Option Investor

Daily Newsletter, Monday, 7/16/2018

Table of Contents

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

Market Wrap

Earnings Season, And Trump

by Thomas Hughes

Click here to email Thomas Hughes


Earnings season is off to a good start, but an historic summit between Trump and Putin may overshadow results. Trump is already making headlines with his Tweets; so far he says US/Russia relations are the worst they've ever been, that he and Putin will reach a major agreement and that the meeting is already off to a good start. You can rest assured there will be more presidential Tweets, probably conflicting, over the next few days.

International markets were firmly mixed if for different reasons. In Asia, markets were mixed on signs of slowing growth in China. Chinese 2nd quarter GDP came in at 6.7%, as expected, but down from the previous 6.8%. The news sent the mainland Shang Hai index down by roughly -0.60% while the Heng Seng tread water, closing with a loss less than -0.10%. The Nikkei led the region with a gain of 1.80%. European indices were also mixed but mostly lower as the Trump/Putin summit comes into focus.

Market Statistics

Futures trading indicated a flat and cautious open to this week's trading. There was little movement in the early hours, even with the release of major earnings reports from Bank of America and Black Rock. The trade held steady near B/E all the way into the open of equities trading. The S&P opened with nearly no movement from last week, held that level for the first few minutes of trading and then began to drift lower. A bottom was hit mid-morning, about -0.20% for the SPX, that resulted in sideways trading that lasted until the end of the day.

Economic Calendar

The Economy

There was a lot of economic data for a Monday and important data at that. First up, Retail Sales. Retail sales rose an expected 0.5%. The number is not hot, but it is strong and puts the YOY read at 6.6%. Helping lift YOY sales is an upward revision to May's figure putting it at 1.3% (up 0.5%). The total of retail sales in the 2nd quarter was also positive, up 5.9% from the year before.

The Empire State Manufacturing Survey fell more than 2 points to 22.6 but remains firmly positive and consistent with expansion within the sector. The decline is due to a decrease in the number of new orders and shipments although both of these indicators remain positive. Deliveries and unfilled orders both increased, employment edged lower to 17. The six-month forward outlook is positive although it too saw declines. The part I liked the most was the prices paid index which fell -10% in the last month and gives evidence FOMC rate hikes are doing their job (containing inflation).

Business Inventories continue to grow in response to rising demand. Inventories increased 0.4% in May (this is a lagging indicator) and are up 4.4% YOY. The Sales index also rose, advancing 1.6%, and enough to offset net gains in inventory. The Inventory to Sales ratio fell to a new three-year low and is in decline, evidence that rising production is not meeting demand.

Moody's Survey of Business Confidence fell -1.6% to 34.0 and is at the lowest level since November 2017. Mr. Zandi says trade tensions finally taken their toll on sentiment, driving the six-month outlook to a long-term low, although current conditions remain stable. If the trade-war does not get resolved, it could drive sentiment even lower. The caveat is that sentiment may not lead the market lower if there no sign of disruption surfaces in the economic data.

Earnings season got off to a lackluster start last week. Of the Big Banks reporting last week JP Morgan was the only one to dazzle investors, this week things are looking a little different. The stats so far; about 5% of the S&P 500 have reported earnings and of that 89% are beating EPS estimates, and 85% are beating revenue estimates. The blended rate of growth fell a tenth on disappointing results from Wells Fargo (among others) and is now 19.9%. Four sectors have seen their estimated growth rate revised lower since the end of June.

The outlook for earnings remains robust although estimates for the third and fourth quarter have fallen. The third quarter is now expected to see growth at 21.5%, down -0.2%, and the fourth 17.8%, down -0.1%. The full year 2018 estimate is now 20.4%, down -0.2%, but that is mitigated in a 0.1% uptick in the S&P 500 2019 full-year earnings growth estimate, now 10.1%.

The Dollar Index

The Dollar Index fell in today's trading, shedding about -0.15% on weaker than expected price gains in the Empire State data. The index continues to fight resistance at the $95 level but also shows support at the 30 day EMA which is rising and putting the squeeze on prices. This week's economic calendar is light on US data so reports from overseas will be important, including but not limited to CPI data from the UK and EU on Wednesday. A move above $95 on the index would be bullish but still face resistance at $95.50 and the long-term high.

The Gold Index

Gold prices edged lower in a wobbly session. The spot price moved down to retest support at last week's low, a key support level, a so far the buyers have remained at bay. Support is at my $1,240 target, a break of which would be bearish. The indicators are a tough read, pointing lower after bearish crossovers but showing divergence at support. The crossovers suggest a test of support is coming; the divergences confirm support is present. A bounce from this level may be bullish but may also find resistance at the short-term moving average. A fall below $1,240 could go as low as $1,200 or $1,180 if driven by strength in the dollar or substantially good news in geopolitics.

The Gold Miners ETF GDX fell in today's session. The ETF shed about -0.10% in a move that touched support targets at the bottom of the near-term trading range. Support is at $21.80 and resulted in a bounce which left the index treading water at break-even levels by the end of the day. Today's candle is a small doji which gives evidence of support, but the indicators remain bearish, so another test is likely. A move below $21.80 would be bearish within the long-term trading range and likely take the ETF down to $21.50 or $21.00.

The Oil Index

West Texas Intermediate shed another 3.5% in today's session. The black gold is under pressure from rising production and high supply that is more than enough to sate current demand expectations. Not only is OPEC pumping more, the Saudis are exceeding their quota, Russian output is rising, US production is rising, and there are whispers we may release some of the strategic reserves. This combination, on top of the news sanctions against Iran are less severe than anticipated, has WTI trading near $68 and looking like it will go lower. The indicators are bearish and suggest a move to $65 is possible. Based on the extreme peaks, and a high level of volatility, I still expect to see WTI rebound to retest the recent high at some point in the not too distant future.

The Oil Index fell about -2.0% in Monday trading. The index is moving in-line with the price of oil but, like on WTI's rise, the index is lagging the underlying commodity. Today's move created a small red candle with a visible lower shadow that gives evidence of buyers at this level. A move lower may be bearish but, with oil prices trading over $65, I still expect to see robust earnings from the energy sector. If the index does move lower support is likely to be found near 1,465.

In The News, Story Stocks and Earnings

BlackRock reported earnings before the bell and beat on the top and bottom lines. The company reports $6.66 in EPS (a bad omen?) versus an expected $6.65 driven by rising volume. The caveat is that volumes are driven by lower fees that are cutting into profits. Net inflows were also well below market expectations but could be due to conditions, according to one analyst. Shares of the stock fell about -1.0% in the pre-market session and then rose from there to close with a loss near -0.75%.

Bank of America also reported earnings before the bell, but its results were much better. The bank reports earnings of $6.80 billion versus $5.90 billion expected or $0.63 per share versus $0.57 expected. The results are driven by cost improvements and volume which are both expected to carry through into the end of the year. Shares of the stock jumped about 1% in the pre-market session and then followed through to a 4% gain in the open session.

JBHunt, the intermodal shipping giant, reported earnings before the bell and delivered some sweet news. The company says total operating revenue, excluding fuel surcharges, is up nearly 21% over last year. The gain is driven by double-digit increases in all segments and led by a 50% increase in Integrated Capacity Solutions. Increases in rates and volume helped drive results but were offset by higher wages and fuel costs. Margins improved by 50 bps. Shares of the stock rose 6.5% on the news, but bears were waiting and drove prices down to test support at the long-term moving average.

Amazon hit new all-time highs as Prime Day kicks off. The company also suffered some glitches that resulted in error messages, possibly due to overwhelming traffic. This Prime Day is the longest yet, 36 hours, and expected to bring in billions.

Netflix reported after the bell and sent shares diving -10%. The company reports they had a strong, but not stellar, quarter. Membership growth was strong but well below target. Revenue fell short of analysts targets as did outlook for third-quarter revenue growth.

The Indices

The market struggled for direction in today's action and nowhere is this more evident than with the Dow Jones Transportation Average. The transports shed more than -1.0% despite the strong showing from JB Hunt. Today's action created a long red candle moving down from the short-term moving average to retest support near the long-term EMA and uptrend line. The indicators are mixed and consistent with the sketchy range bound action I've seen so not much help. A move lower may be bearish. Support targets are 10,400 and 10,200.

The Dow Jones Industrial Average closed with a gain near 0.15% and created a small green candle. The index is above the long-term uptrend line and supported by rising EMA'a, MACD and stochastic. This is consistent with bullish conditions and rising prices; my target is near 25,350 in the near term.

The NASDAQ Composite closed with a loss near -0.35% after opening above Friday's all-time closing high. The index created a small red candle that may lead to lower prices, but the signal is very weak right now. The indicators are showing some signs of resistance at this level but remain bullish so upward drift in price is likely. A move up above the all-time high would be bullish; my target is 8,000.

The S&P 500 closed with a loss near -0.10% and created a small red candle. The index is trading just below the all-time high and is indicated higher by MACD and stochastic. Both indicators are bullish and rising with little indication of resistance. A move higher would be bullish and could take the index up to 2,900 in the near to short term.

The indices held their ground (in most cases) and look like they are ready to rise. The question is whether earnings season will produce the results needed to drive the market higher. It's not enough for the market that earnings growth is going to top 20%, earnings growth needs to beat expectations for a major rally, and it is too soon to know if that will happen. In the meantime, there's Trump to keep the market on its toes. I remain firmly bullish for the long-term based on the outlook for earnings growth, cautiously bullish for the near term.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Narrow Breadth Hurts

by Jim Brown

Click here to email Jim Brown

Editors Note:

Depending on only a few stocks to lift the market is painful when one stumbles. The Netflix disaster after the close and -57 point drop is going to weigh on the Nasdaq on Tuesday. Whether it will hold it in negative territory or not is the question. I wrote on Sunday that 91% of the S&P gains for the year came from only 5 stocks. Those were AMZN, NFLX, GOOGL, FB and MSFT. One of those market leaders just ran off the rails. The resulting negative sentiment could affect the other four and prevent them from leading the Nasdaq higher.


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

Rotation Continues

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow shook off summit headlines to post a minor gain as the Russell fell sharply. The lack of Chinese tariff headlines continued to spark a rotation out of small caps and back into the big cap international stocks. The Russian summit produced a lot of headlines in the mainstream media but none that moved the market. The Dow traded in a very tight 93 point range on weak volume of only 5.4 billion shares. Investors are expecting great earnings but Netflix let them down tonight. Shares fell 57 points or -14% and will definitely be a drag on the Nasdaq on Tuesday.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

ACN - Accenture
The long call position was entered at the open.

JNJ - Johnson & Johnson
The long put position was entered at the open.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Long and short equity trades = Premier Investor

Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.

BULLISH Play Updates

No Updates to Current Positions

BEARISH Play Updates

No Updates to Current Positions