPX, Daily chart

Since its June 19th high SPX has been looking like the Dow with its choppy pullback/consolidation. Assuming we'll get another leg up, I see upside potential to a price projection at 2481, which is also where it would run into its broken uptrend line from November 4 - April 13 and a trend line along the highs since April 26th. The two trend lines intersect near 2476 on July 11th. The first sign of trouble for the bulls would be a drop below price-level support at 2101-2105.

Key Levels for SPX:
- bullish above 2454
- bearish below 2405

Nasdaq-100, NDX, Daily chart

NDX had a nice pattern into a possible top on June 8th but the 2nd leg of its decline from that high is looking a little choppy for what should be a 3rd wave down. It's also struggling but holding onto its uptrend line from June-November 2016, which it closed below on Monday and back above today. Currently sitting near 5628, that trend line needs to hold in order to keep the bulls in control. But a drop below the uptrend line could open the trap door sitting under the bulls.

While the Dow keeps me leaning bullish, NDX keeps me leaning bearish. We're waiting for the market to make up its mind.

Key Levels for NDX:
- bullish above 5846
- bearish below 5592

Russell-2000, RUT, Daily chart

The RUT has been in a messy (choppy and whippy) pattern since December and has barely made any progress all year. The December 9th high was 1388 and today's close was 1420. That's 32 points (+2.3% over six months). But at least it's a gain and not a loss and the gains could continue if we're to see a choppy rising wedge continue into next week and get the RUT up to its trend line along the highs from 2007-2015, now near 1441. The bearish divergence and the choppy move higher tell me it's in an ending pattern and any new highs with these conditions would be a dangerous time to chase it higher.

Key Levels for RUT:
- bullish above 1442
- bearish below 1396

KBW Bank index, BKX, Daily chart

The banks have been strong since the low on June 23rd. BKX has again been testing the underbelly of its broken uptrend line from June 2016 - April 2017. The line, currently near 97.55, held as resistance when first back-tested June 12-13 and has again been holding as resistance since June 29th. If it can push a little higher it could hit the price projections at 98.12, where it would have two equal legs up for the bounce off the May 31st low. Above that is potential resistance at its March 1st high at 99.77.

Transportation Index, TRAN, Weekly chart

On Monday the TRAN closed at 9639 which was above its March 1st closing high near 9594. It added a few more points today with its close near 9646. This is a big deal for the bulls since it keeps the Dow Theory on a buy signal with both the Dow and TRAN in synch to the upside.

But it's not all sunshine and roses for the TRAN since there might not be much more upside left to the rally. I see the potential for a price projection at 9823 to be met (where the 5th wave of the leg up from January 2016 would be 62% of the 1st wave), and maybe all the way up to the projection at 10490 (5th wave equal to 1st wave). But the broken uptrend line from June-October 2016 is acting as resistance and it's showing bearish divergence against its highs since December.

A little higher for both the Dow and TRAN into next week could set up an important top for both so it pays to be cautious about any new highs from here.

U.S. Dollar contract, DX, Daily chart

The US$ made it down to the bottom of its down-channel from January and the trend line along the lows from March. Predictably, it got a bounce off that support and now we wait to see if the bounce develops some bullish legs to at least break the downtrend line from April, currently near 97.10. The 50-dma is coming down toward that level and it could meet the dollar at the trend line if it bounces strong from here.

If the dollar chops sideways/up we'll then have a good idea that the dollar will then head lower again. It's quite possible we'll see the dollar consolidate for months and make it back up to the top of its down-channel, maybe near 97.50 by September, before heading back down.

Gold continuous contract, GC, Daily chart

Gold's break of its uptrend line from December 2016 - May 2017, on June 23rd, was followed by a small back-test and then a steep decline into Monday's low. That was bearish price action and it's looking like gold will continue to head lower. It's getting oversold so there could be at least a bigger bounce/consolidation in its near future, especially as it tests its May 10-11 lows near 1217. Today's low was 1216.50. But the break through multiple support levels (20-, 50- and 200-dmas and its uptrend line) is an indication that a stronger decline is in progress.

Oil continuous contract, CL, Daily chart

Oil had spiked up strong off its June 21st low and then was able to make it back above its broken uptrend line from August 2016 - May 2017. It made it through its broken 20-dma, near the broken uptrend line, on June 30th and then banged its head on the broken 50-dma, near 46.95, on Monday and again today before selling off sharply today. If it can stay above the broken uptrend line and 20-dma, at 44.73-44.87, it will stay bullish for at least a larger bounce. Back below 44.70 could to a continuation lower, which I think has a good chance of happening.

Supposedly oil got hit hard today on the news that Volvo will be making electrically-powered cars starting in 2019 (I presume some will be hybrid). The other car manufactures are likely not far from announcing something similar and the gas consumption is expected to decrease dramatically as more consumers gravitate to electric. And if natural gas continues to be in large supply due to fracking and other methods, electric companies could continue to reduce their demand for oil. Add in a slowing economy in the near future along with growing oil supplies and the fundamentals for oil's price do not look favorable for the near future.

Economic reports

Thursday will be a big day for economic reports, including the ADP employment report and the ISM Services report. Whether or not the reports will move the market, and in which direction, is always the bigger question.


The stock market appears to be either consolidating for another big run higher or it's in a topping pattern. Depending on which metric or price pattern, and which index, you look at you could easily make the argument for either case. That's obviously not helpful for making trading decisions. Actually it is helpful -- when in doubt, stay out. Flat is a position and in times like this it's often the best position.

I see more potential for at least a little higher than lower in the coming week but only if the techs get on board with a rally. The pattern for NDX is bearish and maybe it will get at least a bigger bounce if the blue chips and RUT can chop their way a little higher. But if the techs continue to drop and the banks start to join them to the downside I'd be very reluctant to think long and instead start to look for shorting opportunities. By this time next week I suspect we'll have a good idea about whether or not to continue expecting new highs or if instead we have signals that the top is already in place. For now the jury is still out and we need to exercise patience.

Good luck and I'll be back with you next Wednesday. See below for a good deal on an OIN subscription.

Keene H. Little, CMT



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New Plays

Retailer or REIT?

by Jim Brown

Click here to email Jim Brown
Editor's Note

If you cannot make it in the retail sector should you become a REIT? Sears shareholder Bruce Berkowitz, has been pounding the table on Sears shares because of their liquidation value as a real estate company. That is hardly rousing support of Sears as a retailer.


No New Bullish Plays


SHLD - Sears Holdings - Company Profile

Sears Holdings Corporation operates as an integrated 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, Craftsman, and Joe Boxer labels; Sears brand products, such as Kenmore and DieHard; and Kenmore-branded products. As of January 28, 2017, this segment operated approximately 735 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 merchandise, and parts and services to commercial customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; home improvement services, such as siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair; and protection agreements and product installation services. This segment provides merchandise under the Kenmore, DieHard, Bongo, Covington, Canyon River Blues, Simply Styled, Everlast, Metaphor, Roebuck & Co., Outdoor Life, and Structure brands, as well as under the Roadhandler, Levi's, Craftsman, and WallyHome brands. As of January 28, 2017, this segment operated 670 full-line stores and 25 specialty stores. Company description from FinViz.com.

Hardly a week goes by that some aspiring writer/researcher does not post a scathing article on the retail prospects of Sears and/or Kmart after a surprise visit to an actual location. The outlook for Sears to survive as a retailer is very dim. Sears Canada just filed bankruptcy and that should be a clue for the outlook in the U.S. as well. With a cash burn rate of as much as $2 billion a year, it is only a matter of time.

Expected earnings August 24th.

In the last week of June, the stock rose as board member Bruce Berkowitz began trying to pump up the shares by proclaiming Sears was worth $90 to $100 a share just because of their real estate. They do have a lot of real estate but they are mall anchors and the malls are dying. They have already spun off a large portion of their holdings to Seritage Growth Properties (SRG). Those were the locations without debt. They have recently done some sale leaseback transactions to raise cash but now they have to pay lease rentals and that increases their cash burn.

Most analysts do not believe the Berkowitz story and assume he is trying to rescue a drowning stock price, which is one of his largest holdings.

Shares rebounded from $6.20 to $9.20 on the Berkowitz claims. Short sellers ran for cover. Now that the stock has returned to resistance, the rebound should be over and reality will return.

I am writing this as a stock short. The options are expensive. The August $8 put is $1.30. I am not recommending it.

Sell short SHLD shares, currently $8.69, initial stop loss $9.35.

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

Mixed Messages

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and Nasdaq are giving mixed messages as to direction. The Dow was positive on Monday and the Nasdaq sharply negative. Today the Dow fell -75 points at the open and the Nasdaq was sharply higher. The Nasdaq was probably up on portfolio managers buying the dip with new quarter end retirement money that hit accounts over the last several days.

The tech sector has been hit hard and it is not surprising to see the Nasdaq rebound from 6,100. However, it still closed under resistance and there is more than likely some indecision remaining. The earnings start next week and the forecasts are good but we are heading into the weakest period of the year in August and September. It is time to be cautious rather than reckless.

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

No Changes

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BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile


No specific news. The company filed a NDA for their Parkinson's drug as expected.

Original Trade Description: June 21st.

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.

They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.

Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.

Expected earnings July 27th.

Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.

Position 6/22/17:

Long ACOR shares @ $18.80, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


No specific news. Good thing we do not have a stop loss on KTOS because of the wide spreads on the options. The stock dipped to $10.95 at the open before rebounding to close with a 25 cent gain.

Original Trade Description: May 24th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.

I am not recommending a stock position given the sharp gains already.

Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Update 6/27/17: KTOS received $16 million in radar and system contract awards from a national security systems provider. Due to the classified nature of the program, on additional information was given.

Update 6/28/17: KTOS announced the award of a $37 million initial production contract for subsonic target drones from the U.S. Navy. This is the initial annual order in a long term acquisition program so this represents a major win for KTOS. The company said the anticipated annual order for 2018 was expected to be 25% larger. The aircraft can carry electronic counter measures, active and passive radar augmentation, infrared, identification friend of foe, internal chaff and flare dispensing, threat emitter simulators, smoke and scoring devices. In addition, separate contracts for Peculiar Support Equipment, Initial Systems Spares, External Payload Systems and Flight Consumables will follow shortly.

Position 5/30/17:

Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

PPC - Pilgrims Pride Corp - Company Profile


No specific news. Closed at a new 3-month low.

Original Trade Description: June 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, prepackaged case-ready chicken, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to Mexico, the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946 and is headquartered in Greeley, Colorado. Company description from FinViz.com.

I have started to play PPC several times because it is definitely directional. Every time I would read the headlines and the analyst commentary and everyone is saying good things and how the stock should rise. Apparently, nobody is listening.

Florida is currently probing PPC and Tyson (TSN) on price fixing on chicken. The initial review was broadened after the initial probe suggested there might be fire behind that smoke. There are currently civil lawsuits in progress claiming prices were fixed.

PPC reported earnings of 38 cents that missed estimates for 43 cents and the year ago earnings of 46 cents. Revenue of $2.020 billion did beat estimates for $2.014 billion. Margins shrank and costs rose. Cash on hand fell from $120.3 million to $30.8 million.

Expected earnings August 2nd.

Shares just broke below the May support at $23 and the next material support is $20. If the antitrust probe is going to continue, that support may not hold.

Update 6/28/17: PPC was hit with two animal cruelty suits from Texas and Georgia following an investigation by the Humane Society.

Position 6/27/17:

Short PPC shares @ $22.30, see portfolio graphic for stop loss.
Alternate position: Long Aug $21 put @ .60, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Minor uptick in volatility over the last week. Apparently traders are getting nervous.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

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.

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.

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