It has been a long fight but the Dow, S&P and Russell are all testing resistance highs.
It has been a rocky seven months with two corrections on the Nasdaq and several retests of recent lows. The Nasdaq sprint to new highs in July was followed by some serious profit taking. The August rebound almost retested those highs but the market breadth evaporated.
I wrote multiple times about the narrow breadth driving the Nasdaq and S&P higher and how we would be in trouble when those big cap tech stocks corrected. That came to pass and after a week of declines it appears tech buyers are starting to reappear.
The Dow came to a dead stop at 25,750, the Russell at 1,700 and the S&P ay 2,860. Each of those levels are critical. However, the S&P is only 16 points from a new high. The Russell is only nine points away. The Dow is about 850 points from testing the January high at 26,616 but it did close at a seven month high on Monday.
The economic fundamentals are great, earnings are great and interest rates are low but the elephant in the room is the trade war with China. A nine-person delegation from China is coming to Washington on Wed/Thr for trade talks. We could easily break out to new highs if the results are positive. If the delegation storms out of Washington on Thursday without making any progress, the market could collapse again.
This either-or result on Thursday is likely to keep a lid on the market unless we post some solid gains at Tuesday's open. The closer we get to Thursday the more likely we will see some selling pressure as cautious traders take some chips off the table.
On the positive side, if we did see some resistance breakouts, it could trigger some short covering and some FOMO buying.
The S&P is so close to the prior highs that they should act as a tractor beam for the market until they are touched. What happens after that depends on the trade talks.
The Dow gapped up to 25,790 at the open and immediately fell back to resistance at 25,750 for the rest of the day. It was a dead stop and volume was the lowest since July 13th at 5.3 billion shares. The cloud over the market regarding the Wed/Thr meeting is keeping traders on the sidelines.
The Russell came to a dead stop at 1,700 and only faded slightly at the close. This is critical resistance on the Russell and a breakout here could trigger a broad market rally. If you are wishing for anything this week, wish for the Russell to hit 1,720.
The Nasdaq remains the laggard and 111 points below its high. The biggest of the big cap techs were still weak on Monday but the tide may be about to turn. The index has been down for just over a week and that is typically enough to prompt a rebound.
The calendar for next week is relatively light but there are some high profile events. There are bound to be a lot of headlines surrounding the trade meeting. There are rumors the meeting is to setup the basis for a summit between President Trump and President Xi for early November to work out the details of any final agreement.
U.S. officials are currently in talks with Mexico and the EU with the Mexican talks expected to conclude with a deal as soon as next week.
The current bull market will become the oldest in history on Wednesday when it will exceed the 1990-2000 bull market for longevity.
The Fed begins the Jackson Hole Symposium on Thursday with leaders from around the world and all the major financial officers in the USA. Chairman Jerome Powell will give the keynote address on Friday morning at 10:AM ET.
The Fed minutes on Wednesday will be the first glimpse into the thinking behind the August Fed meeting. They will point to further hikes in September and December. Those hikes are already locked in unless something happens on the global stage like an emerging market currency crisis.
The Fed's rate of QT is likely to slow late this year because the government will be selling so much debt, interest rates are going to rise on their own without the Fed's help in selling their QE securities.
The earnings calendar has shrunk considerably but there are still some big names on the list. Medtronic, Lowe's Target, Alibaba, Hewlett-Packard and VMWare lead that list. This is retail week with a lot of retailers following up with their reports after Macy's, Nordstrom's and Walmart reported last week.
With the earnings cycle nearly over, 467 S&P companies have reported and current estimates are for 24.6% earnings growth and 9.4% revenue growth. Some 79.2% of companies have beaten earnings estimates and 72.1% have beaten on revenue. There have been 55 negative guidance warnings and 33 positive guidance upgrades. This week there will be 18 S&P companies reporting.
Market fundamentals suggest we could see further gains this week but the later days are going to be controlled by trade headlines. The longer the indexes remain near their recent highs the better chance we have of a dramatic move once they become directional again. A breakout could trigger short covering and price chasing as the FOMO syndrome takes hold. (Fear of missing out) If headlines turn materially negative and the market breaks down after a long time near the highs, we could see a significant decline as investors seek a reset before making another move higher.
Enter passively, exit aggressively!
Send Jim an email
NEW DIRECTIONAL Call PLAY
AKAM - Akamai Technologies - Company Profile
Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution; Dynamic Site Accelerator that helps in consistent Website performance; Image Manager that automatically optimizes online images; CloudTest to conduct load testing and other analysis of Websites in a pre-production environment; mPulse that provides real-time Website performance data to provide insight about end-user experiences on a Website; and Global Traffic Management, a fault-tolerant solution. It also provides cloud security solutions, including Web Application Protector to safeguard Web assets from Web application and distributed denial of service; Kona Site Defender, a cloud computing security solution; Bot Manager Premier to identify bots; Fast DNS, which translates human-readable domain names into numerical IP addresses; Prolexic Routed to protect Web- and IP-based applications; and Client Reputation for protection against DDoS and Web application attacks. In addition, the company offers enterprise security solutions, including Enterprise Application Access that enables remote access to applications; and Enterprise Threat Protector to enable enterprise security teams to identify, block, and mitigate targeted threats. Further, it provides network operator solutions, including Aura Licensed CDN, Aura Managed CDN, and Intelligent DNS solutions, as well as professional services and solutions; media delivery solutions, such as adaptive delivery, download delivery, infinite media acceleration, media services, and media analytics solutions; and NetStorage, a cloud storage solution. The company sells its solutions through direct sales and service organization; and channel partners. Akamai Technologies, Inc. was founded in 1998 and is headquartered in Cambridge, Massachusetts. Company description from FinViz.com.
Akamai reported earnings of 83 cents on revenue of $663 million. Analysts were expecting 80 cents on $661.9 million. The CEO was very positive on the 34% increase in earnings. He was more excited about the surging growth in their security portfolio. Akamai is getting away from simple caching and serving up websites around the world. For instance, if I had a video streaming site in Idaho that was attracting viewers in Singapore, Sydney, London, etc, I could pay Akamai a fee to maintain an exact copy of that website on multiple servers in high use areas around the world. This was originally Akamai's claim to fame.
Today they are moving rapidly into cloud security. Revenue in that division rose 33% in Q2 to more than $600 million annualized. Web division revenue rose 11% to $351 million. Median and Carrier revenue rose 8% to $312 million. Platform revenue, the caching of websites, declined -14% to $44 million and almost immaterial given the total revenue of $663 million. This shows how far Akamai has come from their roots.
The biggest take away from the earnings is the 33% growth in their cloud security division. This is where they are going and the business is booming with it now 25% of revenue. Their new Edge security product was recently named best in class by Forrester, Gardner and IDT.
Shares collapsed post earnings despite a 30% increase in the bottom line and raised guidance for the year. The stock was caught up in the Nasdaq volatility. That appears to have faded after shares found support at $71. With the Nasdaq weak for the last two weeks, it is about time for the sector to turn positive again. I believe Akamai will be a favorite because it has already corrected and has strong earnings and guidance.
Earnings Oct 30th.
Buy Nov $77.50, currently $2.68, stop loss $68.85.
Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.
Current Position Changes
ON - ON Semiconductor
The short position was entered at the open on Tuesday.
BAC - Bank of America
The long position was closed at the open on Tuesday.
MSFT - Microsoft
The long position was stopped at $106.85 on Wednesday.
Original Play Recommendations (Alpha by Symbol)
AMBA - Ambarella - Company Profile
No specific news. The earnings date is August 30th. We will have to make an exit decision next week. With multiple chip stocks posting disappointing results and guidance we "should" see AMBA decline ahead of earnings but a positive market could disrupt that potential.
Original Trade Description: July 16th.
Ambarella, Inc. develops semiconductor processing solutions for video that enable high-definition (HD), video capture, analysis, sharing, and display worldwide. The company's system-on-a-chip designs integrated HD video processing, image processing, computer vision functionality, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable cameras, automotive cameras, and professional and consumer Internet Protocol (IP) security cameras, as well as cameras incorporated into unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market. The company sells its solutions to original design manufacturers and original equipment manufacturers through its direct sales force and distributors. Ambarella, Inc. was founded in 2004 and is headquartered in Santa Clara, California. Company description from FinViz.com
Ambarella used to be the sweetheart of the semiconductor industry with their camera chips capturing a wide swath of the up and coming devices. Unfortunately, you cannot rest on past accomplishments.
Shares have declined almost 40% since January. The drop began when one of their customers reported weak sales and falling demand for that company's products. When they reported Q1 earnings they beat the street but lowered guidance and that caused another move lower.
Then GoPro said they would no longer sell the Karma drone, which had 12 cameras with Ambarella chips. Since GoPro accounted for roughly 20% of Ambarella's income that was a major blow. With their Q1 earnings Ambarella said GoPro income would be non-existent for the rest of the year. They said revenues would be "insignificant" in 2018 compared to $37 million in 2017. Analysts are cutting forecasts and trashing talking Ambarella's outlook.
The company is also facing new competition from Qualcomm and that will increase if they eventually acquire NXP Semiconductor as expected.
Earnings September 4th.
Ambarella shares closed at a two-year low on Monday and very close to a major breakdown. I am recommending we play that breakdown.
Long Nov $35 put @ $2.50, see portfolio graphic for stop loss.
We will exit in September or earlier.
ANIK - Anika Therapeutics - Company Profile
No specific news. Shares have flat lined after the earnings spike. We need the small cap Russell to breakout on Tuesday to pill ANIK out of the doldrums.
Original Trade Description: August 6th.
Anika Therapeutics, Inc., together with its subsidiaries, provides orthopedic medicines for patients with degenerative orthopedic diseases and traumatic conditions in the United States and internationally. The company develops, manufactures, and commercializes therapeutic products based on its proprietary hyaluronic acid (HA) technology. Its orthobiologics products comprise ORTHOVISC, ORTHOVISC mini, MONOVISC, and CINGAL for the treatment of osteoarthritis of the knee; HYALOFAST, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery; HYALONECT, a resorbable knitted fabric mesh; HYALOSS used to mix blood/bone grafts to form a paste for bone regeneration; and HYALOGLIDE, an ACP gel used in tenolysis treatment. The company's dermal products include wound care products that comprise HYALOMATRIX and HYALOFILL for the treatment of complex wounds, such as burns and ulcers, and for use in connection with the regeneration of skin; and ELEVESS, an aesthetic dermatology product. Its surgical products comprise HYALOBARRIER, a post-operative adhesion barrier for use in the abdomino-pelvic area; INCERT, a HA product used for the prevention of post-surgical spinal adhesions; MEROGEL, a woven fleece nasal packing; and MEROGEL INJECTABLE, a viscous hydrogel. The company also offers ophthalmic products, including injectable HA products that are used as viscoelastic agents in ophthalmic surgical procedures, such as cataract extraction and intraocular lens implantation; and veterinary products, which include HYVISC, an injectable HA product for the treatment of joint dysfunction in horses. Anika Therapeutics, Inc. has a strategic collaboration with the Institute for Applied Life Sciences at the University of Massachusetts Amherst to develop a therapy for rheumatoid arthritis. Company description from FinViz.com
Anika has had several problems recently. They disappointed on earnings in early May and shares fell $11 the next morning. The stock rebounded and recovered all the loss then in mid June they reported weak results from a trial on Cingal, for osteoarthritis in the knee. The drug performed as advertised but did not generate a statistically significant reduction in pain. The trial has been extended. The drug is already approved overseas for this condition. Shares fell $18 on the news.
ANIK reported earnings of 68 cents on revenue of $30.5 million. Analysts were expecting $33 cents on revenue of $27.9 million. Shares spiked on the news and I am recommending we close the August position.
Anika announced an accelerated share buyback program for $30 million, 6% of the outstanding shares, to be completed in June. Shares are rebounding again. After two bouts of very sharp declines, this could be a major buying opportunity. Worst case we could see shares ease a little higher on the buyback program.
Long Dec $45 call @ $2.00, see portfolio graphic for stop loss.
We entered on a limit order and the option traded at 2:00 on Tuesday @ 10:00.
BAC - Bank of America - Company Profile
We closed the position last Tuesday after the Lira crash tanked all the banks. Shares are starting to recover but the problem in Turkey is not over.
Original Trade Description: July 30th.
Bank of America is one of the worldâ€™s leading financial institutions, serving individual consumers, small and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 67 million consumer and small business clients with approximately 4,400 retail financial centers, approximately 16,100 ATMs, and award-winning digital banking with approximately 36 million active users, including 25 million mobile users. Bank of America is a global leader in wealth management, corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 3 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations across the United States, its territories and more than 35 countries. Company description from Bank of America.
Booming economy, rising rates. That is really all you need to know about this recommendation. The 4% GDP should lift yields on the 10-year treasury to about 3.25% from the current 2.95%. With the Fed on a hike cycle and expected to hike again in Saptember and December, we would see real rates climb significantly over the next several months. Bank of America is positioned to benefit from this rise in rates.
Last week they increased their quarterly dividend by 25% to 15 cents per share. While that is not setting the world on fire, it is an added inducement for investors. The bank also announced it was buying back entire traunches of preferred shares.
After months of non performance the banking sector is rebounding on the high GDP and the prospects for the future. The higher interest rates allow them to earn more money and attract more deposits. It is a win-win scenario.
Shares are about to break out to a new five month high. BAC shares have been slow movers in 2018 but that may be about to change. The sector has shifted into rally mode and this could continue into 2019 as long as the expectations are not diminished for future Fed rate hikes.
Just because the options are cheap, don't back up the truck and open a large position. Until we have a "breakout" it is just a resistance test. If a breakout does occur it could generate an "all clear" signal for investors.
Closed 8/14: Long October $32 call @ 88 cents, exit .50, -.38 loss.
CHGG - Chegg Ing - Company Profile
No specific news. Shares recovered about all of their post earnings loss to close at a new high.
Original Trade Description: May 29th
Chegg, Inc. operates direct-to-student learning platform that supports students on their journey from high school to college and into their career with tools designed to help them pass their test, pass their class, and save money on required materials. The company offers Chegg Services, which include digital products and services; and required materials that comprise its print textbooks and eTextbooks. Its digital products and services include Chegg Study, which helps students master challenging concepts on their own; Chegg Writing that enables automatically generate sources in the required formats, when students need to cite their sources in written work; Chegg Tutors that allow students find human help on its learning platform through a network of live tutors; Chegg Math, an adaptive math technology and developer of the math application; Brand Partnership, which offers various ways for student-relevant brands to reach and engage high school and college students; Test Prep that provides students with an online adaptive test preparation services; and internships services. The company rents and sells print textbooks and eTextbooks; and offers supplemental materials and textbook buyback services. The company has a strategic alliance with Ingram Content Group. Company description from FinViz.com
CHGG reported earnings of 10 cents on revenue of $77 million to beat estimates of 9 cents and $74 million for the fifth consecutive earnings beat. Cash on the balance sheet reached a record high of $500 million compared to $66 million in Q2 2017. Jefferies said the cash pile offered Chegg the opportunity to expand its business outside of its own organic growth.
Shares have been rising steadily since the earnings beat in February and closed at a new high on Tuesday in a very bad market.
Update 7/9: Chegg acquired StudyBlue for $20.8 million in an all cash transaction. There will be no change to 2018 earnings but they will take a $1 charge in 2019 for facility consolidation. The acquisition will add a significant number of subjects to their existing offerings. The new offerings will include online flash cards. In 2016 29% of students used online flashcards. That rose to 37% in 2017 and continues to rise. Fifty percent of students claimed that was their only method of study.
Update 7/30: I clearly did not have the stop loss tight enough. Shares tumbled from $29.50 to $25.50 over the last two days and did not trigger our stop loss at $25.25. Fortunately, they reported earnings after the close and shares rallied back to $27.50 in afterhours. They reported earnings of 12 cents that beat estimates for 8 cents. Revenue of $74.2 million rose 32% and beat estimates for $70.2 million. We may get lucky and have the post earnings rebound continue. I would not bet on it. However, rather than speculate tonight on an exit I would rather wait and see what happens the rest of this week.
Long Oct $30 call @ $1.95, see portfolio graphic for stop loss.
MSFT - Microsoft - Company Profile
No specific news. The big cap tech stocks all rolled over last week as money rotated into defensive sectors. We were stopped out on Wednesday.
Original Trade Description: August 6th.
Microsoft Corporation develops, licenses, and supports software products, services, and devices worldwide. The company's Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, including Office, Exchange, SharePoint, Skype for Business, and related Client Access Licenses (CALs); Office 365 consumer services, such as Skype, Outlook.com, and OneDrive; Dynamics business solutions, such as financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses, large organizations, and divisions of enterprises; and LinkedIn online professional network. Its Intelligent Cloud segment licenses server products and cloud services, such as Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; and enterprise services, such as Premier Support and Microsoft Consulting that assist in developing, deploying, and managing Microsoft server and desktop solutions, as well as provide training and certification to developers and IT professionals on Microsoft products. The company's More Personal Computing segment comprises Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, MSN display advertising, and Windows Phone licensing system; devices, including Microsoft Surface, phones, and PC accessories; and search advertising, including Bing and Bing Ads. This segment also provides gaming platforms, including Xbox hardware, Xbox Live, video games, and third-party video games. The company markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. Microsoft Corporation has a strategic partnership with CNH Industrial N.V. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.
Microsoft has broken out after years of lethargy as a designer of Windows operating systems. Every couple of years they would release a new version and revenue would pop for the next 12 months as people upgraded. As the systems became more stable, the number of people upgrading began to decline. With the help of the new CEO that has changed.
Now they are moving to a subscription software as a service model on the Office products and versions of their new products. They moved into the cloud with Azure and a handful of cloud offerings. They are expanding into service relationship with enterprise customers. Their Windows Surface tablets have caught fire. The Xbox family of products continues to expand.
They are no longer just an operating system and database company. Twenty years ago you could always buy Microsoft and never go wrong because they always went up. After being dormant from 2001-2012 the stock has begun a multiyear rally but a lot of people are ignoring their newfound prosperity because they are remembering the 11 years of lethargy.
The company posted earnings of $1.13 that beat estimates for $1.08. Revenue rose to $30.09 billion and beat estimates for $29.21 billion. All of the good news was in the metrics. Each of the forecasts for the individual divisions for the current quarter was higher than analyst estimates. The Personal Computing forecast was $9.95-$10.25 billion and analysts were expecting $9.87 billion. Intelligent cloud forecasts were $8.15-$8.35 billion and analysts were expecting $8.15 billion. Overall, the company predicted revenue of $27.35-$28.05 billion and analysts were expecting $27.4 billion.
Office 365 revenue rose 35%, Azure cloud revenue rose 85%, gaming revenue rose 38% and Xbox and software revenue rose 35%. Reportedly, high value customers are moving away from Amazon's Web Services to the Azure Smart Cloud. Microsoft languished for years as just a software company but under new leadership, they are surging.
Earnings October 18th.
Shares declined post earnings but are rebounding with the market. Microsoft's market cap is $830 billion and they will be a trillion dollar company when the stock reached $130.31. Now that Apple has reached that threshold it is only a matter of time before Microsoft and Amazon join the club.
The post earnings decline gave us an entry point and now that the Nasdaq is rebounding I think it is safe to buy a big cap tech stock.
If the Nasdaq is going to overcome the normal Aug/Sep weakness there could be significant short covering from institutional traders already positioned for the decline.
We are going to use a November expiration to get us past the October earnings date. That earnings expectation is what supports the premium. We will not hold the position over the October 18th earnings.
Closed 8/15: Long Nov $115 call @ $2.32, exit $1.76, -.56 loss.
ON - On Semiconductor - Company Profile
No specific news. Shares are holding at the recent lows while we wait for the chip sector to move lower. With multiple chip stocks reporting disappointing earnings and guidance the sector is not showing a lot of excitement.
Original Trade Description: August 13th.
ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices product technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. ON Semiconductor Corporation was founded in 1999 and is headquartered in Phoenix, Arizona. Company description from FinViz.com.
ON reported Q2 earnings of 46 cents that narrowly beat estimates for 45 cents. Revenue of $1.46 billion beat estimates for $1.43 billion but that was also a narrow beat. Earnings rose 28% and revenue 9%. They guided for Q3 for revenue of $1.51 billion and analysts expected $1.48 billion. The margin guidanc eproduced implied earnings of 50 cents and analysts were expecting 48 cents. The problem with implied guidance is that it rarely works out.
Mizuho said the stock continued to be a top pick. However, Morgan Stanley cut the stock to a sell with a warning the stock is facing a multiple contraction and lowered the price target to $18.50. He said shares have meaningfully outperformed since the Fairchild acquisition and the strongese analog cycle since 2010. Given the strong multiple expansion in a positive market, he could see a major reversal if the chip sector begins to weaken further. Warnings of weak demand from Microchip and a downgrade to sell on Intel is going to keep the pressure on the chip stocks.
Earnings Oct 29th.
Shares closed at a 6-month low and I expect them to move lower. I am starting with a tight stop loss just in case the trend changes.
Long Oct $20 put @ $.70, see portfolio graphic for stop loss.
SKYY - Cloud Computing ETF - ETF Profile
No specific news. The decline in several high profile cloud companies has been weighing on SKYY. Shares are trying to rebound again after the Nasdaq decline last Wednesday.
Original Trade Description: July 9th.
The First Trust Cloud Computing ETF is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before the Fund's fees and expenses, of an equity index called the ISE Cloud Computing Index. The index is a modified equal dollar weighted index designed to track the performance of companies actively involved in the cloud computing industry. To be included in the index, a security must be engaged in a business activity supporting or utilizing the cloud computing space, listed on an index-eligible global stock exchange and have a market capitalization of at least $100 million.
All securities are then classified according to the following three business segments: Pure Play Cloud Computing Companies: Companies that are direct service providers for "the cloud" (network hardware/software, storage, cloud computing services) or companies that deliver goods and services that utilize cloud computing technology. Non Pure Play Cloud Computing Companies: Companies that focus outside the cloud computing space but provide goods and services in support of the cloud computing space. Technology Conglomerate Cloud Computing Companies: Large broad-based companies that indirectly utilize or support the use of cloud computing technology.
The ETF was started in 2011 and now has $1.4 billion in assets. The ETF really took off in 2016 and has been rising steadily. There have been some hiccups recently as some major companies disappointed on earnings and when the Nasdaq corrected in February and March. The ETF has caught fire in the recent tech rebound and with the Nasdaq about to break out to a new high it should continue to do well.
With Q2 earnings over the next six weeks, picking a tech stock gives us a limited time for appreciation and there is always the risk of a disappointment in a stock in the same sector. By using the ETF we can benefit from the tech rally without having too much exposure to a single stock. The idea is to profit from appreciation while reducing volatility.
Shares appear poised to break out to a new high.
Long October $57 call at $1.25, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
Back below $30 after a quick trip to $34 on the Turkey volatility.
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 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 VXX always declines.
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 new rally into the Q1 earnings cycle 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. There are 34.2 million shares outstanding and ShortSqueeze.com says 44.5 million are short. The shares are out there and being traded because the volume on Monday was 46.5 million. More than 221 million traded on Feb 5th. This ETF is a favorite vehicle for the computer traders so the volume is always high. 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.
Previously: On Feb-5th a reader emailed me saying a friend was short 1,000 shares. When the VXX spiked $21 in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.
We are 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 today.
Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!
Short VXX shares @ $49.16, no initial stop loss.
Prices Quoted in Newsletter
At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.
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All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.