UVXY: My Plan For Success In 2016

| About: ProShares Ultra (UVXY)

Summary

Early positions taken in 2016 have yielded strong returns on capital.

J.C. Penney continues its strong performance and shares are trading in kind.

Fitbit shares have been crushed YTD, but a short-term trade is on the table.

UVXY is a tried and true instrument that continues to deliver strong returns for short participants.

In this publication, I will update readers, followers and investors on just how I've managed to beat the major averages by many multiples year-to-date. As the market has come roaring back from a significant and volatile decline over the last few weeks, investors are likely looking for opportunities to sell into this most recent rally. I would recognize such an action as appropriate given a variety of factors, many of which are macro in nature.

Towards year end in 2015 I began liquidating much of my equity holdings and raising capital alongside many of my institutional clientele that include some of the largest hedge funds in North America. Witnessing the elevated volume in Spider puts and the climbing of open interest was a key indicator for me to reevaluate my year-end strategy and take action. In committing to this action, I managed to avoid much of the downturn in the major averages at the onset of the New Year. As the major averages fell into correction territory I continued to perform analysis on several companies that I provide coverage in both the retail and consumer goods sectors.

In an article titled "J.C. Penney (NYSE:JCP), Bed Bath & Beyond (NASDAQ:BBBY) And Macy's (NYSE:M): Competing Retailers Face The Same Challenges" I outlined two positions that I had taken and the reasons for doing so. The reasons were supported with analytics that could be easily understood and extrapolated for use in one's portfolio. My positioning for J.C. Penney was as follows within the article:

After buying shares of JCP for $6.60 and selling that position above $7 a share, the price has once again fallen below $7 a share. I recently repurchased those shares for $6.30 and will seek to sell them again in the area of $7 if the opportunity presents itself in the near term. I currently don't see reasonable harm for long-term shareholder consideration of JCP shares, but trading and investing strategies differ in a sea of market participants. With that said, let us now move on to our next retail story stock.

In selling my J.C. Penney shares at roughly $8 a share, I successfully achieved a greater than 25% return in roughly a 30 day period. I still rate shares of JCP a Buy and maintain a price target of $11.50 based on the strong and consistent execution of the business model. J.C. Penney has been an outlier in the retail sector as the company has managed to successfully implement several strategies aimed at returning the business to stable operating practices. Shares of JCP are currently trading over $10 and benefiting from a strong Q4 2015 performance as well as an indicated return to profitability in 2016.

Another position that I took that was discussed in "J.C. Penney, Bed Bath & Beyond And Macy's: Competing Retailers Face The Same Challenges" was a position in Bed Bath & Beyond. In my nearly decade long coverage of the retailer, I've managed to benefit from owning stock in the company that was granted to me for services rendered back in 2007. As the stock was granted to me at $25 a share, in 2015 I wrote a series of publications that delivered many insights on the business. My greatest concerns surrounding Bed Bath & Beyond have been discussed at length and they align with gross margin deterioration that has only exacerbated itself in 2015.

Margins

2007

2008

2009

2010

2011

2012

2013

Gross

41.5%

39.9%

41.0%

41.4%

41.4%

40.2%

39.7%

Click to enlarge

Looking at the first half of FY15 gross profit margin results, it is safe to say that the sales issues persist for the retailer and likely impacted Q3 2015 results to the extent the company has issued worse-than-expected preliminary results. In Q1 2015, the company reported a gross profit contraction of 70bps, and in the Q2 2015 period, the company reported a 40bps gross profit contraction.

This was a clear signal to me that eventually revenues and profits would suffer from continued gross margin contraction. It did not help the retailer that store traffic was also declining over the last 18-24 month period. In recognizing the issues surrounding Bed Bath & Beyond, I decided that after many years of stock ownership I would sell my shares in 2015 at an average price of $76 through my UBS (NYSE:UBS) brokerage account. Fortunately my actions proved prudent and profitable.

Through continuous coverage of Bed Bath & Beyond I was able to recognize a short term trading opportunity. In saying that, I would also have been willing to turn that short-term opportunity into a longer-term investment strategy as shares of BBBY plunged to new 52 week lows in early 2016. In my publication "Macy's Shares Soar With Green Light Capital Taking Equity Interest," I outlined the following position I had taken in shares of BBBY:

Circling back to Bed Bath & Beyond, I've patiently been watching and waiting for the stock to decline further and since it last reported quarterly results. At the current trading price of $43.40 I'm dipping my toe in the water and hoping to further scale into a greater position should shares become more depreciated. I'd like to target my next share allotment at $41, give or take. Like most every other retailer of scale in the market today, Bed Bath & Beyond faces an uphill battle with regards to matching its omni-channel footprint and assortment to the growing shift in demand. This demand shift comes as the millennial generation has become the largest demographic in the United States.

As shares of BBBY tumbled below $42 a share I picked up more shares alongside the greater market sell-off that persisted in early February. As fortunate as I was to achieve shares in the $41 and $43 range, I was equally fortunate to sell my total stake in a rather short period of time for roughly $47 or a greater than 10% return on capital. Shares of BBBY are currently trading above $49 a share. I believe the Bed Bath & Beyond business model is still under pressure from a variety of angles and in the face of an ever-changing retail landscape. I will continue to monitor the retailer as it shifts some of its focus into the e-commerce marketplace.

Now, I wish I could say that I had dozens of winners already "banked" in 2016, but the fact is that I maintained a majority of cash holdings year-to-date and only deployed capital for shorter-term trades. This was also evidenced in a couple of day trades that I participated in with regards to my initiation of Fitbit (NYSE:FIT) coverage that began in 2016. Unfortunately, my two-day trades in shares of FIT netted less than a 1% return on capital, but fortunately I avoided the mid-term downturn in the stock.

I released my first coverage report on Fitbit during the pre-market trading hours on January 4th with much scrutiny as the content greatly challenged the perceived addressable market for Fitbit devices. Once the market opened, shares tumbled heavily that day and ever since. I continued to deliver additional analysis on Fitbit through February that increased the level of concerns surrounding the longevity of the business that is centered on a singular product category with extreme attrition of usage. After modest success in each of my first two day trades with FIT shares, and as shares tumbled to $12.12, I took a larger position in the company with my last publication titled, "Fitbit Q4 2015 Results Beg For Solving The Attrition Growth Rate." My cost average in shares of FIT is $12.72 and shares are trading below that price presently. As I am bearish on the long-term fundamentals of the business model, I am maintaining a tight stop loss for this trade at $11.50 a share. I will continue to monitor this position going forward and update investors on the state of the Fitbit business in the coming days.

I receive a good deal of scrutiny for trading on the "long side" for a business model that I don't see advantaged longer-term as I have from many Fitbit investors. What I express with regards to this scrutiny is that regardless of my sentiment or belief for the long-term potential of the business model is that trading opportunities will exist that are either not consistent with Seth Golden's analytics or dependent upon them. As such I often take action that is more dependent on well-defined trading parameters and indicators that offer a profit more than 70% of the time.

The most profitable trading position that I have taken year-to-date has been to continue with a long-term asset that has yielded more than 700% returns for me since 2012. This investment/trading vehicle is known as the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY) After earning a 225% return on capital with UVXY in 2015, the instrument remains a core holding in my portfolio at all times. The UVXY is an instrument that can only go in one direction long-term and for a variety of reasons. I explain these reasons and my strategy for utilizing UVXY in my Instablog here on Seeking Alpha. I would greatly encourage investors to read my two-part series on UVXY to understand its limited risk and outsized return on capital that has been called by many the "Trade of the Decade." I will repeat, "UVXY can only go in one direction long-term…down." There is a great deal of volatility that comes with the UVXY, but for all intended purposes the instrument always deteriorates in price and seeks out new lows over time. With that said I am always shorting shares into any UVXY bull rally. I began doing so in 2016 as shares spiked above $33 and ran all the way up above $61.50 a share. Had shares been available to borrow short above the $61.50 level, I would have continued shorting UVXY shares.

For this particular trading cycle with UVXY, I netted a return on capital of greater than 56 percent. With this exchange traded fund, the double-leverage against the S&P 500 Volatility Index renders itself to come down 2X greater than when the volatility index spiked. As such, in less than two weeks the UVXY has come down from $61.92 to under $33 a share.

In general, I dedicate some 75% of my available investing capital to participating with UVXY shares. The nature and construction of UVXY is widely misunderstood and even more underreported in the financial media world. If one takes a few seconds to study Seeking Alpha and look up the ticker symbol they would easily validate my statement as fact. Again, if you desire greater details on UVXY please feel free to read my two-part series and comment with any questions or sentiment.

I've managed to produce significant returns year-to-date and in accordance with my steadfast trading and investing strategies outlined. Most all of my strategies employ the art of analyzing the business model. My current positions include the following:

  1. FIT: 1.6% of investing capital
  2. MNST: Short from $150, with profits locked in at $117, holding half position and with price target objective at $108. 1.5% of investing capital.
  3. WFM: Cost average of $41, down greater than 20% presently with 2% of investing capital.
  4. UVXY: 6% of investing capital. Maintain core position. Have disposed of greater position yesterday and upon achieving the desired return on capital.

It has been a strong start to 2016 and I hope to see continuous returns into the future. My plans are to continue to limit my exposure to risk assets until the macro-environment shows meaningful and sustainable improvement. Of course having said that, defined opportunity will remain attractive when found and I believe the active trader and/or portfolio manager is advantaged in this market environment that remains volatile.

Disclosure: I am/we are long FIT.

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.

Additional disclosure: I always maintain a core short position in shares of UVXY under the construct of a recognizable short rebate fee that is predetermined