Option Investor

Daily Newsletter, Tuesday, 7/25/2017

Table of Contents

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

Market Wrap

Dow Earnings Drive Rebound

by Jim Brown

Click here to email Jim Brown

The Dow rebounded from Tuesday's decline thanks to earnings from MCD, CAT and DD.

Market Statistics

We were very fortunate there were five Dow stocks reporting earnings this morning. McDonalds, Caterpillar and DuPont offset declined in United Technology and 3M. The MMM decline of -$10.61 points knocked nearly 73 points off the Dow. The UTX decline of $2.71 erased another 18.56 Dow points. Without the winners, it would have been a significantly different day.

Even with the winners offsetting the losers, the Dow was unable to break through resistance at 21,650 that has held for two weeks.

The economic news helped to lift the broader market but could not help the Nasdaq, which was suffering under the large decline in Google shares. The Richmond Fed Manufacturing Survey for July rose from the previously reported 7 to 14 on the headline number. That 7 in June was revised up to 11. The biggest news was the rise in the unfilled orders from -4 to +11. New orders also improved nicely. Employment jumped from 5 to 10.

Worries that consumer confidence might be declining after the first six months of a Trump presidency, appear to be unfounded. The confidence for July rose from 117.3 to 121.1 and halfway back to the March peak at 125. The present conditions component rose from 143.9 to 147.8 and the expectations component rose from 99.6 to 103.3.

Consumer buying plans were almost flat with June but still strong. The percentage of respondents planning on buying an auto rose from 12.6% to 12.7% and home 6.0% to 6.7%. Those planning on buying an appliance or big screen TV declined from 52.1% to 46.1%. That is the lowest in a year but still strong.

Confidence rose in the 35-54 and over 55 groups but declined in the under-35 age group.

The home price indexes rose slightly for May. The FHFA Purchase Price Index rose from 6.8% to 6.9% but that was well over the 5.9% analysts expected. The Case Shiller home price index was flat at 5.7%. These were lagging numbers for May and the reports were ignored.

The calendar for Wednesday is headlined by the Fed meeting announcement. Nobody expects any change in rates but a few analysts believe they could begin tapering their QE purchases. Since late 2014, the Fed has been reinvesting the proceeds from any securities that matured in order to keep their balance sheet at roughly $4.5 trillion. Back in early 2014, the Fed began to "taper" their purchases in the QE3 cycle and that resulted in the famous "taper tantrum" in early 2014.

Nobody expects another taper tantrum when they begin tapering their QE reinvestments because they have laid out in recent releases how they plan to do it and it will be very gradual. However, the market has never been known for rational reactions.

The New Home Sales are expected to rise slightly since this covers the June period. The existing home sales on Monday for the same period declined from 5.62 million to 5.52 million, annualized. We could see weakness in the new home sales because of the rising prices.

The Dow leader for the day was McDonalds (MCD). They reported earnings of $1.70 per share compared to expectations for $1.62. Revenue of $6.05 billion beat estimates for $5.96 billion but was down from the $6.27 billion in the year ago quarter.

Same store sales were up 6.6% internationally, up from 4%, and 3.9% in the U.S. Analysts were expecting 2.9% in the USA. McDonalds said their discounted cold beverage promotion and the new Signature Crafted sandwiches were responsible for the sales and increase in traffic.

Shares rocketed $7.22 to add 49 points to the Dow. This came after a $2 decline on Monday and a five-week closing low.

Caterpillar (CAT) reported earnings of $1.49 compared to estimates for $1.26. Revenue of $11.33 billion rose 9.6% and beat estimates for $10.99 billion. They guided for full year revenue of $42-$44 billion, up from $38-$41 billion and earnings of $5 per share, up from prior guidance at $3.75. Sales rose at all three units but mining/energy reported the biggest gain.

The CEO said a construction boom in China and gas compression business in North America were the highlights. Sales from Asia Pacific rose 23% thanks to China. The Beijing backed infrastructure push and increased investment in China's "Silk Road" project were responsible. U.S. sales rose 7% thanks to a rebound in mining and energy. Shares spiked $6.36 to add 43.5 points to the Dow.

Du Pont (DD) reported earnings of $1.38 compared to estimates for $1.29 per share. Revenue of $7.42 billion rose 5.1% and beat estimates for $7.26 billion. The company is benefitting from a resurgence of farming and they will get a bigger boost when the $75 billion merger with Dow Chemical completes next month. Farmers sowed a record soybean crop. Seed sales jumped with new varieties of soybeans and pesticide sales spikes on demand for fungicides and insecticides. Shares rose $1.14 to add 7.8 points to the Dow.

3M (MMM) reported earnings of $2.58 compared to estimates for $2.59. Revenue of $7.81 billion missed estimates for $7.88 billion. Revenue in electronics and energy rose 7.5% with industrial sales up 2.5%. They guided for full year earnings of $8.80 to $9.05 compared to the prior guidance of $8.70-$9.05. They expect organic sales will rise 3-5% compared to prior guidance for 2-5%. Shares were knocked for a 5% drop or -$10.61 to erase 72.7 points off the Dow.

United Technology (UTX) reported earnings of $1.85 that beat estimates for $1.78. Revenue of $15.3 billion rose 3% and matched analyst estimates. They guided for full year revenue of $58.5-$59.5 billion, up from $57.5-$59.0 billion. They guided for earnings of $6.45-$6.60, up from $6.30-$6.60. Shares declined -$2.71 to erase 18.5 points off the Dow.

Biogen (BIIB) reported earnings before the bell of $5.04 compared to estimates for $4.37. Revenue of $3.08 billion beat estimates for $2.81 billion. They raised their guidance due to faster than expected acceptance of the Spinraza drug for spinal muscular atrophy. The new guidance is $11.5-$11.8 billion in full year revenue and earnings of $20.80 to $21.40, up from $20.45 to $21.25. Shares spiked at the open but faded to lose $1.74 for the day.

After the bell, Amgen (AMGN) reported earnings of $3.27 compared to estimates for $3.11. Revenue of $5.81 billion also beat estimates for $5.67 billion. For the full year, they guided for earnings of $12.15 to $12.65 up from $12.00 to $12.60. Unfortunately, that midpoint of $12.40 only matched analyst expectations. Revenue is expected to be $22.5 to $23.0 billion and in line with estimates for $22.69 billion. Shares declined $4 on the news.

Chipotle Mexican Grill (CMG) reported earnings of $2.32 compared to estimates for $2.16. Revenue of $1.17 billion missed estimates for $1.19 billion. Same store sales of 8.1% were strong but missed estimates for 9.5%. The company said the recent norovirus outbreak in Virginia was due to a sick employee. The store offers paid sick leave but workers claim they are routinely forced to work even when they are sick. They are adding cheese queso to the menu in 350 stores because of constant requests. Some analysts believe this could add 2-3% to sales because consumers want it and traffic could increase when it is added. Shares rallied $9 in afterhours.

Texas Instruments (TXN) reported earnings of $1.01 compared to estimates for 96 cents. Revenue of $3.69 billion beat estimates for $3.57 billion. Shares rose $2 in afterhours.

AT&T (T) reported earnings of 79 cents compared to estimates for 73 cents. Revenue of $39.84 billion barely beat estimates for $39.79 billion. The company lost 89,000 subscribers in the quarter but analysts had been expecting a loss of 256,000. AT&T added 178,000 prepaid subscribers. Shares rose $1 in afterhours.

Wynn Resorts (WYNN) reported earnings of $1.18 compared to estimates for $1.19. Revenues of $1.53 billion beat estimates for $1.45 billion. Revenue in Macau rose 6.8% but industry revenue in Macau rose 22%. Shares declined $6 in afterhours.

US Steel (X) reported earnings of $1.07 compared to estimates for 40 cents. Revenue rose 22% to $3.14 billion beating estimates for $2.98 billion. They guided for full year earnings of $1.70 compared to estimates for 90 cents. They declared a 5-cent dividend payable September 8th to holders on August 9th. Shares rallied $2.50 in afterhours.

Advanced Micro Devices (AMD) reported earnings of 2 cents on revenue of $1.22 billion. Analysts were expecting zero earnings and revenue of $1.16 billion. They guided for annual revenues to increase by mid to high-teens percentages compared to prior guidance for low double-digit growth. Shares spiked about 10% in afterhours. This should be a preview of Nvidia's earnings, which are expected to be strong.

Earnings for Wednesday are headlined by Facebook and Paypal. There are two Dow components with Boeing and Coke reporting. Boeing could be a market mover but Coke is not likely to impress. Amazon follows after the bell on Thursday. Apple closes out the FAANG earnings next week.

With the Fed announcement on rates on Wednesday afternoon, the dollar recovered slightly from its 12 month low. The falling dollar is going to be beneficial to stocks that do business internationally. Currently about 40% of S&P earnings are generated overseas. A low dollar will increase those earnings.

The yield on the ten-year treasury jumped 3.2% or 7 basis points to 2.326% on strong earnings and the potential for a positive healthcare vote. Stocks are starting to be preferred over treasuries leading to a mild bout of selling in the fixed income sector.

Crude prices rose $2.25 in regular trading and helped lift energy equities. The outcome of the OPEC meeting on Monday was positive and Halliburton said they were seeing a plateau forming in the U.S. rig count. That suggests the rapid pace of new production could slow.

The API inventory report after the bell showed a drop of 10.2 million barrels for last week. Gasoline supplies rose 1.9 million barrels and distillates were down -111,000 barrels. Crude prices gained an additional 47 cents to trade over $48 on the API news. If the decline is repeated in the EIA inventories on Wednesday, we could see another sharp spike higher.

The Volatility Index ($VIX) came very close to dipping below 9 today. We are already at historic lows with the December 1993 low close at 9.31. We closed at 9.36 on Friday and dipped as low as 9.04 today before rebounding in the afternoon. This was the 9th consecutive day for the VIX to close under 10. There will be a volatility event in our future. We just do not know what or when but it will be painful. Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.


The markets saw a boost from the Dow component earnings and from the Fed meeting trend. Typically, the day before a Fed announcement sees a positive market as short positions are trimmed and long bets taken.

The S&P gained 7 points to close at a new high and just over resistance at 2,475. The close was not high enough to take us out of the gravitational pull from that resistance so this could have been just a temporary high close. If the earnings cycle remains strong and there are no unexpected headlines, I would not be surprised to see an attempt to tag 2,500 before the week is out. I would be a seller on the SPY at $249.50.

The Dow was the index leader today along with the Russell 2000. The Dow added 100 points but failed to close above resistance at 21,650. We did trade over that level intraday but the declines UTX/MMM were too strong and we could not achieve liftoff. With only one material Dow component with earnings on Wednesday, there may not be enough fuel to break through that resistance level. Initial support remains 21,500.

The Nasdaq Composite closed at a new high by one point. This was due to the drag by Google and the biotech sector. The Biotech Index lost -1.2% to erode support for the tech index. The Nasdaq 100 Index lost 10 points because it was impact much more by the Google loss.

The big cap techs were mixed but it was clearly Google causing all the trouble. The single point gain on the Composite Index is not enough to lift it out of congestion. Facebook could accomplish that task on Thursday if their earnings are strong on Wednesday night.

The Russell 2000 broke over uptrend resistance and held the gains. The 1,450 close could be a psychological stall point but we will not know until this week is over. The small caps are doing great after six months of consolidation.

The FANG stocks had pulled back into a tight group as they moved to new highs but Google clearly broke free and began a decline. If Facebook and Amazon can manage to post big gains and breakout to the upside it would do wonders for the broader market sentiment.

Wednesday morning could be calm with a slight upside bias assuming Europe and Asia do not spoil the party. The volatility after the Fed announcement should be light since no change is expected. However, it all depends on the wording of the statement.

I continue to recommend not being overly long as we move into next week. The high profile earnings will be behind us with the exception of Apple. That report has the potential to disappoint. We could see the post earnings depression phase begin next week. Be prepared if it appears.

There will always be another day to trade if you have capital in your account.

Enter passively, exit aggressively!

Jim Brown

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New Plays

No Recommendation

by Jim Brown

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Editor's Note

The Dow failed at resistance at 21,650 for the fifth time. The S&P is closing in on round number resistance at 2,500 and the Russell stopped on what could be resistance at 1,450. The VIX has closed under 10 for 9 consecutive days and at historic lows. My scans turned up nothing that was screaming buy me and there is no reason to force a play just because it is a newsletter day.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Dow Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tuesday's rally was all about the Dow earnings before the bell. With five Dow components reporting we knew there would be some volatility. Fortunately, gains in McDonalds, Caterpillar and DuPont outweighed losses in United Technology and 3M. The Dow rebounded to resistance at 21,650 but failed once again.

The Nasdaq Composite added 1 point and the Nasdaq 100 lost 10 points because of the big drop in Google shares. The S&P gained 7 to a new high and the Russell 2000 gained a whopping 12 points to a new high. The Nasdaq did not have the benefit of any big earnings reporters today but that will change over the rest of the week.

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

ARNC - Arconic
The long position was entered at the open.

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BULLISH Play Updates

ARNC - Arconic Inc - Company Profile


No specific news. Shares posted a 3% gain despite the weak Nasdaq.

Original Trade Description: June 24th.

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. (description from company release)

For Q2, Arconic reported earnings of 32 cents that beat estimates for 27 cents. Revenue of $3.261 billion beat estimates for $3.233 billion. Since the breakup of Alcoa, Arconic has been focused on reducing costs, reducing debt and expanding their product line. They guided for the full year for revenues of $12.3-$12.7 billion, up from prior guidance at $11.8-$12.4 billion. Earnings guidance was raised to $1.15-$1.20, up from $1.10-$1.20. They ended the quarter with $1.8 billion in cash. They declared a 6-cent quarterly dividend payable August 25th to holders on August 4th.

Expected earnings Oct 24th.

After the breakup of Alcoa, Arconic saw their share price double because this was the high tech portion of the business. They make complex aluminum components for airplanes, aerospace, autos and just about everything that needs a high performance, lightweight component. After the big ramp higher they traded sideways for three months along with the market, Shares declined sharply after the high rise fire in England because one of their components was used in the cladding that had recently been added to the building. Investors did not know if Arconic had any liability risk. The answer is probably not.

The contractor on the building combined multiple components in an unsafe manner to cover the outside of the building. It was not an Arconic component that failed and their products conformed to all the building codes. Once that was established shares began to rise again in late June.

Shares closed at $25 on Monday and resistance is $28. They reported earnings before the bell and after a pre-market spike they traded flat for the day with an uptick at the close. I am going to put an entry trigger on this position just in case there is a delayed reaction to the earnings.

Position 7/25/17 with an ARNC trade at $25.35

Long ARNC shares @ $25.35, see portfolio graphic for stop loss.
Alternate position: Long Oct $27 call @ $.95, see portfolio graphic for stop loss.

BOX - Box Inc - Company Profile


No specific news. Shares rebounded from support at $19.50 and tested resistance at $20.

Original Trade Description: July 17th.

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Company description from FinViz.com.

Expected earnings August 30th.

Box is making a lot os smart moves lately. The recently partnered with Microsoft to jointly offer Box cloud management to Azure enterprise customers. Box will use Azure as a strategic public cloud platform and the companies have committed to share go-to-market investments, including initiatives to co-sell Box with Azure. Any time you can get Microsoft to partner with you, share the expenses and market your product, it was a good move.

Last week Box appointed Stephanie Carullo as the new COO. Carullo led U.S. sales for Apple's education business. Before that whe led the data center and virtualization architecture group at Cisco Systems. That is a good pedigree.

Shares have ticked up since both of those events last week and could be headed for a breakout over $19.50.

Position 7/18/17:

Long BOX shares @ $19.21, see portfolio graphic for stop loss.
Alternate position: Long Sept $20 call @ 90 cents, see portfolio graphic for stop loss.

HZNP - Horizon Pharma - Company Profile


Horizon launched a communications platform called CGD Connections for people with CGD disease. The platform is available at CGDConnections.com and the CGD Connections Facebook page. Shares rallied 2.4%.

Original Trade Description: July 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements 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; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Position 7/17: Alternate position:
Long Aug $14 call @ $.50, see portfolio graphic for stop loss.

NTNX - Nutanix - Company Profile


No specific news. Shares finally began to rebound from their consolidation phase.

Original Trade Description: July 19th.

Nutanix makes infrastructure invisible, elevating IT to focus on the applications and services that power their business. The Nutanix enterprise cloud platform leverages web-scale engineering and consumer-grade design to natively converge compute, virtualization and storage into a resilient, software-defined solution with rich machine intelligence. The result is predictable performance, cloud-like infrastructure consumption, robust security, and seamless application mobility for a broad range of enterprise applications.

Expected earnings August 24th.

Nutanix announced last week that its business in Canada had grown 75% over the 12 months prior to the quarter end. They increased their customer base from 179 customers to 313. There was also a record number of customers that invested $1 million or more into Nutanix infrastructure products.

Goldman added the stock to their conviction buy list saying there was a 53% upside potential. Goldman called Nutanix a '"hyperconverged infrastructure company," a "once-in-a-decade tech infrastructure story," as they see strong adoption of the technology among chief information officers. Based on a survey Goldman did in June they found that 18% of CIOs expected to move to this technology over the next two years with Nutanix the leader in the field. They also said the company could easily be an acquisition target because of their size and revolutionary technology.

Position 7/20/17:

Long NTNX shares @ $24.48, see portfolio graphic for stop loss.
Alternate position: Long Oct $30 call @ $1.50, see portfolio graphic for stop loss.

BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile


No specific news. There was no rebound despite the bullish market.

Original Trade Description: July 22nd.

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

Smith and Wesson saw the future when they changed names to American Outdoor Brands. President Obama was the best firearms salesman ever. He never missed an opportunity to talk down firearms and talk up gun control. Consumers, worried there would be a change in policy, rushed out to buy guns every time there was a new verbal assault on the second amendment. Gun sales hit record levels year after year.

When President Trump was elected as a pro-gun president, the urgency to buy more guns, faded. 2017 is still going to be another record year but only by a thin margin.

Smith & Wesson realized while President Obama was in power they needed to rebrand themselves to avoid the curse of being a prominent gun company in case the laws changed. They changed names to American Outdoor Brands and began a concentrated campaign to acquire a bunch of outdoor brands for products that had nothing to do with the shooting sports but they acquired some of those as well. Scopes, knives, safes, reloading, camping supplies, etc. Unfortunately, their main product line still depended on a continuing rise in firearms sales.

They reported earnings in late June of 57 cents that easily beat estimates for 37 cents. Revenue of $229.2 million beat estimates for $211 million. However, they guided for the current quarter for earnings of 7-12 cents and revenue in the $140-$150 million range. For the full year, they guided for $1.42 to $1.62 and revenue of $750-$790 million. Analysts were expecting $1.61 and $827.8 million. They said gun sales had slowed because of the new president. Secondly, they said they were going to use their unused portion of their $500 million line of credit to acquire additional growth opportunities. That means they were going to leverage up to their max debt to acquire new brands.

The CEO said, "Although good for the long-term viability of the industry, we believe that the election results coupled with a Republican Congress and choice of Supreme Court justice(s) could be a net-negative for [American Brands] as it eliminates any realistic fear of gun regulation, which has been a major driver of gun sales over the past eight years."

Shares declined sharply to $21. Over the last three weeks they have tried to rebound from that level but there is no excitement left. There have been a series of lower highs and Friday's close was below support and a three-month low.

Expected earnings September 24th.

I believe AOBC is going to retest the March lows at $18 if not lower. There are no positive catalysts on the horizon.

Position 7/24/17:

Short AOBC shares @ $20.78, see portfolio graphic for stop loss.
Alternate position:
Long Sept $20 put @ $1.00, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


New intraday low. Volatility rose slightly in the afternoon after the Dow failed to cross resistance at 21,650 and the Nasdaq 100 closed negative.

The VIX historical low close was 9.31 on Dec 22nd, 1993. We are at those levels now.

Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.

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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