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Daily Newsletter, Tuesday, 4/16/2019

Table of Contents

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

Market Wrap

Fear of Heights

by Jim Brown

Click here to email Jim Brown

Investors appear to be afflicted with a bad case of acrophobia or fear of heights.

Market Statistics

Traders were excited this morning, but it only lasted about ten minutes before the sellers appeared and knocked all the indexes back to support. The Dow was up +149 at the open and fell back to the teen's multiple times. Volatility ahead of the close was likely related to the high-profile earnings after the bell.

The Nasdaq 100 ($NDX) traded in record territory four times intraday but the crash at the close kept it from a new high. That level is 7,660 from last August.



The economic reports for the day were lackluster. The NAHB Housing Market Index for April rose 1 point to 63 and in line with analyst estimates. Sentiment for single family sales rose one point to 69 and six month expectations declined one point from 72 to 71. Anything over 50 represents expansion and positive building conditions. Sentiment was higher in the Northeast, Midwest and West but lower in the South. The buyer traffic component rose from 44 to 47. This report was ignored.

Industrial production for March declined -0.1% compared to a +0.1% rise in February and a 0.2% analyst consensus. This was the second monthly decline in the last seven months. Mining and energy saw a -0.8% decline, motor vehicles and parts fell -2.5%. Business equipment rose 0.4%, utilities +0.2% and high-tech goods +0.2%. Colder than average weather drove the rise in utility production. Tariffs on metals and auto parts were blamed for the decline in motor vehicle production. This report was also ignored.

Neither of those reports figure into the Atlanta Fed real time GDP Now forecast for Q1 GDP. The forecast is still 2.3% with the next update after the international trade numbers on Wednesday.


The weekly API crude inventory report showed an unexpected decline of 3.1 million barrels of oil. Gasoline inventories declined -3.6 million barrels and distillates fell -1.3 million. There has been a delay of imports in the Houston ship channel over the last couple of weeks after a chemical spill and fire. There is a backlog of ships in the Gulf waiting to offload. This temporary decline of imports could have caused the inventory decline. However, we are getting to the point where refiners will ramp up production of summer blend fuels and oil inventories will decline for weeks at a time.

Crude prices have stagnated at $65 for the last week. We are nearing some potential volatility as the White House announces their plans to cancel or extend sanction waivers on Iran. The president has said he wants to get tougher on Iran, but he has also been complaining about high fuel prices. What is it going to be? Tough on Iran and higher prices or easy on Iran and lower prices?


The most important report on Wednesday will be the Fed Beige Book, which outlines the economic conditions in each of the Fed regions.

The most important report on Thursday will be the Philly Fed Survey but I doubt there will be very many traders around to see it. Volume will decline for the rest of the week.


The pace of earnings slows starting tomorrow as we head into the long holiday weekend. Abbott Labs, Las Vegas Sands, Morgan Stanley, Pepisco and US Bank are the highlights for Wednesday.

Recent reporters have been beating on earnings but missing on revenue. Current Q1 expectations are for -1.8%, up from the -2.5% a week ago. Revenue is down to expectations for a +4.5% rise.

There are analysts predicting earnings to turn positive in the weeks ahead but not positive enough to really trigger a lot of buying. As usual, the guidance is the key and it has not been exciting.


The leadoff batter this morning was UnitedHealth (UNH). The company reported earnings of $3.73 that rose 22% and beat estimates for $3.60. Revenue rose 9.3% to $60.31 billion and beat estimates for $59.69 billion. Premiums rose 7.8% to $47.51 billion, also beating estimates. Product revenue rose 20.4% to $8.07 billion while services revenue rose 5.2% to $4.32 billion. The Optimum business revenue rose 11.9% to $26.4 billion. They guided for the full year for earnings of $14.50-$14.75, up only slightly from prior guidance of $14.40-$14.70. Analysts were expecting $14.65 so the guidance was roughly inline.

The CEO warned that the health options being touted by the democrats could wreck the healthcare system and destroy patient-doctor relationships. The plan being promoted by Bernie Sanders would cost every taxpayer more than $20,000 per year in higher taxes according to the bipartisan bean counters from the Committee for Responsible Budgeting.

Shares declined sharply after an early morning bounce. UNH was primarily responsible for the decline in the Dow from the +149 high at the open.


Bank of America (BAC) reported earnings of 70 cents that beat estimates for 66 cents. Revenue of $23.0 billion ticked down slightly and missed estimates for $23.2 billion. Net interest income rose 10% to $629 million. Their outstanding loans rose 5% to $292 billion and deposits rose 3% to $697 billion. Loan loss provisions rose $179 million to $1 billion.

Trading revenue declined 17% to $3.5 billion. Equity trading fell 22% to $1.2 billion and FICC revenue fell 8% to $2.4 billion. The CEO said it was a challenging environment for the capital markets. The bank did post a 4% decline in expenses. Consumer banking revenue rose 25% to $3.2 billion. Global wealth and investment banking rose 14% to $1.0 billion but the global markets division saw a 26% decline to $1.0 billion.


Blackrock (BLK) reported earnings of $6.61 that beat estimates for $6.13. Total assets under management rose $65 billion to 6.52 trillion. Net inflows for the quarter rose 13.6% or $64.67 billion. Institutional inflows rose nearly 900% to $29.12 billion. iShares branded ETFs saw inflows of $30.69 billion, compared to $81.40 billion in Q4.

CEO Larry Fink said the market is in danger of a melt-up rather than a meltdown. He said investors are still sitting on a ton of cash. He called it "record amounts." He blamed the December crash for putting fear back into the investor mindset and the quick rebound kept them from putting money back into the market.

Fink is predicting a surge once the market begins trading at new highs. Let's hope he is right.


Johnson & Johnson (JNJ) reported adjusted earnings of $2.10 that beat estimates for $2.04. Revenue was flat at $20.02 billion but still beat estimates for $19.61 billion. Pharmaceutical sales rose 4.1% to $10.24 billion. Device sales declined 1% to $6.46 billion but still beat estimated for $6.34 billion. They guided for the full year for revenue growth of 2.5-3.5%, up from 2.0-3.0%. Earnings guidance rose from $8.50-$8.65 to $8.53-$8.63. Shares gained $1.50 in regular trading.


Netflix traded between $326 and $374 in afterhours before settling at $355 and a $4 decline. The company reported stunning earnings of 76 cents that easily beat estimates for 57 cents. Revenue rose from $3.70 billion to $4.52 billion and narrowly beat estimates for $4.50 billion.

They added 7.86 million paid subscribers internationally to beat estimates for 7.14 million. They added 1.74 million subscribers in the USA and beat estimates for 1.57 million. They now have 148.86 million total subscribers. They guided for an addition of 5.0 million for the current quarter and that missed estimates for 5.48 million. The CEO said they were seeing "some modest short-term churn effect" in reaction to their recent price increases. He also said he did not expect streaming programs from Disney, Apple and Amazon to slow the growth of Netflix. He said the transition from linear (scheduled programming) to on-demand entertainment is so massive it would take time to catch up and there was a broad difference in the variety of the video offerings. (Disney said they expected to lose money in streaming for four years) Netflix said more than 52 million people had watched "Triple Frontier" in the first four weeks and 45 million watched "Umbrella Academy." I had never heard of either one.

The afterhours volatility came from the earnings guidance. They projected 55 cents in Q2, down from 85 cents and well below analyst estimates for 99 cents. Netflix is expected to spend $12-$15 billion on content in the current year compared to a $1 billion spend by Disney on content just for streaming.


IBM shares dipped $6 in afterhours after disappointing on earnings. The company reported earnings of $2.25 that beat estimates for $2.22. Revenue declined -4.7% from $19.07 billion to $18.18 billion and missed estimates for $18.47 billion. Cognitive solutions and cloud revenue declined to $11.91 billion and missed estimates for $12.43 billion. Global business services revenue was flat at $4.12 billion and missed estimates for $4.19 billion. They guided for the full year for "at least $13.90" but analysts were expecting $13.91. The company said demand for its mainframe computers was slowing and the strong dollar provided a stiff headwind to revenue.


Multiple times over the last several weeks I wrote that I would not be surprised to see a Qualcomm-Apple settlement because Apple was struggling with a 5G solution. Apple has been using Intel 4G modems since Apple started a patent fight with Qualcomm two years ago. Apple tried to bully Qualcomm into cutting its royalties that Apple had been paying for years. Apple tried to use its weight against Qualcomm by telling Apple suppliers not to pay Qualcomm the royalties they were due. Apple also went to multiple countries and told the licensing boards that Qualcomm was charging too much for its royalties. Apple gave them thousands of documents that it had previously prepared and legal help in filing cases against Qualcomm in other countries. Qualcomm remained firm and would not cut its prices. They proceeded to do battle in these other countries and won cases in China and Germany that caused a ban on certain versions of the iPhone in those countries.

The biggest case was of course in the USA and the four-week trial began on Monday. When Qualcomm did not fold over the last two years and continued to press for import restrictions in multiple countries, Apple was in for a major battle.

Apple was also fighting the 5G problem. Intel is not expected to have a 5G modem chip ready until late 2020 and it takes 10-12 months for designers to create the iPhone once they know which components they are going to use. Apple could not announce a 5G phone because Samsung refused to sell them chips. Huawei said they would be open to selling chips to Apple but the US government is against that on security grounds.

That left Apple with no choice but to either put off a 5G phone until late 2021 or settle the case with Qualcomm. Apple caved. Had they continued the trial and lost they would have had to pay the roughly $7 billion in unpaid royalties and still not have a 5G chip. Had they won, they would have had to pay some reduced royalty amount and still not have a 5G chip.

Apple and Qualcomm announced a settlement of ALL outstanding litigation around the world. Apple will pay Qualcomm a lump sum payment for past unpaid royalties, the actual amount was not given, and Apple signed a six-year chip licensing and supply agreement with Qualcomm. Clearly, Qualcomm came out the big winner. Shares spiked $12 on the deal and will probably continue higher as details are released in the coming weeks.

I knew this Apple-Qualcomm standoff could not last and I wrote about it multiple times. We were long QCOM in the LEAPS newsletter as a result.



Intel shares declined $1.50 from the intraday high because they lost the Apple chip contract for the foreseeable future. This is the price of falling behind the times. Qualcomm is stealing their communications business. Nvidia is killing their video business and AMD is gaining market share in their PC processor business. AMD is two levels of technology above Intel today. Being a lifelong Intel user I cannot believe I am even typing this. In the technology sector, if you snooze, you lose.


The other Apple chip suppliers also rallied on the news because that means the 2020 iPhone will be competitive and will sell more units. That is good news for companies that were moaning about the potential for a substandard iPhone without 5G. Skyworks Solutions (SWKS) gained $1.50 after the announcement to gain almost 4% for the day.



Markets

Market volume rose about a billion shares from the lowest level of the year on Monday. There were many big names reporting and the indexes moved a little closer to record highs. Unfortunately, every major spike is being sold.

Advancers outpaced decliners 4,132 to 3,431. I wonder how the A/D and volume would have worked out without the Apple-Qualcomm settlement? That powered significant volume surges in nearly all the related companies in the sector. For instance, QCOM traded 84 million shares and average daily volume is 14 million.

We also had the huge volume crush in the healthcare space after the town hall Q&A with Bernie Sanders on Monday evening. UnitedHealthcare traded 27 million shares and the average volume is 4.4 million. Anthem (ANTM) traded 6.5 million and average is 1.5 million.

Recently we have seen low volume on days when the market is positive and higher volume on days when the market is negative OR opened with a big spike higher. There appears to be a lot of traders/investors exiting positions whenever there is a positive spike.

Larry Fink from Blackrock said he expects the market to surge once new highs are reached because retail investors will jump back into the market on the fear of missing out (FOMO) trade. I really hope he is right. I have been worried that the combination of weak earnings and a return to the highs could produce a sell the news event and begin our slide into the summer doldrums. I want to be wrong and I am far from convinced. I just see the minor points on the internals that are suggesting investors have no conviction.

On the positive side, the A/D line for the S&P just keeps rising. It was barely positive today with 270 advancers and 222 decliners but there were 54 new 52-week highs. If we see this line begin to roll over, that is when we should worry.


The small cap A/D chart is an example of what we do not want to see in the S&P chart. If the A/D begins to deteriorate on the S&P it could weaken suddenly. Everyone with trailing stop losses would be heading to the exits. Today the small cap A/D was almost exactly 2:1 in favor of advancers and the Russell did not decline.


The S&P has stalled in the 2905-2910 range for the last three days. You would think at only 23 points from a record high there would be more excitement and that worries me. If investors are waiting for a breakout to a new high, the bears are going to be betting on that not happening by shorting every spike between here and 2,935. Over 2,935 they will probably reverse to longs.


The Dow did sell off from the +149 point opening spike but it overcame a 66 point headwind by UnitedHealth to close at a 6-month high. The index is still below resistance at 26,616 and the prior high at 26,828 but adding 50-60 points a day is a solid strategy. Eventually, the majority of the components will move in the same direction and hopefully that will be up. IBM is going to subtract about 35 Dow points at the open. If UnitedHealth can avoid another major loss the index could overcome that IBM loss.



The Nasdaq continues to lead the markets higher with a steady pace of gains. Note the Nasdaq chart below the total lack of volatility over the last two weeks. The Nasdaq Composite will likely be the second index to close at a new high with the Nasdaq 100 the first index. That could easily happen on Wednesday with the Qualcomm news powering the chip sector. The 8,109 level is the prior high on the Composite Index and the resistance to watch. The Semiconductor Index is exploding higher and the news today should push it even higher. The correlation between the Nasdaq and the $SOX has broken. The Nasdaq should be spiking to follow the chips sector.





The small cap Russell 2000 has run into strong resistance at 1,585 with 1,600 likely to be equally as hard if we ever get there. The volatility on the Russell has also evaporated and the index is trading slowly sideways. We need a breakout here to lift market sentiment.


The Volatility Index hit a six-month low today at 11.85 and very close to support. This indicates there are no real sellers in the market and very few investors are buying S&P puts to protect their positions. We are nearing that complacency top, but we know from experience the VIX can remain at the low extremes for some time if there is a rally in progress. This is dangerous but it is a market sentiment indicator. We need sentiment to be bullish in order to breakout.


I still believe the major indexes, at least the Nasdaq and S&P, will retest their prior highs. However, as every spike is sold that puts more doubt on the outcome. I would caution about being overly long just in case we do get a sell the news event at the top. There is always the potential for a sell the news event on the announcement of a China trade deal as well. Be long but be careful.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

No Reason to Buy

by Jim Brown

Click here to email Jim Brown

Editors Note:

With every market gain sold and resistance intact there is no reason to buy. That could change tomorrow if investors suddenly show up with cash in hand but right now there is still a battle between the buyers and sellers. Today was slightly more positive than the last two days but the S&P has stalled in the 2905-2907 range for the last three days. We need to see enough buying pressure to break through that roadblock.

 

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

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In Play Updates and Reviews

No Change

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors are still being cautious as the earnings cycle progresses. The Dow was up +145 at its highs and the Nasdaq 100 ($NDX) briefly traded in record territory but the highs were brief. Sellers are still concerned earnings and guidance could be a dud and they are afraid of a market top.



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

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BEARISH Play Updates

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