Option Investor

Daily Newsletter, Wednesday, 4/3/2019

Table of Contents

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

Market Wrap

Trade Hope Lifts Stocks

by Thomas Hughes

Click here to email Thomas Hughes


Trade lifts stocks but most of the good news is priced in. With the two sides nearing an agreement it is questionable how much further the major indices can advance. Today's action saw the broad market open higher but struggle to hold the gains.

Market Statistics

Today's trade news includes a report from the FT that U.S. and Chinese negotiators were closing in on a deal. Mnuchin, Lighthizer, and He have been able to overcome most issues with only a few sticking points left to be worked out. The major hurdle is what to do with current tariffs and enforcement; China wants the U.S. to remove all tariffs imposed since the trade war began, Washington wants some assurances China will stick to its promises.

The situation developing now is this; what kind of deal will be struck, and what will be left for Trade War Part II. Chinese views on intellectual property and hacking are at the core of the remaining issues and likely not to be resolved with the first deal. The good news is that, according to Kudlow, Chinese officials have begun to acknowledge we have a point when it comes to IP theft, forced tech transfers, and hacking, a development that helped move the trade talks along. Vice Premier Liu He is in Washington now talking with Mnuchin and Lighthizer.

In political news, Senator Elizabeth Warren has introduced a new bill that would make it easier to charge and jail executives for the wrongdoing of their companies and employees. While it is a good idea to hold people accountable the bill would open a can of worms, unleashing attack dogs on corporate America, and raises the question of double jeopardy. In her bill execs of companies with more than $1 billion in annual revenue, if found guilty of a crime or who have entered into plea agreements/settlements, would be liable.

Brexit drama wears on. The MP's have reached no consensus, Theresa May is unable to garner support for her deal, and the new Brexit deadline is next Friday. Without direction or a deal, May will have to ask for another extension and the EU will have to grant it or force the hard-Brexit.

Economic Calendar

The Economy

Today's data was good but subdued. Both the labor and PMI figures were lighter than expected and point to slowing and slowdown in the U.S. economy. On the labor front, the ADP report on payrolls says U.S. job creation totaled 129,000 last month. This is about 60,000 below expectation and about 60,000 below the consensus for Friday's NFP figure. Small businesses created almost no new jobs while mid and large-sized businesses both created 60,000+ new jobs. Manufacturing jobs shrunk by -6,000 led by a decline in construction jobs (probably weather related) while services job increased 135,000. There was also some weakness in the revisions, January was revised up by 14,000 but that was more than offset by a -36,000 decline in the December read.

Mortgage applications soared in the last week as interest rates continue to fall. The rate on a 30-year mortgage made its biggest decline in years hitting 4.36% in the last week. The total number of applications jumped 18.6% for the month, up 28% YOY, with most of the increase attributed to refi's. Refi applications jumped 39% MOM and 58% YOY while applications for mortgages to buy a house rose only 3.0% and 10% YOY. Regardless of the breakdown this is good news. On the one had apps for new houses are on the rise providing fuel for home sales while on the other, millions of Americans are locking in lower payments providing fuel for the consumer economy.

The Markit Services PMI was slightly better than expected at 54.6 but still down from the previous month. The read alleviated some fear of slowdown but not all and was offset by the ISM report. The ISM report on non-manufacturing PMI says activity slowed and more than expected. The headline index came in at 56.1%, expansionary, but down from 59.7% and less than expected 5.1%.

Activity, New Orders, and Employment are all positive but Activity and New Orders both slowed considerably. Employment edged up 0.7% to hit 55.9%. Prices paid also edged higher gaining 4.3% to hit 58.7%. The good news is that the economy expanded, the bad news is that acceleration is slowing faster than expected and prices are moving up again. The only data tomorrow is jobless claims and the Challenger report on layoffs.

The Dollar Index

The Dollar Index fell from yesterday's shooting star and has confirmed the top of the trading range. The move is driven by today's weaker than expected PMI data and compounded by strong data from abroad. In the EU PMI was hotter than expected and coupled with better than expected retail sales while in Australia retail sales were also above consensus and the trade surplus unexpectedly grew. If this situation persists, weak data at home and strong data abroad, the dollar is going to retest the bottom of its range in the not-too-distant future. The indicators are consistent with a top and the top of the range so sideways to downward movement is expected in the near-term. There is not a lot of data due out tomorrow but the ECB will be releasing its minutes and that could move the euro.

The Gold Index

Gold prices moved lower despite the falling dollar. The move is likely tied to the trade deal and growing likelihood a deal will be made soon. The spot price looks like it is consolidating for another move and that move is most likely lower. Price action is below my support/resistance target at $1,300 and forming a flag pattern that could send spot price down to $1,280. $1,280 is still a decent target for support; if it is broken though, a much deeper move becomes possible.

The Gold Miners ETF tried to rebound in today's session but met resistance. The ETF formed a small doji shooting star within the near-term downtrend and looks like it is heading lower. The indicators are consistent with a move lower but the decline might not get much further. The $21.50 level is a target for strong support; if that gets broken the long-term moving average is just below.

The Oil Index

Bearish inventory data had little effect on oil prices today. The EIA says U.S. crude stockpiles grew an unexpected 7.2 million barrels in the last week. While bearish, and compounded by rising U.S. production, it is also offset and mitigated by other data. On the production side of the equation, the EIA says U.S. drillers pumped 12.2 million barrels per day in the last week, a new record if confirmed.

Offsetting and mitigating the jump in crude supply is a larger than expected drawdown in gasoline (-1.8 million barrels) and distillates (-2.0 million barrels). Additionally, much of this weeks increase in crude reserves is due to downtime among gulf refiners. WTI moved up to set a new high but fell back by the close to post a small loss.

The XOI Oil Index fell in today's action shedding about a half a percentage point. The index fell from the long-term moving average and may move lower but support is just below at the short-term moving average. The index is being squeezed in a tighter and tighter range between the two moving averages and getting ready to pop. The indicators are perfectly neutral showing very little momentum or direction in prices. It looks like the market still can't make up its mind what to do but, with oil prices rising on OPEC support, a move higher is a more likely outcome. The caveat is in the data, slowing data is capping demand outlook and they may weigh on prices in the near term.

In The News, Story Stocks and Earnings

The chipmakers were among today's hottest sectors after a series of bullish reports hit the market. Analysts see a significant increase in business for Intel, AMD, and TSMC. The general consensus is factors over the past 2-3 months have tightened supply (after fear of oversupply had reached a peak) and the slowdown in shipments has bottomed. The Semiconductor Index advanced roughly 3.0% and set a new high but there are some red flags. First and foremost is the indicators which are both highly divergent from this new high. Second, the candle is very shooting star-like and price action looks frothy.

Constellation Brands is set to report before the opening bell tomorrow. The stock corrected harder than most at the end of last year and has yet to really recover despite a history of revenue and earnings growth. Based on today's action I think someone else thinks the company will report well tomorrow, the stock gained 1.7% and looks ready to move higher. Analyst sentiment is bullish, 19 of 27 who follow the stock recommend a buy, so upward movement is likely over the long-term.

The VIX moved up in today's session. More than that, it is confirming the presence of support at my target level of $13.40. It may be nothing but, in light of recent activity, the VIX looks like it could be reversing. The indicators are consistent with growing support at this level, if crossovers were to form here, I would consider it a strong signal. Until then we may see fear trend to the side as the market digests data, trade developments, and waits on earnings. If fear has entered a range the top is near 17.80, a move above that would be bullish for fear and bearish for the broad market.

The Indices

The indices advance but the move is timid and without commitment. The biggest move of the day was made by the NASDAQ Composite, 0.59%. The tech-heavy index was supported by today's move in semiconductors but, like the semis, the candle is not strong. Today's action shows resistance to higher prices and uncertainty among the bulls. A fall in tomorrow's trading would confirm it as a shooting star. The indicators are bullish so it is possible the index will move higher, the indicators are also significantly divergent from the high which suggests weakness and potential for correction. If the index falls my first target for support is 7,800.

The broad-market S&P 500 posted an advance of 0.21% and formed a spinning top doji. The candle is red bodies and sitting on potential support so the rally may continue. The risk is that today's is the second of two spinning tops which suggests a third is on the way. The indicators are weakly bullish but bullish which supports rising prices, the caveat is that they are diverging from the new high and reveal underlying weakness in prices. A move lower, a solid move lower, would confirm resistance at the key level of 2,873 and a previous all-time high.

The Dow Jones Transportation Average is showing resistance at the top of a two-month range. The index formed a tombstone doji after setting a new high confirming resistance at 10,685. The indicators are bullish so resistance is likely to be tested again; if it is broken a move up to 11,000 is possible. Notably, the short and long-term moving averages are forming a bullish crossover so there may be more to this move than meets the eye.

The Dow Jones Industrial Average made the smallest advance at 0.14%. The blue-chip index formed a small doji spinning top after setting a microscopically small new high. The indicators are bullish so higher prices are expected, the risk is that divergences are present here as well and that is never a good thing. The next target for resistance is at the all-time high, just shy of the all-time high.

The market looks like it will move higher. The problem is that the Vee-bottom correction is so extended, the market is so highly valued, resistance targets so immediate, that it's hard to get too excited about it. Factor in hope, the fact that hope is a major player in the Vee-bottom correction, and the cause for hope (trade talks) is so close to resolution, and the odds this bubble will burst soon grow exponentially. I'm not saying you shouldn't be bullish on near-term market movement, just not to expect too much out of it and be wary, I fear a correction is on the way. I am neutral for the near-term but still firmly bullish for the long-term.

Until then, remember the trend!

Thomas Hughes

New Plays

Cancer Fighter

by Jim Brown

Click here to email Jim Brown
Editor's Note

This small biotech is making significant progress in its cancer drugs. Inovio was beaten down in February but it was not knocked out.


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


INO - Inovio - Company Profile

Inovio Pharmaceuticals, Inc., a late-stage biotechnology company, focuses on the discovery, development, and commercialization of DNA-based immunotherapies and vaccines to prevent and treat cancers and infectious diseases. Its SynCon immunotherapy design has the ability to break the immune system's tolerance of cancerous cells, as well as is intended to facilitate cross-strain protection against known, as well as new unmatched strains of pathogens, such as influenza. The company is involved in conducting and planning clinical studies of its proprietary SynCon immunotherapies for human papillomavirus-caused pre-cancers and cancers; bladder cancer; glioblastoma multiforme; hepatitis B virus; hepatitis C virus; human immunodeficiency virus; Ebola virus; middle east respiratory syndrome; and Zika virus. Its partners and collaborators include MedImmune, Limited; The Wistar Institute; University of Pennsylvania; GeneOne Life Science Inc.; ApolloBio Corporation; Regeneron Pharmaceuticals, Inc.; Genentech, Inc.; Plumbline Life Sciences, Inc.; Drexel University; National Institute of Allergy and Infectious Diseases; United States Military HIV Research Program; U.S. Army Medical Research Institute of Infectious Diseases; National Institutes of Health; HIV Vaccines Trial Network; Defense Advanced Research Projects Agency; the Parker Institute for Cancer Immunotherapy; and Coalition for Epidemic Preparedness Innovations. Inovio Pharmaceuticals, Inc. was founded in 1979 and is headquartered in Plymouth Meeting, Pennsylvania. Company description from FinViz.com.

Inovio is developing new cancer treatments that deliver coded DNA to cells so they can create their own antibodies against the invading cancer cells. They have multiple trials in progress and the success of any one trial will catapult INO significantly higher.

The drawback is money. They ended the year with $85.5 million after burning through $69 million in 2018. In February they announced a secondary to raise another $82 million. The secondary was convertible notes at $5.38 in 2023. Since that is almost a slam dunk deal, investors trashed the stock because of the 17% dilution in 2023. I think that is very short sighted since we could see three years of stock gains before that comes to pass.

Earnings May 8th.

After crashing to $3.30 on the secondary announcement shares have started to rebound. Wednesday's close was a two-month high. They announced the early closing for enrollment on two different cancer trials. They also announced a new therapy against respiratory tract tumors in a new study. Good things are breaking out all over.

Buy INO shares, currently $3.86, stop loss $3.55.
Optional: Buy May $4 call, currently 35 cents, no stop loss.


No New Bearish Plays

In Play Updates and Reviews

Technicals Improving

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap index came to a dead stop at the 1,566 resistance but it was still a decent day. The A/D ratio on small caps was almost 2:1 advancers over decliners but the individual gains were minimal. Stocks were mostly positive but only barely. The index was repelled by the 1,566 resistance but remains poised for a breakout if we can get one more decent day in the big caps. There is still resistance at 1,600 and the 200-day at 1,575 so it will not be clear sailing. If the A/D remains positive, eventually we will get some short covering.

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

HAIN - Hain Celestial
The long call position was stopped at $21.85.

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

HAIN - Hain Celestial - Company Profile


No specific news but shares continued to fall from the JP Morgan downgrade on Friday. We were stopped out of the remaining long call.

Original Trade Description: March 2nd.

The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products. The company operates in seven segments: the United States, United Kingdom, Tilda, Ella's Kitchen UK, Canada, Europe, and Cultivate. It offers infant formula; infant, toddler, and kids foods; diapers and wipes; rice and grain-based products; plant-based beverages and frozen desserts, such as soy, rice, oat, almond, and coconut; flour and baking mixes; breads, hot and cold cereals, pasta, condiments, cooking and culinary oils, granolas, and cereal bars; canned, chilled fresh, aseptic, and instant soups; yogurts; chilies; chocolates; and nut butters. The company also provides juices, hot-eating products, desserts, cookies, crackers, frozen fruits and vegetables, pre-cut fresh fruits, refrigerated and frozen plant-based meat-alternative products, tofu, seitan and tempeh products, jams, fruit spreads, jellies, honey, marmalade products, and other food products. In addition, it offers snack products, such as potato, root vegetable, and other vegetable chips, as well as straws, tortilla and whole grain chips, pita chips, and puffs; personal care products consisting of skin, hair, and oral care products, as well as deodorants, baby care items, body washes, sunscreens, and lotions; and herbal, green, black, wellness, rooibos, and chai tea. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and clubs, and drug and convenience stores in approximately 80 countries worldwide. The Hain Celestial Group, Inc. was founded in 1993 and is headquartered in Lake Success, New York. Company description from FinViz.com.

In early February Hain posted earnings of 14 cents that missed estimates for 25 cents. Sales declined -5% to $584.2 million and missed estimates for $611 million. All of the guidance was terrible. Shares fell 20% on the news.

Shares began to rebound almost immediately. The company announced an investor day for February 28th and it was well received. Two analysts posted positive notes about the company the following day.

The most bullish event was a four million share purchase in the open market but the biggest shareholder, Engaged Capital. Director Glenn Welling has purchased five million shares since the analyst meeting and both entities were still buying on Thursday. I see a potential takeover play ahead or at the least and activist shareholder play. Shares are exploding higher on the active buying.

Earnings May 9th.

Update 3/15: Shares are still rising but there has not been any additional insider buying since March 7th when Glenn Welling bought 1.8 million shares and Engaged Capital also bought 1.8 million. Those two entities bought 7,949,822 shares in the week ended on Mar-8th at an average price of $20.25. That is $160 million in new purchases Engaged now owns about 15%.

Position 3/11/19:
Closed 4/3: Long May $23 call @ $1.00, exit .70, -.30 loss.

Previously Closed 4/1: Long HAIN shares @ $21.44, exit $22.85, +1.41 gain.

VIPS - Vipshop Holdings - Company Profile


No specific news.

Original Trade Description: March 30th.

Vipshop Holdings Limited operates as an online discount retailer for various brands in the People's Republic of China. It operates in two segments, Vip.com and Internet Finance Business. The company offers women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories that include belts, jewelry, watches, and glasses for women and men. It also provides handbags, which comprise purses, satchels, duffel bags, and wallets; apparel, gears and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers; sports apparel, sports gear, and footwear for tennis, badminton, soccer, and swimming; and consumer electronic products, including computers, mobile handsets, digital cameras, and home appliances. In addition, the company offers skin care and cosmetic products, such as cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish; and home furnishings comprising bedding and bath products, home decors, dining and tabletop items, and small household appliances. Further, it provides designer apparel, footwear, and accessories; and snacks and health supplements, and occasion-based gifts. Additionally, the company offers Internet finance services, which comprise consumer and supplier financing, and wealth management services. It provides its branded products through its vipshop.com, vip.com, and lefeng.com online platforms, as well as through its cellular phone application. Additionally, the company offers warehousing, logistics, procurement, research and development, consulting, and software development and information technology support services. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People's Republic of China. Company description from FinViz.com.

Earnings May 22nd.

In late February, the company reported earnings of 19 cents that beat estimates for 18 cents. However, revenue of $3.80 billion missed estimates for $3.96 billion. The 8.1% rise in revenue was down from a 16.4% rise in the prior quarter. The CEO said the weak quarter was the result of the company shifting some low margin categories from the "first-party business" and into the "marketplace platform." He said the move would result in a positive improvement in earnings beginning next quarter. For the current quarter they were only targeting 1-5% revenue growth and analysts were expecting 11.6%. The CEO cautioned that revenue growth was not the metric to worry about. The company is now focused on increasing profits rather than increasing revenue at any cost.

Zacks reiterated a buy rating saying earnings estimates had risen 5.9% over the last 60 days which includes the post earnings commentary. VIPS only has a 9.7 PE compared to 29.4 for the rest of the industry.

After the Zacks comments on the 25th the stock began escalating sharply and closed at an 8-month high on Friday. The stock is now over the 50, 100 and 200 day averages.

Position 4/1/19:
Long VIPS shares @ $8.19, see portfolio graphic for stop loss.
Optional: Long August $9 call @ 75 cents, see portfolio graphic for stop loss.

XON - Intrexon Corp - Company Profile


The company said it would align its operations into two units, Intrexon Health and Intrexon Bioengineering to better deploy resources and position the company for growth. They said the move was prompted by rapid growth at its Precigen subsidiary. Shares turned positive and reversed their recent slide.

Original Trade Description: March 13th.

Intrexon Corporation engage in the engineering and industrialization of biology in the United States. The company, through a suite of proprietary and complementary technologies, designs, builds, and regulates gene programs, which are DNA sequences that consist of key genetic components. It provides reproductive technologies and other genetic processes to cattle breeders and producers; biological insect control solutions; technologies for non-browning apple without the use of artificial additives; genetically engineered swine for medical and genetic research; commercial aquaculture products; and preservation and cloning technologies. The company also offers UltraVector platform that enables design and assembly of gene programs that facilitate control over the quality, function, and performance of living cells; and RheoSwitch inducible gene switch that provides quantitative dose-proportionate regulation of the amount and timing of target protein expression. In addition, it provides AttSite Recombinases, which allows stable, targeted gene integration and expression; LEAP automated platform to identify and purify cells of interest, such as antibody expressing cells and stem cells; ActoBiotics platform for targeted in situ expression of proteins and peptides from engineered microbes; and AdenoVerse technology platform for tissue specificity and target selection. The company serves the health, food, energy, and environment markets. Intrexon Corporation has collaboration and license agreements with ZIOPHARM Oncology, Inc.; Ares Trading S.A.; Oragenics, Inc.; Intrexon T1D Partners, LLC; Intrexon Energy Partners, LLC; Intrexon Energy Partners II, LLC; Genopaver, LLC; Fibrocell Science, Inc.; Persea Bio, LLC; OvaXon, LLC; S & I Ophthalmic, LLC; Harvest start-up entities; and others. The company was formerly known as Genomatix Ltd. and changed its name to Intrexon Corporation in 2005. Intrexon Corporation was founded in 1998 and is based in Germantown, Maryland. Company description from FinViz.com.

Intrexon reported a loss of 22 cents that beat estimates for 29 cents. Revenue of $43.2 million declined 44% and missed estimates for $62 million. It was not a good report.

The company's primary revenues come from collaboration and licensing along with some product and service revenues. Collaboration and licensing revenues declined 55% to $25.2 million. These revenues can be very sporadic which means some earnings reports can be ugly. However, the auditor is considering a "going concern" statement in the financials.

The company has $224 million in cash on hand and multiple streams of cash flow from these collaboration and licensing efforts. The CEO said there were multiple efforts underway to develop new revenue streams.

Last week, Bill Miller, of Miller Value Partners, a $2 billion investment fund, tweeted that current efforts underway could make the company worth many multiple of the current stock price. Shares began to rebound from the post earnings beating.

On March 8th, AquaBounty (AQB) a wholly owned subsidiary of XON, received permission from the FDA to import fish eggs from Canada and raise salmon in Indiana. I do not understand what is special about these eggs but shares of AQB spiked sharply.

I am recommending we follow Bill Miller and see if this inexpensive stock can at least return to the pre earnings levels.

Update 3/20: Subsidiary AquaBounty (AQB) priced a secondary offering of 3,345,282 shares at $2.25 per share to raise $7.5 million. This has no impact on XON.

Position 3/14//19:
Long XON shares @ $5.61, see portfolio graphic for stop loss.
Optional: Long July $6 call @ $.95, see portfolio graphic for stop loss.

BEARISH Play Updates

GME - Gamestop - Company Description


Gamestop (GME) reported earnings of $1.60 that matched estimates but was down from $2.02 in the year ago quarter. Revenue declined from $3.32 billion to $3.06 billion and missed estimates for $3.28 billion. Even worse they projected a 5% to 10% decline in revenue in 2019 and losses of up to 5 cents per share in Q1. The company is struggling to adapt to changes in the video game industry.

Microsoft has announced a new Xbox game console that only uses downloaded games. That prevents users from reselling the games to Gamestop on CDs as in the past. Apple and Google also announced new video game offerings that stream games through your browser and the game does not reside on your computer or mobile device. That means no CDs and no consoles needed to play the games. That means no resale opportunities for Gamestop. This is also going to impact the resale value of existing games and consoles. In addition to their woes, Activision Blizzard announced today they were going to release a battle-royale version of Call of Duty that would be free online in the month of April.

Shares fell below $9 at the open but rebounded sharply in what should be a dead cat bounce.

Original Trade Description: March 23rd.

GameStop Corp. operates as a multichannel video game, consumer electronics, and wireless services retailer. It operates in five segments: United States, Canada, Australia, Europe, and Technology Brands. The company sells new and pre-owned video game hardware; video game software; pre-owned and value video games; video game accessories, including controllers, gaming headsets, virtual reality products, memory cards, and other add-ons; and digital products, such as downloadable content, network points cards, prepaid digital and prepaid subscription cards, and digitally downloadable software. It also sells wireless products, services, and accessories; collectibles, such as licensed merchandise primarily related to the video game, television, and movie industries, as well as pop culture themes; gaming-related print media, and mobile and consumer electronics products; PC entertainment software in various genres comprising sports, action, strategy, adventure/role playing, and simulation; and carry strategy guides, magazines, and interactive game figures. In addition, the company operates e-commerce sites under the GameStop, EB Games, Micromania, and ThinkGeek brands; collectibles stores under the Zing Pop Culture and ThinkGeek brands; and Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores. Further, it provides Game Informer magazine, a print and digital video game publication; and operates Simply Mac, an authorized Apple reseller that sells Apple products, including desktop computers, laptops, tablets and smart phones, and related accessories and other consumer electronics products, as well as training, warranty, and repair services. As of March 28, 2018, the company operated approximately 7,200 stores across 14 countries. It primarily operates its stores under the GameStop, EB Games, and Micromania brands. The company was formerly known as GSC Holdings Corp. GameStop Corp. was founded in 1994 and is headquartered in Grapevine, Texas. Company description from FinViz.com.

Gamestop is headed to the same fate as Blockbuster. Gamestop sells preowned game consoles and video games. With Google announcing Stadia where all games are browser based and run on any device and computing power is not important, this is a major hurdle for Gamestop.

Microsoft announced a similar fate with plans on moving the Xbox to the cloud, called Project XCloud, and there will be no game consoles or game CDs.

With these two giants eliminating the hardware and software that is resold by Gamestop, this company is in a world of trouble. They do sell other products but consumers come into their stores for the games. With 7,200 stores they have a lot of overhead and their biggest revenue items are disappearing.

Granted, this will not happen overnight. These game conversions to the cloud will take months to take hold and many months to become the majority of market share. However, investors will see the future, with Blockbuster a prime example, and Gamestop shares are going to bleed value in the months ahead.

Earnings April 2nd. Normally we would not take a position in front of earnings but there will be analyst questions about the path of progress. The answers may be hard for investors to handle. I am recommending we own a put and hold it over the earnings report.

Position 3/25/19:
Long May $10 put @ 65 cents. see portfolio graphic for stop loss.

VXXB - Barclays VIX Futures ETN - ETN Description


Nearing a six-month low once again.

Original Trade Description: Nov 17th.

The investment seeks return linked to the performance of the S&P 500 VIX Short-Term Futures Index TR. The ETN offers exposure to futures contracts of specified maturities on the VIX index and not direct exposure to the VIX index or its spot level. The index is designed to provide investors with exposure to one or more maturities of futures contracts on the CBOE Volatility Index. Company description from FinViz.com.

The VXXB is a short-term volatility ETN 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 ETN. 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, the prior VXX ETN had done five 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 VXXB and its predecessor the VXX always decline long term.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETN and forget it. 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 may put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

The VXXB will be hard to short. The shares are out there and being traded because the volume on Thursday was 22.1 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.

Position 2/1/19:
Short VXXB shares @ $35.33, see portfolio graphic for stop loss.