Option Investor
Newsletter

Daily Newsletter, Monday, 2/25/2019

Table of Contents

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

Market Wrap

Substantial Progress, New Highs

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Trump says enough progress has been made on key trade issues for him to postpone the March 1st tariffs and the market moved higher. Progress on Intellectual Property and Technology Transfers has been mentioned so it does look like the two sides are drawing closer together. What wasn't mentioned was the new deadline, if any, for negotiators to work toward. In the meantime, details for a Trump/Xi summit are solidifying; the two are expected to meet late March at Mar-a-Lago barring unforeseen setbacks.


Stocks in China surged on the trade news. The Shanghai and Shenzen composites both jumped more than 5.5% and are entering bull market territory. The Shanghai Composite for one is now more than 20% above its recently set low and likely to move higher as trade-related outlook improves.

Market Statistics

M&A activity also provided a boost for equities in early trading. Topping the list is news from GE it would be selling its bio-pharma business to Danaher. GE says the deal is worth $21 billion in cash that will be used to reduce debt and strengthen the balance sheet. The move may alter the company's plans to IPO the healthcare unit, a unit that generates 15% of revenue and 43% of operating profits.


Barrick Gold announced an unsolicited offer to take over Newmont Mining in an all-stock deal. The deal is worth $7 billion and is, according to Barrick, superior to the now-planned merger between Newmont and Goldcorp. That deal is still in the regulatory process and may get sidelined in favor of Barrick's offer.

Economic Calendar

The Economy

The Chicago Federal Reserve's National Activity Index reversed course in the last month. The index fell to -0.43 from last month's 0.05 as production-related indicators contract. The reading suggests economic activity slowed in January but remains on trend longer-term. Within the report, one of four sub-indices decreased over the last month while two remain in negative territory. The production index fell to -0.45 from 0.08, the sales orders and inventories index rose to 0.02 from 0.0, and the consumption and housing index rose to -0.04 from -0.06. The employment index was strongest, rising to 0.05 from 0.02 as employers continue to build and maintain staffing levels.


Wholesale Inventories rose 1.1% in December. The build is due to a slowdown in sales activity going into the end of the year. Inventories are also up YOY, about 7.3%, and sign manufacturers have been catching up with demand if not quite fast enough to overcome it. Sales of wholesale items fell -1% over the past month but remain up YOY. The Sales-to-Inventory Ratio climbed again this month in response to slowing sales and rising inventories but remains low relative to past recoveries. Inventories are building because of slowdown, but the slowdown is because of US/China trade relations. Now that trade relations are on the mend I expect activity will begin to pick up again and inventories will fall.


Moody's Survey of Business Confidence plunged again this week giving up four points to hit 12.5. This is the lowest level for business sentiment since 2009 and closely related to US/China trade relations. The sentiment is down in most regions of the world and points to an economy on the verge of breaking. The drop in sentiment is extreme and a warning global economics could contract but comes with the caveat US/China trade relations are on the mend, a snapback in sentiment is more than possible, the only question is when?


The 4th quarter earnings season is just about over and the results were about as expected. While the broad market did report better than expected the difference between expectations and reality was not as big as expected, less than 4.0%, which makes the quarter a miss. Looking forward earnings growth is going to stall over the next quarter's with at least the first quarter of 2019 producing negative growth.

In that vein exposure to defensive sectors is a good idea for the next few months and, coincidentally, the healthcare and utilities sectors are expected to lead growth in the first quarter. Both are looking at 5.0% to 5.5% earnings growth versus an average -2.7% for the broad market and pay good dividends so likely to attract market attention. Longer-term, the utilities are also expected to perform well for the year relative to other sectors and deliver the fourth highest earnings growth rate.


The Dollar Index

The Dollar Index held steady in today's session while traders wait on this week's round of data. When I say a round of data I mean a double-deluge of data points that include current and old data delayed by the government shutdown. The most important is going to be the Personal Income and Spending/PCE Price Index due on Friday. An unexpected uptick in core consumer inflation could alter the outlook for rate hikes and send the dollar moving higher. Until then, the indicators suggest downward pressure within a trading range so I expect to see the index trend sideways or lower. A move below the moving average could go as low as $95.50.


The Gold Index

Gold prices opened the day with a small gain but came under pressure during the open session. The metal is floating between potential support and resistance, near $1,330, and shows little bias in momentum. The MACD is near zero after slowing winding down over the course of the past four months. Divergence in the MACD suggests weakness in the market and stochastic is moving lower so downward pressure is present. Support is near $1,320, maybe just below, and could be strong if tested. If $1,320 fails a move to $1,300 is probable.


The Gold Miners ETF GDX fell in today's session and created a medium sized red candle. This is the third red candle to form below resistance and following last week's shooting star doji so looks particularly bearish. The shooting star, divergences in MACD/Stochastic, and today's candle all point to a reversal in the ETF and foreshadow a fall in gold prices. A move lower would confirm this outlook but the depth of correction is not clear. My first target for support is near $22.50, the next is $22. A move below $22 would be bearish and likely take the ETF down to $21 or lower.


The Oil Index

Trump Tweeted and oil prices fell. Today's Tweet, the one relevant to oil, was an admonishment to OPEC that oil prices were too high. The meaning is clear, Trump would like OPEC to open the spigots and pump more oil. WTI fell more than-3.0% on the news but the declines were halted above support targets. Support is near $55 and above the short-term moving average where it could be strong. A fall below this level would be bullish but a bounce and move is what I expect. Trump asked OPEC to pump more oil, I doubt they will do it without a really good reason.


The Oil Index fell in the early session and opened the day with a small loss. The price moved up from there to create a small green candle but the move halted below my 1,310 support/resistance target and looks like it may fall. The indicators are showing bearish crossovers consistent with falling prices so a test of support is expected at least. Because the energy sector is expected to post the biggest decline in earnings growth in the 1st quarter the chance index price will move lower are high. Support is near 1,276, a move below that may find support at or near 1,230.


In The News, Story Stocks and Earnings

Oilfield services company McDermot reported before the bell and did not please investors. The company swung to a surprise 4th quarter loss that came in well below estimates despite virtually tripling over the past year. The company says it was hit with several non-recurring charges including a $2.2 billion Goodwill Impairment and an unfavorable change to estimates relating to last year's storm damages. The bad news was offset by increases in backlogs and awarded contracts, and they reaffirmed guidance above consensus, but shares fell in early trading anyway. The good news is that after opening with a loss prices were driven up to regain the losses and more.


Carter's, retailer extraordinaire to babies across America, reported before the bell. The company says US retail sales grew 7.1% and wholesale business grew 6.5% beating estimates in both cases. EPS of $2.84 beat by $0.28 despite narrowing margins. Revenue, cash-flow, and earnings are strong enough management increased the dividend 11% and issued favorable guidance for the coming year. Shares of the stock jumped 9.0%.


The VIX moved higher in today's session but the move was small and weak. The VIX is still in a downdraft fueled by improving trade sentiment and may move lower. The caveat is that the indicators are diverging from the low and suggest a rebound in fear is coming. The first target for resistance is near 15, and then at the moving averages. A move above $18 would be bullish for fear and likely induce a spike to $25 or $30.


The Indices

Progress on trade is good news, postponement of tariffs great news, and the market responded in kind. The bad news is that postponement of tariffs is not a trade-deal and, even if a deal is struck, first-quarter earnings are going to suck. The market responded to that too.

While up, today's gains weren't great and market action was a little bearish. The Dow Jones Transportation Average was the most bearish, closing with a loss and forming a red candle in the process. This is the third red candle in a row and third to show indications or resistance at 10,600. The indicators confirm a top and indicate the possibility of price decline with bearish crossovers. A move lower would confirm this outlook with a close below 10,500. Such a close could take the index down to the long-term moving average, a move below that would be bearish.


The NASDAQ Composite posted the largest advance with a gain of near 0.36%. the index created a small doji candle in the process and looks a little frothy trading at a new high. The indicators are bullish but don't support the idea of rising prices as they are divergent from the high and showing bearish crossovers to boot. A fall from this level would be doubly troublesome as it would create an abandoned baby with today's candle and that is not a bullish signal. A move lower may find support at 7,500, a move below that could go all the way to 7,250 or 7,000.


The Dow Jones Industrial Average closed with a gain near 0.25% but created a small shooting star doji. The candle isn't strong but it does show resistance at the new high and raises the possibility tomorrow's action will move lower. The indicators are consistent with a top showing divergence in momentum and a bearish crossover in stochastic that could lead the blue-chips lower in the near-term. A move lower may find support at 26,000 or just below along my uptrend line, a move below the uptrend line may take the index down to the 25,000 region.


The S&P 500 closed with the smallest gain, only 0.12%, and formed a small red candle. The index set a new three-month high with today's action but the candle is bearish and shows resistance at a potentially strong level, the 2,800 level. This level is coincident with the top of the November/December consolidation range and may send price down to retest for support. A move lower would be near-term bearish and could take the index down to 2,700 or 2,600 hundred.


The indices are moving higher, still, but I think this action is nothing more than momentum. The rally is driven by a reduction in fear that centers on US/China trade relations and disconnected from the reality of earnings, the true driver of stock market values. With the first quarter earnings cycle expected to produce negative earnings growth and the estimates still moving lower I see no reason for the market to sustain its current levels.

The progress in trade negotiations is great, but it's not a deal and won't help earnings until the second quarter at the earliest. That is, coincidentally, the fiscal quarter that earnings growth returns to the broad indices and my target time-frame for the market to start rallying for real. I am still firmly bullish for the long-term but neutral for the near-term waiting to see what happens.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Moving Up, But . . .

by Thomas Hughes

Click here to email Thomas Hughes

Editors Note:

Moving up, but there are more reasons to one to doubt how long the market will stay up. No new plays

 

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

Losing Steam

by Thomas Hughes

Click here to email Thomas Hughes

Editors Note:

The updraft in market sentiment that is trade-negotiations is losing steam. Today's action set new highs for the broader market but also gave evidence of resistance at key levels. The indices may move higher in the near-term as trade talks progress, the longer-term outlook is still bullish but includes a possible retest of December 2018 lows.



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


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