The market continues to be volatile and headlines are powering the moves. This should be an easy commentary because nothing has changed over the last several weeks other than the G20 meeting had no lasting impact. The clash of titans lifted the market for one day and even that was strained with the market closing well off its highs. The news of the arrest of the Huawei CFO killed what little bullish sentiment remained.

The hope for a Chinese trade deal was dashed and a new problem arose to spoil the negotiations. The bail hearing for Meng Wanzhou failed to conclude on Monday and will resume on Tuesday morning. Meng and her husband offered to put up their two homes in Vancouver worth more than $12 million as partial collateral for her bail. She offered to be monitored electronically but prosecutors said it would be ineffective if she just walked onto a private jet and disappeared. Her husband's visa expires in February and the $15 million in cash and property would be a small price to forfeit for her to avoid charges that carry a 30-year prison term. She is worth hundreds of millions as the daughter of the founder of Huawei. The Chinese and US responses are on hold until the bail issue is settled, and Canada decides if they are going to allow extradition.

To further complicate the market outlook the Brexit negotiations are falling apart. Prime Minister Theresa May postponed a critical vote on Tuesday and left the future of the split uncertain. Being unable to negotiate a smooth exit from the EU carries the potential for a hard Brexit and a material economic decline for the UK and many of the EU nations. Without agreements on trade, banking, borders and travel we could see the EU fall into a recession. There is plenty of talk of cancelling Brexit but they may be too far down the road for that. The worst case would be a hard break on March 29th that craters several economies.

The current Brexit deal that has taken months to work out is probably going to fail given the cancellation of the vote. That will throw the negotiations into turmoil.

Added to those events above we have a Fed meeting next week where they are likely to hike rates. While that is almost a sure thing, there is growing hope by investors that they Fed will announce a pause in hikes for 2019 until the data firms and confirms additional hikes are the right path.

The price indexes this week will go a long way towards swaying the Fed's opinion. Both are expected to fade, mostly due to the crash in oil prices.

We also have the potential partial government shutdown next week. The battle lines have formed, and the odds are good there will be a shutdown battle. Shutting down the government three days before Christmas is never a good plan but the current republican majority changes in January. It is now of never on border security and wall funding.


The earnings calendar is sparse other than Costco and Adobe on Thursday.


The S&P dipped 17 points under 2,600 to come within 3 points of decent support at 2,580. The 54-point rebound was spectacular but resulted in only a 4-point gain. S&P futures are down about 10 points this evening suggesting sellers are still circulating. The S&P closed at 2,637 and exactly a 10% decline from the highs.


The Dow fell -507 points intraday to trade well under 24,000 but recovered at the close to avoid ending in correction territory. It was a surprising rebound led by Apple after the company said it had filed an appeal on the injunction on sales of iPhones by Qualcomm. Shares rebounded nearly $7 on the news.

Falling oil prices and weak financials kept the index from a stronger rebound. Only six stocks gained or lost more than $1 so basically the index just returned to the flatline.


The Nasdaq was the strongest index with Facebook gaining more than $4 to lift the FANG stocks. The rebound in techs came from 6,878 and the index has not yet tested the decent support at 6,800. It came close today, but buyers were waiting. All of the indicators are bearish, but rallies can begin unexpectedly.

Despite the relative strength and the rebound, it was mostly the big caps doing the lifting. The broader index saw the A/D line make new lows.




The Russell remains the weakest index with a new 52-week low close. There are a lot of factors impacting the small caps including rates, tariffs, slowing economic indicators, rising wages, etc. It would take a major change in sentiment to create a rally here. The path of least resistance is lower.


The S&P futures are down about 10 points on Monday evening. We have seen a lot of 500-point Dow moves reverse the next day. There is no conviction on either side and everyone is trading on reactions rather than fundamentals. The algo computers are causing the majority of the movement. Without any directional conviction, once the algos see a short-term trend they pile on and we get these huge moves. The next day all the computers are rebooted, and we start from scratch without any follow through from the prior day. I know the urge is strong to buy something, but I would try and resist until as actually have a trend. Note that the S&P has had six moves of 180 points or more in opposite directions since October.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

CRM - SalesForce.com - Company Profile

SalesForce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com

When the market is weak, go with strength. CRM shares rallied on the strong earnings then pulled back only slightly during the latest Nasdaq crash. The Nasdaq was the strongest index on Monday and hopefully we are nearing an actual bottom. With CRM shares showing relative strength, this may be a safe port in a volatility storm.

SalesForce.com reported earnings of 61 cents that beat estimates for 50 cents and the year ago quarter of 39 cents. Revenue rose 26% to $3.39 billion and beat estimates for $3.37 billion. The company guided for revenue as much as $3.56 billion in Q4 and analysts were expecting $3.53 billion. They said they were on path for $16 billion in revenue in 2020 and $22 billion by 2022.

Billings, metric of future performance, rose 27% to $2.89 billion and beat estimates for $2.68 billion. Revenues rose 25% in the Americas, 26% in APAC and 31% in EMEA using constant currency. Sales cloud revenues rose 11%, service cloud rose 24% and marketing and commerce cloud rose 37%. Platform and "other" cloud revenues rose 51% or 30% if you exclude the acquisition of Mulesoft. The number of deals for more than $1 million rose 46%.

Adjusted gross profit of $2.6 billion came from gross margin o f76.9%. They ended the quarter with $3.45 billion in cash.

This company can seemingly do no wrong. When the tech sector eventually recovers SalesForce will be a leader.

Buy Feb $150 call, currently $4.05, stop loss $123.65.




Current Portfolio


Open Positions

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


No changes


Original Play Recommendations (Alpha by Symbol)


No Current Long Positions

We were stopped out of our remaining four long positions last Tuesday when the Dow gapped down -600 points.


BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

The VXX surged to 40 once again but that appears to be the line it will not cross unless the selling increases significantly. It will eventually go to single digits. We just have to be patient.

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!

Position 2/13/18:
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.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

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.