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Daily Newsletter, Tuesday, 4/9/2019

Table of Contents

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

Market Wrap

Sentiment Fade

by Jim Brown

Click here to email Jim Brown

Multiple negative headlines caused investors to rethink their current holdings.

Market Statistics

Another drop in earnings estimates, potential tariffs over a WTO ruling on Airbus and global economic downgrade by the IMF had investors reconsidering what they were holding. Those planning on holding positions until the market made a new high, may have reconsidered those plans as sentiment soured.

The Dow was down -240 at the intraday low and -384 from Friday's intraday high. This is a material decline and back to last Tuesday's lows. Any further decline targets 25,400 and would be bearish for the overall market.


The biggest economic report for today was the NFIB Small Business Survey. The optimism index rose only a miniscule 0.1 from 101.7 to 101.8 and remains one of the lowest readings since November 2016.

Plans to increase employment rose slightly from 16% to 18%, current job openings rose from 37% to 39% and those planning on increasing compensation rose from 18% to 20% but most of the other components were flat to down. This was only a mildly positive report in that it did not worsen. There was little to excite investors who had expected a rebound from last month's low numbers.

Despite the minor gain this was the second monthly increase since the low of 101.2 in January. The lingering trade tensions appear to be weighing down sentiment among small business owners. Only 11% of respondents expected the economy to improve and that was flat with February.

While the index appears to have stabilized there is little sign of improvement. This will take a political catalyst on Chinese trade issues to cause a rebound. If we suddenly begin a trade war with Europe over Airbus, this sentiment will only get worse.


The Job Openings Labor Turnover Survey or JOLTS for February showed a decline in job openings from 7.625 million to 7.067 million. Despite being the lowest level since June 2018, openings were still up 8.5% over the same period last year. This corresponds with the low employment in the nonfarm payrolls at 33,000 for February.

The report was still positive, and I would expect it to rebound in March. Hires rose 1.8% YoY to 5.696 million, separations rose 5.4% to 5.556 million and that is positive because it means people are not afraid of not finding a new job. Quits rose 9.6% to 3.480 million and layoffs declined 1.2% to 1.742 million. There were 0.9 available workers for every job opening.

Because this was a lagging report for February and the March employment report showed a strong rebound, this report was ignored.


After the bell the weekly API crude inventory report showed a 4.1 million build in oil inventories. Gasoline inventories declined -7.1 million barrels and -2.4 million barrels for distillates. As I reported before this is normal for this time of the year as refiners try to deplete inventories of winter blend fuels before they ramp up production of summer blend fuels.

The military conflict around Tripoli helped to lift uneasiness around oil prices and that contributed to a minor rise almost to $65. The Libyan National Army is attacking government forces around the city and airport.

Unfortunately, Russia, which was slow to comply with the January production cuts, is now indicating they are likely to boost production in June. This is the peak demand season and any increase would not be felt until the fall. This does signal a potential breakup of the OPEC+ coalition and potential production surpluses and lower prices in the future.

The sanctions against Iran are due to return in May when the waivers for 8 countries allowing them to buy Iranian oil are set to expire. The White House can send prices higher and further punish Iran by not extending them but President Trump has been tweeting about high oil prices, so they are likely to be extended.


The calendar for Wednesday has the Consumer Price Index, which is important because of its inflation indications. However, it will be overshadowed by the made for TV House testimony by CEOs of the large banks. They will be preached at, grilled and verbally abused for several hours without a real opportunity to post a rebuttal. They are actually better off saying nothing and letting the House members each get their 5 min of prime-time harassment recorded for posterity. Arguing with the representatives will only cause them more grief later when the members retaliate with legislation.

In the afternoon the FOMC minutes will take center stage with the real news from the March FOMC meeting. As usual, the minutes will be scoured for some insight into future rate moves.

Fed Chairman Powell will speak multiple times at the Democratic Caucus retreat in Virginia, but this is not expected to be market moving.

The real market challenge is going to come on Friday when Britain either comes up with a last-minute compromise plan or crashes out of the EU to cause an economic disaster. Prime Minister May finally won a Brexit vote in Parliament on Tuesday, but it is immaterial. The vote passed 420-110 on a measure to ask the EU for another extension until June 30th. The EU has already rejected this in the past and will likely reject it again on Wednesday. The European Council president has already warned that granting this request is likely to lead to a long series of requested extensions in the future and not solve the problem. With Parliament completely fractured and unable to agree on anything, the odds of ever getting a satisfactory solution for a soft Brexit are practically zero.

The IMF warned that allowing Britain to crash out of the EU this Friday could swing Europe into a recession. This was one of the reasons the US market and most of the European markets were down overnight.


The earnings calendar remains very light until next week. The Q1 cycle kicks off on Friday with earnings from JP Morgan, PNC Financial and Wells Fargo.


The earnings forecast has declined to a -2.5% growth estimate with 4.8% revenue growth. This morning there was a headline making the rounds claiming the estimates had declined to -4.4% but I could never find any confirmation and Refinitiv is still showing the -2.5%. If there was a 4.4% decline it would damage stocks because it would also suggest Q2 was also going to be negative.

Revenue on top, earnings on bottom.


There were only a couple earnings of note on Tuesday. Lindsay Corp (LNN) shares crashed after reporting earnings of 2 cents that missed estimates for 38 cents. Revenue of $109.2 million fell -16% and missed estimates for $115.4 million. They blamed the widespread flooding in the Midwest and the trade dispute with China. Lindsay is based in Nebraska where they have been having 100-year floods. The uncertainty over what agricultural products will be sold to China and in what quantities is keeping farmers from buying their irrigation equipment.


Shaw Communications (SJR) reported earnings of 23 cents that beat estimates by a penny. Revenue of $988.3 million missed estimates for $1.03 billion. Shares fell sharply on the miss. Shares fell -3.5%.


After the bell, Levi Straus (LEVI), freshly off its second IPO, reported earnings of 37 cents on revenue of $1.44 billion. There were no analyst estimates. However, these numbers were better than the 5-cent loss from the year ago quarter. Revenue rose .10 billion from the $1.34 billion in the year ago quarter. Sales in the Americas rose 9% and earnings rose 11%. Levi went private more than 30 years ago and came back to the public market three weeks ago. Shares spiked $1.50 in afterhours.


Pricesmart (PSMT) shares declined slightly in afterhours after reporting adjusted earnings of 88 cents that beat estimates for 56 cents. Revenue of $854.4 million narrowly missed estimates for $856.7 million. Net sales rose +0.5% but currency translation caused a -3.6% decline in sales. Pricesmart is similar to Sam's Wholesale but they only have 41 stores. Shares fell 80 cents.


Apple (AAPL) closed well off their highs and lost 60 cents to end their streak of 9 consecutive gains. Had they closed positive today it would have been the longest streak since October 2010. Wedbush reiterated an outperform rating and raised their price target from $215 to $225. The analyst said there are 900 million active iPhones and 350 million are in the upgrade window. They are targeting 60-70 million of those to be in China. They believe the cheaper prices in the coming models will make them more affordable in China and prompt that upgrade cycle. The analyst said many customers are at an average life cycle of 33 months with their current phone. They also believe Apple's service business is now worth $400 billion.

TF International Securities said Apple is going to announce a new screen technology that will allow for significantly larger laptops, iPads and iPhones. They expect this over the next two years and will target "a very high-end position" in the market. The new screen will employ a "mini LED" technology to enhance brightness. Unlike the OLED screens the mini LED screens will not have "burn in" issues. It is going to be a very interesting earnings report on April 30th.


Cerner Corp (CERN) reached a "cooperation agreement" with activist investor Starboard Value LP. They increased their buyback program by $1.2 billion in addition to the $300 million currently unspent. They appointed four new directors to the board and created a strategy committee to oversee operational improvements. Shares rallied 10% on the news.


Early on Tuesday Wynn Resorts (WYNN) said it was considering a $7.1 billion acquisition of Australia's Crown Resorts. This would be another attempt to capitalize on Asian gamblers in a calm economic environment. Crown shares spiked 20% at the open. Before the day was out Wynn issued another press release saying they had broken off negotiations with Crown because of leaks of the deal terms by Crown. "Following the premature disclosure of preliminary discussions, Wynn Resorts has terminated all discussions with Crown Resorts concerning any transaction."



Markets

The markets softened today on the declining earnings expectations, looming Brexit, IMF economic downgrade and potential tariffs against the EU over Airbus.

The WTO ruled that European subsidies for Airbus were illegal. That led President Trump to threaten $11 billion in tariffs because those subsidies had harmed Boeing in the global market. The potential for opening a second trade war put a cold chill over the market. The EU said they were prepared to retaliate if he was to follow through with that threat. With a potential hard Brexit in three days this was an even bigger worry.

The IMF downgraded their outlook for global growth from 3.5% to 3.3% and warned a hard Brexit could through Europe into a recession and force those estimates even lower. This is the third time in recent months that the IMF has downgraded its forecast.

The rumors of a 4.4% decline in Q1 earnings forecast also cast a pall over the markets. This was just one of those days where all the headlines were negative, and investors acted accordingly.

It is not unusual to see the financial sector decline ahead of their earnings. The banking spectacle scheduled for Wednesday was just one more reason for banks to be sold. That weighed on the broader market and especially the Russell.

The next three days could be volatile. Until the earnings begin to flow next week we are running on expectations and those are different depending on which analyst is giving them.

It does not make any difference what I say about the markets this evening because they are going to be volatile until next week. Those geopolitical events will continue to dominate the headlines in the absence of any material earnings headlines. The S&P fell back 17 points to rest on prior resistance at 2,872. This would be a good spot for a rebound next week. There is no material resistance between here and the new high territory. There is roughly 55 points of empty chart to get to that level.


The Dow was handicapped over the last several days by the collapse in Boeing shares from $398 to $368. That is the equivalent of about 210 Dow points. Today, the tariff worries had CAT and 3M back in the losers bracket as well.

The Dow has fallen back below prior resistance at 26,191 but that level has been blunted by the minor breakout last week. The Dow will continue to depend on the health of the financial stocks and those mentioned above. It could be bumpy ahead of next week.



The Nasdaq posted only a minor decline thanks to Facebook and Netflix. They offset the other FANG stocks of Amazon and Google. Apple was holding the Nasdaq up all morning when it was up about $2 but when it rolled over so did the index.

Chip stocks were also down after a run to a new high last week. This was simple profit taking in the chip sector.

The Nasdaq remains just under 8,000 and the prior high at 8,109. The index is up 20% for the year so minor profit taking ahead of earnings is to be expected.



The Russell 200 posted a major decline of 1.2% thanks to financials and chips. The index fell back below the 200-day and the prior resistance at 1,566. This is not a good sign and a further decline below 1,550 would be bearish for market sentiment.


As I have written in prior commentaries, I believe the market will continue higher to retest the highs but there is no reason to rush into new positions today. Watch it for the next three days and take a fresh look for next week. We could see a buying opportunity and that is never bad as long as you are holding some cash.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Breather

by Jim Brown

Click here to email Jim Brown

Editors Note:

Stocks took a breather today on multiple negative headlines. The negative press was only temporary but it triggered some light selling by cautious investors. It is hard to argue with the idea of taking some chips off the table at record highs. I have warned for a couple weeks that the closer we got to the highs the more volatility would appear. New highs are an action point. Investors are either taking profits because they think the easy money has been made OR they are chasing prices higher in expectations for higher highs. If all the headlines were bullish I suspect we would be seeing more of the second option. With headlines turning negative, caution is starting to grow.

 

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

New High Jitters

by Jim Brown

Click here to email Jim Brown

Editors Note:

The closer we get to the new highs the less investors want to buy a top. Earnings estimates have fallen to a -2.5% decline by Refinitiv but another company was projecting -4.4% this morning. Add that to the global economic downgrade by the IMF and a warning that a hard Brexit would tip Europe into a recession and there was not a lot of reasons to buy stocks today.



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