Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/16/2019

Table of Contents

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

Market Wrap

Moving On Up

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Equities market shrug off slowing growth, trade concerns, and a failed Brexit in favor of earnings. I'm reasonably sure one of the aforementioned problems will raise its ugly head again but for now, it seems as if the market is focusing on what is really important; corporate profits. The season is still in its infancy but the signs are good we're going to see a good earnings cycle. So far we've gotten reports from most of the big banks and, while there has been some isolated weakness, core consumer businesses are good.

A look at the Banking Index says it all; A VEE bottom is confirmed.


On the political front, the government shutdown wears on. There is growing speculation on the impact of the shutdown should it linger into the end of the quarter but no two sources seem to agree. Pelosi and Trump don't seem to be on a path to get it ended so we may find out. Today's news is a message from the new Speaker of the House to President Trump, reschedule the State of the Union or submit it in writing.

Market Statistics

On the Brexit front, Theresa May's deal with the EU was soundly rejected and resulted in a new vote-of-confidence. The vote, this afternoon, confirmed the May government but did little to enlighten us on the path forward. May says Parliament must find solutions that are negotiable and have a majority of support from UK citizenry, a goal they've been working towards for two years. The question now is what happens next. It seems more and more likely a hard-Brexit is inevitable, Jamie Dimon says the UK may have to take whatever the EU offers if they want to get this thing done.

Economic Calendar

The Economy

There was quite a bit of data due out today include the December read on retail spending. The data was delayed by the government shutdown and is not likely to be released until the shutdown is over. Without data to guide it the market will be forced to rely on secondary and anecdotal sources, analysis, and conjecture which is not a good foundation to build on.

We did get a read on Home Builder Sentiment and Import Prices. Home Builder Sentiment rose by two points to 58 as buyers begin to come back to the market. The gains were driven by lower interest rates, evidenced by high double-digit increases in mortgage applications over the past two weeks, and are likely to continue into the coming months. The three sub-indices all showed improvement but the traffic of buyers remains below 50 and levels seen last year.

Import prices fell a full percent in the last month which is a good thing. The only problem is that the analysts had been expecting -1.3% which makes this month's figure a miss. Regardless, the data show downward pressure in inflation and further evidence the FOMC needs to hold off on future rate hikes.

The CME Fedwatch tool shows an equally low chance for a single rate hike or rate cut this year, about 14% each. What this means is that we're probably going to see no hikes or no cuts this year without some change to circumstances. One possibility is the shutdown could last all quarter and lead the US to the brink of a recession or worse (not likely in my view), another is that a trade deal will be struck with China and global activity will rebound (more likely I think).


The Dollar Index

The Fed's Beige Book was much as expected and did little to move the dollar. According to the monthly report on US economic activity continues to increase in most of the country; eight of the twelve districts reported modest to moderate growth. Non-auto retail sales grew modestly, manufacturing continues to expand if at a slower pace, and the outlook remains generally positive. Market volatility, rising rates, trade uncertainty, and geopolitics have had a negative impact on outlook.

Employment and wages grew throughout the country, no surprise there. The majority of districts are reporting a shortage of workers with some noting some establishments are turning away business due to a lack of staffing. Regarding prices, prices continue to rise at a modest to moderate pace. Most firms are indicated a rise in input costs but a smaller amount have been able to pass those costs on to the consumer.

The Dollar Index edged higher in the early part of the session but gave up the gains well before the Beige Book was released. The index created a small green candle but the upper shadow confirms yesterday's resistance at the short-term moving average so I'm not expecting much of a move higher. Tomorrow's Philly Fed Index is likely to echo the Empire State survey from earlier this week; if it does it will be a weak read and could push the Dollar Index lower. A move above the short-term 30-day EMA could be bullish but would leave the index within the long-term trading range, a fall from this level may be bearish but only if it can break below $95.05.


The Gold Index

Gold prices were able to drift higher in the Wednesday session but spot gold remains within the near-term congestion band. The band, between $1,280 and $1,300, bears the hallmarks of a bullish flag pattern that may soon be confirmed. A move up and above $1,300 would be bullish but is not yet seen in the indicators. The indicators are showing some weakness that may lead the metal lower but, until then, are consistent with consolidation within the uptrend. If prices do move higher and break resistance I'd expect to see gold hit $1,325 and $1,350 over the next few weeks.


The Gold Miners ETF GDX has retreated to support at the $20.50 level and may be ready to move higher. This is assuming that gold moves higher because if it doesn't there isn't much hope for this index. The support level is probably a strong one, it has been a crucial pivot point since the gold correction last summer and confirmed by the short and long-term moving averages. The indicators are moving lower which is a cause for concern but until prices break $20.50 and then fall below the long-term moving average things are looking good for price action to rebound. A move up would be bullish but may be capped at $21.50, a move above there could go to $22.00 or $23.00 in the near to short-term.


The Oil Index

Oil prices were able to hold steady amid today's mix of inventory data. The EIA says crude stockpiles fell 2.6 million barrels, about double the expected, but distillates and gasoline more than made up the difference. Distillate stockpiles rose almost 3 million barrels, also double the expected, while gasoline stocks rose by 7.5 million barrels, almost 3 times the expectations. Along with this, the EIA says US crude production could top 12.9 million barrels per day by next year which means we will be pumping more than enough to offset OPEC's production cuts. Today's price action has WTI trading above the short-term moving average but still below a key resistance point. If resistance is not overcome soon, and considering the inventory data, oil prices could begin falling again.


The Oil Index tread water in today's session and is positioned much like the underlying commodity. The index is consolidating above the short-term 30-day EMA but below a resistance point with the future in question. With oil prices so low the energy sector is expected to post the worst earnings of the year which includes negative growth for most quarters. The only thing supporting the sector is buybacks, dividends, and potential for dividend increases. A move up from here would be bullish but may not go far, there is resistance at the 1,300 level and then the long-term moving average near 1,350.


In The News, Story Stocks and Earnings

Blackrock reported earnings before the bell and the money manager reported a -50% decline in net-inflows. Total revenue missed by a hair but was down from the sequential quarter and the same quarter in the previous year. Assets under management also fell. The results were bad but not so bad considering the market was expecting worse. Reports from Citigroup, JP Morgan, and others showed significant weakness in trading-related revenue that could have cut much deeper into Blackrock's bottom line. The market chooses instead to focus on a 5% increase to the dividend which helped drive the stock higher. Blackrock advanced more than 4% in today's session and looks like it could be reversing a downtrend that has shaved nearly 50% off its share price over the last year.


Bank of America reported before the bell and blew past consensus estimates. The company reports revenue grew more than 11% over the last year and that the consumer is strong. EPS of $0.70 beat by $0.07 on strength in Consumer Banking and Global Wealth Management. Consumer Banking net income grew 52%, Global Wealth by 43%. There was a small decline in trading revenue, about -6%, but nothing like what we've seen from banks with exposure to the segment. Shares of the stock gapped up at the open, opened above the long-term moving average, and moved higher from there. By the end of the day the stock was up more than 7.60% and supported by strong momentum.


Goldman Sachs also reported before the bell and absolutely smashed the consensus estimates. The company reported revenue of $8.08 million, down in the YOY comparison, but a half billion above the expected. The strength in numbers was driven by strength in net investment income, Investment Banking, and Institutional Services, and aided by an improvement in operating costs. Shares of this stock gained nearly 10% and closed at the high of the session.


Rail giant CSX reported after the bell and delivered a package of nice surprises. The company beat on the top and bottom lines with revenue up more than 10% over the last year. Revenue is driven by broad-based volume growth, pricing gains, and a favorable mix. The company also announced its best ever operating ratio, up 40 basis points in the last quarter, and a fresh $5 billion share repurchase program that has the stock trading down -2.0% in the after-hours session.


The Indices

The indices moved higher and the price action looks good. In all cases, a VEE-ish bottom is forming after the December low and most indices are confirming the move.

The Dow Jones Industrial Average led today's market with a gain near 0.60%. The blue-chip index opened slightly above yesterday's close, above the baseline of said VEE bottom, and moved higher from there. The index is supported by rising momentum and stochastic that point to a continuation of the 2019 rally. A move higher is likely to find some resistance at the long-term moving average, a move above that would be bullish for the long-term and likely result in a retest of the all-time highs.


The Dow Jones Transportation Average posted the second largest gain in today's session but is the least advanced in its reversal. This index is still below the baseline of its potentially VEE bottom and that is a concern. The indicators are bullish but also still showing some weakness in an index I'd rather see leading the market than lagging. Today's resistance was just above 9,610, a move above that would then to cross another resistance target at 9,750 before it would be in the same position as the broader market. Today's after-hours report from CSX


The S&P500 posted the largest advance with a gain near 0.30%. The broad market index is well above the baseline of its reversal pattern and set a new high with today's candle. The index is also indicated higher so a move to test the long-term moving average is likely. My next target is 2,700, a move above that may find resistance at the 2,750 level.


The NASDAQ Composite was the weakest mover in today's session, no surprise since it isn't very heavily weighted toward financials. The index is above the baseline of a reversal pattern, and above the short-term moving average so further upside is likely as the earnings season progresses. The indicators are a bit weak but consistent with consolidation within an uptrend so I am not worried at this time. A move higher will confirm this outlook but may face some resistance at the long-term moving average. A move above that would be bullish.


I am so happy, earnings season is here and the market is not focused on the FOMC, or too heavily on trade. The results are good so far and, based on what the bankers are saying about the consumer, should continue to be good throughout the cycle and on into the rest of the year. Like they say, when its bad for Wall Street it's good for Mainstreet and that is what we've seen over the last year. Wall Street has been struggling with a lot of issues while labor markets, wages, consumer health, and retail spending all improve. Now, Mainstreet is back and ready to drive the economy to new highs over the next year (s). I am firmly bullish for the long-term and cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes


New Plays

Back from the Dead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Analysts were ready to turn out the lights, but this company recovered. Nuance has recovered half of the market crash losses and still moving up briskly.

 

New positions are only added on Wednesday and Saturday except in special circumstances.


NEW BULLISH Plays

NUAN - Nuance Communications - Company Profile

Nuance Communications, Inc. provides voice recognition and natural language understanding solutions worldwide. It operates through five segments: Healthcare, Automotive, Enterprise, Imaging, and Other. The Healthcare segment offers clinical speech and clinical language understanding solutions, such as Dragon Medical, a dictation software that allow physicians to capture and document patient care in real-time; transcription solutions, which enable physicians to streamline clinical documentation with a transcription platforms; clinical document improvement and coding solutions; diagnostic solutions that allow radiologists to document, collaborate, and share medical images and reports; and professional and personal productivity solutions to business users and consumers. The Automotive segment provides branded and personalized virtual assistants and connected car services for automotive manufacturers and their suppliers. The Enterprise segment offers On-Premise solutions and services, an automated customer service solution that comprise automated speech recognition, voice biometrics, transcription, text-to-speech, and dialog and analytics products; and On-Demand multichannel cloud, a platform, which offers enterprises the ability to implement automatic customer service. The Imaging segment provides multi-function printer (MFP) scanning and document management solutions; MFP printing and document management solutions to capture and automate paper to digital work flows; and PDF and OCR software for capturing, creation, and management of document work flows. The Other segment offers voicemail transcription and other value-added services to mobile operators; and speech recognition solutions and predictive text technologies for handset devices. The company was formerly known as ScanSoft, Inc. and changed its name to Nuance Communications, Inc. in October 2005. Nuance Communications, Inc. was founded in 1992 and is headquartered in Burlington, Massachusetts. Company description from FinViz.com.

Multiple positive headlines over the last three weeks plus an appearance at the JP Morgan healthcare conference last week has brought new life to Nuance.

In mid November the company announced the spinoff of its automotive unit and shares tanked in an already down market. The spinoff will be completed before the end of 2019 so it is not anything that should impact price today.

Their expertise in voice recognition software is being married with a new AI background to bring this technology to a wide range of applications. Organic revenue rose 12%.

Shares have rebounded from $12.50 to $15.20 in three weeks and could easily retest their November highs near $18 on the new business applications. Fund managers are looking for beaten down small cap stocks as we move into 2019.

Earnings February 19th.

Buy NUAN shares, currently $15.20, stop loss $14.35.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Strongest Index

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell was actually the strongest index with a 9.5 point gain. The Dow gained 141 but 116 points of that gain was Goldman Sachs. This is encouraging to see the small caps rally while the rest of the market was stagnant. Unfortunately, the futures are sinking tonight.



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


Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.


BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile

Comments:

The chip sector was weak today and that weighed on AMD and the Nasdaq.

Original Trade Description: Dec 22nd.

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. It operates in two segments, Computing and Graphics; and Enterprise, Embedded and Semi-Custom. The company's products include x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. It provides x86 microprocessors for desktop PCs under the AMD Ryzen, AMD Ryzen Pro, Threadripper, AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; microprocessors for notebook and 2-in-1s under the AMD Ryzen processors with Radeon Vega GPUs, AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brands; and microprocessors for servers under the AMD EPYC and AMD Opteron brands. It also offers chipsets under the AMD brand; discrete GPUs for desktop and notebook PCs under the AMD Radeon and AMD Embedded Radeon brand; professional graphic products under the AMD Radeon Pro and AMD FirePro brands; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. In addition, it provides embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, G-Series, and AMD Embedded Radeon brands; consumer graphics under the AMD Radeon brand; and semi-custom SoC products. It serves original equipment and design manufacturers, datacenters, system integrators, distributors, and add-in-board manufacturers through its direct sales force, independent distributors, and sales representatives. Advanced Micro Devices, Inc. was founded in 1969 and is headquartered in Santa Clara, California. Company description from FinViz.com.

AMD was always the red-headed stepchild that Intel kept around to prevent Intel from being called a monopoly. They let them have just enough business to keep them going. After decades of picking up Intel's scraps, the company has finally come of age and has announced multiple processor families that are more technological advanced than Intel's chips and they are 12-18 months ahead of Intel's first foray into this level of manufacturing.

Cloud operators are taking notice of the faster, cooler, cheaper processors and this sector buys hardware by the truckload. AMD is stealing market share from Intel and this is likely to accelerate as these new processor families flood the market before Intel can catch up.

Earnings Jan 23rd.

Over the last two weeks of Nasdaq decline, AMD pulled back to uptrend support and could be ready to rebound sharply if the market cooperates.

Update 1/10: AMD's president and CEO, Dr Lisa Su, gave the keynote address at CES 2019 on Thursday. She announced the fastest GPU video card they have ever produced running on a 7nm process. The card has 60 compute units, 3840 stream processors, 16gb of ultra-fast HBM2 memory with a 1 TB memory bandwidth for stunning high speed graphics on 4K and 8K monitors. Shares popped at the open but faded in the afternoon.

Position 12/24:
Long April $20 Call @ $1.70, see portfolio graphic for stop loss.



INFN - Infinera - Company Profile

Comments:

No specific news. Shares faded with the market.

Original Trade Description: Jan 5th.

Infinera Corporation provides optical transport networking solutions, equipment, and software and services worldwide. The company's product portfolio consists of Infinera DTN-X Family of terabit-class transport network platforms, including the XTC Series, XTS Series, and XT Series; Infinera DTN-X XTC series multi-terabit packet optical transport platforms that integrate digital OTN switching and optical WDM transmission; and Infinera DTN-X XT series for terrestrial applications and XTS series for subsea applications. It also provides Infinera XTM Series packet-optical transport platform that enables high-performance metro networks with service-aware, application-specific capabilities; and Infinera Cloud Xpress Family designed to meet the varying needs of ICPs, communication service providers, Internet exchange service providers, enterprises, and other large-scale data center operators. In addition, the company offers Infinera FlexILS open line system platform that connects various Infinera and third-party terminal equipment platforms over long-distance fiber optic cable providing switching, multiplexing, amplification, and management channels. Further, it provides software solutions, including Xceed Software Suite that address long-haul, subsea, and metro networks, as well as a range of support services for all hardware and software products. The company also serves telecommunications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, enterprise customers, and government entities. It markets and sells its products and related support services primarily through its direct sales force. The company was formerly known as Zepton Networks. Infinera Corporation was founded in 2000 and is headquartered in Sunnyvale, California. Company description from FinViz.com.

Earnings Feb 5th.

Infinera is a global supplier of terabyte speed network equipment. They are in nearly every country. Their products handle long haul data transmission even in undersea links.

Shares collapsed back in early November when they reported earnings. The CEO said the company had seen a pause in sales as buyers evaluated the combined company. They had just purchased Coriant. The CEO said revenue in Q4 would increase by 50% because of the acquisition but they would post a bigger loss on acquisition expenses.

For Q3 they lost 4 cents and analysts were expecting a 5-cent loss. The guidance for Q4 was a loss of 26-30 cents because of the acquisition.

Shares fell to $3.50 post earnings. Over the last week they have recovered to $4.25 and appear to be accelerating higher. Resistance is $5.

This is not a fast mover, but all the bad news is now priced into the stock.

Readers have been requesting more low dollar stock recommendations and this would fit that scenario.

Update 1/10: The Australia to Japan undersea cable completed a major upgrade of the 12,700 kilometer cable system using Infinera ICE4 devices allowing multi terabit capacity.

Position 1/7/19:
Long INFN shares @ $4.22, stop loss $3.75.

Optional: Long April $5 Call @ 31 cents, no stop loss.



REI - Ring Energy - Company Profile

Comments:

No specific news. Shares stalled thanks to the stall in oil prices at $51.

Original Trade Description: Dec 29th.

Ring Energy, Inc., an exploration and production company, acquires, explores for, develops, and produces oil and natural gas in Texas, the United States. As of December 31, 2017, the company's proved reserves consisted of approximately 31.9 million barrel of oil equivalent. As of the above date, it also had interests in 8,102 net developed acres and 61,772 net undeveloped acres in Andrews and Gaines counties; and 10,235 net developed acres and 9,682 net undeveloped acres in Culberson and Reeves counties. It primarily sells its oil and natural gas production to end users, marketers, and other purchasers. The company was formerly known as Transglobal Mining Corp. and changed its name to Ring Energy, Inc. in March 2008. Ring Energy, Inc. was founded in 2004 and is headquartered in Midland, Texas. Company description from FinViz.com.

Ring is an up and coming shale oil producer. With oil prices down so sharply over the last three months, Ring shares were knocked back to $4 after trading above $16 in May. The decline in crude prices is about over. The current $45 level is not economic for many producers and a major pain level for the OPEC nations. They are rapidly cutting production to lift prices higher. This will lift all the US energy stocks as well.

Their Q3 earnings were 14 cents beating estimates for 11 cents. Revenues of $32.7 million rose from $16.4 million in the year ago quarter. Revenues for the first 9 months of 2018 rose from $43.4 million to $92.5 million. Production rose from 346,900 barrels to 555,020 barrels, a 59.9% increase. Gas volumes increased 39.2% to 280,200 Mcf. On a Boe basis production rose 58.1% from 380,426 to 601,720 Boe.

They closed an acquisition of 4,763 net acres in Andrews County Texas on December 26th that gave them 55 new horizontal drilling locations. The leases are adjacent to Ring's currently operated properties. The seller was Tessara Petroleum, a wholly owned subsidiary of the Carlyle Group. The Carlyle Group took payment in stock saying, "We have chosen to receive consideration in the form of stock as we believe Ring is a best-in-class operator and the assets being transferred are synergistic with Ring's existing properties that lie just across the lease line. We are fortunate to have found a partner that we admire and trust and look forward to seeing Ring increase its scale and value over time."

The Carlyle Group are smart people. If they believe Ring is going to appreciate, it is likely to happen. Ring's production is growing rapidly and with oil prices rebounding the stock should continue rising as well.

Position 12/31/18:
Long REI shares, currently $5.28, see portfolio graphic for stop loss.



SNCR - Synchronoss Technologies - Company Profile

Comments:

No specific news. Breakout appears to be imminent.

Original Trade Description: Jan 5th.

Synchronoss Technologies, Inc. provides cloud, digital, messaging, and Internet of things platforms, products, and solutions worldwide. Its products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. The company also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, healthcare, and life sciences markets; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.

At CES 2019, Synchronoss Technologies announced a partnership with TBCASoft to redefine telecom operators with a blockchain payment processing system. This will allow users to make instore payments, mobile and digital purchases directly from their phones using the Synchronoss secure-multichannel communications platform. Payments can be made vis SMS, email and rich communications services (RCS) leveraging the TBCASoft cross-carrier blockchain payment system. Synchronoss plans to leverage distributed ledger technology to remove middlemen parties typically found in other payment ecosystems.

Shares rose 20% over the last 10 days as the news surrounding CES became known in the investor marketplace. The stock is on the verge of a breakout to a seven-month high.

Earnings Feb 6th.

Position 1/14/19:
Long SNCR shares @ $6.75, see portfolio graphic for stop loss.
Optional:
Long March $7.50 call @ 60 cents, see portfolio graphic for stop loss.



BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

Volatility rebounded despite the flat market and big gain in the Dow. We just need the market to remain positive for another week without any major hiccups.

The VXX will eventually be single digits but it could be months in the future.

Previously: Earlier this year, a reader emailed me saying a friend was short 1,000 shares. When the $21 spike came in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.

I wrote in the prior newsletter that we were not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position. In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better tonight.

Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!

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.
Position 9/6/18:
Short VXX shares @ $54.27, see portfolio graphic for stop loss.

Average cost = $47.61.





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