The Russell may have rebounded 11 points from the morning drop but Friday was still a lower low. The trend is still down until the index moves back over the correction level at 1,566. Friday's rebound was weekend short covering, not a sudden rush by investors to buy the dip. Volume was weak.
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
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Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.
BULLISH Play Updates
MDR - McDermott International - Company Profile
No specific news. Shares down with the market.
Original Trade Description: March 2nd.
McDermott International, Inc. provides engineering, procurement, construction and installation, front-end engineering and design, and module fabrication services for upstream field developments. It operates through three segments: the Americas, Europe and Africa; the Middle East; and Asia. The company delivers fixed and floating production facilities, pipeline installations, and subsea systems from concept to commissioning for offshore and subsea oil and gas projects. Its operations include fabrication and offshore installation of fixed and floating structures; and the installation of pipelines and subsea systems, as well as provision of shallow water and deep water construction services. The company's customers include national, integrated, and other oil and gas companies. McDermott International, Inc. was founded in 1923 and is headquartered in Houston, Texas. Company description from FinViz.com.
McDermott posted a whopping $15.33 per share loss for Q4 after writing down $2.2 billion in goodwill. The adjusted loss was $1.55 and analysts were expecting earnings of 17 cents. This was a kitchen sink quarter. They knew it was going to be bad so they bundled everything they could find into the quarter to get it over with in one bad report.
On the flip side they guided for full year earnings of $1.65-$1.75 and analysts were only expecting $1.47. Revenue forecast of $9.5-$10.5 billion was also better than the $9.8 billion estimate.
They ended the year with an order backlog of $10.9 billion and have received $5.5 billion in awards YTD in 2019. They are bidding on $93.1 billion in projects. They have $1.4 billion cash on hand and $2 billion in unused credit.
They recently closed a merger with Chicago Bridge & Iron (CBI) which gave them broader expertise, additional capabilities, and a deeper order book. They expect the $475 million in cost savings synergies to be realized in 2019.
They are currently planning to sell their pipe fabrication business and storage tank business to focus more on their key sectors. They expect proceeds in excess of $1 billion. The pipe business is expected to close in Q2 and the tank business in Q3.
The strong guidance is the key to this position. Shares have rebounded sharply from the earnings disaster and should break over $10 in the next couple of weeks with the potential to move a lot higher. The risk should be minimal because all the bad news is over.
Long May $10 call @ 90 cents, see portfolio graphic for stop loss.
Previously Closed 3/7: Long MDR shares @ $9.16, exit $8.15, -1.01 loss.
BEARISH Play Updates
VXXB - Barclays VIX Futures ETN - ETN Description
The VXXB rebounded 4 points for the week in a bad market. It could have been a lot worse. It does not appear that traders were very concerned about a larger decline. We just need to be patient.
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.
Short VXXB shares @ $35.33, see portfolio graphic for stop loss.