Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/23/2019

Table of Contents

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

Market Wrap

Market Wobbles, Support Holds

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The equity market tried to rebound from Tuesday losses but gains didn't hold. The good news is that support is still present. Price action was very indecisive but no wonder, there is a lot for investors to think about and no end in sight for many of the market's woes. Earnings are coming in at a decent clip and better than expected but the cautionary tone from Davos and uncertainty on trade has people on edge.


Today's Davos headline(s) come from Jamie Dimon. He says the US economy is doing well and on course to do keep doing well. He also says there are obstacles (trade, Brexit, shutdown) that could slow or alter the economy if they are not overcome. The salient point I think is that the economy is doing well and on track to do well. The obstacles are there, yes, but when are there not obstacles for the market to overcome?

On the trade front, reports that the White House had canceled preparatory meetings scheduled ahead of next week's higher-level trade meeting have been all but forgotten. Kudlow's message that there was no meeting scheduled, no meeting canceled, was enough to sooth the restless beast. The general consensus is some progress will be made at the trade-meeting next week, at least enough to allow another meeting and postponement of threatened tariffs.

Market Statistics

In earnings news, UTX and Proctor & Gamble were among the top movers in the early session. Both reported before the bell and both delivered better than expected results and guidance. While the two have little in common they both report strong or solid sales growth in key units and expect that trend to continue. It is important to note that PG's results were boosted by higher prices and show successful pass-through of cost to the consumer.



The Economy

Economic Calendar

There was no economic data today and there is very little due out this week. Tomorrow is going to be the big day because everything scheduled for Friday won't come out, government shutdown. The shutdown rages on and still no sign of a solution. Trump said today he will deliver a State of the Union Address despite Pelosi's request otherwise. Pelosi later responded that the House wouldn't allow the State of the Union until the government is reopened. The two are now locked in battle, hopefully, it won't blow up in all of our faces.

The Dollar Index

Another central bank cycle is at hand, today's policy statement comes from the BOJ. The BOJ kept policy unchanged, lowered their inflation targets, and cited growing risks to the global economy. The news had the yen trading lower versus the dollar although the generally weaker outlook for global growth, trade, and political uncertainty had it down against just about everything else. The index fell below the short-term moving average in today's session and may move lower. The risk is in tomorrow's ECB meeting, a meeting that could send the dollar back to retest the recent highs if Draghi and crew turn dovish like the rest of the worlds central bankers.


The Gold Index

Gold moved sideways in today's session as traders wait on tomorrow's ECB meeting. The meeting isn't expected to bring a change in policy but it could bring a change in outlook that could keep the EUR, the USD, and gold moving sideways over the next week or more. Today's action shows support is still present at the short-term moving average, near $1,275, where it is possible a bounce may form. A move higher may take the metal up to retest the $1,300 level, a move lower may find support at my near-term trend line.


The Gold Miners ETF GDX moved sideways in today's action and is sitting on support at the long-term moving average. The ETF appears to be setting up for another push higher but that is dependent on gold prices, the dollar, and geopolitics. The indicators are consistent with consolidation and test of support so, while the ETF is above the 150-day EMA, I am cautiously bullish for this sector. A fall below the moving would negate that outlook and could happen as soon as tomorrow if the ECB meeting is substantially more dovish than what I expect.


The Oil Index

Oil prices continue to trend sideways near the $52.50 level. Today's action was light, weak, and within a tight range that produced a small spinning top candle. The market looks like it wants to move higher, perhaps because it believes OPEC can tighten the market again, but the slowdown in global economic activity and continuously rising US output won't let it. Sooner or later the outlook will change or US output will top-out but until it does I think there is more risk to the downside than up. A move below the short-term moving average could retest the long-term low below $44.


The Oil Index moved lower in today's session and is testing for support at the short-term moving average. The index is poised to move lower and may do so considering the outlook for earnings this year is the worst of all 11 S&P 500 sectors. The energy sector, due to low oil prices and slowing global growth, is expected to see EPS decline and that is a heavy burden for it to bear. If oil prices fall again the sector could fall hard too. A move below the 30-day EMA would be bearish and may lead to a retest of the 1,100 level.


In The News, Story Stocks and Earnings

Tesla got a downgrade from RBC that tips the scales in favor of the bears. Now that RBC is recommending an underweight holding there are more bears among the sell-side analysts than bulls. The downgrade is due to valuation lofty expectations the company has yet to meet. Goldman Sachs issues a similar warning and downgrade yesterday.

In company news, Tesla slashed its workforce in what it says are moves made for efficiency and continuing improvements. We can only assume these cuts will aid the company its quest for profitability. Many of the cuts were in non-essential areas like sales and delivery but there were cuts in the production staff as well. Shares fell -4.0% and could retest $260 in the near future.


Texas Instruments was among a number of tech companies to report after the bell. The company reported a mixed quarter that included a slight miss on revenue and a slight beat on the EPS end. Sales were weaker than the headlines show, a surprise widening of the gross margin offset the revenue miss to aid EPS. Forward guidance was also a bit on the weak side but investors didn't care, the company is yielding over 3.0% at current prices and able to cover its payment. Shares were up 0.50% in after-hours trading.


Ford reported a mixed quarter that resulted in a slight beat on the top line and a slight miss on the bottom. The company reports that sales in the US were strong but offset by losses in the EU, Latin America, and China. Mix and product pricing was favorable in the US as consumers move away from sedans into the SUV/Crossover category. Shares of the stock were up about 0.60% in after-hours trading.


Briggs & Stratton is another to report a mixed quarter and have investors shrug it off. The icon of small engines grew revenue a surprising 13.2% beating estimates by a substantial margin. EPS fell short on both a GAAP and non-GAAP basis but that shortfall was offset by the outlook. The company makes note of favorable momentum in sales of small engines and parts for commercial markets that is expected to continue. The news that really got the market's attention, however, was the revised guidance. Guidance was lowered to a range of $1.10 to $1.30 from $1.40 to $1.60, a big change, but not as much as some had feared the Sears bankruptcy would bring. Shares were up 1.5% in after-hours trading.


The Indices

Today's index was up, it was down, it was sideways but in all cases, it shows support is still present. The worst looking chart, the Dow Jones Transportation Average, shed -1.0% but even it shows the market is still supported. The candle is medium sized and red but the wick shows prices bounced off of the short-term moving average. The bounce was not strong but prices were able to hold the rebound into the close and momentum is bullish. Earnings are the key to the rally, so long as those continue to be good and the outlook for 2019 holds up the rally should be able to regain its footing. A move up would be bullish, my targets are 10,000 and then 10,280 if the index closes above 9,750.


The NASDAQ Composite also posted a loss but only about -0.10%. The tech-heavy index moved down in today's session to retest support at 7,000 and the short-term moving average where support is confirmed. This level of support is also consistent with a major, long-term trend line so it could produce a strong bounce with the right catalyst. The indicators are consistent with consolidation and potential for prices to fall so caution is still warranted. A move up from this level would be bullish and may test resistance at the long-term moving average.


The S&P 500 closed with a gain near 0.10% and created a small doji-like candle for today's session. The candle shows some uncertainty but also that support is present at the baseline of the Vee Bottom I talked about last week. So long as this support holds I am very optimistic a move higher will come, likely driven by earnings and possibly by trade news, an end to the shutdown, etc. Support is just above 2,600 and the short-term moving average, a break below which would be bearish. A move higher is likely to reach 2,700 in the very near-term and 2,775/2,800 in the near to short-term.


The Dow Jones Industrial Average closed with a gain of 0.70% after moving within a slightly wider range than its fellows. The blue-chip index created a medium sized doji candle sitting between the support of the short-term moving average and long-term moving average. The index is at a make-or-break moment where the long-term money gets back in the market or resumes selling so the next few trading days could be crucial. A move higher may find resistance at 24,735 and then near 25,500, a move lower may find support at 24,000 and the short-term moving average, a break of which would cancel the Vee Bottom reversal.


The market is indeed at a make-or-break moment; it has to decide if it is going to believe earnings and outlook for earnings or if it's going to succumb to fear.

The fears are not misplaced, there is some risk on all fronts, but so far the global recession is at still at bay.

The fears could become reality if the trade talks break down and tariffs burdens are intensified, until then I am cautiously optimistic they won't. Based on earnings, the reality that drives the market, the outlook is positive so I remain bullish for the long-term. Because there is still so much risk and fear in the market I am very cautiously bullish, at least until the next round of trade talks.

Until then, remember the trend!

Thomas Hughes

Quick note. My wife is due to deliver our second baby any day now. If there is no wrap on Thursday that is why. If there is no baby by Monday then we're going to induce so Monday's wrap may be brief.


New Plays

Quality not Quantity

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company is looking for quality customers, not volume of customers. It was very refreshing to hear SFIX say they were going for quality, not quantity.

 

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


NEW BULLISH Plays

SFIX - Stitch Fix - Company Profile

Stitch Fix, Inc. sells a range of apparel, shoes, and accessories through its Website and mobile app in the United States. It offers denim, dresses, blouses, skirts, shoes, jewelry, and handbags for men, women, and kids under the Stitch Fix brand. The company was formerly known as rack habit inc. and changed its name to Stitch Fix, Inc. in October 2011. Stitch Fix, Inc. was founded in 2011 and is headquartered in San Francisco, California. Company description from FinViz.com.

Stitch posted Q3 earnings in early December of 10 cents compared to estimates for 3 cents. Revenue rose from $295.6 million to $366.2 million and beat estimates for $358 million. They guided for Q4 for revenue of $360-$368 million. Analysts were expecting $363 million.

Shares sank because the expected growth was nearly flat. The company said it was changing its focus to quality long term customers rather than short term customers that are more costly. This is a great move but short sighted investors sold the stock.

They want to move away from customers that continually return everything in their box creating headaches for the company. They want to keep customers that actually buy some or all of the items in their box because that generates the profits. They don't want to add customers at a breakneck speed just to please analysts.

Shares rebounded from the December earnings drop and market crash to a two-month high on Friday. This week has seen a pullback, which could be an entry point.

Buy SFIX shares, currently $21.81, stop loss $19.92.
Optional: Buy March $23 call, currently $1.95, stop loss $19.50.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Sellers Return

by Jim Brown

Click here to email Jim Brown

Editors Note:

Earnings worries returned to weigh on the market as 2019 estimates decline. The Dow rallied to 294 at the open then fell to -97 before recovering. The worries remain the same with China, global economics and slowing growth leading the list. However, as we move through the Q4 earnings cycle the outlook for Q1 earnings has fallen significantly. At the beginning of October analysts expected 8% earnings growth and that has fallen to only 3%. That is stressing fund managers because a continued government shutdown and no resolution to the China trade issue could lead to an earnings recession. Stocks are in profit taking mode from four weeks of gains and as long as we do not start setting new lows the rally will eventually return.



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 again and that is holding AMD back. Earnings coming on the 29th.

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.



BOX - Box Inc - Company Profile

Comments:

No specific news. No material movement.

Original Trade Description: Jan 19th.

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage and share their enterprise content from anywhere or any device. The company's Software-as-a-Service 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 23 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, and energy industries, as well as government sector primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Box, Inc. was founded in 2005 and is headquartered in Redwood City, California. Company description from FinViz.com.

Earnings February 27th.

Box is a provider of cloud content management services to enterprise customers. Procter & Gamble and GE are two of its largest customers. Over the last several weeks there has been a persistent rumor they will be acquired. Google has been a rumored acquirer but it is more likely Microsoft or even Hewlett Packard could be interested.

Entering a position on acquisition rumors is rarely a good move. More than 90% of the time nothing happens. In this case revenue is growing in excess of 25% for 2018 and they guided for 20%+ for 2019. They also guided for their first quarterly profit in Q4 since they went public in 2015.

Their customer retention rate is close to 100% and they had more than 90,000 customers at the end of Q3. Box has enough scale that it makes sense to be acquired rather than a large company trying to replicate their product and service and spend years stealing market share. Buying Box now would be an instant add on to profits.

Shares broke over three-month resistance on Friday and the next material level is $24.

Position 1/22/19:
Long BOX Shares @ $19.74, see portfolio graphic for stop loss.
Optional: Long March $21 Call @ $1.00, see portfolio graphic for stop loss.



INFN - Infinera - Company Profile

Comments:

Shares still flat on news the president would sign an executive order regarding networking equipment made in China. It should actually help Infinera but the sector was down on the news.

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.



NUAN - Nuance Communications - Company Profile

Comments:

No specific news. Earnings date changed to February 7th.

Original Trade Description: Jan 16th.

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, see portfolio graphic for stop loss.

Optional: Long Apr $16 call @ 90 cents, see portfolio graphic for stop loss.



SNCR - Synchronoss Technologies - Company Profile

Comments:

Synchronoss partnered with Rackspace to resell the Digital Experience Platform (DXP).

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:

Minor decline but the morning spike was erased.

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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