Option Investor

Daily Newsletter, Wednesday, 1/24/2018

Table of Contents

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

Market Wrap

Wobbly Market Sets New Highs

by Thomas Hughes

Click here to email Thomas Hughes


The indices set new highs in a mixed session; traders are waiting on the ECB, GDP and Trump talk from Davos. Through it all earnings continue to roll in. On average businesses are beating expectations and giving positive forward outlook but there are some areas of concern. One concern, estimated tax savings aren't quite what the market was expecting. The savings are there but earnings growth estimates haven't reached the 20% level like some proponents put forth. . . yet.

Asian indices were mostly up on positive earnings and economic outlook although there was one notable laggard. The Japanese Nikkei 225 fell nearly a full percent the day after hitting a 26 year high. The move is driven on profit taking and a stronger yen. European indices were flat to up in the early part of the session but fell later in the day to close with losses near -1%. The move was due to mixed earnings and economic uncertainty. Data over the past month or so has been weak to tepid, consistent with ongoing expansion but not consistent with acceleration in the economy. Today's PMI data shows slowing in the EU manufacturing sector offset by acceleration in the services sector.

Market Statistics

Futures trading was flat to up in the early morning and gained some strength going into the open. The trade was driven by positive earnings and comments from Davos attendees like Jamie Dimon. Mr. Dimon sees tax cuts driving wage growth and inflation, and a surge in economic growth to above 4%. The open was calm, the SPX began the day with a small gain and then moved slightly higher. The index set a new all time high, as did the Dow Jones Industrial Average and NASDAQ Composite, but failed to hold the gains. By 11AM the indices were moving down from the highs and approaching break even. By 1 oclock they were firmly below break even and by 1:30 at the lows of the day. By 2PM they were bouncing off of those lows and once again approaching break even levels where they hovered into the close.

Economic Calendar

The Economy

Markit's Flash PMI reading shows another month of solid growth in the US economy. Although the composite and services readings both showed slowing of expansion both were positive. Composite PMI fell to 53.8 and an 8 month low while services PMI fell to 53.3 and a 9 month low. Offsetting this data and leading the economic expansion is manufacturing PMI which rose to 55.5 and a 34.4 month high. Manufacturing output rose to 56.2 and a 12 month high.

Existing Home Sales fell -3.6% in December but remained positive for all of 2017. Full year 2017 existing sales grew by 1.1% and is the best year for sales since 2006. Economist at the NAR say the gains were driven by strong growth in labor. A shortage of homes for sale has led to higher prices which have in turn curbed what may otherwise have been robust sales. They don't give a forward outlook but do make comments to the effect low inventory could continue to hurt sales this year.

The Dollar Index

The Dollar Index shed more than -1% to hit $89.00 and a 3 year low. The move is driven on improving global economics, trade war fears and comments from Steve Mnuchin. The Treasury Secretary let it be known that the administration is not concerned with a weaker/weakening dollar and may even welcome it. Today's move brings the index down to a possible support target but there is no sign of support as yet. Tomorrow the ECB will release their policy statement, if they alter their policy stance like they've indicated they're ready to do the dollar could see more losses.

The Gold Index

Gold prices moved up to set a 4 month high on today's weakening dollar. The move carried spot price up to $1,359 and may go higher if trade war fears persist. LG has already indicated it will raise prices in response to Trump's tariff's, if more manufacturers follow suit Americans could see washing machine inflation begin to pick up. Gold prices are now approaching resistance targets near $1362.

The Gold Miner's ETF GDX gapped up at the open to create a small green bodied candle and set a 4.5 month high. The move is bullish but not supported by both indicators. MACD is bullish but very weak and divergent from the new highs while stochastic is also divergence and not looking bullish at all. Today's move is highly questionable and may correct quickly. One such chance is tomorrow with the ECB, if the bank fails to meet market expectations the euro could tumble from its new multi-year highs versus the dollar, drive the Dollar Index higher and gold lower. After that 4th quarter GDP on Friday could be a mover, and then of course there is the FOMC meeting next week to watch out for. Regardless, the ETF is likely to remain within the longer term range; top is near $25.60.

The Oil Index

Oil prices surged to set a new 3 year high. The gains were driven by a tenth week of stock draw-downs on top of last week's lower rig count. It looks, for now, as if US production is not meeting the needs of the market but there are risks for the bullish outlook. The first is that the US has seen record cold temperatures across the bulk of the country over the past 6 weeks and this is leading to above average use of heating fuels. The second is that US producers aren't going to sit on the sidelines forever, high prices will bring them and others to the market. Forward outlook remains the same; well supplied market in 2018 are expected to lead to average prices near $53.

The Oil Index gained 0.50% on today's gains in oil. The index moved up to create a small red bodied candle setting a new three year high. This move is trend following, supported by rising oil prices and the indicators although there are some warnings signs. Both MACD and stochastic are bullish and in support of higher prices but both are also showing divergence from the newly set high that is consistent with a weakening rally. This may lead to a consolidation and/or correction at some point in the future, caution is due. Until then the trend is up, new target is 1,500.

In The News, Story Stocks and Earnings

Comcast, one of America's leading cable/internet providers, reported earnings this morning before the bell. The company delivered a line-up of good news that sparked a volatile day of trading. Earnings and revenue beat expectations on 350K new subscribers, the company also increased the dividend, announced a stock buy back and improved guidance. The news sparked buying which drove it up to set a new all time high. This sparked profit taking which caused the stock to fall sharply. Support came back into play however, leaving the stock very nearly at break even creating a long legged doji.

GE also reported before the bell. The multi-national conglomerate reported a -5.1% decline in YOY earnings, missing estimates by $2.66 billion and falling short of EPS as well. The company offset this news with an upgrade to guidance and comments like “cash flow is improving” and plans to cut another $2 billion in structural costs. It also revealed it is the focus of an SEC investigation into insurance payments. Shares of the stock opened with a gain but that was quickly reversed leaving them down more than -2% at the close.

United Technologies also reported before the bell. The company reports revenue grew by 7.0% YOY, beating estimates, leading to adjusted EPS of $1.60. Adjusted EPS beats last year but does not take into account a tax charge related to the tax reform. Forward outlook is good and above expectations. The company is expecting to see accelerating sales and revenue growth in the range of 4-6%. They also say they are planning repatriate $2 billion off shore profits. Shares of the stock opened lower, moved up to set a new high, then fell back to close near the open creating a long legged candle with small green body. This is indicative of resistance at the recently set high. Correction is possible but for now it looks like the stock is forming a consolidation pattern with chance for continuation.

The Indices

The indices hit a hiccup on their march to new highs but new highs were reached in today's session. That being said not all indices set new highs and the one most notable is the Dow Jones Transportation Average. The transports fell more than -2% intraday, closing with a loss near -1.25%, and created a small doji candle. This doji is hammer-like and may indicate near term support although there is potential for further downside. The indicators have rolled over into bearish crossovers which, in an uptrend, usually lead to consolidation or correction. A firmer target for support is near 11,000 and just below that at the moving average.

The NASDAQ Composite also close with a loss but only about half that of the transports. The tech heavy index also set a new all time high but did so while creating a red bodied candle. The candle is a dark cloud cover but a weak one, it may lead to consolidation or near term correction but is not an indication of major market shift. The indicators are bullish and consistent with uptrend if a bit mixed in the near term. A move up would be trend following and bullish, a move lower may confirm the onset of consolidation/correction but not a full reversal.

The broad market S&P 500 posted the smallest gains, near 0.15%, but created a small red bodied candle. The index is drifting higher and showing a little bit of froth with today's action but nothing to be concerned about yet. The indicators are bullish and consistent with higher prices, upside target in new all time high territory. A fall from this level may be bearish but would, at this juncture, more likely result in a consolidation move than deep correction.

The Dow Jones Industrial Average posted the largest gain, about 0.30%, and created a small hanging man doji. Today's candle is indicative of indecision and pause but not in any significant kind of way, it looks like average daily action within an uptrend. The indicators are bullish and consistent with higher prices although they are a bit mixed in the near term. A move lower may find support at 26,000, a move below there would likely go to 25,500. A bounce or move up from this level would be bullish and trend following with upside target near 27,000.

The markets are moving up in the near, short and long term, there is no denying that. Today's action was a bit disconcerting but does not, at the end of the day, appear to be anything for the bulls to worry about. There are some concerns including the renewed threat of trade wars but none have yet had impact on earnings growth or earnings growth outlook. Until that happens I am bullish. I remain cautious for the near term because there just isn't any reason to go nuts.

Until then, remember the trend!

Thomas Hughes

New Plays

Volatility Kills

by Jim Brown

Click here to email Jim Brown
Editor's Note

Extreme volatility kills positions as investors panic and run to the sidelines. With another 285-point Dow reversal today, we need to be careful. The last time the Dow crashed -300 points from its intraday highs, the market rebounded the next day. That will not always be the case. The small cap A/D line was negative 3:1 today suggesting more weakness than was evident in the closing numbers. With the S&P futures down -4.50 as I type this, the market could open negative again. There is no reason to add new plays with increased volatility at market highs just because it is a newsletter day.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Sellers Appear

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes hit new intraday highs before sellers caused a significant reversal. The Dow fell -285 points intraday before rebounding 144 points to close with a 41-point gain. The Nasdaq fell 109 points from the intraday high to -86 but recovered half of those losses at the close. The decline in the Nasdaq influenced the Russell, which fell from the new intraday high to close back under 1,600. Too many big name analysts are warning the market is overvalued and investors are starting to take them seriously.

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

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

BB - Blackberry Ltd - Company Profile


No specific news. We have a $13 put so we are not in danger of a big loss.

Original Trade Description: January 8th.

BlackBerry Limited operates as security software and services company in securing, connecting, and mobilizing enterprises worldwide. The company operates in three segments: Software & Services, Mobility Solutions, and Service Access Fees (SAF). The Software & Services segment offers enterprise software and services, including mobile-first security, productivity, collaboration, and end-point management solutions for the Enterprise of Things through the BlackBerry Secure platform; BlackBerry technology solutions, such as BlackBerry QNX, Certicom, Paratek, BlackBerry Radar, and intellectual property and licensing; AtHoc, which provides secure, networked crisis communications solutions; SecuSmart that offers secure voice and text messaging solutions with encryption and anti-eavesdropping facilities; licensing and services related to BlackBerry Messenger; and cybersecurity consulting services and tools. The Mobility Solutions segment engages in the development and licensing of secure device software and the outsourcing to partners of design, manufacturing, sales, and customer support for BlackBerry-branded handsets. This segment also develops software updates for its legacy BlackBerry 10 platform, and delivers BlackBerry productivity applications to Android smartphone users via the Google Play store; and sells its DTEK60, DTEK50, Priv, Leap, and Passport smartphones and smartphone accessories, as well as offers non-warranty repair services. The SAF segment consists of operations related to subscribers using mobile devices with its legacy BlackBerry 7 and prior operating systems. The company was formerly known as Research In Motion Limited and changed its name to BlackBerry Limited in July 2013. BlackBerry Limited was founded in 1984 and is headquartered in Waterloo, Canada. Company description from FinViz.com

Expected earnings March 21st.

BlackBerry started out as a smartphone manufacturer under the name Research in Motion (RIMM). Over the years they failed to keep pace with Apple and Android and the BlackBerry phones are now just a niche market and they contract with another company to have them made.

BlackBerry has evolved into a software and services company with security software, mobility solutions, and dozens of other categories. The company is now the largest provider of automobile operating systems with tens of millions of cars using their QNX software.

They are using their experience in auto OS to build the next generation of autonomous vehicles. They announced last week that Baidu had chosen them to help develop self-driving technology. Baidu said "by integrating the QNX OS with the Apollo platform, we will enable carmakers to leap from prototype to production systems." BlackBerry radar, an asset tracking solution, is already available at more than 2,800 heavy-duty truck dealerships across North America. This software and equipment tracks trucks, loads, trailers, containers, heavy machinery and other transportation assets. Trucking companies and shippers can track the location of their cargo and vehicles in real time all the time.

Last week they reported earnings of 3 cents that beat estimates for a breakeven quarter. Revenues of $226 million beat estimates for $212 million. The company guided for the full year for revenue of $920-$950 million with software revenue up as much as 15%. This was the second quarter of positive earnings surprises after a long drought of weak results. The company promised positive EPS and cash flow for the future.

There are rumors in the market that BlackBerry could suddenly become an acquisition target because of their small size of $8 billion market cap and vast array of growing software services. Shares spiked to a new 4-year high on the earnings and guidance and the stock is suddenly hot once again. This is not some new fad company. There is history and there is a remarkable turnaround in progress.

I am going out to June with the option to get past the March earnings. There is likely to be some profit taking from the recent gains, so we need to buy some time.

I am going to recommend the stock but I am adding a March put, just in case the rebound fails. I fully expect the stock to be significantly higher a couple months from now but I am recommending a 50 cent insurance policy.

Update 1/16: BlackBerry launched a product called BlackBerry Jarvis. This is anti hacking software for self driving cars. Manufacturers can use it to scan their product before they are released to look for weak points that could be hacked. Tata Motors said the product allowed them to cut the analysis time down from 30 days to 7 minutes.

Position 1/9/18:
Long BB shares @ $14.22, see portfolio graphic for stop loss.
Long Mar $13 put @ 50 cents, see portfolio graphic for stop loss.

Alternate position: Long June $15 call @ $1.30, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


Since this is a long-term slow moving ETF position, there will not be daily commentary.

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Update 10/26: Shares of BOTZ fell 50 cents for the biggest one-day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.

HIBB - Hibbett Sports - Company Profile


No specific news. Minor decline in a weak market.

Original Trade Description: January 22nd.

Hibbett Sports, Inc., together with its subsidiaries, operates athletic specialty stores in small and mid-sized markets primarily in the South, Southwest, Mid-Atlantic, and the Midwest regions of the United States. Its stores offer a range of merchandise, including athletic footwear, team sports equipment, athletic and fashion apparel, and related accessories. The company also sells merchandise directly to educational institutions and youth associations. As of January 28, 2017, it operated 1,059 Hibbett Sports stores and 19 Sports Additions athletic shoe stores. Hibbett Sports, Inc. was founded in 1945 and is based in Birmingham, Alabama. Company description from FinViz.com.

Earnings expected on Feb 16th.

Hibbett had a tough 2017 with shares crashing back to $10 on various problems including those created by Nike and Under Armour. The shoe and sports apparel business was very weak but that has turned around and even Nike is posting strong gains. Retailers in every sector are surging.

Last week Bank of America upgraded HIBB from underperform (sell) to a buy and hiked the price target from $14 to $30. The analyst said a successful launch of its ecommerce business and very easy comps for the next 12 months made Hibbett a buy.

The ecommerce launch at the beginning of last quarter added 5% to same store sales and helped eliminate a lot of aged inventory. They expect ecommerce to be accretive to 2018 earnings. The analyst also said it was providing sales from areas where Hibbett does not have stores and therefore was not cannibalizing sales at existing locations.

BAC said Hibbett had reallocated footwear space and styles for faster sales of Nike and Adidas products.

Hibbett has a healthy balance sheet, low PE, active buyback program and high short interest.

Position 1/13:
Long HIBB shares @ $26.25, see portfolio graphic for stop loss.
Alternate position: Long March $30 call @ $1.40, see portfolio graphic for stop loss.

IMMU - Immunomedics Inc - Company Profile


No specific news. New intraday high and only a minor decline at the close.

Original Trade Description: December 23rd.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, focuses on the development of monoclonal antibody-based products for the targeted treatment of cancer, autoimmune disorders, and other diseases. The company engages in developing antibody-drug conjugate (ADC) products comprising IMMU-132, an ADC that contains SN-38, which is in Phase II trials used for the treatment of patients with metastatic triple-negative breast cancer, and small-cell and non-small-cell lung cancers; IMMU-130, an anti-CEACAN5-SN-38 ADC that is in Phase II trials for the treatment of solid tumors and metastatic colorectal cancer; and IMMU-140 that targets HLA-DR for the potential treatment of liquid cancers. It also develops products for the treatment of cancer and autoimmune diseases, including epratuzumab, anti-CD22 antibody; veltuzumab, anti-CD20 antibody; milatuzumab, anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. The company also provides LeukoScan, a diagnostic imaging product to determine the location and extent of infection/inflammation in bone. In addition, it offers other product candidates for the treatment of solid tumors and hematologic malignancies, as well as other diseases, which are in various stages of clinical and pre-clinical development. The company has a research collaboration with The Bayer Group to study epratuzumab as a thorium-227-labeled antibody. Immunomedics, Inc. was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics recently announced a blinded trial on breast cancer drug sacituzumab govitecan showed positive results. The drug is an anti-TROP-2 antibody that can target multiple tumor types including breast cancer, lung cancer and colorectal cancers. This would be a holy grail of cancer treatment if the drug continues to post solid results. The drug is being tested to treat triple negative breast cancer, a tough-to-treat indication with limited treatment options. These cases represent 15% of the 246,660 new cases of breast cancer reported each year resulting in 40,450 deaths per year. In the recent trial the "objective response rate" or ORR was 31% or nearly double the historical rate for the standard treatment of these patients. The company plans to file for an accelerated FDA approval in early 2018. An independent study of this drug by an outside firm estimated it could produce $3 billion in annual sales by 2025.

Obviously, there is no guarantee the drug will be approved or be successful in the real world but the outlook is promising and it is lifting the stock price. Shares broke out to a new 15-year high on Friday and could continue to make new highs as long as the research on this drug and others continues to be positive. Seattle Genetics (SGEN) owns 7.3% of the company and executed warrants to acquire 8.6 million shares on December 5th for $42.4 million. They obviously believe the drug has potential.

Hopefully the potential for a blockbuster drug will insulate us from any market negativity in January.

Update 1/8/18: Royalty Pharma bought $75 million of IMMU shares at $17.15 per share, 15% over the current price. They also paid $175 million for the rights to market Sacituzumab Govitecan (IMMU-132) on a global basis. They will pay a royalty of 4.15% on a step down basis until sales reach $6 billion annually then the rate will be 1.75%. The $250 million in cash will allow IMMU to fund its next phase of growth with expenses covered well into 2020. Shares declined slightly since the stock sale added to the shares outstanding.

Position 12/26/17:

Long IMMU shares @ $14.69, see portfolio graphic for stop loss.
Alternate position: Long Feb $16 call @ $1.15, see portfolio graphic for stop loss.

JCP - JC Penny Company - Company Profile


No specific news. Retail sector was weak after Toys-R-Us said they were closing 180 stores.

Original Trade Description: January 10th.

J. C. Penney Company, Inc., through its subsidiary J. C. Penney Corporation, Inc., sells merchandise through department stores. The company sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products, home furnishings, and appliances, as well as provides various services, including styling salon, optical, portrait photography, and custom decorating. As of November 10, 2017, it operated approximately 874 department stores in the United States and Puerto Rico. The company also sells its products through its Website, jcpenney.com. J. C. Penney Company, Inc. was founded in 1902 and is based in Plano, Texas. Company description from FinViz.com.

This is going to be a short play description. JCP had been left for dead as the next retailer to disappear after Sears because they are both anchor tenants in dying malls across America. A funny thing happened on the way to bankruptcy court. JCP actually began to recover.

The company raised guidance last week saying same store sales rose 3.4% thanks to strong demand for home goods, beauty products and jewelry. The company said their ecommerce sales rose double digits. They reaffirmed their full year earnings forecast and the CFO warned Sears, "we are coming after your appliance business." That is pretty cocky and suggests JCP is a long way from dead.

Expected earnings Feb 9th.

Shares are suddenly recovering and the outlook has improved significantly.

The best thing about this position is that the May option is very cheap since investors have not really caught on to the recovery yet. We can slip in and take a position and hold the option over earnings and we could have a big long term winner.

Position 1/11/18:
Long JCP shares @ $3.97, see portfolio graphic for stop loss.
Alternate position: Long May $4 call @ 60 cents, see portfolio graphic for stop loss.

TTMI - TTM Technologies - Company Profile


No specific news. Third consecutive minor decline. Time for a rebound.

Original Trade Description: January 20th.

TTM Technologies, Inc., together with its subsidiaries, manufactures printed circuit boards (PCBs) worldwide. It provides a range of PCBs and electro-mechanical solutions, including conventional PCBs, high density interconnect PCBs, flexible PCBs, rigid-flex PCBs, custom assemblies and system integration products, and IC substrates. It also produces test specialized circuits that are used in radio-frequency or microwave emission and collection applications; printed circuits with heavy copper cores, and embedded and press-fit coins; PCBs with electrically passive heat sinks; and PCBs with electrically active thermal cores. In addition, the company offers various services, including design for manufacturability, PCB layout design, simulation and testing, and quick turnaround services. The company's customers include original equipment manufacturers and electronic manufacturing services companies that primarily serve the networking/communications, cellular phone, computing, aerospace and defense, and medical/industrial/instrumentation end markets of the electronics industry; and the U.S. government. TTM Technologies, Inc. was founded in 1978 and is headquartered in Costa Mesa, California. Company description from FinViz.com.

TTMI is an underappreciated chip stock. Earnings are rising and they are growing by acquisition. For Q3 they reported earnings of 32 cents on revenue of $667 million. For Q4 they guided for earnings of 49-55 cents on revenue of $700-$750 million. This was the fourth consecutuve quarter of organic growth, revenues and earnings that exceeded guidance.

On December 3rd they announced a deal to acquire radar components maker Anaren for $775 million in case from Veritas Capital. Anaren produces microwave components for wireless, space and defense electronics providers and counts Raytheon Co Lockheed Martin Corp, and Northrop Grumman Corp as customers. TTMI said the deal would immediately reduce costs and be accretive to earnings.

Earnings expected on Feb 7th.

Shares are about to break out to a six month high over $17.50 ahead of earnings. The short-term trend over the last month has been steadily higher. They have long-term resistance at $19.50 and a break over that level would be a new high and cause significant buying.

I do not usually recommend stocks just before earnings. I am suggesting we play the stock position and exit before the Feb 7th event. I am recommending we hold the very inexpensive option over the earnings in hopes of a real breakout to new highs. The stock closed at $17.59 so the $17.50 strike is expensive and risky. The next strike is $20, well OTM but the price is only 35 cents. It is a cheap bet on a positive earnings breakout.

Position 1/22:
Long TTMI shares @ $17.48, see portfolio graphic for stop loss.

Alternate position: Long March $20 call @ 34 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


Since this is a long-term slow moving ETF position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF 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 five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

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 into year-end we could see a sharp decline in the VXX over 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.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.

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