As the rally stretches into its second week, the Volatility Index is dropping fast. After hitting 30 last week the index closed at 19.38 today and almost a two-month low.
The drop in the $VIX is finally having an impact on our long-suffering VXX short. If the rally continues even at a slower pace we could see the VXX return to 20.
We were stopped out on the BG short after the stock rallied 5% on no news other than Zacks reiterating their "strong sell" recommendation.
That minor loss was offset by JB Hunt, which hit our exit target this morning for a $4.50 per share gain.
The Dow broke over strong resistance but the S&P has yet to reach the equivalent position at 1,950. That could be the level that stops this rally unless the S&P rolls over at a lower high before then.
We are in overbought territory so we should expect some profit taking soon.
Current Position Changes
JBHT - JB Hunt
The long position in JBHT was closed for a $4.50 gain when the $78.50 target was hit.
LGF - Lions Gate Ent
The long position in LGF remains unopened.
SGI - Silicon Graphics
The long position in SGI remains unopened.
BG - Bunge Ltd
The short stock position in BG was stopped at $51.25. The long put is still open.
Check the graphic above for any profit stops in green.
We need to always be prepared for a profit exit at resistance.
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.
BULLISH Play Updates
GPRO - GoPro - Company Profile
GoPro gapped back over resistance at $12.70 at the open and managed to hold that level throughout the day. That was a 4% gain.
Original Trade Description: February 8th
GoPro is the number one action camera maker and created the current market. They moved from a simple camera maker to a content creator over the last couple years. At least that is what they wanted people to believe so that their sky high PE would be based on something other than simply a hardware company.
Fast forward to 2015 and 5-6 companies began to compete with action cameras of their own. GoPro's market share began to dwindle. A botched roll out of a new model in Q3 and two prices cuts in Q4 has knocked their share price down from $65 in August to $9 on Thursday.
One of the problems that GoPro has been unable to conquer is the relatively hard method to recover, edit and publish videos produced by the cameras. They have promised new software for a couple years and it never seems to arrive or fails to satisfy when the updates appear. This is a drag on future camera sales because you have to be a geek to produce any quality videos.
News broke today that GoPro had licensed its video technology, certain file storage and other system technologies. While the details are still unclear this could be a Hail Mary pass to Microsoft for help with their software problems. If it is not related to that then there is something else going on that could provide a boost for GoPro in the future.
Lastly, the drop in market cap from $8 billion to $1 billion makes them a very attractive acquisition target for somebody like Sony or even Under Armour. Microsoft could buy them with their pocket change.
Shares appear to have bottomed at $10 but just in case we can buy a March $10 put as protection for 97 cents. This means we have unlimited upside and almost zero downside risk. If somebody makes an offer for GoPro I would expect it to be $15 or more simply because the company is not in financial trouble. They currently has no debt and $474 million in cash. They just need to get over this technical problem and they will be fine.
Long GPRO shares @ $10.65, no stop loss.
Long March $10 put @ 99 cents, no stop loss
Net debit $11.64.
JBHT - JB Hunt - Company Description
JBHT spiked to $78.81 shortly after the open to hit our exit target at $78.50 for a $4.50 per share gain. The play is closed.
Original Trade Description: February 10th.
While the majority of the transportation sector has been in decline in response to lower energy costs trucker JBHunt has been expanding its fleet, hiring new drivers and increasing load volumes across the country. In its most recent earnings report the company produced EPS in line with estimates but it is the internal data that is most promising.
JBHunt Transport services and its wholly owned subsidiaries is a diversified transportation and logistics company operating throughout North American. Operations are centered in the United States with some portions operating in Canada and Mexico. The company operates in the intermodal space using its own fleet and to some extent third party operators in 4 sub-segments.
Fourth quarter results were good. Earnings were in line with expectations on flat revenue but as mentioned, it is the internals that are most interesting. Q4 operating income was up 5% over the previous year with a 9% increase in EPS. Full year results include a 13% increase in operating income with a 16% increase in EPS. Full year revenue was flat, not something we necessarily want to see, but when taken in light of lower fuel surcharges is not the red flag it would seem to be. Remember, in recent years revenues among the entire transportation sector have been inflated due to surcharges related to what were then record fuel prices.
Three of the four business segments showed notable increases. The Integrated Capacity Solutions segment, management of third party transportation services, showed a 4% decline in revenue due to decreased spot market activity and lower revenue per load. The other three segments; Intermodal, Dedicated Contract Services and Trucking all showed notable increases in revenue of 1%, 2%, and 3% respectively for a total operating revenue increase of 9%.
Drivers of the gains, no pun intended, include increases in new customers, revenue realizations from previous rate increases, improved fuel economy, lower maintenance costs attributed to newer equipment, less reliance on third party shippers, increased fleet size and improving margins. These were offset by higher wages and increased costs of recruitment and retaining employees but those cost are ultimately a sign of ongoing improvement in the labor market and the consumer that will eventuall spill over into this and other segments of the economy.
Earnings results are all well and good but the reason why we really like this stock is two-fold; a recent dividend increase and a couple of analyst upgrades. The board of directors approved and announced a 5% increase to the dividend on January 28th. According to the board earnings and free cash flow warrant the increase. As for upgrades, there were two; one in early January and another just after the earnings report was released. The stock was upgraded from hold to buy at BB&T and from peer perform to outperform by Wolfe Research. Based on the average analyst target of $87.14 there is still a minimum upside potential of 16%.
Buy the May $80 call with a trigger price of $74.00.
Position 2/12/16 with a JBHT trade at $74
Closed 2/22: Long JBHT shares @ $74, exit $78.50, +$4.50 gain
Closed 2/22: Long May $80 call @ $2.25, exit $2.80, +.55 gain.
LGF - Lions Gate Entertainment - Company Description
LGF posted only a minor gain after a sharp spike at the open. If we see one more decline before breaking out I will cancel this recommendation. No change in play.
This position remains unopened until LGF trades at $21.25.
Original Trade Description: February 17th.
Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.
Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.
The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.
One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.
Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.
The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.
I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.
With a LGF trade at $21.25
Buy LGF shares, initial stop loss $17.85
Buy June $23 calls, currently $1.55, no initial stop loss.
SGI - Silicon Graphics Intl - Company Profile
SGI posted a minor gain with a high at $5.99. It did not reach the trigger point of $6.05 to open the position. The resistance at $6 is holding.
This position remains unopened until SGI trades at $6.05.
Original Trade Description: February 19th
Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.
SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.
In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.
Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.
I believe the worst is over and the shelf registration forgotten in light of the partnership news.
I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.
Earnings are April 27th.
With SGI trade at $6.05
Buy SGI shares, stop loss $5.25
SWHC - Smith & Wesson - Company Description
Resistance at $24 still haunting us with the high today at $24.01 before a $1 intraday decline.
I raised the stop loss to $22.85 because the stock should have rallied today after the weekend shooting in Michigan and President Obama's gun speech again today.
Original Trade Description: January 21st.
Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.
The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.
December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.
While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.
S&W said they were on the hunt for candidates but did not have any announcements at the current time.
This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.
Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.
Earnings March 8th.
Long SWHC shares @ $21.35, see portfolio graphic for stop loss.
Long June $23 call @ $1.75, see portfolio graphic for stop loss.
USO - US Oil Fund ETF -
4% rally on the short covering in WTI ahead of the switch to the April futures contract as front month at the close.
This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.
Original Trade Description: January 27th
The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.
Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.
The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.
If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!
Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.
I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.
Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.
While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.
Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.
I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.
2/1/16: Position entered with a USO trade at $9.00:
Long USO shares @ $9.00, no stop loss.
Long USO July $10.00 calls @ $.85. No stop loss.
WU - Western Union - Company Description
WU closed at a 3 day high at $18.37 and appears to be getting ready to move higher if it can overcome that resistance at $18.60.
Original Trade Description: February 12th
Western Union is one of the more recognizable names in the market. Although the mode of transport has changed from stagecoach to digital the basic business model has remained the same for 165 years, the transfer of wealth. Western union is money transfer and payment solutions provider operating in 34 countries with 3 business segments; person to person, person to business and business solutions.
The company reported earnings earlier this week and results were good. Despite the negative impact of currency conversion, the company was able to meet expectations and provide forward guidance in line with expectations. Merely meeting expectations is not enough to get the market excited but the inclusion of a -$0.15 impact into the forward guidance and the recent decline in dollar value is reason enough to think guidance could be low.
Speaking of the dollar. I don't mean to completely discount the impact of currency conversion. Merly to point out that the projected impact for 2016 may be too high. Looking at the chart of the DXY it is clear that the dollar is declining in value and trending in the average range we saw in 2014. If it continues to fall back to the bottom of the range negative impact in 2016 should be no worse than 2015.
Results for the 4th quarter and full year 2015 were good. The company reported earnings of $0.42 on revenue of $1.38 billion; earnings were in line with estimates, revenue was short by 0.02 billion. In constant currency this is a 3% gain in revenue for the fourth quarter and a 4% gain for the full year. There were a couple of other red flags in the report but all related to currency conversion. One was margin. Margin improved from 20% to 20.9% in 2015 but is expected to fall back to 20% in the coming year.
Any reduction in earnings due to narrowing margin should be more than overcome by increased revenue. Economies in North America and Europe, the two largest segments by region totaling more than 40% revenue, are both strong and growing. Speaking solely of the US labor trends and earnings point to strength and should fuel person to person transactions, 80% of total business.
Another reason to expect revenue expansion is the expanding footprint. The company operates in over 200 countries, 34 added in the past year, including 100,000 kiosks and ATM's and is planning to continue expanding into 2016. At the same time the company is expanding its services and has recently added a 3rd payment solution, the WU Connect, which enables users to offer Western Union services on their platforms.
On a technical basis the stock looks like it is in reversal and heading higher. The stock is moving up off of a double bottom with increasing volume. Volume has been on the rise for the last month, the last week has been more than 2X average daily. Today the stock jumped 4% to break above the short term moving average. MACD momentum is bullish and on the rise, confirming the break. Stochastic is still weak but consistent with a signal early within a bullish movement. Today's action saw prices hover around $0.85 with a Delta of 0.48. The average analyst estimate for the stock is just over $18.79, not high, but the data pool is skewed to the upside with low outliers dragging down the mear. The high target is $24.
The option is cheap so I chose the May expiry to give the stock time to move.
Position 2/16/16 with WU trade at $18
Long WU shares @ $18, see portfolio graphic for stop loss.
Long May $18 call, entry .79, see portfolio graphic for stop loss.
BEARISH Play Updates
BG - Bunge Limited - Company Profile
The short stock position was stopped out at $51.25 on a 5% spike in BG shares at the open. There was no news. Friday's downdraft was completely reversed.
The long put is still open with a stop loss at $51.85.
Original Trade Description: February 18th
Bunge is an agricultural business and food company. They sell food, commodities and fertilizer on a global basis to more than 40 countries. Last week they reported earnings on February 11th and they were not good. Earnings came in at $1.49 compared to estimates for $1.56. Revenue of $11.1 billion missed estimates for $11.6 billion and that was well below the year ago quarter at $13.2 billion.
The company guided lower saying the strong dollar was weighing on revenues and declining economic conditions in countries like Brazil are limiting the available funds to import food. Pricing power is falling as commodity prices continue to decline worldwide.
Adding to Bunge's problems was a cargo of French wheat that was rejected by Egypt because of what they claimed was excessive levels of the ergot fungus. The generally accepted level for fungus is 0.05% and apparently, Egypt decided the content was higher than the standard. Since it is impossible to halt the naturally occurring fungus entirely, it exists in every load. Egypt made the unusual statement that they would have "zero-tolerance" for fungus in the future. If Egypt can get away with that qualification then other countries could try to change their rules as well. Bunge is suing Egypt and the cargo of wheat is still parked off the Egyptian port of Damietta. Egypt subsidizes bread for its population of 88 million.
Reportedly Bunge is trying to resell the wheat but it may be difficult since the rejection has tainted the cargo. The decision by Egypt for zero-tolerance has pressured the prices for wheat to $179 per ton and a five-year low. This hurts future sales by Bunge to any other country.
To recap, Bunge missed on earnings and revenue, guided lower for 2016 and has seen future commodity sales threatened by the Egyptian move and the falling prices of their various commodities.
Shares fell sharply after earnings from $58 to $46. An instant rebound appeared to $53 but that is now fading as the bad news sinks in and the outlook for Bunge's earnings dims even further. I believe that we could see the stock price return to those lows from last week, if not lower. Shares had already been declining since last June.
With a BG trade at $49.75
Stopped 2/22/16: Short BG shares @ $49.75, exit $51.25, -1.50 loss.
Long April $47.50 put @ $1.80, stop loss $51.85
VXX - VIX Futures ETF ETF - ETF Description
The drop in volatility is accelerating with the VXX nearing two-month lows. If the rally continues even at a slower pace, we could see a return to 20.
Original Trade Description: August 24, 2015
The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).
You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.
How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.
Here is an explanation from the product website:
The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.
The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.
I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.
Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.
Short VXX @ $21.82, no stop loss.
Second Position 9/2/15:
Short VXX @ $29.01, no stop loss.
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
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