Option Investor
Newsletter

Daily Newsletter, Monday, 4/8/2019

Table of Contents

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

Market Wrap

Earnings Are Upon Us

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Earnings season kicks off this week with reports from JP Morgan and Wells Fargo. The bad news is that this is not going to be a good cycle. At best we can expect to see the season end with flat to slightly positive EPS growth, at worst earning will shrink. The real worry is how this quarter's reports are going to affect the outlook. The second quarter consensus estimate is already flirting with 0.0% growth, it won't take much for it and the 3rd quarter to turn negative as well. There may not be a real recession on the horizon but the possibility of an earnings recession is very real.

Market Statistics


Also on tap this week; the FOMC minutes, the Consumer Price Index, and the Producer Price Index. All three are important in terms of Fed outlook, inflation, and the trajectory of future interest rates. Both CPI and PPI are expected to expand and accelerate from the previous month, a reality not in line with the FOMCs recently adopted a dovish stance. A hot read on either, or both, would alleviate the need for patience. The FedWatch Tool is showing a 52% chance of rate cut by December, possibly because Trump keeps demanding rate cuts and QE, but that may change by the end of the week. The next FOMC meeting is just under one month away.


In international news, the Chinese press says "new progress" on trade was made last week, good news indeed but still not a trade deal. Maybe we'll get some more details this week. In England, the Brexit draws ever closer. Theresa May is expected to travel to Brussels later this week to ask for another extension of the deadline; if she doesn't get it and Parliament doesn't make a decision a hard-Brexit will happen on Friday.

Economic Calendar

The Economy

Factory orders were released at 10 AM and they were as expected at -0.5% in February. February is the fourth month in five to be negative but it's as close to five as it can be, last month's 0.1% was revised down to 0.0%. At the core, ex-autos, orders are up 0.3%. Within the report, shipments are up and unfilled orders are down causing a decrease in the unfilled orders to shipments ratio. The decrease is a sign that producers are catching up with demand although the strength of sales is keeping inventories of retailers low.


Moody's Survey of Business Confidence fell 1 point in the last week to hit 13.8. The data is retreating from a recent high and shows continued instability and sourness in global business sentiment. Mr. Zandi says outlook concerning current conditions is especially weak and that global economic conditions are expanding at a rate below potential.


This week marks the start of peak earnings although the calendar is light on names. This week we'll see reports from six S&P 500 companies including big bankers like JP Morgan and Wells Fargo. The outlook for the financial sector is expected to see YOY EPS contract by -3.8%, roughly in line with the broader market, although growth will return by the end of the year. The BKX Banking Index is trading above its short-term moving average but hovering in the middle of a trading range and susceptible to volatility over the next two week. The rest of the big bankers will report next week.


The estimates for the 1st quarter and 2019 EPS growth fell again. The first quarter is now expected to produce -4.2% YOY EPS growth. The only good news is the index is still expected to end the cycle with flat to mildly positive EPS growth. The S&P 500 has beaten the average analysts estimate by 4.8% over the last several years which means we could final growth in the range of 0.6%. So far 23 S&P 500 companies have reported, 19 beat the EPS consensus estimate and 13 beat the revenue consensus estimate.


Estimates for the coming quarters and next year all fell. The 2nd quarter is now looking at 0.0% growth, the 3rd quarter 1.6%, and the 4th 8.2%. The full year 2019 is now estimated to produce 2.6% earnings growth and next year 11.5%, the good news is that this quarter is the bottom of the earnings trough so far as the outlook goes. I will remind you that in 2015/2016 we were in similar conditions relative to outlook (outlook is positive but the estimates keep falling) and one or two-quarters of negative growth dragged out to six. I see an upswing in earnings growth and earnings growth estimates on the horizon, the timing of its arrival is still uncertain.


The Dollar Index

The Dollar Index fell a little more than -0.30% today. The index fell from resistance at the $97.50 level for the second time in a week and looks like it is reversing at the top of its trading range. The top is also indicated by MACD and stochastic although the signal is not strong. Momentum has peaked but remains bullish and stochastic is set up to fire a bullish crossover so a test of resistance or break to new highs is possible. The target catalyst for that move could be the CPI or FOMC minutes on Wednesday or the PPI on Friday. A fall from today's close may find support at the short-term moving average or near $96.00.


The Gold Index

Gold prices moved up on today's weaker dollar but the move was met by resistance. The spot price advanced nearly a percent to cross the $1,300 level but fell back to settle near the short-term moving average. The candle shows clear resistance to rising prices despite bullish bias to the indicators. A fall from this level would confirm resistance and lower prices but support may only be as far as the $1,280 level. A break below $1,280 would be bearish and could take spot gold down to $1,260, $1,240 or lower. If gold prices are able to close above $1,300 convincingly the next targets are $1,320 and $1,340.


The Gold Miners ETF GDX bounced on today's move in gold prices but it isn't a strong bounce. The ETF is still trapped within its trading range and likely to remain there near-term. Today's move puts the ETF price above the moving average and near the mid-point of the range where anything could happen. The indicators are rolling into a bullish signal but not yet bullish so upward drift is possible but how high is uncertain. A move up may hit resistance anywhere between $23.00 and $23.50, a move lower may find support at several levels between the moving average and $21.50.


The Oil Index

Oil prices are advancing nicely although today's move comes with a bit of negative news. Fighting has broken out in Libya again and threatens oil ports as well as lives and livelihoods. WTI gained 1.70% on the news, supported by OPEC+ tightening and warming demand outlook, and set a new high. The black gold is at a five-month high and indicated higher.


The Oil Index tried to extend a move above the strong resistance target of 1,340. The move was timid and fell back to its open so may result in another test of support. The indicators are bullish so this move looks like it could be strong/gain strength. It is essentially a bounce from a long-term uptrend line confirmed by the moving averages and both indicators. A move higher is expected, I think it's just a matter of time. The caveat is earnings, the energy sector has a mixed picture, it will lead earnings declines this quarter but rebound to lead earnings growth later this year.


In The News, Story Stocks and Earnings

GE was one of today's biggest losers after it got downgraded by JP Morgan. Analyst Stephen Tusa at JP Morgan says GE's shareholders are underestimating the severity of the situation and overestimating the value of small improvements. He lowered his price target to $5.00 from $6.00 and sent the stock to a one month low. The move may be a knee jerk reaction, price action is volatile but hopeful, and earnings are due out in a couple of weeks.


Boeing received a downgrade this morning that sent shares back to retest the recent lows. The downgrade centers on production cuts announced Friday and a growing number of order cancellations. The latest, from China Aircraft Leasing, is worth 100 aircraft when and if Boeing can prove the jets are safe. Bank Of America cuts its rating on the stock from buy to neutral with a target of $420, about 5% upside from today's prices.


The VIX is hovering near the 13.25 support line where it is showing some signs of support. The fear index is still indicated lower but momentum is so weak you can barely see the MACD histogram. Stochastic is more bearish but even it has a little bend in it that looks like it could be rolling over. I may be grasping at straws but I'm concerned about a reversal in volatility and market correction focused on earnings season and earnings season is here. This Friday's reports from JPM and WFC may be enough to alleviate my concern (and that of the market) but I don't think so, not unless they are just over the top better than expected.


The Indices

The Indices wobbled a bit in today's session but are otherwise little changed from Friday's close. The majors were evenly split with two advancing and two declining although the biggest movement was to the downside. The Dow Jones Industrial Average fell about -0.40% at the close forming a small spinning top doji. The index is forming a small near-term peak and showing indecisiveness in the face of uncertain earnings. The indicators are bullish but showing signs of peak consistent with consolidation. The index may move sideways or lower this week with a possible target for support of 26,000.


The NASDAQ Composite posted the largest advance in today's session, about 0.15%, but it set a new high. The tech-heavy index is still advancing on hopes of global expansion and may surpass 8,000 this week. The indicators are positive and moving higher so higher prices are expected, a move to 8,000 may find resistance but I wouldn't count on it before it happens.


The Dow Jones Transportation Average also closed with a gain near 0.15%. The transports set a new closing high but not a new intraday high. The indicators are bullish but momentum is weak and stochastic is already overbought so a big move is not likely. A move higher may find resistance at 11,00 if not sooner. A move lower will probably move to 10,500 or just below to the pair of moving averages.


The S&P 500 made the smallest move, about 0.05%, but it formed a green candle nonetheless. Price action looks like it is consolidating for a push to retest the all-time highs but caution is due. The move faces potentially stiff resistance at 2,900 and then the all-time high that could easily reverse prices. At the very least I would expect the market to start hitting some turbulence as it creeps higher.


The market is hopefully, anxiously, awaiting the first major earnings of the season and they are almost here. The season is not expected to be a good one, at best it can be better than expected, and best-case scenario the S&P 500 will eke out a small gain in terms of earnings growth. While higher prices are indicated for stocks I think we're still in a large, secular-level, consolidation and sector rotation that has another six to twelve months to play out. In any event, I am firmly bullish for the long term and neutral leaning to cautiously bullish for the near-term.


Until then, remember the trend!

Thomas Hughes


New Option Plays

Patience Grasshopper

by Jim Brown

Click here to email Jim Brown

Editors Note:

There is no reason to rush into the market as the indexes chip away at overhead resistance. That is probably the wrong word since the 34 points on the S&P between today's close and the prior high does not really contain any material resistance. This is just open ground that the index needs to cover. You can tell by the 3 point gain today that investors are not racing to be invested before that prior high is reached. With earnings expected to be negative and geopolitical headlines swirling there is no need to put more money at risk. The overall market is positive with internals greatly improved but we are at risk for a sell the news event at the prior high and/or the announcement of a trade deal. Just be patient and wait for a buying opportunity.

 

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

Earnings Pause

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets were dormant today as Boeing erased -121 points from the Dow to sour sentiment. With Boeing weighing on the Dow and earnings still over a week away, investors were not in any hurry to put more money to work. The various geopolitical headlines were prompting caution and a shuffling of the President's cabinet further clouded the outlook. We should not expect too much of this week after the strong resistance breakout. The S&P is only 34 points from the prior high and magnetism should pull us to that level.



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


SWKS - Skyworks Solutions
The long call 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