Option Investor
Newsletter

Daily Newsletter, Thursday, 3/28/2019

Table of Contents

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

Market Wrap

The Economy May Have Slowed

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

There were a lot of ways I could have started today's wrap but a quote from Warren Buffet uttered during one of his rare televised interviews, caught my attention. The Oracle of Omaha says it looks like the economy has slowed down. Well duh, the data has only been showing that for about 4 or 5 months. At this point in the game, the economy has slowed, the question we need to be answered is if slowing has stabilized and the jury is still out on that one. The good news is that the market continues to steady near its recent highs and looks like it will give the economy the benefit of the doubt.

Market Statistics


Trade, trade relations, and the trade negotiations are, in my view, the #1 cause of the global slowdown. The FOMC shares some blame but only in that they were to slow to react to the weight of tariffs and trade tensions on economic activity. If the trade talks fail to produce a satisfactory result the global slowdown will linger on and possibly worsen if the trade dispute is resolved economic activity will surely begin to pick up again.

The trouble is that we keep getting mixed messages and today's news is no different. Early on we got word that the Chinese had made major concessions, later in the day a sound bite from Larry Kudlow suggested it could be months before a deal is done. He says, and rightly so, that the trade deal is not time-dependent, its policy and enforcement dependent, so may take weeks or months to complete.

Regarding concessions, sources close to the trade talks have leaked word the Chinese are offering major concessions on tech. The leaks specifically mention forced tech transfers although they also mention that intellectual property and enforcement are still sticking points. Mnuchin and Lighthizer are in Beijing now so I would expect more headlines tomorrow.

Economic Calendar

The Economy

The jobless claims data still looks good but also still looks like market tightening is over. The initial claims data fell to 211,000 from last week's downward revision and are not just above the long-term high. The four-week moving average of claims also fell and is also sitting just above the long-term low. It is possible we will see another new low set but the tables show a clear flattening of the trend over the past year. On a not-adjusted basis claims fell -2.4% versus an expected -0.3% and are down only -2.9% from last year, consistent with a healthy labor market but one in which YOY improvements have all but dried up.


The continuing claims figure rose 13,000 to 1.756 million. The gain is not what we want to see but not bad leaving the data essentially flat for the past month. The four-month average of claims fell though, down -7,000, but is also flat for the past month. Continuing claims are holding near the 1-year high but may begin to fall in the next few weeks if the initial claims figures remain low.

The total number of jobless claims fell -80,984 to 2.039. This decline is seasonally expected and in line with long-term trends but no as deep as I'd like to see. On a year over year basis total claims are running near -5.0% which is the narrowest margin in several years. The total claims should continue to decline as the spring hiring season progresses, the figure needs to fall to 1.5 million to stay on trend. If it misses it will be a question of degree.


The final revision for 4th quarter GDP came in more or less as expected at 2.2%. This is down from the previous 2.6% and due to a downward revision in personal consumption, state, and government spending. Real GDP advanced at a rate of 3.4%, the Gross Domestic Income increased by 1.7%. The PCE price index edged higher to 1.8% but is still below the all-important 2.0% target and 2.5% overshoot level some Fed members are calling for.


Pending home sales fell -1.0% but economists at the NAR aren't worried about it. The -1.0% drop comes a month after big gains (up 5% in January) and was not surprising. On a regional basis two of the four major U.s. regions saw sales increase while two saw sales decrease. Pending sales are down -4.9% YOY but that may change in the next few months. Mortgage apps, a leading indicator of future sales, have been surging on lower interest rates and the rate on a 30-year mortgage fell again this week. This week's decline is the biggest drop in mortgage rates in a decade and puts the 30-year mortgage rate below last year's level.

The Dollar Index

The Dollar Index advanced another 0.25% as fear of slowing global growth sap risk-on appetite for other currencies. Today's weaker than expected data from the EU and the Brexit stalemate helped support the dollar. The move is supported by external factors ie mounting dovishness among the world's central banks but upward movement may be capped by slowing in the U.S. economy. Tomorrow's PCE price index, the most current read on consumer level inflation we have, could easily disappoint the market, reduce outlook for rate hikes, and cap gains in the dollar. A move higher is likely to find resistance at the $97.50 level, a move above that may be bullish. If the index reverses course within the range support is likely near the short-term EMA.


The Gold Index

Gold prices took a big hit today as the dollar index advanced and trade news supported equities. The spot price fell more than -1.5% to break below the $1,300 level on its way down to retest $1,280. The $1,280 level is now the target for strong support if it is broken gold will likely fall further. The indicators are consistent with a move to support and possibly lower, a move below $1,280 could go to $1,260 and $1,240.


The Gold Miners ETF GDX gapped lower at the open and extended a -1.0% decline to nearly -2.7% by the end of the session. The GDX has confirmed support at a lower high, near the top of the $21.50/$23.50 trading range. Today's action found support at the short-term moving average but the indicators consistent with a bearish swing in prices so downward movement may persist. If the price of GDX falls below the 30-day EMA a move to $21.50 is expected.


The Oil Index

Oil prices fell in response to a Trump Tweet but the losses were not held. Trump says OPEC should increase production to lower prices, something he's said before, but there is no expectation the cartel will comply. Increasing production would counter what their goal is and their goal is higher prices. Today's action created a small doji showings support within an uptrend and above the short-term moving average. The indicators are mixed but generally bullish and set up to fire bullish crossovers and reconfirm the near-term uptrend. A move higher is expected, a move and close above $60 would be bullish.


The Oil Index fell slightly in today's trading but is still above support and still looks more bullish than not. Today's candle is a small green candle sitting on support at the long-term uptrend line and short-term moving average. The indicators are bearish but weak and considering the trading range, the index is consistent with range-bound trading. The index may continue to wind up within its narrowing range but I do expect it to pop to the upside once sufficient pressure builds up.


In The News, Story Stocks and Earnings

Facebook came under pressure again as the Trump administration sets its eyes on the stealer of personal data. The Department of Housing and Urban Development has charged Facebook with a violation of the Fair Housing Act. HUD alleges the use of audience-targeting algorithms to display ads limits the options for people based on race, religion, disability and national origin. Facebook says it has been working with HUD to alleviate these issues and is surprised by the charges. Coincidentally, Trump has spent over $3.6 million in the first quarter of the year buying ads on Facebook that focus on his competition and the need for a wall. Shares of FB fell in early trading but were able to find support. The stock moved up from the intraday low to close with a small gain and above the short-term moving average.


Carmax reports before the bell tomorrow morning. The used car specialist is expected to report strong numbers and is known for exceeding expectations. The consensus estimate is 6.9% revenue growth and 103% EPS growth. Over the past two years, Carmax has beaten estimates 75% of the time but tomorrow may not be one of them. Car sales are slowing and sluggishness was expected to spill over into the used car market. Today's action shows resistance at the long-term moving average which may be an indication of which way the winds are blowing.


I don't like the way the VIX looks, I'll say it as simple as that. It has made a kind of whompy inverted double bottom pattern I don't recall ever seeing before. I don't know what it means but it looks like something is up and the indicators are firing off what I'd call a fairly decent bullish signal. I've mentioned before I think the trade deal, when it is announced, is going to be or quickly lead to a sell-the-news event. There is just too much hope built into the deal and, with earnings outlook as it is, I don't see much reason for the broad market to move much higher. I could be wrong but it looks like the VIX is about to reverse. If it closes above 17.00 the next targets are 20.00, 25.00, 30.00, and 35.00.


The Indices

The moved in tandem, all but one, and the one posted a gain of 1.20%. The Dow Jones Transportation Average extended its bounce from the 10,000 level and is now closed above both moving averages. The move certainly looks bullish and is supported by the indicators although the signal is very weak. The index looks like it could continue to move higher but 10,364 to 10,500 may produce some strong resistance. The weakness in the indicators suggests range bound trading between 10,000 and 10,500 or 10,600 is possible.


The other three major indices all closed within 0.02 of each other with two posting the same gain, 0.35%. The NASDAQ Composite is the odd-duck in today's action but created a similarly small candle by the end of the day. The tech-heavy index formed a small doji candle within the body of the previous candle and above support. Support is the short-term moving average where a bounce may form, the risk is in the indicators which are both moving lower. A drop below the 7,600 and the short-term moving average would be bearish and could take the index down to 7,400 and 7,200 in the near to short-term.


The S&P 500 formed a small green bodied doji sitting beneath the long-term uptrend line and above the short-term moving average. The candle and price action appear to be bullish, bouncing off the moving average like they are, but resistance at the trend line and above has been holding the bulls back. The indicators are not bullish, they are both moving lower and suggest a test of the moving average at least. A move below 2,785 would be bearish and likely take the index down to 2,730.


The Dow Jones Industrial Average looks exactly the same as the SPX. The blue-chips formed a small doji squeezed between a rock and a hard place, waiting for something to give.


There is so much uncertainty in the air I am surprised the VIX isn't already at 25 or 35. I guess that's because there is some positive spin to the uncertainty, a trade deal is a good thing, but uncertainty is uncertainty. It could go either way. Both the trade deal and the Brexit are coming to a head. Both the trade deal and the Brexit have potential to rock global markets (more so one than the other) and alter the world trade order. And economic data is slowing, bonds yields are falling, the earnings growth outlook is dimming, blah blah blah doom and gloom. There is a lot of reason to be afraid but they all fail to take heed of the fact the U.S. economy is still very stable and growing nicely. Until things become a little more certain I am neutral on near-term market direction, leaning toward bearish, but still firmly bullish for the long-term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Surprisingly Positive

by Jim Brown

Click here to email Jim Brown

Editors Note:

After a monster decline in the futures on Wednesday night the A/D on the Dow was surprisingly positive. The futures were down -14 at one point late Wednesday but the Dow came back and opened positive and then recovered from the intraday dip to close positive. Only four Dow components posted losses. That is rare even on days that are significantly more bullish. The rebound lifted the Dow to 25,715 and resistance for the last two days. Closing there could suggest we will have a higher open on Friday but the trick will be holding any gains.

 

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

Still Fighting

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P is still fighting resistance at 2,815 but fortunately it refuses to give up the battle. The index traded slightly over that level at 2,819 at the open but selling was brisk. After a 20 point intraday decline the S&P fought back to close at 2,815. This has been resistance since mid-October and eventually it will be broken. I would like to think we will see another rally attempt on Friday given the late afternoon rebound.



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

No Updates to Current Positions


BEARISH Play Updates

No Current Puts