Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/20/2019

Table of Contents

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

Market Wrap

FOMC, Trade, Trump, Oh My!

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market took a dive even before the FOMC policy announcement on (more) mixed messages about the trade negotiation. Today's confusing news comes directly from Trump. He told reporters the Administration isn't talking about removing tariffs levied on China, they're talking about leaving them in place for a long time, years even. His reasoning is that we need proofs and guarantees China would uphold its end of the bargain and this is the way to do it.

The comments are in direct contrast to Trump's own words that a deal was coming along nicely, they are also in direct contrast to Beijing's desires. With this latest revelation on trade, it makes sense that Beijing would be pushing back against U.S. demands. Steven Mnuchin and Robert Lighthizer are scheduled to travel to China next week for another round of negotiation, if the talks are going to stall or break-down I think next week might be when it happens.

Market Statistics


The market surged after the FOMC policy announcement but the gains were short-lived. There were four key takeaways from the FOMC policy statement. Number 1, the FOMC left rates unchanged. They cited global risks and tame inflation as the primary reasons.

Number 2, the FOMC plans to end the balance sheet reduction at the end of September. They will begin to taper the runoff in May leaving the mortgage portion of the operation untouched. This will continue until September when all run-down operations will cease.

Number 3, the FOMC has lowered their GDP forecast for this year and next. The committee says 2019 GDP will be about 2.1%, down from 2.3%, while the forecast for 2020 fell only a tenth. The longer-run forecast was unchanged at 1.95.

Number 4, the committee says it will remain patient on expected rate hikes. While labor markets are expected to remain tight inflation projections fell a bit. The committee now thinks there will be NO rate hikes this year and then one the next. The market is now calling a 35% chance for a rate cut by December.



In Brexit news, the Article 50 deadline is less than 10 days away. Theresa May, at the behest of the UK Parliament, has officially asked for an extension of the deadline. The extension must receive the approval of all 28 EU member nations and is far from guaranteed. At this point it looks like the EU holds all the cards, the UK doesn't want to allow a no-deal Brexit and they may not have any other choice. The official EU stance has been, so far, no renegotiation and any request for an extension must come with compelling reasons.

Economic Calendar

The Economy

Mortgage applications are pointing to a rebound in home sales this spring. The number of applications rose 1.6% in the last week, the third straight week of increases, and the third new record in a row. The surge is driven by slowly falling mortgage rates, the caveat is that much of the gains are due to refinancing efforts. The rate on a 30-year fixed has fallen to 4.55% from 4.64% while the average amount has increased. The average loan amount is now $327,000 showing sales are skewed to the higher end of the market. Refi's are up 4% for the week and 3.5% YOY.

The Dollar Index

The Fed was arguably more dovish than the market was anticipating and sent the dollar moving lower. The DXY fell a half percent in the wake of the announcement and looks like it may move lower. The caveat is that the index is still trapped inside a range and there is little reason for it to move outside of it. While the dollar is weakening, so too are the economies of Europe, the UK, and Japan and that is going to keep this index moving sideways over the longer-term. Today's data included a CPI read from the UK that came in a few tenths below expectation. In the near-term a move to $95.50 is expected, a drop below that level may alter my viewpoint.


The Gold Index

Gold prices spiked on today's weaker dollar and may move higher. The caveat is that the spot price met resistance at the uptrend line that may keep the metal from extending the 2018/2019 rally. The indicators are bullish so upward pressure is present, the problem is that the MA may push price action to the side and resistance at $1,340 may be strong. While a dovish FOMC has weakened the outlook for interest rates and the dollar that outlook can only take gold so far, the FOMC is still on a tightening path however diminished it is. I'm still looking for a retest of the $1,280 support which raises the possibility of range bound trading over the next couple of months.


The Gold Miners ETF GDX reversed an early loss after the FOMC announcement. The miners ETF advanced to the end the day with a gain near 2.0%. The candle formed is long and green with a visible lower shadow so has come strength. The caveat is the candle is in the middle of a wide consolidation range with mixed indicators so not quite as strong as it could be. A move up looks likely at this point but resistance is at $23 and $23.50 that may keep the ETF trading sideways over the longer-term.


The Oil Index

Oil prices got a jolt from today's inventory data. Data shows much larger than expected draws for crude, distillates, and gasoline fueling the OPEC driven rally. WTI stockpiles fell nearly -10 million barrels versus the expected build of 0.3 million. Distillates fell -4 million, four times the consensus, while gasoline stockpiles fell 4.5 million, nearly double the forecast. WTI had been down in early trading but reversed when the news was released. The black gold gained a little more than 1.5% in today's session and moved above $60 for the first time in months. The indicators remain bullish so higher prices are expected although momentum is weak. My next target is $64.


The Oil Index gained more than 1.60% after today's inventory data. The data is good for prices, prices are good for earnings, and earnings are good for the sector; Nuff said. The index is now above the long-term moving average and looking bullish. The candle isn't really large but it did close at the high of the day and is supported by the indicators. MACD has confirmed the bullish signal and is moving higher with plenty of room for the index to run. My next target for resistance is at 1,400 although there may be a pocket of sell orders waiting at 1,350. Longer-term I see the energy moving substantially higher as oil prices rise and earnings estimates follow suit.


In The News, Story Stocks and Earnings

Shares of Google extended their rally today despite some bad news from the EU. EU regulators have levied a third antitrust fine against the world's largest search engine, this time for blocking the ads of rival advertisers. The fine is worth $1.7 billion but a drop in the bucket compared to what the company is making. Today's move was supported by yesterday's announced plan to build a gaming platform. The platform would leverage Youtube as a means for spectators to watch game-play (apparently some people like to). Shares of the stock gained 2.0%.


General Mills reported earnings before the bell. The iconic producer of packaged foods reports revenue and earnings above consensus. Revenue was driven by a 1% increase in organic sales along with a 2.3% improvement in margin. Results were mixed across segments with weakness in the EU, Australia, Latin America and China offset by strength in Convenience and Food Services. Guidance for the coming year was also above consensus calling for 9-10% revenue growth and 0-1% EPS growth. Shares advanced 2.5% in the premarket, doubled that gain intraday, but gave up some gains before the close.


Ford is doubling down on plans for the future. The company announced yesterday plans to increase production of SUVs, today the company announced plans to build a new factory for the production of autonomous vehicles. The plan, while bold, maybe a bit premature as it is expected to be operational in only two years. Shares of the stock fell more than -2.0%.


The Indices

The indices were up, down, and sideways in today's trading as hopes, fears, expectations, and reality vie for dominance. Today's biggest mover was the Dow Jones Transportation Average with a loss of -1.30%. The transports gapped down at the open, opening below the pair of moving averages, and moved lower from there. The only good thing about today's candle is the lower shadow which reveals the presence of buyers. The indicators are mixed but more bearish than not suggesting downward movement but within a trading range. In the near-term, it looks like the index will move down to the 10,000 level. In the longer-term, it looks like the 10,000 may be where firm, solid, market support is located.


The Dow Jones Industrial Average was the second biggest decliner with a loss of -0.54%. The blue chips created a small red candle moving down to support at the long-term uptrend line and so far support is holding. The indicators are mixed but momentum is bearish so I would expect to see the uptrend line tested again over the next couple of days. Support is possibly strong, it is confirmed by the short-term moving average, but with the transports leading the market lower, I see this index moving down to touch the long-term EMA.


The S&P 500 closed with a loss of -0.29% after a slightly volatile day of trading. The broad market index created a small doji candle with red body showing indecision but with a bearish bias. Today's action shows support is present along my uptrend line but momentum is bearish and stochastic is rolling over so it may be broken. A move below 2,810 may be bearish for the longer term but additional support targets exist just below along key moving averages.


The NASDAQ Composite posted the only gain in today's action, small as it was. The tech-heavy index closed with a gain of 0.06% after setting a three-day low and a five-month high in the same session. The action shows mounting indecision and resistance to higher prices although the indicators are bullish. Both MACD and stochastic are pointing to higher prices albeit weakly and with divergence. A move higher may be forthcoming but I'm not holding my breath right now.


If there is one thing I can say for certain it is that the market is indecisive. The good news is that one of the causes, the FOMC, is safely behind us for another six weeks (not counting Fed-speak). The bad news is that the main cause of global economic slowing, the U.S./China trade war, is far from over. Yes, there's been progress, sure a deal is getting closer, but no, it isn't coming in the next week or two and there are still hurdles to cross that may be insurmountable. Applying this to what really matters, earnings, we're starting to get some fairly dire warnings on further economic slowing (FedEx) and that my friends will weigh on outlook and equities. I am still firmly bullish for the long-term, still cautiously neutral in the near-term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Resisting Temptation

by Jim Brown

Click here to email Jim Brown

Editors Note:

I really want to believe the market is going higher. However, the individual stock charts are not confirming. I looked at more than 300 individual charts again today and well over 95% were negative. The rest were neutral. The only charts with positive trends are the big cap tech stocks that are lifting the Nasdaq 100 and they are too expensive and option premiums too high to recommend. I am wary of the market after President Trump's comments today and the increasing volatility. I am not making any new recommendations. However, if you must buy something you could look at AMT, MNK, JKS, MYL or puts on KR.

Cash is a position when there is no dominant direction.

 

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

Could Have Been Worse

by Jim Brown

Click here to email Jim Brown

Editors Note:

The broader market may have been lower, but it could have been worse. The Dow was down over 217 points at the lows but rebounded after the Fed decision. Sellers appeared once again and pushed the market down at the close after the president said the sanctions on China could last a long time. This is his way of negotiating in the press.

The Fed signaled there would be no further rate hikes this year after previously saying two were likely in the December release. The economic outlook is slowing, and the Fed is concerned. Investors do not believe the economy is headed for recession, so the dips are being bought.



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


No Changes


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


BULLISH Play Updates

CAT - Caterpillar - Company Profile

Comments:

No specific news. Shares trading sideways while we wait for a trade deal.

Original Trade Description: March 2nd

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Its Construction Industries segment offers asphalt pavers, compactors, cold planers, feller bunchers, harvesters, motorgraders, pipelayers, road reclaimers, skidders, telehandlers, and utility vehicles; backhoe, knuckleboom, compact track, multi-terrain, skid steer, and track-type loaders; forestry and wheel excavators; and site prep and track-type tractors. The company's Resource Industries segment provides electric rope and hydraulic shovels, draglines, rotary drills, hard rock vehicles, track-type tractors, mining trucks, longwall miners, wheel loaders, off-highway and articulated trucks, wheel tractor scrapers, wheel dozers, landfill and soil compactors, machinery components, electronics and control systems, select work tools, and hard rock continuous mining systems. Its Energy & Transportation segment offers reciprocating engine powered generator sets; reciprocating engines and integrated systems for the power generation, marine, oil, and gas industries; turbines, centrifugal gas compressors, and related services; remanufactured reciprocating engines and components; and diesel-electric locomotives and components, and other rail-related products. The company's Financial Products segment provides operating and finance leases, installment sale contracts, working capital loans, and wholesale financing; and insurance and risk management products. Its All Other operating segment manufactures filters and fluids, undercarriage, ground engaging tools, fluid transfer products, precision seals, and rubber sealing and connecting components; parts distribution; integrated logistics solutions and distribution services; and digital investments services. 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.

Caterpillar has had a rough five months. Shares were testing $160 when the China tariff problem began, and they have languished as low as $112 in the aftermath. Every time it looks like the China talks are progressing, shares run up to about $140. Every time it looks like talks are breaking down, they pullback to $130 or lower. If we ever get an actual agreement, they should blast higher to the $150-$160 level once again.

Shares fell from $142 to $130 over the last two weeks on the latest headlines about negotiations. With the president continually saying there will be a meeting with President Xi in March, that gives us a short-term window for success. CAT also has reasonably priced options.

Earnings April 29th.

Position 3/11/19:
Long May $140 Call @ $3.25 , see portfolio graphic for stop loss.


CRM - SalesForce.com - Company Profile

Comments:

No specific news. Very close to a new high.

Original Trade Description: March 16th

Salesforce.com, Inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com.

Shares fell from $165 to $150 after the company reported earnings of 70 cents that beat estimates for 55 cents. Revenue of $3.6 billion beat estimates for $3.56 billion. The problem came on the guidance. They projected earnings of 60-61 cents on $3.67-$3.68 billion. Analysts were expecting 63 cents on $3.69 billion. For the full year the company projected $2.74-$2.76 on a 20% increase in revenue to $15.95-$16.05 billion. Analysts expected $2.75 and $15.97 billion. SalesForce also projected revenue of $26-$28 billion in 2023.

The company said it was fighting headwinds because of the strong dollar. However, billings rose 22% to $6.79 billion and beat estimates for $6.43 billion. Their future unearned contract revenue rose 25% to $25.7 billion. This is money that will become due in future months. If a customer signs a 24 month deal for $1,000 a month, SalesForce only gets to count that revenue as it is earned at $1,000 a month. They have $25.7 billion in contracted but unearned revenue. Their RPO, contracted revenue expected to be earned within 12 months, rose 24% to $11.9 billion. They also expect that number to be up 24% at the end of the April quarter.

The "SalesForce Platform and Other" segment saw revenue grow 54% to $825 million. Revenue from the EMEA region rose 25%. Revenue from Asia-Pacific rose 25%. Contracts over $20 million rose 48%. There were two deals over $100 million signed last quarter.

Yes, shares fell after earnings but who would not want to own a business that is growing this fast? It was just a knee jerk reaction and I wish I had recommended it again the prior week.

Position 3/18/19:
Long May $170 call @ $3.00, see portfolio graphic for stop loss.


INTC - Intel - Company Profile

Comments:

Intel shares and chip shares in general were down ahead of the Micron earnings after the close. Micron beat and shares were up sharply after hours.

Original Trade Description: Feb 16th

Intel Corporation designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, desktops, and wireless and wired connectivity products; enterprise, cloud, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. The company offers microprocessors, and system-on-chip and multichip packaging products. It also provides NAND flash memory products primarily used in solid-state drives; and programmable semiconductors and related products for communications, data center, industrial, military, and automotive markets. In addition, the company develops computer vision and machine learning, data analysis, localization, and mapping for advanced driver assistance systems and autonomous driving. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has collaboration with Tata Consultancy Services to set up a center for advanced computing that develops solutions in the areas of high performance computing, high performance data analytics, and artificial intelligence. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.

In November Intel announced a $15 billion share buyback program. Intel had $4.7 billion remaining under a prior authorization putting them just shy of $20 billion. This represents almost 10% of the outstanding shares. Six years ago, Intel had 6.5 billion shares outstanding. If they complete this buyback program, they will have just over 4 billion shares outstanding.

Intel is poised to profit from the coming 5G revolution. Apple has already said they are going to use Intel's 5G model in their 2020 phones. Intel has participated in more than 25 5G trials with potential partners. In the last quarter Intel said revenue from communications service providers rose 30%. The company said in August it is pursuing the $24 billion communications infrastructure segment of the market and expects to gain significant market share by 2022. Intel is not just a PC and server processor company any more.

Intel reported Q4 earnings of $1.28 that beat estimates for $1.22. However, revenue of $18.66 billion missed estimates for $19.02. Their biggest problem was guidance for Q1 of 87 cents on $16 billion in revenue. Analysts were expecting $1 on $17.29 billion.

Intel is poised to benefit from a trade agreement with China. They currently get 24% of their revenue from China. With the advent of 5G, Intel is poised to be a leading player. They bill themselves as an "end to end" provider. The 5G revolution is not only going to replace nearly every piece of networking gear on the planet, every cellphone owner will be upgrading to a new 5G phone, many with an Intel modem. Remember the old commercials from the 2000's, "Intel Inside?" With Intel's new push into the internet of things (IoT), smartphone communications and self-driving vehicles, they really will be inside most electronic products.

Intel is expected to grow revenue by 5% in 2019. That is better than the sector forecast for 2% growth.

Earnings April 25th.

We have to reach out to the June option cycle to get a strike that comes after earnings and will keep the premiums inflated. We can buy time, but we do not have to use it.

Position 2/19:
Long June $55 call @ $1.53, see portfolio graphic for stop loss.


NTNX - Nutanix - Company Profile

Comments:

The analyst day was a big success with shares spiking $2.50 today.

Original Trade Description: March 13th

Nutanix, Inc., together with its subsidiaries, develops and provides an enterprise cloud platform in North America, Europe, the Asia Pacific, the Middle East, Latin America, and Africa. Its solution addresses a range of workloads, including enterprise applications, databases, virtual desktop infrastructure, unified communications, and big data analytics. The company offers Acropolis, an open platform comprising hyperconvergence, native virtualization, enterprise storage, virtual networking, and platform services; and Prism, an end-to-end consumer-grade management plane providing management and analytics across its software products and services. It also provides Nutanix Calm that offers native application orchestration, automation, and lifecycle management to its enterprise cloud platform. In addition, the company offers Beam, a multi-cloud optimization service; and Frame, a desktop-as-a-service. It serves customers in a range of industries, including automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology, and telecommunications, as well as service providers. The company was founded in 2009 and is headquartered in San Jose, California. Company description from FinViz.com.

Nutanix shares were crushed on March 1st after they posted an adjusted loss of 14 cents. Analysts were expecting 25 cents, so this was a beat. Revenue of $335.4 million beat estimates for $331 million. However, billings rose from $355.9 million to $413.4 million. Analysts were expecting $416.5 million and not a big miss.

The problem came from guidance. They guided for the current quarter for a loss of 60 cents on revenue of $290-$300 million and billings of $360-$370 million. Analysts were expecting 28 cents on revenue of $348 million and billings of $430.2 million. That was a major miss.

The CFO said, "The guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring." "We took a critical look at these areas and have taken actions to address them."

Shares fell $17 to $33 on the news. After a week of sideways consolidation shares have started to move higher. The CFO said they corrected the problem. That may not mean there will be a recovery in the current quarter but there will be a recovery. I am recommending we buy the dip.

The first option cycle out of the 30-day premium depreciation window is July. We can buy time, but we do not have to use it.

Position 3/14/19:
Long July $42.50 call @ $3.25, see portfolio graphic for stop loss.


BEARISH Play Updates

No Current Puts