Bids evaporated and the Dow declined 800 points in less than 15 minutes. This was a once in a generation event in the market. At least I hope it is once in a generation. The Dow was down -1,600 points at the low for the day and lost -1,175 at the close. The Nasdaq lost -273 points. That is not a typo. The market is in meltdown mode but at these levels there may be a rebound in our future.
I am suspending the new update schedule until the volatility passes.
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.
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
KTOS - Kratos Defense
The long position was entered at the open.
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BULLISH Play Updates
KTOS - Fratos Defense and Security - Company Profile
No specific news.
Original Trade Description: February 3rd
Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.
Earnings Feb 26th.
We played Kratos several months ago when they were just beginning to win contracts for their target drones. Now they are winning contracts and have vehicles in advanced tests as attack drones that can fly with F16s and F35s and function as ground attack aircraft and aerial defense aircraft.
Kratos has found a niche in the unmanned aircraft business. Last week they were chosen to participate in a multi company award for $998 million for the Air Force TETRAS program. This is to develop a multi function drone that will be used for Command, Control, Communications, Computer Intelligence, Surveillance and Reconnaissance or C4ISR. The military sure loved their alphabet soup names.
Also last week, Kratos completed the first milestone in the Enterprise Ground Services (EGS), Command and Control System-Consolidated (CCS-C) and the transition of the Military Satellite Communications (MILSATCOM) satellite C2 system into the EGS. I don't know what all of that means but it is part of the Air Force Enterprise Space Battle Management Command and Control system (BMC2) currently being developed.
The key point here is that Kratos has been winning these awards nearly every week and they are rapidly integrating themselves into every phase of the military's attack and defense communications network in addition to their highly intelligent drone division.
The prior week Kratos announced that numerous high performance unmanned drone aircraft had completed multiple missions for customers around the world in tactical and threat representation missions. They do sell to other customers than the US military.
With Kratos rapidly advancing their capabilities and winning larger and larger contracts, they are likely to seen even more business once the defense funding is approved by congress.
Shares did NOT decline in the market selloff last week. I am recommending an options only position using a longer term option and we will hold over their earnings on Feb 26th.
Long May $12.50 call @ $1.10, see portfolio graphic for stop loss.
VIPS - Vipshop - Company Profile
No specific news. Only a minor decline in a weak market.
Original Trade Description: January 27th.
Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including 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 consisting of belts, fashionable jewelry, watches, and glasses for women and men. The company also provides handbags, such as purses, satchels, duffel bags, and wallets; apparel, gear and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers of all age groups; sports apparel, and sports gear, and footwear for tennis, badminton, soccer, and swimming; and skin care and cosmetic products, including cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish. In addition, it offers home furnishing products comprising bedding and bath products, home decors, and dining and tabletop items; small household appliances; designer apparel, footwear and accessories; and snacks, health supplements, and occasion-based gifts, such as chocolates, moon-cakes, and tea. Further, the company provides consumer financing, supply chain financing, and wealth management services. The company provides its branded products through its vipshop.com, vip.com, and lefeng.com Websites, as well as through its cellular phone application. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People's Republic of China. Company description from FinViz.com.
VIPS has about a 6% market share in e-commerce apparel in China. Currently there is a battle in progress for market share among numerous major players including Alibaba and their various websites. They all exist in come part under the Alibaba umbrella.
Tencent (TCEHY) and JD.com (HD) are two of the major online players. They just announced an $853 million stake in VIPS. Tencent bought a 7% stake for $604 million and JD.com put up another $259 million to increase their stake from 2.5% to 5.5%. FYI Tencent owns a 21% stake and Walmart owns a 10% stake in JD.com. These are major players who believe VIPS is going to grow significantly.
VIPS is the 4th largest business to consumer online retailer in China behind Alibaba's Tmall, JD.com and Suning, in that order. Over the last 12 months VIPS increased its active customers by 22% to 6.5 million. The company is expanding out of apparel and accessories and into things like pharmaceuticals. On Alibaba's Singles Day, VIPS handled more than 10 million orders. Analysts expect VIPS revenue to grow 33% in 2018 and earnings to grow 43%.
Why is the investment by JD.com and Tencent so critical? Tencent has 980 million monthly active users on WeChat and JD.com has 266.3 million active customers. They are going to make these customers available to VIPS. Remember, VIPS only has 6.5 million customers but they have the products that Tencent does not have. This means VIPS sales are going to explode.
VIPS has earnings on Feb 19th. I am recommending we buy a cheap call and hold over the earnings event because good things are likely to come out of the report.
No stock, just buy the call. The stock is rising quickly but it could reverse just as easily.
Long Mar $19 call @ $1.15, see portfolio graphic for stop loss.
BEARISH Play Updates
JBL - Jabil Inc - Company Profile
No specific news. New 52-week low.
Original Trade Description: January 31st
Jabil Inc. provides electronic manufacturing services and solutions worldwide. The company operates through two segments, Electronics Manufacturing Services and Diversified Manufacturing Services. It offers electronics design, production, and product management services. The company provides electronic circuit design services, such as application-specific integrated circuit design, firmware development and rapid prototyping services; and designs plastic and metal enclosures that include the electro-mechanics, such as the printed circuit board assemblies (PCBA). It also specializes in three-dimensional mechanical design comprising the analysis of electronic, electro-mechanical, and optical assemblies, as well as offers various industrial design, advance mechanism development, and tooling management services. In addition, the company provides computer-assisted design services consisting of PCBA design, and PCBA design validation and verification services; and other consulting services, such as the generation of a bill of materials, approved vendor list, and assembly equipment configuration for various PCBA designs. Further, it offers product and process validation services that include product system, product safety, regulatory compliance, and reliability tests, as well as manufacturing test solution development services. Additionally, the company offers systems assembly, test, direct-order fulfillment, and configure-to-order services. It serves automotive and transportation, capital equipment, consumer lifestyles and wearable technologies, computing and storage, defense and aerospace, digital home, healthcare, industrial and energy, mobility, networking and telecommunications, packaging, point of sale, and printing industries. The company was formerly known as Jabil Circuit, Inc. and changed its name to Jabil Inc. in June 2017. Jabil Inc. was founded in 1966 and is headquartered in St. Petersburg, Florida. Company description from FinViz.com.
Expected earnings March 15th.
Jabil reported earnings of 80 cents that beat estimates for 78 cents. Revenue of $5.59 billion also beat estimates for $5.5 billion. They posted wide guidance for Q1 of 50-74 cents on revenue of $4.75-$5.50 billion. Analysts wre expecting $4.76 billion.
By all rights Jabil shares should be rising but the decline that started in September has accelerated with Wednesday's close a 52-week low. With the Semiconductor Index showing increased volatility in what could be a topping process, the lesser known chip companies are declining.
Short JBL shares @ $24.33, see portfolio graphic for stop loss.
Alternate position: Long March $24 put @ 70 cents, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
MAJOR volatility event. Pay close attention! Market volatility exploded on Monday. The Dow was down -1,600 at the lows and there was $3.5 billion in sell on close orders on the NYSE. Bids were evaporating faster than rain on a 140 degree sidewalk in Texas.
The VXX spiked $11 in the regular session to $43.94 and just over our entry point at $40.95. No harm, no foul because we know it will always move lower in the future. However, in the afterhours session the VXX spiked to $65. This is why you should ALWAYS has catastrophe stop losses on a futures product.
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 last 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!
For those not in this position OR wishing to increase their future profits, entering a new position at these levels is free money. We know the futures product is flawed and will eventually move lower because of the futures roll over. I am recommending we enter a new short at the open on Tuesday.
Sell short VXX shares, currently $56. This will average up our current basis and increase our future profits.
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.
Short VXX shares @ $40.95, see portfolio graphic for stop loss.
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