Option Investor
Newsletter

Daily Newsletter, Thursday, 2/7/2019

Table of Contents

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

Market Wrap

No Trade Deal Yet

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market fell on renewed trade fears and could signal a general collapse in equity prices. Losses were broad but not too deep so it is possible today's action is just reaction to bad news. The news, a Trump/Xi meeting is unlikely before the March 1st tariff-deadline. Trump and Xi want to meet after Trump meets with Kim Jong Un, that meeting is slated for the final days of the months, and there are still differences that need to be resolved before a date can be set.


The real question is tariffs. The March 1st deadline is the trigger for a doubling of tariffs already in place on Chinese goods, will the tariffs be halted or will they be triggered as planned, and if so how is that going to impact the negotiations, global economic outlook, earnings estimate, and the equity market?

Market Statistics

Adding to today's woe are two additional voices in the chorus of those harmonizing on the risk of US/China trade relations to global economic growth. The first is from the ECB, the ECB issued the first volume of the 2019 Economic Bulletin and Update and the update is not good. The ECB says geopolitical uncertainty (ahem, US/China trade relations) are curtailing growth. Economic indicators are coming in worse than expected and point to slower than expected growth in the EU despite underlying strength in domestic activity.

The ECB has lowered its GDP target for this year and next by several tenths but there is good news; domestic economies are still strong, economic conditions are favorable, labor markets are healthy, and wages are growing. Looking forward, EU GDP growth is expected to expand in 2020 but will be subdued if trade-relations are not resolved and global trade remains constrained.

In the UK the Bank of England held its rates unchanged but issued a warning. The BoE says the UK could see the slowest growth since 2009 as Brexit concerns and global trade curb activity. The bank lowered its already diminished GDP outlook to 1.2% and this could go much lower if the Brexit isn't resolved. There are 50 days to go.

Economic Calendar

The Economy

Initial claims for unemployment fell a less than expected -19,000 to 234,000. The previous week's figure is not revised and the four-week moving average of claims rose 4,500 keeping the number of first-time claims moving sideways. On a not adjusted basis claims rose 2.0% versus an expected 9.2% and are up from the same time last year. There is no specific mention of the shutdown in the data but the number of new civilian claims rose 17,277 in the last week and has been rising over steadily over the past few weeks. Regardless, claims continue to trend near the long-term lows and are consistent with healthy labor markets so nothing to worry about here.


The number of continuing claims fell -42,000 to 1.736 million. This is on top of a downward revision to last week, -4,000, and brings the four-week moving average to 220,250. The number of claims and the moving average have been rising over the last two months and that is a concern. Despite that concern, the number of continuation claims continues to trend near long-term lows and is consistent with labor market health.

The total number of claims increased by an expected 54,515 to hit 2.203 million. The number of claims is topping out at a seasonal peak (expected) and should begin to subside in the next two weeks. The only questions are how the shutdown will impact the data, and if employment trends are still positive (other data points say yes). My next target for total claims is a decline to 1.5 million by late spring.


The Dollar Index

The Dollar Index got a boost this morning from the BOE and ECB. The two central banks have confirmed relaxing their outlook for the coming year and offset weakness in the dollar sparked by a similar outlook from the FOMC. Today's gains were capped though, at resistance, and may not be able to move higher. Resistance is at $96.50 where it kicked in last month. The indicators are bullish so a move to retest resistance is likely, a move above that would be bullish.


The Gold Index

Gold prices were able to regain some of yesterday's losses on today's trade news. The news ups the ante for the expected Trump/Xi meeting, a meeting that not materialize at all (I shouldn't forget). Today's move confirms support is still present above the $1,300 level but the move is not decisive. Downward drift may continue if the dollar strengthens, support may be found near $1,300. A move up would be bullish but new directional trades shouldn't be considered until new highs are set.


The Gold Miners ETF GDX fell again today and set a new one week low. This low breaks the short congestion band which formed over the last week and may indicate rejection of prices at the key level of $22.50. This level has been an important pivot point for nearly three years and strong resistance is likely even if prices do move eventually higher. The indicators are rolling over as well which suggests consolidation in the least and pullback to support at worst. If the ETF does move lower support is possible at $21.00.


The Oil Index

Oil prices moved lower on today's news. Trade uncertainty and declining prospects for economic activity are sapping outlook for oil demand and offsetting signs of market tightening. The price of WTI fell about -3.0% intraday but found support near $52.40 and the short-term moving average. Prices ma move higher but without positive catalysts to support them range-bound trading is the best we can expect. If prices move below the short-term moving average a decline to $48 or $44 is possible.


The Oil Index fell in today's action and confirms support at the 1,300 level. The move takes the index below my long-term uptrend line but found support at the short-term moving average. The index is still in consolidation so sideways movement should be expected in the near to short-term. Because the indicators are so weak and showing strong divergence I suspect a deeper fall may be coming, possibly to 1,220 or lower. A move below 1,220 would be very bearish for this sector.


In The News, Story Stocks and Earnings

Twitter moved sharply lower in today's session after beating earnings outlook on the top and bottom lines. The company says average monthly daily users is on the rise but weaker revenue and rising costs are going to hurt the bottom line. Twitter has been shifting to a more news-centric approach and that is costing them dollars, news attracts users but it doesn't convert to dollars the way other types of traffic do. Shares of TWTR fell -10.00% on the news.


Kellogg's beat forecasts as sales trends begin to stabilize. The maker of iconic breakfast foods and snacks says next year should see revenue grow 3% to 4% with EPS growth of -4% to -7%(effect of tax reform wears off). The guidance is better than expected and helped shares move higher in the pre-opening session. Later, but before the open, shares reversed their climb to fall more than -5.0% as traders cash out in favor of other steady dividend payers that do have positive EPS growth in the forecast.


Arcelor Mittal, one of the world's largest steel producers, beat revenue and earnings estimates soundly. Shares of the stock fell, however, on the outlook for moderating demand and expectations for weak revenue and EPS growth. The company still sees demand growing by 0.5% to 1.0% but the lower outlook and declining prices are going to hurt bottom line results. Shares of the stock fell more than -4.0% despite a doubling of the dividend distribution and increased share buyback.


Shares of Columbia Sportswear surged more than 11% in after-hours trading after the company proved consumer spending is robust. The company grew revenue 16% over the last year, improving operating income by 34%, and expects to see strength all year. The guidance is well above, not just a little but well above, the analyst's consensus $4.09 at $4.30 to $4.45 for the year.


Urban Outfitters was not so fortunate. The company reported light on revenue and gave a soft outlook for the full year. Shares fell -4.0% in after-hours trading.


The Indices

The indices moved lower today on a round of negatively charged news but the moves weren't that big. The indices had a heads-up moment on some news we already knew, the 2018 updraft in equity prices is still intact. Today's action was led by Dow Jones Transportation Average which closed with a loss of only -0.31% after tickling -0.50% intraday. The index created a small doji candle just below Wednesday's candle and the long-term moving average but within the five-day range so is not that bad looking. The indicators are consistent with the index hitting a peak and entering consolidation and that is what looks like is happening. A move lower may come but will likely find support near 10,000 or 9,750 unless the news worsens.


The NASDAQ Composite posted the largest decline with a drop of -1.18%. The tech-heavy index is now testing support at the long-term moving average and so far support is present. The indicators are consistent with consolidation at this level so the moving average may be tested again, sideways action should be expected regardless. A break below the 150-day EMA would be bearish and could take the index down to 7,100, a move higher would be bullish and may lead to a retest of 7,500.


The S&P 500 closed with a loss of -0.94%. The broad-market index created a small red candle with a visible lower shadow after testing support at the long-term moving average. So far, support is present at the EMA but the indicators suggest this is not the last time it will be tested. A move below 2,700 could be bullish and may lead the index down to 2,650. A move up would be bullish and confirm support at the EMA, my target, in that case, would be 2,730 and 2,775 in the near-term.


The Dow Jones Industrial Average closed with a loss of -0.87% after trading much lower intraday. The blue-chip index created a small hammer-like candle showing support at the 25,000 level and indicating a possible move higher. The indicators are bullish but consistent with near-term weakness/consolidation so sideways action is expected over the next few days. A move lower may result in a fall to 24,775 and the long-term moving average, a move up would confirm support at this level.


The indices moved lower on today's news but the moves weren't that strong, the news wasn't that bad (it certainly wasn't new news, just regurgitated news from new sources), and the outlook for 2019 and 2020 is the same; slower growth than first thought but growth, and growth that will expand into 2020. Today's news and price action could result in a general market breakdown but I don't think so, not yet. There is still hope for the trade deal, it wasn't 86'd the date of the meeting is just a little later than we first thought. Until the trade talks do break down I am firmly bullish for the long-term and long-term positions. I am cautiously bullish for the near-term, leaning toward neutral, with my fingers crossed trade news continues to trend positively.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Best Option

by Jim Brown

Click here to email Jim Brown

Editors Note:

Seeing some follow through with a decline on Friday would be the best option. One day is not a trend and neither is it material profit taking. For those wanting to enter new positions after six weeks of gains we would get a safer entry if we could duplicate Thursday's losses and then start over again on Monday with a new rebound.

Unfortunately, the news on China may be longer lasting and two days might not be enough profit taking to provide a real margin of safety. I have written multiple times that the market was maintaining its rally because of hopes for a trade deal with China in two weeks. Now that the meeting appears to be off the table, it suggests the March 1st increase in tariffs may be back on the table.

Add in the economic downgrade of Europe and the approaching hard Brexit and the negative earnings growth for Q1 and we might not make it to the normal February turning point of expiration Friday.

 

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

No Surprise Here

by Jim Brown

Click here to email Jim Brown

Editors Note:

I have been warning of some impending profit taking for over a week. The market does not need an excuse to take profits but whenever one appears traders use it as a reason. Larry Kudlow said we were still a long way from a deal with China and President Trump said there will probably not be a meeting with President Xi before the March 1st tariff deadline. European economics were downgraded again and now the Fed is not expected to hike again over the next two years. A lot changed in 24 hours and I am surprised we only closed down -220 on the Dow. It may not be over with the futures down -12 tonight.



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


FFIV - F5 Networks
The long position was entered at the open and stopped at $159.

IBB - Biotech ETF
The long position was stopped out at $108.65.

SPY - S&P SPDR ETF
The long position was stopped out at $272.15.

SWK - Stanley Black & Decker
The long position was stopped out at $126.35.


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


BULLISH Play Updates

FFIV - F5 Networks - Company Profile

Comments:

Not a good day to enter a new play on a tech stock. No specific news but shares fell $4 with the market to stop us out.

Original Trade Description: Feb 6th

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. The company's primary application delivery technology is Traffic Management Operating System (TMOS) that enable company's products to intercept, inspect, and act on the contents of traffic from virtually each type of Internet Protocol-enabled application. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers, as well as Link Controller. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; BIG-IP Virtual Edition software platform; and management and orchestration software platform. The company sells its products to enterprise customers and service providers through distributors, value-added resellers, and systems integrators in the Americas, Europe, the Middle East, Africa, Japan, and the Asia Pacific Region. F5 Networks, Inc. was founded in 1996 and is headquartered in Seattle, Washington. Company description from FinViz.com.

On January 24th, F5 reported earnings of $2.70 that rose 19.5% and beat estimates for $2.54. Revenue of $544 million rose 4% but narrowly missed estimated for $547 million.

Software sales rose 21% and contributed 19% to total revenues. Services revenues rose 4.7% to $309.9 million and accounted for 57% of the total. EMEA revenues rose 7% and Asia Pacific/Japan rose 11%. Enterprise customers accounted for 65% of revenue, services providers 14% and governments 21%. Gross margins were a whopping 85.2% with operating margins of 37%. They ended the quarter with $1.13 billion in cash and long-term debt of $435 million.

They repurchased $101 million in shares in Q4 and authorized a new $1 billion buyback for 2019.

F5 is going through a product transition from providing a physical piece of hardware that acts as a firewall for customer servers, to a software as a service model where they supply a software firewall and eliminate the hardware expense. This impacts revenue because the hardware is expensive. As hardware is eliminated from the sales cycle it drags on total revenue but margins gain appreciably.

They are launching F5-as-a-Service and Cloud Native App Services in the first half of 2019 and should be key growth drivers.

They guided for software revenue growth of 30-35% in 2019-2020. Earnings guidance for Q1 was $2.53-$2.56 with revenue of $543-$553 million.

Shares dipped to $152 after earnings and then flatlined for a week. Over the last week shares have been rising. With most stocks already rebounding 15-20% since December, fund managers and investors should be looking for these fallen stars as a less risky investment.

Position 2/7/19:
Closed 2/7: Long March $170 call @ $2.75, exit $1.47, -1.14 loss.


IBB - iShares Nasdaq Biotech ETF - ETF Profile

Comments:

No specific news. The biotech sector crashed -2.4% with the Nasdaq to stop us out.

Original Trade Description: Jan 19th

The investment seeks to track the investment results of the NASDAQ Biotechnology Index, which contains securities of companies listed on NASDAQ that are classified according to the Industry Classification Benchmark as either biotechnology or pharmaceuticals and that also meet other eligibility criteria determined by Nasdaq, Inc. The fund generally invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents. It is non-diversified. Company description from FinViz.com.

The IBB has 226 stocks and follows the Nasdaq Biotech Index ($NBI). The IBB rebounded strongly from the Christmas bottom and then stalled for over a week in the $108 range as it consolidated its gains. Friday's minor gain set it up to test resistance at $111.50 and a breakout there would target the prior highs at $122.

The first quarter is normally strong for biotechs because of the multiple conferences and calendar of FDA drug approvals. I am recommending we enter a position to benefit from a break over resistance.

Position 1/22/19:
Closed 2/7: Long March $115 Call @ $1.79, exit .55, -1.24 loss.


SPY - S&P-500 SPDR ETF - ETF Profile

Comments:

The morning market crash hit our tight stop on this February position to stop us out for a nice gain.

Original Trade Description: Dec 22nd

The SPY is the SPDR ETF for the S&P-500. It was the first exchange traded fund listed in the USA starting in 1993.

If the market is going to rebound the SPY would be our vehicle of choice. This avoids single stock risk and capitalizes on the most oversold big cap index.

This is a bet on an end to tax loss selling and a post-Christmas market rebound. There is no guarantee there will be a rebound and there is the risk of some early January volatility.

There are hundreds of billions in cash on the sidelines waiting for the selling to end. Investors want to establish positions for 2019 and at the current lows there are plenty of bargains.

Position 12/24:
Closed 2/7: Long Feb $255 Call @ $3.25, exit $16.18, +12.93 gain.


SWK - Stanley Black & Decker - ETF Profile

Comments:

No specific news. The market sell off today simply triggered profit taking and the three weeks of gains saw some retracement. If we get another down day on Friday, I am going to reenter this position on Monday.

Original Trade Description: Jan 23rd

Stanley Black & Decker, Inc. provides tools and storage, engineered fastening and infrastructure, and security solutions worldwide. The company's Tools & Storage segment offers professional products, including corded and cordless electric power tools and equipment, drills, impact wrenches and drivers, grinders, saws, routers, and sanders, as well as pneumatic tools and fasteners, including nail guns, nails, staplers and staples, and concrete and masonry anchors; and consumer products, such as lawn and garden products comprising hedge and string trimmers, lawn mowers, and edgers and related accessories, as well as home products, such as hand-held vacuums, paint tools, and cleaning appliances. It also offers hand tools, including planes, hammers, demolition tools, clamps, vises, knives, chisels, and industrial and automotive tools, as well as measuring, leveling, and layout tools; power tool accessories; and storage products. The company's Industrial segment sells engineered fastening products and systems, which include blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners; sells and rents custom pipe handling, joint welding, and coating equipment; provides pipeline inspection services; and sells hydraulic tools and accessories. Its Security segment provides alarm and fire alarm monitoring, video surveillance, systems integration, and system maintenance solutions; sells healthcare solutions, which include asset tracking, wander and fall management, and emergency call products, as well as infant, pediatric, and patient protection products; and sells automatic doors. The company was formerly known as The Stanley Works and changed its name to Stanley Black & Decker, Inc. in March 2010. The company was founded in 1843 and is headquartered in New Britain, Connecticut. Company description from FinViz.com.

Earnings were not kind to Stanley Black & Decker (SWK). On Tuesday the company reported earnings of $2.11 that edged out estimates by a penny. Revenue of $3.63 billion barely edged out estimates for $3.62 billion. The problem came in the guidance. The company predicted earnings for fiscal 2019 of $8.45-$8.65 and analysts were expecting $8.79. The company is in the middle of a large $250 million restructuring program that is impacting costs in the short term.

Analysts were quick to moan about the falling housing market and how it was impacting this sector. However, about 90% of home improvement sales come from consumers not selling their homes. Investors were quick to dump Home Depot thinking weakness at SWK meant weakness at Home Depot since they are their biggest customer.

Investors need to focus. Revenue hit the target, restructuring costs are impacting earnings, Home Depot has not reported any sales declines. Unfortunately, SWK shares fell $21 on the news.

Now is the time to buy the dip on SWK.

Update 1/30: OpenGate Capital has agreed to buy lock maker Sargent and Greenleaf from SWK. The lock maker was founded in 1857 and sells products in more than 100 countries. No terms were disclosed and the transaction will be completed in March.

Position 1/24/19:
Closed 2/7: Long Mar $125 Call @ $2.40, exit $5.00, +$2.60 gain .


BEARISH Play Updates

No Current Puts