Option Investor

Daily Newsletter, Monday, 10/15/2018

Table of Contents

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

Market Wrap

Geopolitics Holds Bulls Back

by Thomas Hughes

Click here to email Thomas Hughes


The new twist in the geopolitical arena has the market on edge waiting for the other shoe to drop. The Saudi's have some connection to the death of a prominent journalist and the political shock waves have not settled. Our own Vice President in on his way to Saudi Arabia to root out the cause (unlikely to succeed) of the tragedy.

Meanwhile, earnings season is here, and that is what traders want to focus on. The big banks are the primary story in earnings so far, and the news from that sector is positive. Bank of America reported this morning and beat on the top and bottom lines on strength in consumer banking and expanding margins.

Asian markets were down in Monday trading as confidence waned in the face of last week's global sell-off. The losses were in the range of -1.5% to 2.0% led by the Nikkei. The Shang Hai Composite hit fresh four-year lows during the session even as looser reserve requirements go into effect for Chinese banks. The new requirements are expected to stimulate economic growth to fend off the effects of Trump's trade war and are a two-edged sword. China's national debt levels are already out of control and loosening the bank's requirements for capital reserves is not going to help that situation.

European markets struggled in the Monday session as Brexit talks reach an impasse. The latest round of meetings resulted in no significant progress, but Theresa May says they aren't so far apart a deal can't be reached. The CAC closed with a loss of -0.02% after flirting with gains, the DAX and FTSE closed with gains of 0.78% and 0.48% respectively.

Market Statistics

Futures trading was negative in the early hours of electronic trading as news of journalist Khashoggi's disappearance spread through the market. Khashoggi is a prominent and outspoken critic of the Saudi regime and a willing exile from that country. His disappearance sparked a round of announcements by top executives they would be skipping the Saudi's upcoming investor event some are calling "Davos in the Desert". The SPX was indicated to open with a loss near -0.5% around 8:30 AM but that moderated to break-even by the open. The open produced a small loss for the broad market S&P 500 index, about -0.10%, and led to a session of semi-quiet sidewinding until late in the day. A late day sell-off sent the indices to the lows of the day where they remained until the close of the session.

Economic Calendar

The Economy

The Retail Sales figures for September fell short of expectation but still positive in both the MOM and YOY comparisons. The headline retail sales figure rose 0.1% from last month's unrevised 0.1% and are up 4.7% from the same time last year. The retail trade sales figure rose 0.4% in September and are up 4.4% YOY. Gasoline is the underpinning cause of gains, up more than 11.0% over the last year.

The Empire State Manufacturing Survey headline index rose 2.0 points to hit 21.1. The index shows continued expansion within the manufacturing sector but at a faster pace than the previous month. The reading is above historical averages and consistent with robust growth within the US economy. Within the report sub-indices on new orders, shipments, and employment all increased which suggests expansion and activity will continue over the next few months. We'll get a look at the latest read on Leading Indicators later this week; I expect to see the index come in positive with a high chance of expanding from the previous month.

Business Inventories rose a strong 0.5% in August and as expected. Adding to the strength is an upward revision to July which puts that month's reading at 0.7%. Business Inventories are up 4.2% from the same time last year. Sales of goods also rose at 0.5% in August but are up a much stronger 7.8% YOY and fueling demand for manufactured and trade goods.

Moody's Survey of Business Confidence rose 0.9% to hit 33.5% in the last week. The index shows business confidence remains firm although forward outlook remains dim. Mr. Zandi says responses relating to hiring, sales, and business investment are strong and that global business continues to expand at a rate above potential.

So far about 6% of the S&P 500 have reported earnings, and the results are as expected. The number of businesses beating earnings is near 86%, above average, while the number beating on the top line is a more tepid 68% but still strong. The blended rate of earnings growth is now 19.1%, down -0.2% in the last week on downward revisions in Energy and the Industrials, which is a concern but it is still very early in the season. I still expect to see the final rate of earnings growth near 24% by the end of this earnings cycle.

Looking forward, earnings growth is still expected to decline over the next few quarters and estimates have fallen a bit in the last week. The good news is that full-year estimates for both 2018 and 2019 rose in the last week. Full-year 2018 is now expected to produce 20.3% growth versus only 19.2% last week; full year 201 is now expected to produce earnings growth of 10.5%, up a tenth from the last week.

The Dollar Index

The Dollar Index opened with a small gain but fell throughout the day to close with a small loss. The index created a small green bodied candle in the process and is still below resistance at the $95.50 level. The indicators are rolling over in confirmation of resistance at this level and may lead the index lower. The index, despite numerous possible catalysts, remains within its longer-term trading, so a move to $94 is possible. Over the next week, possible catalysts for the index include the FOMC meeting minutes and a raft of data from the EU/UK including retail sales and CPI for both. A move above $95.50 could go to $96 or $97.

The Gold Index

Gold prices continued their advance in today's session. The move is driven by risk-off trading and fear which was enhanced by the Saudi Arabian scandal. The Saudi's have made a serious mistake and been caught out in it, and now the question is what The West will do how the Saudi's will react to it. Regardless, today's move set a new high for the spot price and the indications are bullish. Now that gold is broken out of its consolidation range a move up to test resistance levels at $1,240 and $1,260 is likely.

The Gold Miners ETF GDX jumped more than 2.0% as gold prices rocket higher. The ETF moved up to test resistance near the short-term moving average and, so far, resistance is present. The indicators are bullish but weak, particularly the stochastic, and suggest resistance at the moving average, or just above it near $21, is likely. A move above $21 would be bullish and may send it back to the upper reaches of the long-term trading range near $23 and $24.

The Oil Index

Oil prices surged on the Saudi news, but the gains weren't held long. While there is fear the Saudi's may use oil as a weapon, there is more reason to believe they won't. The price of WTI formed a tombstone doji with doji today's action and is confirming resistance at the short-term moving average. Resistance is further indicated by the indicators which are both bearish and pointing lower. If the price of black does move lower my targets for support are near $70 and $68. If not, if prices for WTI moves above the EMA, a retest of $74 and $76 come into play. Regardless, I expect to see oil prices trading choppy in the near-term.

The Oil Index fell in today's session to form a small red candle sitting on the long-term 150 day EMA. The candle is the third in a row to test support at the EMA, and this is the 7th test of the EMA this year, an EMA that has provided numerous entry points for bullish positions, so I think it is ultimately a buying opportunity. The indicators are bearish, so there may be an aggressive test of the EMA, and it may be broken but, with earnings outlook so good and oil prices so high, the longer-term outlook remains bullish. The EMA is near 1,475, but it would take a break of 1,450 before I would start getting bearish on the sector.

In The News, Story Stocks and Earnings

JB Hunt, giant in the intermodal shipping and trucking industry, reported earnings after the bell. The company missed revenue estimates by a slim margin, but all other metrics look fine to me. The company reported revenue is up 20.1% over the same time last year and resulted in an EPS beat of $0.07 ($1.47 adjusted versus an expected $1.400). Strength was seen in all segments, offset by some disruption due to storms, and is driven by improving margins. Shares of the stock moved up following the news, advancing more than 2.0% in after-hours trading.

Bank of American reported earnings before the bell and delivered good results in just about every segment. The company beat estimates on the top and bottom lines as strength in consumer banking drive revenue. The company reports that expenses are down, net investment income is up, and there is loan growth in all segments. Despite the good reports shares of the stock opened flat from Friday's close and fell throughout the day. BAC is now trading near a one year low and at the bottom of the one-year trading range.

The VIX fell for the second day in a row as the market tries to find its bottom. The fear index created a small bodied doji candle with a long lower shadow that indicates there is still some support for volatility in the near-term. The indicators are bullish, but MACD has peaked, so a decline in fear is in line with past performance. Support is now at the 20.00 level, a fall below there could lead the VIX down to 15.00 and the broad market back to all-time highs. If the VIX does not fall back below 20.00, a deeper correction in stocks could be brewing.

The Indices

The indices tried to hold their ground in today's session, but most weren't. The one that did, the Dow Jones Transportation Average, posted a gain of 0.61% in today's session and will likely move higher tomorrow if the JB Hunt report is any indication. The transports created a small green candle that extended Friday's bounce from the 10,400 level and hit resistance at the 10,600 level. The indicators remain bearish and suggest support could be tested again although MACD has formed a peak. If prices move, higher resistance is 10,600, a move above there would be bullish and trend-following and still well below the long-term moving average with room to move higher.

The NASDAQ Composite posted the largest decline with a loss of -0.88%. The tech-heavy index created a small red bodied candle above the 7,400 support target and may be stabilizing near a bottom. The indicators are showing signs of bottoming at this level, and if so, this will lead to a trend-following entry signal sometime in the near to short-term. If the price for the NASDAQ moves lower from here support is likely near 7,300, a break below that would be bearish.

The S&P 500 posted the second largest decline with a loss of -0.59%. The broad market index created a small red-bodied candle with a visible upper shadow that shows there are still sellers present near the top of Thursday's candle. The indicators are bearish and pointing lower, so a move down to retest the recent low is likely. If support is not found at the low a move to 2,675 is likely.

The Dow Jones Industrial Average posted the smallest decline with a loss of only -0.35%. The blue-chip index created a small bodied red candle with the visible upper shadow moving down to test support at the long-term moving average. The moving average is providing support, but it looks like the actual bottom may closer to the Friday low. A move lower, if it does not find support near the Friday low, could go as low 24,500.

It looks like the major indices are nearing the bottom but maybe not quite there yet. The selling, sparked by fear and driven by rotation, could take the indices down to retest last week's lows before moving higher. The takeaway is that I think they will begin to move higher again and fairly soon, the US economy is in too good of shape and earnings growth is too strong to hold the equities markets back for long.

Earnings growth is going to decelerate over the next year but will still be strong and strong enough to fuel the dividend increases and share buybacks that have been supporting the market all along. Plus, there are a record number of Americans working record numbers of American jobs funneling large amounts of money into their 401(k)/retirement plans to help support the market long-term. I remain firmly bullish for the long-term, waiting for the next strong bullish trend-following signal to develop, but I am neutral in the near-term while I wait for that signal to develop.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Geopolitical Volatility

by Jim Brown

Click here to email Jim Brown

Editors Note:

Geopolitical news is always good for a market move when uncertainty reigns. If it is not Saudi Arabia and hit squads in Turkey, it is problems in Italy, Brexit standoffs in Europe, sanctions on Iran or Putin and gas pipelines. There is always something happening on the global stage to rile the markets. The expected resolution of the Saudi problem without seeing oil prices spike to $100 or more is a positive market event even if it is a lie. World leaders will eagerly accept the lie because it will make their life easier. We just need a couple days of positive headlines to move the market through these troubled waters and back into rally mode.


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

Saudi Market Virus

by Jim Brown

Click here to email Jim Brown

Editors Note:

Worries over the outcome of the missing Saudi journalist weighed on global markets. Investors worried over the possible impact of a sanction fight with Saudi Arabia put a cloud over the market and the weakness from last week returned. Fortunately, after the close the news broke that the Saudi government was going to release a story saying it was a rogue element inside the Saudi military, the writer died unexpectedly while being tortured and the Saudi king had no knowledge of the event. Supposedly this gives the king plausible deniability and therefore no sanctions. Obviously this is a cleverly constructed lie once they figured out it was not going to blow over. S&P futures are up +12.

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

CSCO - Cisco Systems
The long call position was entered at the open.

CGC - Canopy Growth
The bull call spread was entered at the open.

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

BULLISH Play Updates

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