Option Investor

Daily Newsletter, Monday, 1/28/2019

Table of Contents

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

Market Wrap

Caterpillar Whiffs

by Thomas Hughes

Click here to email Thomas Hughes


**The baby is not here yet but we are going in tonight so the Dr's can make it happen. I wrote this wrap before the market closed in order to facilitate that event. It is possible the market made a significant move after I posted this wrap. Next time you hear from me I should be a daddy, again. ***

A bad report from Caterpillar and revised guidance from NVIDIA drug the indices lower. Peak earnings season is here so the news was not taken well. The markets are looking for growth and confidence from CEO's and it did not get what it wanted. The good news is that there are events at had, this week even, that could alter the outlook for earnings growth this year but we'll just have to wait and see how they turn out.

This week could be turbulent for many reasons. First off it is a big data week and many of the data points on the calendar have been delayed over the last month. We should see two months worth of data for things like the PCE Price Index and Personal Income so there could be a strong reaction to the news. Not counting what's on the schedule it is possible we'll start getting other delayed data points as well.

Also on tap this week is a meeting of the FOMC. The committee that determines the direction of US monetary policy is not expected alter rates but is expected to comment on the trajectory and timing of future rate hikes and possibly the end to the Fed's balance sheet run-off. What we want to see is a Fed at ease with inflation and ready to let the economy run its course without additional hikes (unless the data dictates). If the Fed indicates they will alter, slow, or end the balance sheet run-off it would be an added bonus for equity and bond markets.

Market Statistics

Perhaps the most important event this week will be the trade talks between Chinese Vice Premier Liu He and Washington's finest. The talks are not expected to bring much change to the situation but they could be a turning point. If the talks end successfully there will be a path forward, no fear of additional tariffs, and less headwind for global economies to weather. If the talks end badly we could tariffs increased again and the global economy begins to sink into the recession we've all been warned about.

Economic Calendar

The Economy

Only one economic release today but there are over a dozen releases this week including the FOMC policy statement, the PCE Price Index, the Nonfarm payrolls report, and many others. Today's release is the Chicago Federal Reserves Economic Activity Index and shows activity expanded in December. The diffusion index increased by 0.06 to 0.27 on strength in two of the four sub-indices.

Both the production and employment-related indicators showed some increase, production showed a strong increase, while sales/orders held steady and consumption/housing declined. The decline in consumption and housing is mostly due to housing, not surprising, but should be noted in case other signs of consumer weakness emerge.

Moody's Survey of Business Confidence jumped 3.7 points in the last week but I'm not convinced there's been a reversal. The confidence figures have rebound before and there is no reason for this one to be different assuming no change of sentiment is sparked by trade talks, the FOMC, the earnings outlook, or economic data.

Earnings season is about to ramp into high gear and so far the results are good if a bit less than expected. The average S&P 500 company is beating consensus but at a lower rate than it has over the past few years. This is a concern but it is still early in the season so things could change, if not we may see the broader market move lower to correct for lower than expected growth. The blended rate for the quarter is now 10.9%, still down from its mid-2018 levels, but up from the previous week. There are 126 S&P 500 companies reporting this week, 25.2%, so it's going to be a busy one.

Looking forward there is still an expectation for earnings growth but that outlook continues to worsen. The next three quarters are now only looking at 0.70% to 3.0% growth, very weak compared to last year's 20.6%, but there are brighter days ahead. Earnings growth is still expected to accelerate throughout the year and then surge in the fourth quarter. The surge should put earnings growth back in the double-digit range and projected to carry into 2019 barring unforeseen geopolitical/trade events. Growth for 2019 is going to be focused on the industrials, financials and consumer discretionary which makes today's report from Caterpillar all the more worrisome.

The Dollar Index

The Dollar Index continues to drift lower after last week's stunning reversal. The index is now heading toward support targets at $95.50 and may get there before the FOMC release on Wednesday afternoon. The reversal comes on word the FOMC may curtail the balance sheet rundown sooner than expected and that is dovish in terms of policy stance. The rundown has allowed the Fed to absorb billions in liquidity and tighten the market to the point of a recession. If they do as expect we might see the Dollar Index fall through support at $95.50 and $95.00 and move to $94 or lower. This month's meeting also includes a press conference so there could be added volatility.

The Gold Index

Gold prices held steady after their surge to new high last week. The metal is now hanging above the $1,300 level where it may linger in order to gather support. The move is driven by the weaker Fed stance more than anything else but I'm sure there is some fear-factor in the price as well. Now that price is above $1,300 the uptrend is confirmed so higher prices are expected over the near to short-term. The indicators are not yet fully in-line with the break-out so caution is due. My next target for resistance is $1,320 and $1,340 with a possible move to $1,360.

The Gold Miners ETF GDX extended its launch from major support with an advance of 1.0% in today's trading. The ETF created a medium-sized green candle pushing up to test resistance at the $21.50 level and so far there is some resistance there. The indicators are firing bullish crossovers so it looks like there is some strength in the move, I would expect to see $21.50 tested if not broken. A move above $21.50 would be bullish and could take the ETF up to $22.00, $23.00, and $24.00.

The Oil Index

Caterpillar's warning on 2019 revenue and earnings was taken as a sign of slowing demand for oil. The price of WTI and Brent both fell more than -3.0%, WTI nearly -4.0%, but the moves aren't as ominous as they sound. WTI is still trading within the near-term consolidation range and above the short-term moving average so support is still present. Later this week, if the inventory data is still strong and/or industrial outlook weakens, we may see WTI move lower.

The Oil Index held steady in today's session and barely posted any movement. The index is sitting on key support where it may hold but not if oil prices fall. If oil prices fall back to test their lows I think we can count on the energy sector to retest its lows too. A move below 1,230 would be bearish and could take the index all the way to 1,100.

In The News, Story Stocks and Earnings

NVIDIA, a leader in AI, gaming, data-center, and cryptocurrency mining chips, issued a warning this morning. The company says revenue will fall well short of current consensus due to weakness in its core businesses gaming and data-center. They cite economic deterioration in China that is bad for them but may spur President Xi to up the pace of trade negotiations. Despite the warnings, company execs were optimistic for future sales, just at a slower pace than expected. Shares of the stock fell -15% but are still above support. If support in the $130/$135 range we could see a reversal take place.

There were at least a dozen small and regional banks reporting before the bell with one thing in common, growth. The regional banks are seeing growth in their net-interest income and consumer banking segments that are driven by healthy labor market conditions. While individuals may not have seen a change in their pay or earnings the average American worker has, and there are more workers than ever before, and that is driving revenue at the local bank. The Regional Banking SPDR KRE was one of few to see gains in today's session.

The after-hours activity does not look like it will be too busy, there are some reports but nothing major and not the quantity expected later in the week. Topping the list is Whirlpool, a big name with ramifications for consumer products, manufacturing, and the industrial sector. The company was expected to post EPS near $4.25 and revenue growth of 1.1%. The stock traded slightly lower in early action and looked hopeful earnings would be OK. WHR is a good dividend payer with low payout ratio and high growth rate in recent years, if it falls in after-hours trading I would expect to see some value-buyers step in around $120.

The Indices

The indices were broadly lower in late afternoon trading but above support levels. The action was bearish but not a full reversal which is good, Caterpillar and NVIDIA are only two companies, there are lots more S&p 500 companies due to report this week and next. The loss leader was the NASDAQ Composite with a decline of -1.25% but the candle forming did not look that bad. The candle was a small spinning top sitting above potentially strong support at the short-term moving average. The indicators show some weakening with the recent rally but that could change with earnings. A move up would be bullish, a move lower may find support near 6,960.

The Dow Jones Industrials were hit second hardest on results from Caterpillar. The industrial giant raises the question of earnings for every global megacorp so there is a lot riding on the next few reports. The blue-chips were down about -1.20% in late afternoon trading but well above support. Support is at the short-term moving average, near 24,000, and may be reached over the next couple of days if earnings don't perk up a bit. A move below 24,000 could take the index down to 23,000 or 22,000.

The S&P 500 was down about -1.0% in late afternoon trading and poised above support targets, just like the tech and industrial sectors. The index created a small spinning top-type candle and does look like it will move much lower provided earnings do not disappoint. The indicators are weakening but momentum is still bullish and consolidation is occurring above the short-term moving average so I am still optimistic a move higher is brewing.

The Dow Jones Transportation Average posted the smallest decline in late afternoon trading and was forming the most bullish candle. The candle is small but green and shows support is still present above the 9,750 level. The 9,750 level is the baseline for the index recent reversal and a crucial pivot point should it be broken. Until then I am expecting a bounce to form with a possible target of 10,275 and then 10,750.

The market got a blow with this mornings report from Caterpillar and warning from NVIDIA but it was taken in stride. The indices gave up a little bit of ground but held above major support targets where they have been consolidating over the past week. There are risks this week, quite a few risks, but so long as the indices hold above their respective support levels I am optimistic a rally will follow.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Rocky Road Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

If earnings for the rest of the week continue this trend it will be a rocky road. We are very close to seeing earnings estimates for Q1 turn negative and that will be very bad for the market. I would not be surprised to see a retest of the lows should that happen.

Nearly half of the Dow's loss was Caterpillar and there are 12 more Dow components to report this week. Apple reports on Tuesday and bad news there would be crippling for what is left of market sentiment. Futures are already down -12 tonight.


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

Major Sentiment Change

by Jim Brown

Click here to email Jim Brown

Editors Note:

The earnings, or lack thereof, put a firm cap on the markets today. Caterpillar missed. Nvidia issued a major warning and fell 14%. Whirlpool missed on earnings and guided lower for 2019. Shares fell $10 in afterhours. Investors were looking for earnings to lift the market, but it is not working out as expected. We could be headed for some rocky trading in the days ahead.

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

DELL - Dell Technologies
The long position was entered at the open.

MDT - Medtronic
The long position was closed at the open.

CAT - Caterpillar
The long position was stopped at the open.

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

BULLISH Play Updates

CAT - Caterpillar - Company Profile


CAT reported earnings of $2.55 that missed estimates for $2.98. That was the biggest quarterly earnings miss in over a decade. However, it was still an improvement from the $2.16 in the year ago quarter. This was the first earnings miss in ten quarters. Revenue of $14.34 billion also missed estimates but was up from $12.90 in the year ago quarter. The guided for 2019 to earnings of $11.75-$12.75 and analysts were expecting $12.73.

They blamed a slowdown in China's economy and the trade tariffs for the earnings miss.

We were stopped out at the open and CAT closed down $12.49 for the day.

Original Trade Description: Dec 22nd

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for construction, resource, and energy and transportation industries. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Deerfield, Illinois. Company description from FinViz.com.

CAT has failed to decline with the market until the last couple of days. Earnings were good and forecasts were good. CAT has been hobbled by the trade war with China. Investors are worried that tariffs could disrupt its rapidly growing business. CAT said it has raised prices three times to cover the majority of the increased costs and the net impact has only been around $150 million. When a trade deal is reached, you can bet those price increases will not be completely erased. They will make up their losses.

Position 12/24:
Closed 1/28: Long Feb $135 call @ $2.43, exit $1.33, -1.10 loss.

MDT - Medtronic - Company Profile


We closed this position at the open because of lack of movement.

Original Trade Description: Jan 9th

Medtronic plc develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates through four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group. The Cardiac and Vascular Group segment offers implantable cardiac pacemakers, cardioverter defibrillators, and cardiac resynchronization therapy devices; AF ablation product; insertable cardiac monitor systems; mechanical circulatory support; TYRX products; and remote monitoring and patient-centered software. It also provides aortic valves; percutaneous coronary intervention stents, surgical valve replacement and repair products, endovascular stent grafts, percutaneous angioplasty balloons, and products to treat superficial venous diseases in the lower extremities. The Minimally Invasive Therapies Group segment offers surgical products, including surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, and gynecology products; hardware instruments and mesh fixation device; and gastrointestinal, inhalation therapy, and renal care solutions. The Restorative Therapies Group segment offers products for spinal surgeons, neurosurgeons, neurologists, pain management specialists, anesthesiologists, orthopedic surgeons, urologists, colorectal surgeons, urogynecologists, interventional radiologists, and ear, nose, and throat specialists; and systems that incorporate energy surgical instruments. It also provides image-guided surgery and intra-operative imaging systems; and therapies for vasculature in and around the brain. The Diabetes Group segment offers insulin pumps and consumables, continuous glucose monitoring systems, and therapy management software. The company was founded in 1949 and is headquartered in Dublin, Ireland. Company description from FinViz.com.

Medtronic tanked after the JP Morgan Conference after the CEO updated guidance and some analysts took it negatively. The company lowered 2019 guidance slightly due to worries over paclitaxel and higher mortality signals. However, the company feels "very confident" the devices are safe and has the necessary data to back up the claim. An analyst at BTIG said the guidance was "very conservative" after talking to the CEO. He said Medtronic should be able to at the very least match its guidance and more than likely beat it.

BTIG said beyond 2019 the company has a "broad and rich" pipeline for fiscal 2020 that will generate more than a 4% growth in several specific areas. He upgraded MDT shares from neutral to buy with a $100 price target.

On Tuesday Medtronic announced a new mobile app that communicates directly with its portfolio of pacemakers. Patients and doctors can monitor the pacemakers on a smartphone or tablet. That means the pacemaker can transmit vital data to the patients smartphone without intervention and the app can communicate with the doctor for analysis. Patients no longer need to be tied to home based monitoring equipment.

Shares rallied the last two days on the new mobile app news and the analyst upgrade.

Earnings February 19th.

I am recommending a May option because there are no March or April options at this time. We can buy time, but we do not have to use it.

Position 1/17:
Closed 1/28: Long May $90 call @ $2.82, exit $2.28, -.54 loss.