September is normally the worst month of the year for the market.
However, that does not mean we are due for a nasty sell off but we are likely to see some volatility. The average decline is only 1.0-1.5% which would only be 30-45 S&P points. While that would be painful it is not even close to a normal bout of profit taking. We saw a 100-point decline that started on June 13th, a 50 point decline that started on July 26th, a 40 point decline that started on August 8th. These happen all the time but that does not mean they are enjoyable. They are buying opportunities in a long-term bull market.
When you average results over a long period of time, most "averages" are calculated since 1950, it erases the big gains and losses. For instance, in September 2017 the S&P posted a 48 point gain. That was only about 2% but it is sure better than the long-term average.
New highs on the S&P, Nasdaq and Russell are a great way to begin September. The trick is keeping the rally going. September tends to have a lot of negativity and since the earnings are basically over there is little to distract traders from the headlines. This year those headlines are the current trade war with Canada, China and the EU, the potential government shutdown on October 1st and the Fed rate hike the last week of the month.
The Canadian problem should be resolved soon. They cannot afford to be left out of the new deal and have massive tariffs placed on the items they export to America. It is all over but the whining. Everybody knows it but the headline still needs to be printed. That should be a positive for the market unless the president has to resort to tariffs to get Canada to concede. Eventually they will concede.
European countries are in talks. They do not want to wait until the last minute and be forced to deal the tariff issues. They would rather be civil and just come to an agreement. This will all be market positive.
The China problem is going to be a longer problem. China's Xi does not want to lose face by giving into the U.S. but their economy is cooling, political unrest is brewing and the government has its hands full fighting its debt problems. Xi will eventually concede because Trump has more leverage against China than they do against us. Xi is not stupid. He understands the U.S. election cycle and will probably wait until closer to the election in hopes of getting a better deal. After the election his leverage goes away and Trump and continue to cause him pain.
The government funding cycle requires a bill or bills to be signed by October 1st. When lawmakers come back to work in September they only have 11 days to resolve the funding issue and get a bill to the president's desk. He has vowed not to sign an omnibus funding bill like he was forced to do last time. He is demanding a minimum of $5 billion for the border wall and is likely to refuse funding for various departments until that funding is included. The odds are very good that there will be a partial shutdown on Oct 1st unless everyone agrees to a continuing resolution until after the elections. Then the shutdown will happen in November.
The Fed is virtually assured of hiking rates in late September. Since it is so well known there is little chance of a market impact unless the commentary changes. This is simply one more step in the markets wall of worry.
All of these headlines will begin to come together in mid September as reporters begin to speculate on the eventual outcomes.
The economic calendar for this week is very busy with multiple reports that could move the market. The ISM Manufacturing on Tuesday is the biggest manufacturing report for the month. The ADP Employment on Thursday and Nonfarm Payrolls on Friday are also closely watched. Any material decline in either one could trigger investors to start worrying that the cycle has peaked. However, with the weekly jobless claims numbers are at 45-year lows. That means the employment reports are not likely to take a sudden dive.
There are nine Fed speeches this week. John Williams is working overtime with three on the same day. The composition of the Fed members is evenly split on expectations. Of the 16 members 8 of them expect 2019 rates over 2.9% and 8 of them expect that level or below. Several want to halt rate hikes now until the current stimulus impacts work their way out of the system.
Currently the Fed Funds Futures are predicting a 98.4% chance of a rate hike at the end of September. There is a 71.2% chance of another hike in December. For 2019 chairman Powell has said there will be a press conference after every meeting, not just the quarterly meetings. This emphasizes that every meeting is "live" and has the potential for a rate hike. This should increase the uncertainty and could lead to higher market rates without the Fed having to take action. The years of a calm, laid back Fed, may be over and that is not good for the market.
On the S&P, 496 companies have reported earnings. The current earnings growth rate is 24.9% for Q2 with 9.5% revenue growth. Back on January 1st, the growth estimate was only 11% for earnings. The current forecast for Q3 is for earnings growth of 22.4% and revenue growth of 7.7%. There have been 38 guidance upgrades and 73 guidance warnings for Q3.
There are some large tech companies reporting next week. Dell Technologies reports on Wednesday and could give us an update on the plan to take the entire company public again. Ctrip.com, Broadcom and Palo Alto Networks rounds out the big tech schedule.
Volume was light at 5.8 billion shares but that was still surprisingly higher than a normal summer holiday Friday. The same Friday in 2017 barely broke 5.0 billion shares. Of course, the markets were not at new highs in 2017.
The week after Labor Day was lethargic but starting on September 11th the market exploded higher and ran for 411 S&P points to peak at 2,872 in January. I know we would all love to see a repeat of that rally. Unfortunately, between the January 26th peak and February 9th low, the S&P gave back 340 of those points. This was the proverbial rally to die for and anybody without tight stops in late January did see their positions die. They say the markets take the stairs up and the elevator down.
While we cannot expect the market to give us a repeat performance, the fundamentals remain strong. Unfortunately, with the political headlines expected to increase in intensity the current Teflon market may begin to fray around the edges. With Q2 earnings over for all practical purposes, there will be less support and the potential for some post earnings depression. In the past, there has been a flurry of updated full year guidance in September now that companies are nearly 75% through the year. We have also seen portfolio managers trimming some positions to raise cash for any October dips. October is known as the bear killer month because most declines through September tend to bottom in October and those dips are bought.
Current support on the S&P is 2,900 but that is new and weak. Prior resistance at 2,872 could be a decent resting place on any profit-taking decline. I would not plan on a dip but I would not plan on the markets surging higher in the week ahead. The post Labor Day week tends to be volatile.
The Dow remains at mercy of the tariff sensitive stocks. Boeing gave back $13 after the weekly high on Monday. That is roughly equivalent to 91 Dow points. Until the China trade situation is worked out, the Dow will continue to be volatile and the index laggard.
Apple could be a challenge in the weeks ahead. Apple shares rose 20% in August. With the iPhone announcement on September 12th, there is a good possibility for a sell the news decline. It does not happen every time but it does happen quite often. Since shares are up $37 over the last month, (259 Dow points) the potential for post announcement profit taking is very high. Of course if we are expecting a decline it will never happen.
The Dow is still fighting uptrend resistance around 26,100. Next week could be a fight unless a Canadian trade deal appears quickly. Support is back down around 25,850.
The Nasdaq Composite closed only 0.10 below the record high. The strong gains by Amazon, Apple and others offset the drag from Alphabet. Considering it was a pre holiday Friday with decent event risk, this was a strong performance. The Nasdaq is over extended in the short-term and the same Apple risk for the Dow is a risk for the Nasdaq.
Apple is 12.6% of the Nasdaq 100 index, Amazon is 11%, Google 9.3% and Facebook 5%. With the Nasdaq up 5.8% for the month, Apple 20% and Amazon 13%, there is definite risk for profit taking in September. This was the best August for the Nasdaq since the year 2000.
The Russell outperformed again with a nice gain to a new high thanks to the resumption of the tariff headlines. The small caps should be somewhat immune to tariffs. The Russell is also overextended and nearing uptrend resistance around 1,750.
Even with the potential for some volatility in September, I would still be a buyer of the dips as long as you remember the potential budget pitfall at the end of September. In trader terms, a month is a lifetime but the market has no calendar. It remembers nothing and never needs a reason for profit taking. All we need is for a handful of large portfolio manager to decide around the same time to trim positions and a decline is born.
Investors understand there is no alternative to equities. Getting 3% a year in treasuries cannot compete with 20% in a month from Apple. With the rest of the world markets fading, money is coming back to the U.S. because it is the strongest market in the world. Add to that the $1.5 trillion in announced stock buybacks and there is a lot of support under the market. Of that $1.5 trillion, analysts expect only $800 billion or so will actually be purchased in 2018 but that is still a massive amount of stock taken out of the market.
Earnings at 25%, GDP at 4.2%, record buybacks, low inflation, accommodative Fed, low unemployment, 45-year low in jobless claims, record consumer confidence and the Target CEO said this is "the best retail environment in his lifetime." Why would investors not buy stocks? Look for a dip because the market is more than likely going to continue moving higher long-term.
Enter passively and exit aggressively!
Send Jim an email
NEW DIRECTIONAL Call PLAY
MNK - Mallinckrodt - Company Profile
Mallinckrodt public limited company develops, manufactures, markets, and distributes branded pharmaceutical products in Canada and the European Union, as well as in Latin American, the Middle Eastern, African, and the Asia-Pacific regions. The company markets branded pharmaceutical products for autoimmune and rare diseases in the specialty areas of neurology, rheumatology, nephrology, ophthalmology, and pulmonology; and immunotherapy and neonatal respiratory critical care therapies, as well as analgesics and gastrointestinal products. It offers H.P. Acthar Gel, an injectable drug for various indications, such as proteinuria, multiple sclerosis, infantile spasms, ophthalmic, neuromuscular disorders, dermatomyositis, polymyositis, rheumatology, and pulmonology; Inomax, a vasodilator to enhance oxygenation and reduce the need for extracorporeal membrane oxygenation; Ofirmev, an intravenous formulation of acetaminophen for pain management; Therakos, an immunotherapy treatment platform; and Amitiza for the treatment of chronic idiopathic constipation. The company is also developing StrataGraft, which is in Phase III and II clinical development for the treatment of burns; terlipressin for the treatment of hepatorenal syndrome; MNK-1411 for the treatment of Duchenne muscular dystrophy; Stannsoporfin, a heme oxygenase inhibitor for the treatment of jaundice; Xenon gas for inhalation; MNK-6105, an ammonia scavenger for the treatment of hepatic encephalopathy, a neuropsychiatric syndrome associated with hyperammonemia; VTS-270 that is in Phase III development for Niemann-Pick Type C, a neurodegenerative fatal disease; and CPP-1X/sulindac, which is in Phase III development for Familial Adenomatous Polyposis. Mallinckrodt public limited company markets its branded products to physicians, pharmacists, pharmacy buyers, hospital procurement departments, ambulatory surgical centers, and specialty pharmacies. The company is based in Staines-Upon-Thames, the United Kingdom. Company description from FinViz.com.
MNK reported earnings of $1.78 that beat estimates for $1.48. Revenue rose 5.3% to $631.7 million and beat estimates for $620 million. The raised full year earnings guidance from$6.00-$6.50 to $6.50-$6.90 and revenue growth guidance from 3%-6% to 4%-7%.
I will not bore you with all the different drug details but they have multiples that are growing recenue by double digits. Net sales for Acthar is expected to exceed $1 billion. They have sold off some non-core assets and acquired drugs, Amitiza and Rescula, which will produce about $200 million in 2018. This is going to be a transformational year with multiple drugs significantly through the pipeline process and involved in various trials.
Earnings November 6th.
As you can tell by their raised guidance they believe they are on the right path. Shares spiked from $24 to $36 on the earnings, a 50% gain. That post earnings rally peaked back on August 20th and shares have been trading sideways as they consolidate.
I do not want to buy a 50% gainer until it shows us it is going higher. I am going to recommend a $36.50 entry point on a rebound from the current $34.45 close. That puts us just about the perfect spot for a $40 call.
We have to buy January because there are no November or December options.
With a MNK trade at $36.50:
Buy Jan $40 call, currently $2.75, initial stop loss $33.50.
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
SYMC - Symantec
The long position was entered at the open on Tuesday.
Original Play Recommendations (Alpha by Symbol)
AKAM - Akamai Technologies - Company Profile
No specific news. Shares are still moving slowly higher.
Original Trade Description: August 13th.
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.
Long Nov $77.50 @ $2.68, see portfolio graphic for stop loss.
ANIK - Anika Therapeutics - Company Profile
No specific news. Shares have flat lined after the earnings spike. I am recommending we close the position.
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.
CHGG - Chegg Ing - Company Profile
No specific news in three weeks. Shares recovered 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.
SKYY - Cloud Computing ETF - ETF Profile
No specific news. The positive market has lifted SKYY to a new high.
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.
SYMC - Symantec - Company Profile
No specific news. Shares were moving up briskly until Thursday when there was a minor retracement.
Original Trade Description: August 27th.
Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, direct marketing and co-marketing programs, e-commerce and telesales platforms, distributors, Internet-based resellers, system builders, Internet service providers, employee benefits providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Symantec Corporation was founded in 1982 and is headquartered in Mountain View, California. Company description from FinViz.com.
Symantec reported earnings of 34 cents and analysts expected 33 cents. Revenue fell from $1.18 billion to $1.16 billion and barely beat estimates for $1.15 billion. The company guided for Q3 earnings of 31-35 cents and analysts were expecting 37 cents. The guided for revenue of $1.13-$1.16 billion and analysts expected $1.17 billion. The CEO said large multiplatform sales are taking longer to close. Several large deals had been expected to close and it would have lifted them to solid revenue growth. Those deals are still in the pipeline. They signed one deal in Q1 with more than 100,000 users in a single company and there are more to come.
Shares fell -15% on the report. After a minor rebound the shares rolled over again until Aug 16th when Starboard said they had taken a stake and nominated 5 directors. Shares rebounded back to $20 and should continue to creep higher on hopes that Starboard stirs up the board and turns the company around.
Analysts believe there is 30% upside in the stock after the post earnings decline. Having Starboard in the mix could increase that gain. Shares are easing higher after making a 2-year low at $18 in early August. There is limited downside and unlimited upside.
Earnings Nov 1st.
Long Jan $21 call @ $1.26, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
The VIX/VXX has been reluctant to decline as we enter September, a month known for volatility. Buckle your seatbelt, we do not know what this September will bring.
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.
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