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Daily Newsletter, Wednesday, 11/7/2018

Table of Contents

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

Market Wrap

Election Over, Gridlock Expected, Market Cheers

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The equities market surged in the wake of mid-term elections. The move was driven by relief, relief that political uncertainty is in decline, and the belief the Trump's pro-business agenda will remain intact.

The rhetoric is already heating up; we can be assured whatever happens in Washington the next two years are going to be interesting. Both sides have taken jabs at each other, but both have also made peace offerings, suggesting middle-ground could be reached on infrastructure and healthcare. I guess we'll see about that, hopefully, our esteemed Representatives won't just spin their wheels for two years.

Asian indices were flat and mixed in Wednesday trading as market participants waited on US election results. The Shang Hai Composite led declining indices with a loss near -0.70% while the Australian ASX led advancers with a gain near 0.40%. While there was some relief over preliminary results, the shadow of trade-tensions continues to hang over the region. The Democrats are expected to put a check on Trump's domestic agenda but have little impact on trade relations.

EU markets were more buoyant as earnings and election results lifted stocks. The banking and retail sectors led gains in the region with shares of Delivery Hero surging more than 8.0%. The financial sector was also supported by good news from Spain; the EU Supreme Court ruled that Spanish banks are not responsible for levies on mortgages curtailing fears they would be responsible for billions in back-payments. The CAC led EU markets with a gain near 1.25% and was followed closely by FTSE and German DAX.

Market Statistics

Futures trading was up all morning on post-election euphoria. The election results were mixed, the Congress is going to face deadlock and headwinds, but that is good news for the market. Now we can expect little in the way of serious change from Washington which means the status quo has been set.

The SPX and Dow Jones were both indicated to open with gains between 0.75% and 1.00% and, although there was fluctuation in trading, those gains were held until the open of today's session. The indices began moving higher as soon as the market opened. The SPX doubled its early gains by midday and looked like it would keep moving higher. By late afternoon the broad market was up nearly 2.0% and held that level into the close of the day.

Economic Calendar

The Economy

There was no economic data today; the next major release will be tomorrow afternoon when the FOMC issues the latest policy statement. The committee is not expected to raise rates at this meeting but is expected to hike rates at the next meeting, and may indicate that in this month's statement.

The Dollar Index

The Dollar Index surged in early trading as preliminary election results were reported. The trade created a long-green candle that later turned into a doji as election euphoria wore off and markets turned their attention to the FOMC meeting. The FOMC is expected to continue raising rates over the next year, possibly four more times by December 2019, and word to that effect could strengthen the dollar.

Also on tap for tomorrow are the ECB Economic Bulletin and Forecasts which may confirm what many already see; economic activity in the EU is slowing faster than expected. The DXY ended today at the short-term moving average and is indicated lower. A move lower may take it down to $95.50 or lower, a move higher may find resistance at $97.


The Gold Index

Gold prices made a knee-jerk reaction in today's session, moving first higher and then lower to form a doji candle sitting on the short-term moving average. The metal is supported by geopolitical tensions and held back by dollar outlook and wound on both, waiting for the FOMC meeting. The policy statement may not spark a major move in the spot price, but it is the next best catalyst for such a move. If gold prices move up resistance is near $1,240, if they move lower support is near $1,210, a break beyond either could be significant.


The Gold Miners ETF GDX fell in today's session as traders wait on gold's next move. The ETF has wound up around the $19.50 level which is the lower boundary of a price gap that formed over the summer and may move lower from here. The indicators are mixed, consistent with a range bound asset, and give little indication to the long-term direction in prices. The FOMC meeting could be the spark to start the next movement, if not we can expect to see gold and the Gold Miners ETF continue to trend sideways over the next month. If the ETF moves higher resistance is near $20.40 if it moves lower support is near $18.50.


The Oil Index

The price of WTI experienced some volatility today, first shooting higher and then falling back to break-even before the close. The move was driven by supply concerns linked to the Iran sanctions as well as today's inventory data. The inventory data shows WTI stockpiles surged more than double the expectation over the last week and bolstered by an unexpected build in gasoline storage. WTI formed a tombstone doji, the second this week but at a lower level than the fist, and that signal is supported by the indicators. Both stochastic and MACD are consistent with an overextended or oversold market and suggest a rebound could be coming. Support is at today's close, at the April low, and a move below it would be bearish.


The Oil Index opened with a price gap up and was able to hold that level through a day of active trading. The index was supported by earnings outlook, and word Russia and Saudi Arabia are discussing output cuts for 2019. The news is far from reality but may lift oil prices over the longer-term if market participants begin to believe it. The XOI was able to close with a gain greater than 1.75% and is indicated higher. Both MACD and stochastic are both consistent with a bullish entry that is in line with the long-term trend. A move up may find resistance at 1,450; a move lower may find support at 1,350.


In The News, Story Stocks and Earnings

Shares of Amazon were among today's market leaders with a gain near 7.0%. The move helps confirm the reversal in price movement following the October correction and is supported by the indicators. The indicators are both showing bullish trend-following entry signals and suggest a move to $1,800 should be expected in the least. Resistance is currently at the short-term moving average and, if broken, could lead to a substantial gain in the world's leading digital retail platform.


Caterpillar was another leader in today's session advancing more than 4.5% in a move that regained support at the long-term moving average. The indicators are bullish and suggest a move up to $140 is likely.


The VIX fell in today's session, and the move set a new one month low. The fear index created a price gap lower and fell below the short-term moving average in the process. The indicators are bearish and gaining strength which means a move lower should be expected. If fear continues to fall the index may find support at the long-term moving average. If the index can fall below the 150-day EMA, near the 15 level, I would consider that to be bullish for the broad equities market.


The after-hours action included earnings from Qualcomm. The company reported a sound beat on revenue and earnings and gave a mixed outlook for the next quarter. The company says revenue will fall short of consensus, but EPS will be above consensus and sent shares up in after-hours trading.

Square reported after the bell and also beat on the top and bottom line. The company provided weak guidance though, and that sent shares down by -5.0%.

The Indices

The indices moved strongly higher today. The move was led by the tech sector and pushed the NASDAQ Composite up more than 2.50%. The tech-heavy index created a medium-sized green candle that moved above the short-term moving average and supported by the indicators. Both indicators are firing bullish trend-following signals that suggest the index will continue to advance. The next target for resistance is the long-term moving average which is just above today's high. A move above that would be bullish and likely take the index up to test targets near 7,800 and 7,900.


The Dow Jones Transportation Average gained more than 2.30% in today's session. The transports created a long green candle that closed near the high of the day and looks set to rise higher. The indicators are both rising after firing bullish trend-following signals and suggest a move up to 10,750 or 11,000 is on the way. A move above 10,750 would take the index above the long-term moving average and will increase the chances of a prolonged bullish movement.


The S&P 500 advanced right at 2.10% in a move that created a long green candle. The index is moving higher after bouncing from a major support target and indicated higher. Both MACD and stochastic are moving higher after firing bullish trend-following signals and suggest higher prices are on the way. Today's action confirms support at the pair of moving averages which adds weight to the bullish argument. If the index can move forward the first target for resistance is just above today's close near 2,820, a move above that may go as high as 2,880 in the near to short-term.


The Dow Jones Industrial Average advanced about 2.0% in a move that created a long green candle. The blue-chip index extended its trend-following bounce from support and met resistance at an important uptrend line. The indicators are bullish and suggest a move higher should be expected, providing the trend line can be broken. A move above the trend line would be bullish and likely result in a retest of all-time highs.


The market moved higher and is confirming bullish outlook over the long-term. The indices are all extending strong bounces from key support targets and may move up to retest all-time high levels. These moves are supported by the indicators and outlook, the fear of slowing earnings growth has been mitigated by price correction, and could easily result in another prolonged rally in equities. While today's action looks good and there is hope it will continue, there is also the Xi/Trump trade talks to worry about and how they will impact global trade over the next year. I remain firmly bullish on the market for long-term positions and cautiously bullish for near-term positions.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Buy the News

by Jim Brown

Click here to email Jim Brown

Editors Note:

We always hear about sell the news events but there are also buy the news events. The first two days of the week were calm and low volume as investors and traders placed their bets for election results. Apparently quite a few were short because they did not believe in historical trends or thought there was going to be a tsunami of conversions to democratic held positions. When disaster did not strike and gridlock seems inevitable the race was on to cover those shorts. At the same time there was a strong case of FOMO hitting the markets. (fear of missing out) Everyone seeing prices jump then raced to buy something, anything.

The Nasdaq 100 big cap index surged 3% because those stocks were the most oversold. The FAANG stocks had a near record day. Even Apple gained $6 as shorts there were forced to cover as well.

The Dow saw heavy buying in the tariff sensitive stocks that had been beaten severely over the last several months. CAT, BA, MMM were at the top of the leader board but there was only one loser and that was PG. That is a super defensive stock that has been rallying in a down market. Money was rotating out of defensive issues.

The problem with a 545-point short squeeze is that all the stocks you would want to buy blew through resistance and packed on the points. The option premiums surged out of sight and there is no way to buy any of those stocks today. Anyone buying calls on stocks with big gains today will likely lose money when the sugar rush fades.

Thursday is a Fed rate decision and statement. It is entirely possible the Fed could say something the market does not like. The yield on the ten-year is holding at multiyear highs and a hawkish Fed statement could see it soaring and that would be market negative.

Rather than try to force a new position on a stock that exploded higher today, I think we are better off to wait until the post election short covering is over and the Fed statement is behind us. No new positions today.

 

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


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Election Blowout

by Jim Brown

Click here to email Jim Brown