Option Investor
Newsletter

Daily Newsletter, Monday, 3/4/2019

Table of Contents

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

Market Wrap

Bears Take Control

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

U.S. equities indices tried to rebound on Monday but the bears wrest control of the market away. The move follows a report in the Wall Street Journal alleging that U.S. and Chinese negotiators were in the final stages of making a trade-deal. The news was well received but comes with little detail and so left investors where they were last week, hopeful but otherwise unsupported by fact and vulnerable to sell-off. Although the indices were able to open positively and at new highs, profit-taking began almost as soon as the opening bell sounded.


The word is that Chinese officials may remove or reduce tariff-barriers for many U.S. products. U.S. officials, in return, may reduce most or all of the tariff and sanction-related penalties imposed over the last year. Negotiators are now working on the final version of the deal in hopes Trump and Xi will be able to sign it later this month. While a step in the right direction it is no more than what the market has been expecting and likely already priced into the indices.

Market Statistics

Economic Calendar

The Economy

The trade situation set the indices up for today's decline but it was the Construction Spending data that sparked today's deep decline. Construction spending fell -0.6% in December despite estimates for a slight increase. The drop was led by declines in residential and private construction, both down more than -1.0% on a month to month basis. The only good news is that construction spending is still up 1.6% YOY and mitigated by more-recent housing data.

Moody's Survey of Business Confidence slumped another -1.6 points in the last week and hit another low. This low dates back to 2009 and is consistent with an economy on the verge of stalling out. The reading shows business is not as optimistic for a meaningful trade deal as the broad equities market and may be telling us something we need to listen to; Yes, a trade deal is at hand but it may be too little too late (and there is still the Brexit to think about). On the flipside; the extremely low level of business sentiment may be just that, an extreme, and ready to snap back once a trade-deal is in the bag.

Regarding the Brexit, we are now less than four weeks from the March 29 deadline with no deal in sight. Comments from the Irish PM point to an extension of the deadline, possibly to June, but the UK Parliament still needs to request it (an extension).


Earnings season continues to wind down for the 2018 Q4 cycle. There are now 96% of reports in the bag and the results are good, just not as good as they have been and not as good as expected. The average S&P 500 company is beating the estimates but by a smaller margin than we've seen in the past. The blended rate of growth for the quarter is now 13.1%, up to a full percent from the end of the fiscal quarter but shy of the 15% or so we were looking for. On a sector basis only 7 of the 11 S&P 500 sectors beat consensus. Looking forward, 71 companies issued negative guidance which is above average.


In terms of the estimates, the forward outlook continues to decline. The first quarter is now looking at negative growth near -3.2%, the second quarter is dangerously close to turning negative itself, and the third and fourth quarter estimates have fallen to 1.9% and 8.5%. The good news is that earnings growth decline is still expected to bottom in the 1st quarter and expand into the end of the year, and 2020 estimates are still creeping higher. If the market (and economy) can survive through the 1st quarter earnings cycle there is a good chance we'll see the market rally in the second half of the year.


The Dollar Index

The Dollar Index got a boost from the trade news that sent it up about 0.30%. The index has moved above the short-term moving average and the mid-point of its trading range. The indicators are consistent with such a move and may lead the index up to the top of the range as sentiment stiffens. A move above the range, above $97.50, is possible considering this week's data. Friday will bring us another round of labor data and, if it's strong like it was last month, could easily lead the dollar to new highs simply because the U.S. economy is doing so much better than the rest of the world.

The average hourly wage figures may also stiffen the dollar because wages have been growing above 3.0% for four months and accelerating. If average hourly wages increase at a hotter than expected rate (entirely possible given recent signs of labor market tightness) it would support the FOMCs general outlook. The FOMC is patient, but most participants are patiently waiting for data that will support the need for more rate hikes later this year.


The Gold Index

Gold prices sank again today as geopolitically driven fear premiums come out of the market. The news that a trade deal is in the works may not be the end of the trade dispute but it does, for now, mean that the U.S/Chinese relations are improving. Now that spot price is below $1,300 and the recent uptrend line a change in the wind is at hand. Gold prices may continue to fall but the depth of decline will be limited by the dollar and possibly this week's data. My next target for support is near $1,280, a move below that could go to $1,260 in the near-term. If prices are able to rebound from here resistance is $1,300 to $1,310.


The Gold Miners ETF fell in the pre-market session but was able to recover all the losses by the end of the day. The ETF may be signaling a rebound in the underlying commodity but I might wait a bit before trading on that signal. Today's move opened just above and tested support at January's high. Support is evident but the indicators are still strongly bearish so a retest of that support is expected at least. If $21.50 is confirmed as the support we may see prices move up to retest resistance at $22, $22.50 and $23.00. If support at $21.50 fails a move down to the long-term EMA is likely; if gold prices fall further a move below the EMA is likely.


The Oil Index

Oil prices were able to move up today and were supported by trade optimism and hopes for OPEC's supply-tightening plans. WTI advanced nearly 2.0% intraday as it continues to consolidate within the near-term trading range. Support is at the $55 level where prices appear to be gathering strength. A move up from here looks very likely, resistance is near $57.50, a move above that would be bullish.

In OPEC news a cartel spokesman says the group, plus partners, will probably wait until June to make the next output decision. The group's monthly output is now at a 4-year low underpinned by the Saudis commitment to cut more than required. The decision is of course predicated upon the data and oil prices, if prices don't move higher I would expect to hear chatter from within the cartel another production cut was on the table.

In U.S. oil news the number of rigs looking for new reserves fell to a 9-month low last week. This is due to a growing number of energy companies cutting back on CAPEX for the year but mitigated by increasing production. The U.S. drilling community has boomed over the past few years and production is still on the rise as those projects come online and reach max-efficiency.


The Oil Index wobble a bit in today's action as it continues to consolidate around the 1,300 level. The index is gearing up for a big move and it could be up provided oil prices continue to drift upward as well. The risk, the caution I should say, is the energy sector is expected to lead the market with negative earnings growth in the first half of the year and not the most attractive from that perspective. The indicators are weak and wishy-washy consistent with a range bound asset and one waiting for something to happen. If that something is a move higher resistance is likely near 1,330; if the something is down, support is near 1,285, but it will take a break of either line before a significant move in prices is possible.


In The News, Story Stocks and Earnings

Shares of client management and retention specialist Salesforce tanked this morning on earnings fears. The slowing global economy was expected to weigh on revenue and earnings and shares fell more than -4.0%. The actual results were much better than expected but the original idea was sound. Forward outlook is weak and spells an end to this stocks wicked growth streak.

The company reports revenue rising 26.3% YOY 4th quarter and EPS, both GAAP and Non-GAAP, beat consensus. Revenue beat consensus too, by 1.1%, while non-GAAP EPS of $0.70 beat by $0.15 and GAAP EPS of $0.46 beat by $0.36. The bad news is that outlook for revenue is in a tight range around consensus and outlook thru 2023 is below expectations, not enough to keep profit takers from taking profits. Shares fell another -2.5% on the news.


BBQ slinger Famous Dave's of America reported after the bell and crushed estimates. The company reports a 7.2% revenue beat driven by strong comp store sales, EPS double consensus, and updates on new initiatives designed to boost results. Comps were up 2.2% in the quarter reported, better than expected, and followed by a 6.3% increase this month which shows momentum is building. EBITDA fell on a year over basis but overlooked because the drop was caused by strategic spending including the testing of a comprehensive new menu.


It looks like a bottom may be in for the VIX which means we're looking at a top for the broader market. The VIX surged in today's session to confirm fear at the 13.50 level. Today's move tested resistance at the short-term moving average and resistance was found although I suspect it will be tested again. The indicators are both showing strong bullish crossovers consistent with rising prices. A move up may be halted at or near 17.50, a move above that would be bullish on fear and bearish for equities.


The Indices

Dark Clouds are brewing in the equities market. The indices fell from early highs to create ominous looking red candles and bearish looking signals. The day's leader is the Dow Jones Industrial Average with a loss of -0.79%. The blue-chip index formed a medium-sized red candle that engulfed the last ten day's of trading and set a new near-term low. The candle is a strong bearish signal and supported by the indicators which are both confirming lower prices. Both MACD and stochastic are forming strong bearish crossovers that suggest a deeper move is at least possible. Today's candle is showing some signs of support with the long lower shadow but I would expect a move to 25,500 or 25,000 before strong support kicks in (if it will).


The Dow Jones Transportation Average posted the second largest decline in today's session and is only a little less-bearish looking. The transports fell -0.59% to create a medium-sized red candle that is testing support at a key and crucial level, 20% above the December low. This support could be the turning point for the broader market assuming the transports are in the lead. A break below this level would likely lead to a prolonged round of selling, profit-taking, and rotation ahead of the 1st quarter earnings cycle. If, however, support is confirmed at this level it would confirm the Vee-Bottom reversal and may result in a retest of the all-time highs.


The S&P 500 posted the third largest decline at -0.38%. The broad market index created a Dark Cloud Cover confirming resistance at the +20%-from-Decembers-low level and suggest an imminent reversal is at hand. The indicators are bearish firing strong crossovers consistent with resistance and reversal. A move lower would confirm the move but may not fall too far, at least not at first. The first strong, really strong, target for support is near 2,700 and the long-term EMA, a move below there would be bullish.


The NASDAQ Composite posted the smallest decline at -0.23% but is no less bearish looking. Today's action created a new high but a red candle with long lower shadow. There is potential for support at the 7,500 level but that is more psychological-round-number support than anything else. My target for strong support is slightly below 7,500 at 7,428 and the +20% level from December's low. The indicators are showing bearish crossovers so I expect to see a retest of 7,500 at least; if that is broken a move to 7,428 is expected and then 7,250 is that is broken.


The indices may not move deeply lower but a move lower is brewing. The trade-deal is looking more and more like a sell-the-news event and today's action may prove it. The deal is getting closer to hand and yet resistance to higher prices is firming. The risk for bullish positions is that support targets are close to hand for all the major indices so, even if a deep move develops, volatility is expected and that will make trading frustrating if not outright difficult. These conditions may persist for a month, or two, maybe longer, it depends on earnings outlook and that depends on the trade deal.

The trade-deals true importance may be in its effect on earnings outlook. If the deal falls apart earnings outlook will deteriorate and that will drive the market lower. If the deal (whatever it may be) gets signed we can rest assured that at least the status quo will be upheld and earnings growth outlook will stabilize, if not improve, and that will drive the market higher. I remain firmly bullish for the long-term but I'm feeling a little bearish for the near-term, cautiously bearish.

Until then, remember the trend!

Thomas Hughes


New Option Plays

China Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

Up one day, down the next on the potential trade deal with China. As details begin to leak out, analysts are concerned President Trump is going to be so desperate for a deal ahead of the 2020 election that he might accept a watered down deal with an agreement to continue talks well into the future. China has said there would be no deal without a complete lifting of tariffs and the US is saying they will keep some tariffs until China performs some of the agreements in the deal on things like intellectual property.

The date now has slipped to "late March" or the "end of the month." The longer the delay the less likely a meaningful deal will be completed. The market is sensing this and cautious investors are starting to take profits at the current strong resistance.

 

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

Sell Before the News

by Jim Brown

Click here to email Jim Brown

Editors Note:

Positive trade comments could no longer support the market and traders started getting nervous. I have warned for weeks that the trade deal was already priced into the market and even strongly positive comments today could not keep the rally alive. This could reverse tomorrow but the longer we go without a scheduled date for the Trump/Xi meeting, the more than likely the deal will blow up.



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


ASHR - China A-Shares ETF
The long position was entered at the open.

IWM - Russell 2000 ETF
The long position was entered at the open. Stopped at $115.65, RELOAD

DELL - Dell Technologies
The long position was stopped at $55.35.

QQQ - Nasdaq 100 ETF
The long position was stopped at $172.50.


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


BULLISH Play Updates

DELL - Dell Technologies - Company Profile

Comments:

Market crash and post earnings depression tanked the stock and we were stopped for a nice gain at $55.35.

Original Trade Description: Jan 26th

Dell Technologies Inc. designs, develops, manufactures, markets, sells, and supports information technology (IT) products and services worldwide. It operates through three segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. The ISG segment provides traditional and next-generation storage solutions; and rack, blade, tower, and hyperscale servers. It also offers networking products and services that help its business customers to transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes; and attached software, and peripherals, as well as support and deployment, configuration, and extended warranty services. The CSG segment offers desktops, notebooks, and workstations; displays and projectors; third-party software and peripherals; and support and deployment, configuration, and extended warranty services. The VMware segment offers compute, management, cloud, and networking, as well as security storage, mobility, and other end-user computing infrastructure software to businesses that provides a flexible digital foundation for the applications that empower businesses to serve their customers globally. The company also offers cloud-native platform that makes software development and IT operations a strategic advantage for customers; information security and cybersecurity solutions; cloud software and infrastructure-as-a-service solutions that enable customers to migrate, run, and manage mission-critical applications in cloud-based IT environments; cloud-based integration services; and financial services. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.

Dell was taken private several years ago and disappeared from the market. When they acquired VMWare they had a tracking stock representing their 80% interest in the company under the symbol DVMT. In December they bought back that tracking stock in a complex transaction and then changed the ticker to DELL. Today, this represents all of Dell.

Over the last month Citigroup and Goldman initiated coverage with a buy rating and average target price of $60. Now that Dell is back as an operating company with strong management, we should be seeing a lot of funds and institutional investors moving back into the stock.

Dell has 145,000 employees. It is not a small company and it is a leader in the PC/Server sector and of course VMWare is a major component of the cloud.

Since the new Dell shares have only been around a month, they are definitely not over-owned.

Update 2/9: Dell said it was exploring the sale of SecureWorks (SCWX) with 4,300 clients in more than 50 countries. Dell bought the company in 2011 for $612 million then spun it off in 2016. Dell still owns 85% if the stock. The company only has a market cap of $254 million but Dell thinks it could be worth $2 billion. Dell has more than $50 billion in debt.

Update 3/2: Dell reported a loss of $287 million on revenue increase of 9% to $23.84 billion. They did NOT supply an earnings per share number with the release but in documents supplied later the earnings came out to about $1.86 per share. Analysts had expected $1.81 in adjusted earnings and a GAAP loss of $45 million on revenue of $23.83 million. Revenue in the infrastructure group rose 10% to $9.9 billion with servers and networking revenue rising 14% to $5.3 billion. They guided for full year earnings of $6.05-$6.70 and missed estimates for $6.81. I tightened the stop loss in case of post earnings depression.

Position 1/28/19P:
Closed 3/4: Long April $47.50 call @ $2.60, exit $8.40, +$5.80 gain.


IWM - Russell 200 ETF - ETF Profile

Comments:

We entered on the gap up this morning and were stopped out on the intraday decline of more than $3.50. I am recommending we reenter this position at the open on Tuesday ONLY if the Russell is positive.

Original Trade Description: March 2nd

The investment seeks to track the investment results of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index. Company description from FinViz.com.

This is a short-term trading position based on expectations for a Chinese trade deal to be completed in March. I expect the markets to struggle higher into that president's meeting in Florida and then roll over.

The 30-min chart on the Russell shows a potential breakout ahead over the 1,600 level. The IWM has already closed over the 200-day, which has been holding the index back. It is entirely possible the Russell could run to 1,700 over the next three weeks if the China headlines continue to be positive.

However, this is a high risk position. The slightest headline about a glitch in the negotiations could tank the market. I do believe the prior highs are going to act like a tractor beam for the indexes as long as we do not suffer a headline disaster.

The end of February weakness was right on schedule and now we are poised for a directional move. Given 10-weeks of gains, that could be in either direction.

Position 3/4/19:
Long April $162 call @ $1.57, stopped $155.65, -.65 loss. RELOAD!


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

The opening gap took the Qs over resistance, but the afternoon crash knocked them back to a 3-day low to stop us out. We still exited with a decent gain.

Original Trade Description: Dec 7th

Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq looks like it wants to decline further. I am profiling a dip buy at $158.15 on the hope that the Nasdaq/ETF will not decline below 6,800/155.00.

Position 1/14/19:
Closed 3/4: Long March $170 Call @ $1.77, exit $4.30, +$2.53 gain.

Previously closed:
Position 12/17 with a QQQ trade at $156.85:
Long Jan $168 Call @ $1.12, see portfolio graphic for stop loss.

Position 12/24:
Long five Jan $168 Calls @ .12 each.
Expired 1/18: Adjusted cost for 6 = $.29 each. Expired, -.29 loss.


BEARISH Play Updates

No Current Puts