Tag Archives: josh-arnold

Retailers Need A Christmas Miracle

XRT is showing huge weakness in a number of areas. I think the selloff in the sector is just getting started and that XRT is toxic. There are individual names I like in retail but the ETF should be avoided or shorted. The recent market selloff has hit a number of sectors and names but more than most, the retailers, shown here using the SPDR S&P Retail ETF (NYSEARCA: XRT ), have been crushed. Weak earnings reports from just about everyone includi ng Macy’s (NYSE: M ), Nordstrom (NYSE: JWN ), Cabela’s (NYSE: CAB ) and Fossil (NASDAQ: FOSL ), ju st to name a few, have investors on edge and selling anything and everything retail related of late. The chart below shows just how ugly things have gotten and with the Christmas shopping season upon us, one may expect XRT to outperform. However, I’m not so bullish. (click to enlarge) The sector as a whole has been struggling since the market hit its highs back in July. XRT failed to break out and make a new high at that time and that signaled the top in a big way. Since that time we’ve seen an epic break down and the XRT and individual names alike have been pummeled to varying degrees. The culprit has been terrible earnings reports from a number of retailers as pockets of strength are very difficult to find these days and that means investors are selling first and asking questions later. Certainly, this is not the sign of a healthy sector. We’ve seen weakness in all sectors within the broader retail industry including handbags, general line retailers, apparel, and the list goes on. No one has been spared from the recent rout and it seems that the Christmas shopping season is set to be weaker than last year’s. Black Friday must be strong or the XRT could fall off a cliff in the coming weeks because Q3 earnings from various retailers have done nothing but fuel pessimism. Looking at the chart above, the daily timeframe looks like it is trying to bottom. There is a lot of support in the $40 to $42 area from a previous channel XRT eventually broke out of so there is some hope for bulls there that if the channel can hold, XRT may form a base in this area. In fact, the momentum indicators are showing some divergences as lower lows in price are not being met with lower lows in momentum, a bullish sign that the selling is abating somewhat. That is certainly not a reason to buy the ETF but it does mean that if XRT can stop the bleeding, we have a potential base forming in the short term. Over the long term, the picture is much less rosy. This chart shows XRT on the weekly time frame over five years and as we can see, the longer term is much more bearish. (click to enlarge) XRT blasted through the uptrend that was in place form the 2011 lows earlier this year, a very bearish development. It has also been making new lows in the momentum indicators since April, well before the actual top in price occurred. This was a signal to get out as buying interest was waning significantly. We continue to see momentum on the weekly time frame coming in very weak and in a bearish range and that is extremely bearish for the stock right now over the medium term. The same support levels apply here but the weekly time frame looks a lot worse than the daily chart. That would indicate there is the potential for some mean reversion in the short term but longer term, a lot of damage needs to be repaired before XRT can move higher. And given the rock bottom sentiment and terrible fundamentals right now, that seems like a tough road ahead. If we compare relative strength in the XRT to the broader market – as represented by the SPDR S&P 500 Trust ETF ( SPY) – we can see the selloff is not tied completed to the broader weakness in equities. This is a story of sector-specific weakness and that also bodes particularly poorly for XRT heading into the holiday season. (click to enlarge) We can see that XRT goes through very clear trends against the broader market of outperformance and underperformance and has been doing so for years. The problem is that the recent underperformance has been sharp and brutal as relative strength broke through the support that was formed for almost all of 2014. In other words, retail couldn’t really be weaker right now as it slices through its former uptrend and support levels including relative strength. If we look at the momentum indicators on the relative strength chart, they are horrendous. Momentum continues to get more and more oversold instead of bouncing and that is one of the most bearish things that can occur. In short, the latest round of underperformance for XRT looks set to continue and that looks bad for the ETF heading into Q4 reports. Fundamentally, I think this is also the wrong time to buy XRT. December is typically a pretty strong period for retail stocks because of the Christmas shopping season but this year, sentiment has flipped entirely. Anything retail-related is getting crushed even when decent results are posted. Bellwethers like Macy’s and Nordstrom were decimated on relatively small misses/guidance cuts simply because sentiment is beyond negative at this point. In short, the environment for retail stocks is so unfavorable right now that I don’t think it matters what news comes out; it is all being taken as bearish at this point. I think there are individual names within the sector that can be bought including the ones I linked to above. Some stocks have been beaten down like they are going out of business and that is simply not the case. My favorite pick in the retail space right now is Macy’s but I like others as well. What I don’t like is the sector as a whole as weaker names are driving the XRT lower and I think all evidence is pointing to more downside action in XRT. Sentiment is showing no signs of bottoming, the fundamentals are weak after a rough Q3 reporting season and the charts really couldn’t be worse. If you want to be in retail, please don’t buy XRT; pick the names you like the most and go that way because this sector is falling like a rock.

I Was Wrong About Shorting Volatility

I posited at the beginning of this correction that shorting volatility looked very enticing at current levels. That has turned out to be a terrible call as my belief that there would be a quick rebound in the equity markets was disproved. I’ll provide my outlook for the markets and shorting volatility going forward from here. Ever since the current market rout started, I’ve been salivating at the chance to get short volatility via the short term volatility ETF VXX (NYSEARCA: VXX ). This is a strategy I’ve used repeatedly over the past year or so to take advantage of buying the dip on a leveraged basis and it has worked very well. Unfortunately for me (and many others) this dip turned into a correction. My last post on the subject seems like ages ago at this point but if you’d like to see my rationale at the time, please take a look. Some time has passed and the landscape for shorting volatility has become a lot more complicated so in this article, I’ll update my views on shorting volatility and see what I think is next for markets and VXX. (click to enlarge) Obviously, I was too early. That comes from my steadfast belief in “buy the dip” that has developed over the past six years of this bull market. It has worked beautifully in the past but of course, this time it did not. This is why it is important to keep volatility-related positions small and why I always issue that warning in VXX pieces. I’ll issue it again here and offer that any position in VXX is, by its nature, speculative. Please keep positions small and understand that the potential for large rewards comes with the potential for sizable risks as well; the chart above shows this better than my words can convey. Now that we’ve established my original premise for shorting volatility this time around has proven to be unequivocally incorrect, let’s take a look at what may happen in the short to intermediate time frames with respect to the market and the VXX. The fact that the VIX is still elevated above 23 this many weeks into the correction is something I never thought would happen as it was beginning back in late August. I saw the spike down as just that and nothing more but obviously, we have something larger on our hands here. (click to enlarge) The VIX is showing tremendous ability to remain elevated and given the term structure at present, it appears traders think it will continue or even go higher. Credit: VIX Central We can see the spot VIX is near 24 while the front month is just over 22. But if we look further out, there is only a small drop in what the market is predicting volatility will look like several months into the future. While this isn’t unusual during a correction, there is real money on the line here so there are some traders with serious firepower betting on a sustainably higher VIX. The second mistake I made is in assuming contango would disappear quickly, as it had during so many quick down turns in the market in the last several years. As you can see, I made a pretty high probability bet that the spike in contango would be short-lived. Obviously, that is not the case. While contango has lessened significantly, it is still present. And as the down turn in 2011 showed us, it can stay that way for a long time. Given the way the VIX is behaving so many weeks into the spike, I have to think we are in for some more suffering before things get materially better. Now, these two conditions were the very reasons I originally put my short VXX trade so I’m not going against my system that has worked time and again; what I’m saying is that this time is different and requires a different approach. I found out this time was different the hard way – by losing money – but that doesn’t mean we can’t adapt and learn. First, I think the equity markets are in for some more selling before repairs can be made to the damage that we’ve seen in the past six weeks or so. We can see here that when the market (NYSEARCA: SPY ) broke down, it broke down hard and hasn’t looked back. (click to enlarge) The spike bottom has yet to be retested and the SPY formed a rising wedge pattern in the midst of a down trend, usually a bearish formation. We can see the formation was broken in the last week or so and stocks have moved down ever since. I think this wedge pattern coming to completion and the fact that there are no catalysts to buy mean a retest of ~187 on SPY is very likely and perhaps, even a move lower than that. The bottom line is my short to intermediate term outlook on the SPY is negative until we get a retest of the spike lows and until that happens VXX’s bias is up, not down. While the basic conditions of my short VXX trade are still in place (contango, elevated VIX) the one other major condition (a healthy stock market) has disappeared. That means VXX, VIX, and contango could stay elevated for extended periods of time and that means the short volatility trade is probably going to tread water or see another move lower in the coming weeks. I moved out of my short VXX position for a sizable loss because conditions changed and my reasoning for the trade in the first place evaporated. While taking losses is very painful, it is the right thing to do when you are proven wrong by the market. I will short VXX again at some point but I need to see a few things first. I need to see the SPY retest its lows successfully. That will mean a move down from current levels and some painful selling to set up a base that currently does not exist. Until that happens, shorting VXX is very dangerous. Second, I need to see the VIX sustain selling pressure. Until the market retests its lows the VIX is likely to stay elevated. That means shorting volatility in general isn’t going to work. Lastly, I think time is the final condition. This correction has taken a psychological toll on investors and that takes time to heal. Extremely volatile action like we’ve seen causes people to bail and until calm is restored, sustained buying pressure – and lower volatility – are going to be hard to come by. The time will come to short VXX again will come but for now, I’m out of this trade. I was proven wrong by the market so I’m licking my wounds until a better opportunity presents itself.

Time To Short Volatility Again

VXX has spiked in recent days on China fears. But I think the conditions for a short of VXX have been met. Contango has disappeared and that has been a reliable signal in the past. I’ve written several times in 2015 about volatility and specifically, shorting the popular short term VIX ETF proxy VXX (NYSEARCA: VXX ) as I’ve taken the occasion of various spikes to bet on normalization. Last time I wrote about such a trade it was during the July meltdown stemming from the now-distant Greek crisis and that trade returned very nice profits, as you can see below. Well, here we are again as the VXX is spiking once more on China’s woes or any other global event investors can think of. (click to enlarge) My basic premise for entering a short VXX trade is pretty simple; wait for a spike in VXX, assess the reasonableness for a sustained higher VIX level and if there is none, short VXX. It really isn’t more complicated than that. VXX is a great vehicle to short because of its famous contango. It costs money (most of the time) to hold VXX due to contango so the opposite of that is that shorting it has a natural tailwind. This is the second cue for me in knowing when to short VXX and when to wait for a better entry point. But first, let’s assess why the VIX is spiking. Seems to me market participants are up in arms about China’s most recent meltdown and while that’s fine, just like the Greek crisis, I believe fears are overblown here. S&P earnings are also suffering somewhat and the market is losing leadership in a lot of ways so for me, that is a much bigger problem than China’s latest bubble popping. I know there are many people that would disagree with me but I just don’t get it on China. Therefore, the first condition of my short signal has been met; the reason for the spike seems improper and in particular, the magnitude with which VXX has spiked. We’re up double digits in two days on the VXX and for what? The second signal I mentioned is when VXX is no longer in contango, that has historically been a great time to short it. I like to use VIX Central to chart the VIX curve and determine the level of contango because it makes it easy for even novice VIX watchers to understand what is happening. I’ve pulled two charts from VIX Central below to illustrate my point. This first chart is a straight look at the VIX curve. Since the VXX deals with short term VIX contracts, we’re really only interested in the first two months. As you can see, as of yesterday’s close September and October were at exactly the same level and even November and December were only pennies higher than the front month. That means contango has disappeared and when that has happened in the past, it was a great time to short VXX. This chart shows the level of contango between the first and second month VIX contracts for the past several years and as you can see, flat contango and backwardation are rare. But when either of those conditions are met, we are usually due for a sell-off in front month VIX. That means that when we reach the level of contango we are at right now (zero, the red line on the chart), while we may move a little higher, history suggests the odds are heavily in favor of shorting VXX right now. So here’s the setup; the SPY just hit a six month low yesterday and after the beating the market has taken in the last couple of days, I think today will be a flat to lower day. That means VXX will probably be higher on Friday and that is where I will make my short. I will use the recent spike in VXX to short it as I think we are nearing the top of this particular spike. Now, I’ll make my standard VXX trade disclaimer because I don’t want anyone to get the wrong impression. Trading VXX is very risky and extremely volatile and thus, you must understand that the potential reward is high but so is potential risk. Please understand what you’re doing before taking a long or short position in VXX because it moves around a lot and can make or lose you a lot of money in a very short amount of time. I’ve been on both sides of VXX trades and I can tell you it can wipe out a lot of value quickly. The odds are in favor of a VXX short right now and I think today is the perfect opportunity to take a short position in VXX given that the spike in volatility seems overblown. I also think the market is near a base and will rally from here so that is also a favorable setup for shorting VXX. This position is not without risk but given the setup we have now, VXX shorts are heavily favored here. Good luck out there. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in VXX over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.