Option Investor

Daily Newsletter, Thursday, 6/14/2018

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Market Steady After Central Banks

by Thomas Hughes

Click here to email Thomas Hughes


A pair of key central bank statements has failed to shake market confidence. Over the past 48 hours, both the FOMC and ECB have released policy statements, and neither has led the market to sell off. While their messages are a mixed, one sounding firmly hawkish the other less so, they both indicate the same thing; improving economic conditions. Improving economic conditions mean improving business conditions (earnings) and that is why the market held steady; earnings outlook remains robust.

Asian markets were not euphoric following the Wednesday FOMC meeting. Indices fell across the board, led by a -1.88% fall in the Korean Kospi. Losses were driven by the Fed's hawkish stance, the indication for two more rate hikes this year, but may reverse in the overnight session on a less than hawkish turn from the ECB. The ECB indicated an end to their asset purchases would come in December, if the data allows it, but did not sound like they had the intention to raise rates or even begin discussing higher rates, any time soon. European markets surged on the news led by a 1.68% gain in the DAX.

Market Statistics

Futures trading indicated a flat open ahead of the ECB policy statement. The statement came out at 7:45 AM and initially sent futures up, but the spike did not get very far or last very long. The trade settled back to break-even by 8:00 AM where it held until economic data was released. Better than expected retail sales helped lift stocks, driving them up to the high of the day. S&P 500 futures moved up to indicate an open near 0.40% where they stayed until the open. The open was calm, the indices opened with small gains, and then trend sideways within narrow ranges into the close of the session.

Economic Calendar

The Economy

Initial jobless continues to trend lower, falling -4,000 from last week's unrevised figure to hit 218,000. The four week moving average of claims also fell, shedding -1,250, to hit 224,500. On a not adjusted basis claims rose 11.6% in the week, less than the 13.8% expected, but remain lower on a year over year basis. YOY not adjusted claims are down -8.9% and consistent with tightening in the labor market.

The number of claims for the second week of assistance fell -49,000 to hit 1.697 million. This is a new long-term low not seen since December 1st, 1973. The four week moving average of claims also fell, shedding -3,750 to hit 1.725 million, and set a new 45 year low. This figure is also trending lower and consistent with tightening of the labor market.

The total number of Americans receiving unemployment assistance gained 423 to hit 1.600 million, virtually unchanged from the previous week. The gain is marginal at best and well within expectation. It is also consistent with labor market tightening on a seasonal and long-term basis, indicative of healthy and improving labor market conditions.

Retail sales jumped more than expected coming in at 0.8%. This twice the consensus and twice the previous month showing strong and accelerating sales. The gain is driven by increases in a broad array of goods, not just automobiles, and leaves the YOY comparison at 5.9%. Ex-autos sales jumped 0.9% in evidence of strength in sales of consumer goods and general merchandise.

Business inventories rose 0.3%, as expected. This is up from the previous month's -0.1%, revised lower from +0.1% and puts the YOY gain at 4.4%. Because this is an April read it is included in the second quarter GDP estimates and points, along with the other data, to strong growth this quarter.

The Dollar Index

The Dollar Index spiked more than 1.25% on the combined effect of a more-hawkish-than-expected FOMC and less-hawkish-than-expected ECB. The move created a long green candle moving up from the short-te moving average and key support. The gains were halted at a key resistance level that, if broken, could lead to significant upside in the dollar. The indicators are not quite bullish, but they are rolling over which suggests momentum is shifting to the upside. Resistance is at the $95 level, a break above there would be bullish.

The Gold Index

Gold prices tried to rise on what I assume is geopolitical fear, not sure because the dollar spiked and that typically sends gold lower. The metal moved up by more than 0.5% but hit resistance at the $1,307/$1,310 level and fell back to the short term moving average by settlement time. The move is yet another confirmation of resistance at this key level and raises the chance for prices to fall. The indicators are mixed in their signal but together indicate sideways range-bound trading. A move lower would confirm my outlook and possibly take the metal down to $1,280 or $1,260 in the near term. A move above resistance would be bullish.

The Gold Miners ETF GDX also moved higher in today's trade, a move that is decoupled from the typical relationship between the dollar and gold. The ETF gained 0.65% creating a small green bodied candle moving up from the mid-point of its trading range. The move is small, weak, met resistance and is not supported by the indicators, so I don't have much expectation for prices to continue higher. If they do, the metal is still within a significant and long-term trading range with resistance targets at $23.00 and just above.

The Oil Index

Oil prices edged higher but did not get far and have indicated the presence of resistance at and just above the $66.50 level, near the short-term moving average. The gains are driven by this weeks surprise drawdown in US stockpiles but kept in check by rising global production, and the prospect OPEC could lift its production caps next week. A break above the moving average would be bullish with a target near $72, a fall from this level would confirm a reversal in prices (possibly to a trading range) if not a move lower.

The Oil Index shed -0.30% in today's session, creating a medium sized red candle in the process. The index has moved back to support at the short-term moving average and waiting for cues from OPEC and next week's data. The indicators are neither weak nor strong, trending near the middle of their respective ranges consistent with range-bound trading and market wind-up. The last few weeks have formed a symmetrical triangle that may turn out to be bullish. Considering the outlook for earnings growth in the energy sector is still the highest in the market I would not count it out, even if prices for oil move lower in the near term.

In The News, Story Stocks and Earnings

Etsy.com, the craftsperson's answer to eBay, announced a new fee structure (higher prices) and updated revenue guidance. The company is now offering a Plus and Premium service for additional fees. The part the market liked was the 10% increase in revenue growth estimates, to 32% from 22%, and it showed in the share price. Shares of Etsy surged 30% to set a new all-time high.

Adobe reported after the bell, delivering solid beats on the top and bottom line. The company reports revenue grew by 24.3% over the last year as all segments performed above expectation. The company's CFO, John Murphy, is quoted saying strong momentum will carry through into the second half of the year. Despite this shares of the stock fell in the after hour session, shedding more than -2%. The after-hours loss is probably just profit taking; the stock hit a new all-time high in today's session.

The VIX opened with a small gain but moved lower in the session. The fear index is trending sideways at short-term lows and looks like it may hang at this level for a while longer. The indicators are mixed but do not suggest a big move is coming in either direction. Momentum is virtually nil while stochastic trends at the low end of its range suggestive the index may fall simply because there is nothing to hold it up. The caveat is that tomorrow is OPEX and that could change the whole outlook. The good news is that the index is below the pair of moving averages which together provide a strong target for resistance should a move higher ensue.

The Indices

Oh, the difference a day makes. Yesterday's action made it look like the indices had reached a near-term peak and today's action negated that entirely. The NASDAQ Composite led with an advance of 0.90% and set a new all-time high. The index is marching higher on earnings expectations fueled by tax-relief and positive economic conditions and looks like it will keep moving up in the near term. The indicators are bullish but have weakened, so caution is due. A move up will likely reach 7,800 in the near term and may go higher should positive sentiment persist.

The S&P 500 posted the second largest gain, near 0.30%, but did not post a new high. The index created a small doji candle within the near term consolidation range and is forming a small bull flag. The indicators are bullish, but a little weak but consistent with consolidation and set up to fire bullish trend-following signals should a move higher materialize. Resistance is near 2,790, a break above that would be bullish.

The Dow Jones Transportation Average posted the smallest gain at 0.06%, and that was hard fought, it was showing a loss near -0.25% as the closing bell drew near. The transports created a small red candle with visible upper and lower shadows indicative of indecision. The move may precede a deeper fall, but so far it does not look like one is coming. The indicators are mixed but consistent with rally and consolidation within a rally, so a move up looks more likely than not. If prices were to fall a move to 10,800 is likely, if they move up resistance may be found near 11,100. A break above the near term high at 11,100 would be bullish and trend-following.

The Dow Jones Industrial Average tried to close with a gain in price but couldn't do it, clocking in near -0.10% at the close. The index created a small red candle moving down from a resistance target, but the loss was halted at a one week low. The indicators have rolled over in confirmation of resistance but have not turned bearish just yet, but that may come in the next day or two if prices continue to fall. If prices do fall support is likely found at 25,000 or just below along the long-term uptrend line. Longer term, the index remains in an uptrend so touching a major support would be a buying opportunity.

Today's action is promising; the market held steady in the face of central bank action, buoyed by positive economic data, and looks like it is gearing up to retest the all-time highs (higher in the case of the NASDAQ). Tomorrow we may see some volatility; it is OPEX, but other than that there is nothing on the horizon to derail this rally other than geopolitical issues. Economic and earnings outlook remains positive, so I remain firmly bullish for the long term, cautiously bullish for the near term.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Event Risk?

by Jim Brown

Click here to email Jim Brown
Editor's Note

The potential headlines for this weekend are all political and should be ignored. Weekend event risk is normally higher in the summer but this weekend could be quiet. The Washington headlines are all about the IG report on FBI misconduct and that has no market impact. The Russell and Nasdaq are overbought and could see some profit taking ahead of the weekend but they have both been strong in the face of worse events so maybe they continue higher.

The event risk is towards the big caps with new tariff headlines today. If a Twitter war appears over the weekend between President Trump, China and the G6 nations, that could impact the market for Monday and it is something investors may worry about on Friday.


New positions are only added on Wednesday and Saturday except in special circumstances.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Fed Uncertainty

by Jim Brown

Click here to email Jim Brown