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Daily Newsletter, Thursday, 1/10/2019

Table of Contents

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

Market Wrap

Retail Sales Fall Short

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Weaker than expected December comp-store sales dragged on markets but the news isn't really all that bad. The few companies that still deliver monthly comp-store sales has shrunk to near zero over the last decade which makes it a bit of a dubious market metric. Regardless, comps from Macy's and Kohl's, along with lower guidance took their toll on the sector driving the XRT Retail SPDR down more than -3.0% in early trading. The good news is that buyers were able to shrug off the news, focus on the retailers that matter, and regain much of the day's losses.


The major indices were impacted by the retail data but not much and early losses were exchanged for small gains later in the day. Along with positive spin on trade-war news statement from a handful of FOMC members including Jerome Powell provided additional confirmation the Fed is patient, flexible, waiting, and watching for what to do next with the economy. James Bullard says inflation will miss the Fed's long-running targets which isn't surprising given the recent reduction in economic activity. Bottom line, the Fed has opened the door to a pause and possibly a prolonged one at that. If the inflation data continues to weaken we could see an FOMC rate cut by the end of the year, maybe sooner.

Market Statistics

There was a little bit of news on trade this morning but nothing new. The Chinese Foreign Ministry issued another statement saying progress had been made. According to statements from both the Chinese Foreign Ministry and the Office of the US Trade Representative the parties have been able to establish a foundation upon which a broader agreement can be built.

Meanwhile, Chinese inflation fell to 1.9% YOY (CPI) ad 0.9% YOY (PPI). These are both well below expectations and a further sign of slowing within China's economy. China's slowing economy has been a concern for the ruling party many years, the added pressure of trade issues may spur them to make trade concessions sooner rather than later. Regardless, there is momentum building in the trade negotiating process that should result in some positive development in the near future. If not, Trump can always bump tariffs up to 25% (let's hope not).

Economic Calendar

The Economy

Only two economic releases today and one of them was delayed by the government shutdown, the Business Inventory data. The other data, weekly jobless claims, continues to show seasonal volatility while trending at long-term lows. The initial claims figure fell -17,000 to 216,000 and below expectations. This is on top of a slight upward revision and puts initial claims just above the 49 low. The four-week moving average of claims ticked higher but should begin to fall next week. On a not-adjusted basis, initial claims rose 6.5% versus an expected 14.9% and continue to trend lower over the long-term. On a YOY basis, not-adjusted claims are down -13.75%, consistent with tightening labor market conditions.


Continuing claims fell -28,000, also more than expected, to hit 1.722 million, but the previous week's figure was revised up by 10,000 so the decline s less than it sounds. The four-week moving average of continuing claims rose 15,250 to hit 1.721 million and is at a new high. The uptrend in continuing claims moving average is a concern but should begin to reverse soon based on seasonal trends.

The total number of jobless claims spiked 33,384 in a seasonally expected increase. This data is three weeks in arrears and still showing the effects of year-end staffing and budget rebalancing. The total claims should top out over the next couple of weeks somewhere near 2.25 or 2.30 million. On a YOY basis, total claims are down more than -13.0% and consistent with healthy, tight, and tightening labor market conditions.


The Dollar Index

The Dollar Index was able to regain some of yesterday's losses but the move wasn't overly strong and met with resistance at $99.50. The move may have been sparked by the ECB minutes released this morning but I don't think they were very moving. The bank does not seem to be ready to alter its policy outlook but they see risk to the downside as global economies slow. Slowing global economies may lead them to alter policy outlook at the next meeting but they, the ECB, has been counting on sluggish and slowing growth for some time.

Today's resistance may prove to be a critical level for the index. A move higher would keep the index within the three-month trading range and moving sideways over the long-term. If resistance at $96.50 holds up and is confirmed the index could fall to $94 or lower. The next bit of market-moving data is the PPI figures next Tuesday, if they come in weak I would expect to see the DXY move lower on an expectation of fewer future interest rate hikes.


The Gold Index

Spot gold tried to move higher in today's session but the gains didn't hold. The metal reversed in mid-session to give up the early gains and close with a small loss. Today's resistance is a bit below the recent high which is a concern but so far price action is holding within a near-term consolidation pattern. The indicators are mixed but suggest a consolidation is in process. Support is near $1,280, a break of that could take the metal back to $1,250 in the near-term. Resistance is near $1,300, a break of which would be bullish.


The Gold Miners ETF GDX fell in today's session to form a small red candle and give up -1.40%. The ETF is still trending sideways at recent highs and looks like it could fall from this level. The indicators have both turned bearish after diverging from the recent highs and suggest a sharp correction could come at any minute. A fall from this level may not be bearish, just profit-taking, if it is able to hold above the $20.50 level. The $20.50 level has been a pivot-point over the last few months and is now confirmed as support by the short and long-term moving average. A move below that level would be bad for the bulls.


The Oil Index

Oil prices were able to move higher in today's session but a further increase is questionable. Today's move was trapped in a tight range between two resistance targets where it looks like a reversal could take place. Resistance is consistent with the December congestion band and could be quite strong. On the bull side, OPEC and the Saudi's are working hard to manipulate prices higher while on the bear case US production continues to run at 11.7 million barrels per day (all-time high) storage levels are high. A resolution of US/China trade disputes could spur demand outlook but until then I think high-supply is the name of the game. A fall from this level would confirm the Oct 2018-Jan 2019 downtrend.


The Oil Index was able to tread water at yesterday's new high. The index formed a small green bodied candle to the side of the previous candle in what may become a flat pattern. The index is trading above the short-term moving average and is supported by the indicators so a move up does look likely. The caveat is that resistance levels are just above today's close at 1,260 or 1,265 and they may keep prices from moving higher. Also, a move up in the index is usually tied to a move in oil, if oil prices are not able to move higher I don't see the index following suit.


In The News, Story Stocks and Earnings

Macy's reported positive comp-store sales but the figures fell short of expectations. The December comp was only 0.7% which doesn't compare well to an expected 1.1% and December 2017's even higher number. The sales were weak enough for management to lower guidance to the low end of the previously stated range and that sparked a massive sell-off in the stock. Shares move down more than -10% immediately after the report and kept falling from there. The stock opened with a loss near -18% giving Macy's its worst day ever. At $25 the stock is now back to its November/December support levels where it may find buyers; the company may have missed growth targets but growth is present.


Target's holiday comps were much better, beat expectations and came in higher than the previous year. The chic discount store says comps of 5.7% were driven by traffic and average ticket increases, a sign the store is gaining market share. The company maintains its guidance for the full year but shares fell anyways. Analysts at Wells Fargo say the report is robust but deceleration of online sales (still about 30% growth) may weigh on shares moving forward.


Kohl's reports comps were 1.2% adjusted which is well short of the 6.7% seen in the previous year. The company says despite the miss on comps they are seeing positive transaction growth and double-digit growth in online which is helping to fuel results. Management raised guidance to the upper end of the previous range but that was not enough to keep the stock from falling -10%. The good news is that buyers were waiting and drove shares up to post a loss of only -5.0% at the close.


The Indices

The indices fell under the weight of poor retail comp-store sales. While the miss on comps isn't good news it wasn't that bad and was shrugged off in favor of optimism. The trade talks are moving along, the earnings season is at hand, and the outlook is positive.

The Dow Jones Industrial Average led the charge with a gain of 0.50%. The blue-chip index created a small green candle with a visible lower shadow that confirms the presence of support at the short-term moving average. The index looks like it is preparing for a big move higher and that move may be fueled by the start of earnings season next week. The indicators are bullish and support this move so I am expecting to see higher prices soon. A move up is likely to hit the long-term moving average near 24,785, a fall from this level may find support near 23,250.


The broad market index closed with a gain near -0.45% and created a small green candle. The candle is next to the previous and sitting on the short-term moving average which is now supporting prices. The indicators are bullish and moving higher so a rise in prices is expected. Now that momentum has begun to increase a move up to retest the long-term moving average near 2,700 is likely.


The NASDAQ Composite closed with a gain near 0.40%. The tech-heavy index is supported by positive trade developments that will help protect against unwanted tech-transfers as well as open new markets. Today's candle is medium sized and green, is moving up from support targets at the short-term moving average, and has moved above a long-term uptrend line so looks fairly bullish. The indicators are bullish and on the rise, so higher prices are expected. My target is the long-term moving average near 7285.


The transports did not lead in today's session but that's OK, market action was still bullish. The index confirmed support at 9,500 and moved above the short-term moving average in a way that makes me think it will continue higher. The indicators are consistent with this outlook although there are still resistance hurdles to overcome in the near-term. The next target for resistance is 9,750 and then 10,000.


There was a chance that retail comp-store sales would tank the market but it didn't happen. This is a good sign because it shows resilience is back in the market and that is because optimism is back in the market. The trade war isn't over, global growth is still slowing, but there are signs a trade deal is close at hand and that is one mega catalyst that will spur economic activity all over this planet. Until then we have earnings season ahead of us and that should be good too. Growth is still expected to be double-digit and it is likely to exceed expectations so I am bullish on the market, cautiously, but bullish.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Long in the Tooth

by Jim Brown

Click here to email Jim Brown

Editors Note:

While our rally is growing old, there is plenty of life left. The term long in the tooth refers to horses and the fact that their gums recede as they grow older making their teeth look longer. Buyers can tell the age of the horse by looking at the length of their teeth. Investors do not have an easy indicator to determine when a rally is growing older other than by counting the days of gains. The Russell 2000 has been up 11 of the last 12 days. Since trees do not grow to the sky and rallies don't last forever, we would be justified in saying this rally has moved farther than anyone would expect without a material bout of profit taking. Up 11 of 12 days is asking for trouble. Fortunately, there have been a few rallies with streaks longer than that but very few. Historically, we would be justified in expecting a pause in the current growth spurt. That does not mean the rally is over, it would just be a pause to consolidate. Any trader currently long over the last three weeks is more than likely snugging up their stop losses every day. When a real bout of profit taking hits those stops will be hit and that will give us a new entry point for future longs.

 

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

Nearly Perfect

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market would be hard pressed to perform any better than today. The Dow dropped -176 at the open before struggling back to positive territory before noon and then rallying into the close to post a 122-point gain. I have been warning that we would see some weakness soon. That came at the open and gave everyone a new buying opportunity and they bought the dip. The recovery was steady rather than frantic and suggested investors were picking their entry stocks and their entry points rather than simply rushing back into the market or frantically covering their shorts. This was nearly a perfect day. Unfortunately, the Dow did come to a dead stop at resistance at 24,000. This sill be the challenge for Friday.



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


HD - Home Depot
The long position was entered at the open.


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

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