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Newsletter

Daily Newsletter, Tuesday, 2/19/2019

Table of Contents

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

Market Wrap

Hope Springs Eternal

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market is high on hope, hope we'll get some positive news on trade, and maybe we will but don't hold your breath. Chinese sources are moaning about how the US is trying to stifle economic growth by repressing their tech-sector, an issue that could stall the negotiating process.

So far what we know about the talks is this; lower-level meetings begin today with higher-level meetings scheduled for later in the week. Trump says the talks are progressing well and that helped lift today's market. He also says the March deadline is not some magical date, which the market understood to mean the tariffs would be, could be delayed.


The government shutdown was averted last week but now we have another problem, a mounting battle to block the President's State Of Emergency. A coalition of 16 states has filed a motion to stop the State of Emergency but I think the efforts and time wasted would be better spent somewhere else, like pushing Congress to come together on immigration reform.

Market Statistics

Bernie Sanders announced his candidacy for the Presidency today. The man who made it cool to be a socialist in modern times says America is embracing his ideas and ready for him to be President. I don't know about that but I do know that if he gets elected we can expect some big changes to economic fundamentals.

Economic Calendar

The Economy

Today's data is limited to the Home Builders Index for February. The index ticked up 4 points to hit a 4 month high of 62. The gain was driven by the improvement of all three sub-indices with only the level of traffic remaining below 50. The number of sales of Single-Family Homes rose 3 points to 67 while the 6-month outlook for Single Family Home sales increased 5 points to 68. The level of Traffic increased 4 points to 48. The news is good but the level of activity is still low relative to trend. The housing recovery remains sluggish despite signs of increased construction activity in the labor data and slowing rising inventory levels.

Housing Starts and Building Permits data is due out tomorrow but the data is expected to be delayed by the Government Shutdown.

This week's economic calendar is not full but there are some important events to note. The most important is the FOMC Minutes released tomorrow, the next will be the data dump on Thursday. The minutes will be important for signs of FOMC sentiment, just how dovish are they right now, and how that will affect future interest rate hikes. There is still little expectation the Fed will hike rates this year, the odds of a rate cut are growing.

Of particular interest will be what the FOMC says about the balance sheet and unwind. If they sound like they will end the unwind/runoff the market may get another boost.

The data dump on Thursday includes the weekly jobless claims and the Markit Flash PMI readings for manufacturing and services. Weakness in this data could renew fears of slowing global growth but I wouldn't count on it, not the way the market was moving today.


The Dollar Index

The Dollar Index gave up some ground today on China-Trade hopes. The DXY shed about -0.30% in today's session and created a medium sized red candle. The price action is bearish but within a trading range and above the short-term moving average so doesn't look too worrying in the long-term sense. Price may continue to fall in the near-term, possibly spurred by the FOMC minutes tomorrow, with a target for support near $96 or $96.50. If the index is able to hold above the moving average a retest of the top of the range near $97.50 is likely.


The Gold Index

The entire metals complex got a boost from trade hopes today. The move was led by palladium and platinum, both used in the auto industry, on hopes a trade deal would lead to increased automobile sales and production. The price of gold, further supported by weakness in the dollar, gained about 1.0% in the session and set a new high. Today's move confirms uptrend in the metal and is supported by the indicators. Now that gold is breaking above the $1,340 level a move up to $1,360 is likely.


The Gold Miners ETF GDX surged on today's move in gold. The ETF gained nearly 4.0% in a move creating a strong green candle, breaking past resistance, and setting a new high. The move is supported by the indicators which are both showing bullish crossovers so a move to new higher highs is expected. Now that the ETF has broken above $22.50 a move to $24.00 or$24.50 looks likely.


The Oil Index

Oil prices held steady in today's session but still have an upward bias. The price of WTI has been drifting higher over the past few weeks and look like they will continue to do so. The upward pressure is due to OPEC's supply cuts and may pressure WTI up to $58 or $60 in the near-term. The risk is US data, due out on Thursday this week, which is expected to show another build. If the price of WTI falls from this level a move to retest support at the short-term moving average is likely.


The Oil Index moved up in today's session and looks like it may move higher. The index crept up by 0.60% to break above the 1,300 resistance line and the indicators are bullish. Both MACD and stochastic support a move to higher prices, possibly as high as 1,335, in the near-term. The next target for resistance is now at the long-term moving average, a move above which would be bullish.


In The News, Story Stocks and Earnings

Walmart was the big story in the early pre-opening session. The world's largest retailer reports that revenue was in line with expectations and EPS beat consensus. The strength in EPS was driven by improving margins and sales mix and accompanied by other good news. Global comps came in above expectations and strength in online sales shows the company is able to compete and succeed against Amazon. Shares were up 3.0% intraday and are likely to move higher this year. Sales at Walmart and other retailers are supported by the ever-strengthening US consumer and expected to grow again this year. The retailer also increased the dividend, a factor that will help attract new money to this market.


McDonald's got an upgrade this morning that had its shares on the move. The maker of tasty burgers is expected to beat consensus estimates, according to analysts at Stephens, because of accelerating business. The new rating is overweight with a price target of $200, a 10% premium to today's prices and about 5% to the 12-month high.


Herbalife grew revenue 9.4% over the last year proving it can sustain growth. The top line result was in-line with consensus and produced stronger than expected EPS. The outlook for the coming year is positive, the supplements supplier is expecting mid to high single-digit sales growth in the first quarter and full year 2019, and shares moved higher on the news in after-hours trading.


Texas Roadhouse also reported after the bell. The steak house reports better than expected top and bottom line results on strength in comp store sales. Corporate owned stores saw comps up 5.6%, topping estimates of 4.6%, while franchise stores saw sales up 4.8%. The only downside to the report is that margins are being squeezed by rising labor costs but so far the company's sales volume is more than compensating. The company also reports that comps in the first two months of the new quarter are running at 6%. Shares fell -2.5% on the news.


The Indices

The indices moved higher today on hope and those hopes were later stoked by the President. He says trade talks are progressing rapidly and hinted at postponing the March 1st tariffs. The indices did not make strong gains but they are significant gains and would have closed near the highs of the session if not for profit-taking in the last 20 minutes of trading.

The Dow Jones Transportation Average posted the largest advance, about 0.50%, and created the largest candle. The transportation average set a new high with today's action and is supported by the indicators. The indicators, MACD in particular, suggest that bullish momentum is re-accelerating and could continue to move higher. The next target for resistance is my uptrend line near 10,750, a move above that would be bullish.


The NASDAQ Composite posted the second largest advance with a gain of 0.19%. The tech-heavy index created a small green candle with barely visible upper shadow testing for resistance at the 7,500 level. This level is an important pivot point that may cap gains in the near-term, a fall from 7,500 may indicate near to short-term reversal in the market too. The indicators are bullish and pointing higher so I do expect to see prices drift higher and retest 7,500 if not set a new high. A move above 7,500 would be bullish and may take the index up to 7,750 or 8,000 in the near to short-term.


The S&P 500 opened the day with a small loss, as did all the major indices, but quickly regained the losses. By midday, it was trading at a new 2.5-month high and by late afternoon, it was testing resistance near 2,785. The index closed with a gain of 0.14% and created a small green candle with visible upper shadow. The shadow is indicative of the presence of resistance but not its strength so upward drift is still expected. The indicators are both bullish and reconfirming the uptrend with crossovers high in their respective ranges. A move up is likely to find some resistance along my uptrend line, near 2,785, a move above that would be bullish.


The Dow Jones Industrial Average posted the smallest advance in today's session, only 0.03%, but it is the most bullish of all. Today's action was light but occurred above a major uptrend line and resistance level. The indicators are both supportive of higher prices in that they are showing bullish crossovers and those signals are further supported by the moving averages. The pair of moving averages, the 30 and 150-day EMAs, are forming their own bullish crossover and a strong looking one at that. Prices may fall from this level but I would expect support to kick in at the uptrend line or just below it. A move up would be bullish and could take the index up to 27,000 in the near to short-term.


The indices are moving higher and the signals look good. The momentum indicators suggest rising price pressure, the moving averages suggest short and long-term traders are behind the move, and there are positive tailwinds pushing us higher. The trade talks and optimism growing out of them may carry the indices higher but I fear there is a limit to how high they can go without a concrete resolution on trade. The outlook for first-quarter earnings growth is dismal, negative -2.2%, and that will probably cap gains at some point in the future unless outlook changes or the trade war is ended.

That said, I think the 1st quarter earnings season is a likely turning point for equities. Even with tariffs that are now in place earnings are expected to return to growth in the 2nd quarter and accelerate over the next 4 quarters. That is a near perfect scenario that will drive a market rally in the second half of the year. If the trade war is ended sooner the rally will probably start sooner, and be aided by the rising outlook for earnings this year and next.

The only real risk I see is if the trade talks break down, or if Trump decides he needs to enact the next round of threatened tariffs. If that happens all bets are off. Until then I am firmly bullish for the long-term and very cautiously, but optimistically, bullish for the near-term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Patiently Waiting

by Jim Brown

Click here to email Jim Brown

Editors Note:

China trade talks are on again and investors are patiently waiting for an outcome. They may be waiting longer than they expect. The talks in Washington are the last ones before the artificial deadline of March 1st for increased tariffs. President Trump has said he is willing to extend it if there is material progress. Several of the US negotiators have commented there is a long way to go. There is a distinct possibility they will not reach an agreement and negotiations could turn hostile again. Reportedly, China wants to settle the dispute but does not want to give up any ground on the really important items. Both parties have said they will not give any further updates in order to prevent headline complications. The market could continue to stagnate until there is news. The last two weeks of February are normally the weakest part of the month. Expiration Friday is the turning point. Time will tell if this pattern repeats this month.

I will be out of the office until next Wednesday. I will not be posting new plays until then.

 

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

Step by Step

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P only posted a 4-point gain, but we are that much closer to 2,815. That is the real resistance threat with round number resistance at 2,800 also a hurdle. The market took a breather on Tuesday but recovered from an early decline to post the minor gains.

I will be out of town the next several days and there will not be full updates on plays until next Wednesday.



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


INTC - Intel Corp
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

No Current Puts