Option Investor

Daily Newsletter, Thursday, 10/18/2018

Table of Contents

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

Market Wrap

Yields Jump And Stocks Fall

by Thomas Hughes

Click here to email Thomas Hughes


The yield on the ten-year treasury jumped in today's session and sent stocks back to support. The fear of rising rates and the FOMC has trumped earnings and may send the market lower. The caveat is that today's data was positive, points to continued growth and shows a deceleration of inflationary pressure in the manufacturing sector. Today's sell-off may have been aided by news Treasury Secretary Steve Mnuchin would not be attending the Saudi's investment summit in response to the Khashoggi murder, and word from Larry Kudlow that China was not responding positively to anything we've asked for relating to trade.

Asian markets were down in Thursday trading although the losses were firmly centered in mainland China. The Shang Hai composite posted a loss near -3.0% compared to a smaller -0.80 for the Heng Seng and a mere -0.03% for the Nikkei. The fear in China is that trade conflicts are hurting economic growth and those fears are being realized in the data. European indices tried to hold positive in early trading but fell later in the day as Brexit, and Italian budget angst led the market lower.

Market Statistics

Futures trading was negative from the start of the early electronic session. The trade edged lower throughout the morning and was unaffected by data or earnings results. The open of Thursday trading saw the SPX post a loss near -0.50% and then fall from there. By mid-afternoon, the broad market was down more than -1.5% where it began to find support. A late afternoon bounce lifted the indices off of the daily lows before the close of trading but not by enough to significantly reduce the day's losses.

Economic Calendar

The Economy

The Philly Fed's MBOS fell less than expected over the past month. The headline activity index fell -0.7% to 22.2 and shows that business activity continues to expand but at a slightly slower pace than the month before. The New Order Index fell -2.0 to 19.3 which was the biggest decline within the report. Shipments rose by five points to a strong 24.5 while employment gained 2 points to come in at 19.5 and the workweek index expanded more than 6 points to 20.8. On the inflation front, the prices index fell -1 point after falling -15 in the preceding month. Also, there is a consensus among business that CapEx will increase next year. All in all, this is a good report that shows expansion within the economy and moderation of inflationary pressure.

Initial claims for unemployment fell -5,000 from an upwardly revised 215,000 to hit 210,000. The revision was only 1,000 so not a big adjustment. The four-week moving average of claims rose 2,000 from its upward revision, +250, to hit 211,750. On a not adjusted basis claims fell -4.9% versus an expectation of -2.5% and are down -7.5% from last year. There is still no mention of the hurricanes in the report, but I still expect to see some impact on the numbers. Regardless, the initial claims figures remain consistent with long-running trends and ever-tightening labor markets.

The number of Continuing Claims for unemployment insurance fell -13,000 on top a downward revision for a net decline of -20,000 this week. The drop puts continuation claims at 1.64 million and a new 43 year low. The four-week moving average of claims also fell, to 1.653 million, and is also sitting at a new long-term 43 year low that is consistent with tightening labor markets.

The total number of claims fell by -26,574 to hit 1.395 million. This figure exceeds my expectations and brings the total number of Americans to a new long-term low and below trend. The number of total claims is now -13.5% below last year, a bit lower than the -20% we saw over the summer, but still shows tightening has accelerated above the -10% trend that we've seen over the past few years. Former FOMC Chairman Alan Greenspan says this is the tightest labor market he's ever seen, but we already knew that.

The Index of Leading Economic Indicators came in at 0.5% this month and as expected. The figure shows activity has accelerated from the previous month but is still below the levels we saw earlier this year. The Conference Board's commentary says the index points to a strong growth trajectory that will keep us on pace for 3.5% GDP all year. The caveat is that there is some weakness internally that may lead to slower growth next year. If there is slower growth, it will be because there aren't enough people to work all the jobs we have. At current count, there are over 7.1 million job openings and only about 6 million people unemployed and looking for work.

The Dollar Index

The Dollar Index moved up in today's session and advanced about 0.30%. The move is driven by today's data, data that supports US economic growth and FOMC outlook. The candle is small but green and moving up from support so higher prices can be expected. The indicators are both showing bullish crossovers that confirm such a move if the index can surpass the $96.00 level. A move above $96 would be bullish and likely take the index back to retest the top of the trading range near $97.

The Gold Index

Gold prices were able to edge higher despite the strength shown by the dollar. The spot price moved up on fear and formed a small green candle with visible upper and lower shadows. The candle is bullish but also indecisive as it is still below resistance at $1,232.50 and shows signs of that resistance in the upper shadow. The indicators are bullish but have rolled over in confirmation of resistance, so a move higher is questionable. If the price does move above $1,322.50, a move to $1,250 looks likely. If not, a move down to retest support near $1,205 is possible.

The Gold Miners ETF GDX moved up in today's session but was capped by resistance. Resistance is near $20.40 and below the short-term moving average. The indicators are beginning to roll over in a move that would confirm resistance at the top of a trading range if it completes. Until then I expect to see the sector continue to consolidate at this level until gold makes its next move. A move lower will likely find support at $19.50; a move up may hit resistance at the short-term 30-day EMA.

The Oil Index

Oil prices fell another -2.0% in today's session as rising US stockpiles and fear of slowing global growth trump fear of Iran sanctions and Saudi Arabian scandal. The price of WTI shed more than -$1.25 to fall below the $69 level for the first time in a month. The move is bearish and may take the black gold lower, but so far price action is still within the short-term trading range. My targets for support are $68 and $66, a move below $66 might lead oil back to levels where profits in the energy sector are questionable.

The Oil Index fell about a percent in today's session to drop below the long-term moving average and form a small doji candle. The candle is a spinning top and shows a market unsure of what it's doing. Over the past year, all moves such as this have resulted in buying opportunities for short and long-term positions, and earnings outlook remains robust, so I am bullish with the index at this level. The indicators remain weak but are showing sign of buying at this level that may keep prices from falling much further. If they do fall further my target for support is just below 1,450.

In The News, Story Stocks and Earnings

The yield on the ten-year treasury spike overnight and sparked today's selling. The TNX rose about 1.0% to open with a small gap; the thing is it fell from there to form a red candle and post a loss. The candle may be bearish but price action over the past few weeks has been bullish, so I do not expect to see a major sell-off in yield/rally in bonds. If anything, a move in yields back towards 3.125 would likely be met by bond-sellers and drive it back up.

BB&T reported earnings this morning among a host of smaller regional banks. The company reported revenue grew 4.3% over the past year and beat expectations. The jump in revenue resulted in adjusted, and GAAP EPS, beating expectations and was driven by the growth of consumer accounts, broad loan growth (up 5.8%), and tighter cost controls. Shares of the stock responded positively to the news and moved up sharply in today's action. The negative is that resistance was hit at the short-term moving average and unleashed a flood of selling.

American Express reported after the bell and blew past expectations. The company reports revenue is up more than 9%, and that has shares moving higher. GAAP EPS of $1.88 beats by $0.11 and is up more than 20% from last year. The jump in revenue is driven by an increase in cardmember spending, loan growth, and fees. Shares of the stock surged on the news, gaining more than 1.0%, but the gains were moderated to about 0.50% soon after.

The Indices

The indices moved lower in today's session and look like they may move lower tomorrow. The day's loss-leader in the Dow Jones Transportation Average which shed -2.60%. The transports created a long red candle with a visible lower shadow that moved down to test support at the 10,400 level. Support is holding, but the indicators are still weak so a deeper decline could come. If so, support may found just below 10,400 at or near the long-term uptrend line, a break of which would be bearish. If support at these levels holds, I see a high probability for the index to fire a strong trend-following signal in the not too distant future.

The NASDAQ Composite posted the second largest decline with a loss of -2.06%. The tech-heavy index created a large red candle moving down from the long-term EMA in confirmation of resistance. The indicators do not support the move and are showing a bullish trend-following entry signal, so I am optimistic the index will not fall much further. If it does support is likely at the recent low, a break below there would be bearish.

The S&P 500 posted the third largest decline with a loss of -1.44%. The broad market index created a long red candle moving down to confirm resistance at 2,800 and fall below the long-term EMA. The indicators are mixed, so a deeper fall is not indicated so support is likely to hold in the range of 2,700 to 2,750. A fall below 2,750 would take the index below a key long-term uptrend line which would be bearish. A bounce from support would be bullish and trend-following.

The Dow Jones Industrial Average posted the largest point decline but the smallest percentage decline with a loss of -1.26%. The blue-chip index created a medium sized red candle that moved down to test support at the long-term moving average. Support held and is highlighted by the long lower shadow on today's candle. The indicators are rolling into a trend-following signal at the same time, so the price action looks bullish even though the candle is red. A move below the long-term EMA may be bearish if it closes below 25,000. A bounce from support at the current level, or 25,000, would be bullish and trend-following.

The market fell today, but once again it was due to fear of a strong economy. Fear of a strong economy would be a fine excuse if we were nearing the end of a long cycle of tightening designed to hamper out of control inflation, but we're not. As it is, we're still in the early stages of a long cycle of tightening that is only expected to bring interest rates to neutral. With that in mind, and with an eye to earnings outlook, today's weakness looks like corrective action within a trend and above support that is preparing the market for future gains. I remain firmly bullish for the long-term and neutral/cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Headlines Overpower Earnings

by Jim Brown

Click here to email Jim Brown

Editors Note:

The flurry of negative headlines today overcame the good earnings news. The internals were bad with 4:1 decliners over advancers. The Volatility Index closed back above 20. Investors hate uncertainty and that is the only thing we have in unlimited quantities. The various events in Saudi Arabia, Turkey, Italy, Venezuela, Latin America, Europe/Brexit, China, etc are starting to become more than just an irritant. Together they are starting to become a witches brew that could eventually tank our markets.

Today was still just a retracement of the early week gains driven by headlines. Any further declines could become toxic and send the markets back to new lows. The tech stocks were hammered and the Russell lost 28 points to give back almost all of its gains. We could have a large amount of weekend event risk worries on Friday. I would love to see another short squeeze but it remains to be seen as to what would power it.


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


No New Bullish Plays


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In Play Updates and Reviews

Not a Good Day

by Jim Brown

Click here to email Jim Brown