Option Investor

Daily Newsletter, Monday, 8/13/2018

Table of Contents

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

Market Wrap

Trump Talks Turkey

by Thomas Hughes

Click here to email Thomas Hughes


President Trump doubled down on pressure against Turkey and sent the Turkish economy into a tail-spin. Turkey has been plagued with sanctions, political unrest, and national debt for a long time, so the crash is not a surprise. Disagreement over the release of Pastor Andrew Brunson, accused of inciting a political coup, has the US and Turkey at odds but it is the policies of Turkish president Erdogan that have the country in the position it is now.

Asian indices fell on the news shedding more than -1.0% in many cases. The Japanese Nikkei led with a loss of -2.0% followed by a -1.5% decline in the Heng Send index and more tepid -0.32 for the mainland Shang Hai index. European indices were also lower in Monday trading, but the losses were moderate compared to those in Asian. The DAX led with a loss near -0.50% followed by a -0.30% decline in the FTSE and virtually no loss in the CAC.

Market Statistics

Futures trading was mildly negative in the early morning but turned flat by the open. The opening trades saw the broad market post fractional gains and then edge higher into the end of the first hour of trading. After that selling pressure took over and drove the broad market SPX below break even and into negative territory. The low was hit around 12:30 PM at which time the market began to recover some of the lost ground. By 3 PM the market was trading within a tight range near the lower end of the day's range where it remained until the close of trading.

Economic Calendar

The Economy

According to the New York Fed's Survey of Consumer Expectations, US households expect higher growth in taxes but lower growth in medical care costs. The wage growth expectations retreated somewhat but remain high and above 2%. Regarding financial market conditions, consumers were less optimistic about stock price growth. The median inflation expectations held steady at 3.0% for the one year time horizon.

Moody's Survey of Business Confidence jumped 3.7% to 31.4 from last week's long-term low. The reading shows a rebound in confidence and is consistent with healthy conditions but remains low relative to the Trump Presidency. Mr. Zandi says the reading is improved although trade concerns have weighed on sentiment. Long-term outlook hasn't taken the hardest hit, Asian markets are the most worried, US the least. If the US-China trade disputes are settled soon, global business confidence could easily reach new lows.

More than 90% of the S&P 500 have reported earnings for the cycle and the blended rate of earnings/expected earnings growth continues to rise. Now at 24.6%, it is at the high of the cycle and the second highest in 8 years. Nearly 80% of those who have reported have beaten earnings estimates making it one of the strongest quarters recorded regarding that metric. There are 13 S&P 500 companies reporting this week, about 2.6% of the index, many of them in the retail sector.

Looking forward, the expectations for earnings growth remain strong, but estimates have taken a hit from tariffs and trade tensions. The current quarter is expected to see growth in the range of 20.3%, down from a high of 21.70%, while the fourth quarter has seen estimates fall from a high of 19.0% to a mere 17.6%. The outlook for the first half of 2019 has also seen downward revision, but that is offset by upward revision for the second half. The first half of next year should see earnings growth run near 7.5% and then expand to 13.5% in the second.

The National Retail Federation says estimates for 2018 retail sales growth are likely to low. They have issued an updated outlook for 2018 and have said sales could reach at least 4.5%, more than half a percent higher than the low end of the previously released range of 3.8% to 4.3%. This week the retailers will be the big story in earnings as reports from Wal Mart, Home Depot, JC Penny's and a handful of others are expected to report.

This is also a big week for economic data. There are at least 14 individual reports with nearly two dozen key data points for the market to digest. These range from housing data (starts, permits, homebuilder index) to labor (unit labor costs, claims), manufacturing (industrial production, Philly Fed, business inventories) and the Index of Leading Indicators.

The Dollar Index

The Dollar Index got off to a shaky start in early Monday trading but quickly regained upward momentum. The financial crisis in Turkey has the Turkish to all-time lows which has in turn hurt the euro, both aiding upward movement in the dollar. Today's action created a long green candle moving up from support at $95/$95.50, and it looks bullish. The index has broken above resistance and is supported by the indicators. The next target for resistance is near the $98 level, a move above that could go to $100.

The Gold Index

Gold prices are falling on the strength in the dollar. The spot price of gold fell -1.5% to create a long red candle and confirm downtrend in the metal. Today's action moved below my support targets at $1,210 and $1,205 and looks like it could carry gold down to $1,180 or lower. The indicators are mixed but consistent with a bearish swing in momentum and trend-following entry so falling prices should be expected.

The Gold Miners ETF is moving lower with a vengeance shedding more than -3.0% in today's action. The ETF has exceeded my target at $20.25 and indicated lower. Both MACD and stochastic are moving lower and showing weakness consistent with bear market conditions. A move to $18.50 looks likely, $18.50 is the bottom of an 18-month trading range and the lowest low in nearly three years, a move below that could take the ETF down to $15 or $12.50.

The Oil Index

Oil prices began the day in the green as reports the Saudis cut production in July helped support the market. Later in the day, it reversed those gains to fall nearly -3.0% on whisper reports US inventories grew over the past week. The news sent WTI to a new two month low that triggered a response from the bulls. Buyers stepped in below $66.50 and drove prices back above my support target. This is another confirmation of support at this level that, along with divergences in the indicators, suggest a rebound could form.

The Oil Index shed about -75% in a day of light downward movement. Despite the loss, the index remains within its near-term consolidation range although it is indicated lower. The bottom of the range, near 1,465, is my target for support. A break below support would be bearish, but I don't expect that at this time. The energy sector is still expected to post substantial earnings growth, so a major reversal is not expected in the Oil Index.

In The News, Story Stocks and Earnings

Elon Musk says the Saudi Arabian sovereign wealth fund wants to take Tesla private and is the source of funding behind his Tweets last week. Despite this revelation, there are still some questions of legality around those Tweets that have the SEC checking into it. At issue is the possibility a company exec such as Musk could drive up the price of company stock by announcing a takeover they have no plans of following through on. Shares of Tesla held fairly steady in today's session but are off the peak set last week following the initial Tweet.

Shares of Harley Davidson took a hit as President Trump signals support for a consumer-led boycott of the motorcycle company. Harley Davidson says they have to shift some of their production overseas to combat the effects of tariffs; Trump says its a really bad move and shares fell in response. Shares of HOG shed more than -4.0% and appear to confirm the downtrend in stock prices. Support may be at $41 and $40, a move below $40 would be bearish.

Some big names in the retail space are set to report earnings this week, and the expectations are high. Based on reports we seen from names in the consumer discretionary and consumer staple spaces we can expect to see robust growth well above analysts consensus. The consumer discretionary sector has beaten earnings estimates by more than 5% (19.6% growth compared to 14.3% expected) while staples have beaten by a slightly smaller margin. The XRT Retail Sector SPDR moved down in today's session along with the broader market, but the indications are still bullish. A move up may find resistance at the all-time high which was set last week, a move to new all-time highs would be bullish.

The Indices

The indices sold off on fears the global economy would suffer contagion from Turkey's economic crisis. While the action was negative, it was not strong and left the indices above support targets. The biggest loser was the Dow Jones Transportation Average with a loss of -0.60%. The transportation average created a medium sized red candle moving down to test support at the 11,000 level. This level has been significant several times over the past few months so a move below would be significant now. Such a move is supported by the indicators which are both bearish and could go as low as 10,900 or 10,750. If support at 11,000 confirms a move up to retest the recent highs is likely.

The NASDAQ Composite posted the smallest decline with a loss near -0.10%. The tech heavy index created a small red bodied candle just below the all-time high and above support at the short-term moving average. The indicators remain bullish so upward drift in the index is more likely than not, the caveat is that the indicators are also weak and suggest the summer 2018 rally may have peaked. Near-term support is near 7,800, a move below there may find support at the short-term moving average.

The Dow Jones Industrial Average posted a loss near -0.50% and is testing support targets at the short-term moving average and the long-term uptrend line. The indicators are weak and bearish suggesting a move lower could come if the index cannot regain the high side of the trend line a move to 25,000 or the long-term moving average near 24,600 looks likely.

The S&P 500 closed with a loss of -0.40%. The broad market index created a medium sized red candle with visible upper shadow indicative of the downward pressure in prices. The candle has created a one week low and looks like it could fall further. The indicators are both bearish and pointing lower, suggesting lower prices are on the way, with the caveat support is just below. Support is along the short term moving average, near the 2,810 level, and could keep prices moving up in the near term.

The market has fallen on global woe and what I think may become another brick in the wall of worry. Turkey and its economy is a worry, but the risk of contagion is limited, we've seen economies all over Europe struggle with politics as long as I can think of and they've yet to topple the global economy. More important for us is earnings from the retailers. With today's upgrade to outlook from the National Retail Federation the expectations are high and will have an impact on index performance. Results for the second quarter will be important but not as important as the outlook for earnings in the next quarter and the rest of the year.

Regarding the indices, they look like they could fall but they are all at or above support, and in an uptrend, which is usually a good time to start getting bullish again. Positive earnings surprises from the retail sector could spark a move higher. Home Depot is first on the list and reports tomorrow morning before the bell. I remain firmly bullish for the long-term and cautiously bullish for the near.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Dip Buyers Unite

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors tried to buy the dip with the Dow down -150 but volume was too light. The market internals were also weak. Declining volume was 3:1 over advancing and decliners were 5:2 over advancers. The dip buy at 1:PM lasted about an hour before the sellers returned just after 2:PM to push the S&P back to the lows for the day. The combination of tariff issues, Lira decline and the normally weak Aug/Sep period were too much for the bulls ot overcome. However, futures are up +4 this evening. That could change by morning but at least we are not hitting lower lows overnight.


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

Weakness Spreading

by Jim Brown

Click here to email Jim Brown