I am sure everyone has heard that expression and that applies to the current market decline. There is nothing magic in the market decline. I doubt Harry Potter cursed the market, but it is cursed. We finally reached point where selling begets more selling. As the indexes break below critical support levels it triggers more stop losses and each progressive break becomes stronger than the prior break. Stocks investors have held for years are seeing stop losses hit and years of profits erased. This type of decline is a sentiment killer and that of course produces even more selling.

The AAII Sentiment Survey that closed on Wednesday, before the latest round of declines, was the most bearish since April 2013. Nearly 50% of respondents were bearish and only 20.9% were bullish. That was an 18% spike in bearish sentiment in only one week. Since the last three days have seen the loss of 1,221 Dow points, these numbers will be even worse this week unless there is a huge rebound on Tue/Wed.


There is really nothing to say about the market. Nothing has changed, only the direction has solidified. Instead of choppy as we had the prior week, we are completely directional to the downside.

The political environment is the same. China trade issues are the same or slightly better. Europe is still involved in the Brexit fire drill with time running out. Paris is still burning. Italy is still economically depressed. Venezuela is circling the drain even faster.

Crude prices are under $49 because there was nothing left to sell. When traders are scrambling to raise cash to cover underwater positions, they sell whatever they can sell. That can be oil, gold, etc.

This is option expiration week and traders who were hoping for a market rebound to bail them out of underwater positions are suddenly scrambling to close and cover where they are exposed and are willing to do anything to stop the bleeding.

There may be some daylight ahead. Historically, the Tuesday before a Fed meeting is positive even when a rate hike is expected. Futures are up slightly Monday evening in what I hope is at least a minor rebound to follow that trend.

If the Fed and Powell do/say anything dovish we could see a decent rally but it will probably be short lived. The potential for a partial government shutdown on Friday is going to be a cloud over the market after the Fed meeting.

A government shutdown has no real physical impact on the market, but investor sentiment takes a big hit and that causes selling ahead of the event. Depending on the tone and length of the shutdown the market can recover before the end of the work stoppage.


FedEx and Micron are the biggest earnings reporters on Tuesday with Dow component Nike folloing up on Thursday. There is not much here to move the market.


The S&P dipped to 2,530 and two points below the February low. Technically this was a successful retest and we could expect a rebound from here if it were not for the surplus of potentially negative headlines. On the flip side, if the S&P moved lower again and closes well under that level, it would be very bearish and suggest we are headed significantly lower.


The Dow also retested the first quarter lows at 23,500 and held. The rebound was lackluster but this would be a good place to rebound if Tuesday's pre-Fed trend returns. We have erased all the gains for the year and the chart will turn uber bearish if we get a close significantly below that 23,500 level.



The Nasdaq was the second most bearish index behind the Russell 2000. The Nasdaq closed at a new low for the year and that suggests it could be going lower. There could be a little hope that a test of February's intraday low at 6,630 would be a stopping point but I see that as grasping at straws. If we move lower from here, that intraday number may not even be a blip on the chart. All the big cap stocks were negative, and the big names were severely negative. It was an ugly day but at least it was not a -220 day. We have had several of those recently. This means we are either running out of sellers or bulls are starting to nibble at the bargains. The chip sector has been stronger than the Nasdaq for the last week. Chips normally lead but we have not seen that leadership yet.




The Russell 2000 closed more than 20 points in bear market territory under 1,399. The next logical resting place is 1,350 but with the velocity of the downtrend, I could easily see the Russell penetrate that level. It would be too easy for it to just hit 1,350 and stop or rebound. That is too big of a target not to be tested multiple times.


While we could see a positive market on Tuesday, I am continuing to recommend that we stand aside and let the smoke clear before we jump into traffic again. There is no reason to try and catch a falling knife and definitely no reason to try and short into this extremely oversold market. Just because we get a positive market on Tuesday it does not mean it will remain positive the rest of the week. Eventually a new trend will appear, and we can capitalize on it then once the waters have calmed.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Call PLAY

No new play this week. You would have to be suicidal to jump in front of this train with a long position and crazy to enter a short position with the market extremely oversold. We can afford to be patient because it is less expensive than being impulsive.



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)


CRM - SalesForce.com - Company Profile

Comments:

Salesforce.com was holding up well in the face of the market decline until today. The overwhelming amount of selling and the afternoon acceleration in the market decline was too much and every big name tech stocks was crushed.

Original Trade Description: Dec 10th.

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 of 76.9%. 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.

Position 12/11/18:
Long Feb $150 call @ $4.40, see portfolio graphic for stop loss.



BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

The VXX surged to 40 once again and closed slightly over that resistance level. 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 history 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.