Option Investor

Daily Newsletter, Tuesday, 2/12/2019

Table of Contents

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

Market Wrap

Headline Frenzy

by Jim Brown

Click here to email Jim Brown

Multiple headlines triggered significant buying interest ahead of option expiration.

Market Statistics

Just when traders thought they were going to coast through the last couple days of the February option expiration cycle, multiple headlines appeared to send the Dow on a 400-point romp. Comments from President Trump that a new government shutdown was not likely and the March 1st deadline on hiking Chinese tariffs was flexible, caused traders to buy stocks. Whether it was sudden bullish hopes or short covering on a changing outlook, the result was the same. The Dow spiked +405 intraday and thanks to another uptick in buying at the close it ended near the highs of the day.

The Dow and Nasdaq barely closed over prior week resistance and odds are good there will be some profit taking on Wednesday to drag them back below resistance.

The S&P broke well above the prior week resistance but remains in the grip of the 200-day average at 2,743. Technically it was a higher close, but it is still in the grip and the battle is not over. The 2,750 level is currently the consensus year-end estimate for the S&P and that makes that level also strong resistance.

On the economic front, the NFIB Small Business Optimism Index for January declined for the 5th consecutive month from the high of 108.8 in August to 101.2 today. This was down from 104.4 in December. The is the lowest level since November 2016 when it spiked from a low of 94.1 before the election to 106.9 after the election.

The blame can be placed right on the government shutdown and the China trade war. The declines in Nov/Dec were due to the Fed's comments about a "long way to go until neutral" and "autopilot" on balance sheet reductions, which are the equivalent of three undeclared rate hikes per year.

There was a marked decline in the internal components. Plans to increase employment fell from 23% to 18%, those expecting the economy to improve fell from 16% to 6% and those planning to increase inventories fell from 8% to 1%. Those expecting higher sales declined from 23% to 16%.

Solving the government shutdown problem and signing a trade agreement with China would improve sentiment significantly. However, we are slowly moving into the 2020 election process and the mud slinging is going to be horrific. This is likely to put a damper on strong sentiment growth for the next two years. Having every candidate promising to raise taxes to obscene levels will worry business owners.

The Job Openings Labor Turnover Survey (JOLTS) report showed job openings soared in December to a record 7.335 million. This was a 29% increase from the 5.667 million in December 2017. Employment is exploding! Openings rose 4.7% from November. This report was started at the end of 2000 and this is the highest reported number.

New hires were relatively flat but rising from 5.812 to 5.97 million. Separations were flat from 5.563 to 5.545 million. Quits were also flat going from 3.494 to 3.482 million. Layoffs declined from 1.753 to 1.697 million.

Service industries reported the most hiring. The South had the most openings, increasing 4.9% and the Northeast had the fewest at 3%. Job gains have now been positive for 100 consecutive months.

The weekly API crude inventory report showed a decline of 1.0 million barrels. Gasoline inventories rose by 746,000 barrels and distillate inventories declined by 2.5 million. Analysts had expected a rise in oil inventories by as much as 2.7 million barrels.

Prices were up over $1.65 intraday on news Saudi Arabia pledged to cut even more production after Russia failed to follow through on the cuts agreed to back in December. OPEC output declined by 800,000 bpd in January to 30.81 mmbpd. Russia lowered production by only 90,000 bpd after promising to cut 230,000 bpd. In light of the Russian default, Saudi Arabia said they would cut another 500,000 bpd starting in March. Reportedly the CEO of Rosneft wants Putin to cancel the production cut agreement with OPEC.

Saudi oil minister Khalid al-Falih said the state-owned oil company Saudi Aramco was preparing to venture out into the rest of the world to explore and produce oil.

The biggest report for the week is due out tomorrow with the Consumer Price Index. While nobody expects any inflation to appear, especially with oil prices so low, there is always the chance. As long as it is minimal there will be no reason for the Fed to change their outlook.

The earnings calendar for Wednesday is led by AIG and Cisco Systems with Hilton, MGM, NetApp and Teva as the supporting cast. Nvidia and Applied Materials are the big dogs for Thursday.

Under Armour Inc (UA) produced a lot of headlines with their earnings. They reported adjusted earnings of 9 cents that easily beat estimates for 4 cents. Revenue of $1.389 billion narrowly beat estimates for $1.379 billion. Gross margin rose by 160 basis points to 45%. They guided for the full year for earnings of 31-33 cents on a 3-4% rise in revenue. After reducing inventory levels, the company was able to cut back on discounts and profit from their hot sneaker lines including Project Rock, Curry 6 and HOVR models. Discounts were about 10% to 20% lower than the year ago quarter.

Unfortunately, US sales fell -6% because of a seemingly unending string of product launches from Nike. They guided for similar US sales in Q1. Nomura said it appears the company has hit a ceiling in North America. Fortunately, international sales rose 24% to $395 million. The Middle East and Africa rose 31.7% and Asia-Pacific 35.2%. Latin America declined -15% but only represents $49 million in volume.

Molson Coors (TAP) suffered from an earnings hangover with a faceplant loss of $6. They reported earnings of 84 cents that beat estimates for 79 cents. Revenue of $2.42 billion declined -6.2% and missed estimates for $2.52 billion. Global volume declined -1.5% with a 5.1% drop in the US and 2% decline in Canada. Europe rose 3.3%. To further complicate the outlook, they are restating their financials for 2016 and 2017 and reported "ineffectual internal controls" and evidence of "material weakness" associated with the restatements. Auditors reportedly found accounting errors for income taxes related to deferred tax liabilities. The errors were related to its acquisition of the remaining 58% of MillerCoors in 2016. They said the restatement would not have a material impact. That is what companies say about two months before they report a material impact.

Shopify (SHOP) reported earnings of 26 cents that beat estimates for 21 cents. Revenue of $343.9 million also beat estimates for $327.0 million. Subscription revenue rose 42% to $133.6 million driven by an influx of new subscribers. Monthly recurring revenue rose 37% to $40.9 million. Merchandise volume rose 54% to $14.0 billion. Gross payments rose from $3.5 billion to $5.7 billion. They guided for Q1 for revenue of $305-$310 million and full year revenue of $1.46-$1.48 billion. Analysts were expecting $308 million and $1.473 billion. The guidance was initially seen as weak, but shares rebounded from a $13 drop to close with a $2.38 gain.

Twilio (TWLO) reported earnings of 4 cents that matched estimates. Revenue of $204.3 million rose a whopping 77% and beat estimates for $185 million. The company guided for Q1 for revenue of $222-$225 million and adjusted earnings of 1 cent. Unfortunately, analysts were expecting 2 cents, but they were only expecting $192 million in revenue.

After the bell Activision Blizzard (ATVI) reported adjusted earnings of 90 cents that was no where close to the estimate for $1.29. Revenue of $2.43 billion also missed estimates for $2.84 billion. The company announced a restructuring and said it was laying off some non-essential workers and management and ending some efforts that were not seeing any progress. They said they would take a restructuring charge of $150 million. Despite the planned layoffs they will be increasing the developer headcount for Call of Duty, Candy Crush, Overwatch, Hearthstone and Diablo.

The company guided for full year earnings of $1.85 on revenue of $6.03 billion. Analysts were expecting $2.50 on more than $7 billion in revenue. The company did increase its dividend by 9% to 37 cents and approved a $1.5 billion two-year stock repurchase plan. Shares rose about $1.50 to $43 in afterhours.

Trip Advisor (TRIP) reported earnings of 27 cents and missed estimates for 30 cents. Revenue of $346 million did beat estimates for $344.3 million. The company suffered from weakness in the hotel division. Revenue fell -2% due to a 20% drop in referral revenue from other websites. The non-hotel segment saw revenue rose 38%. Monthly unique visitors declined 2% in Q4 with hotel shoppers down 11%. At the same time revenue per hotel shopper rose 14%. They now have more than 730 million reviews covering 8.1 million locations. They guided for tough conditions in the hotel segment for the first half of 2019 but were upbeat about the second half.

Akamai Technologies (AKAM) reported earnings of $1.07 that beat estimates for $1.00. Revenue of $713.4 million beat estimates for $703.7 million. The company also said the CFO Jim Benson was retiring and Ed McGowan, senior VP of accounting would succeed him. Cloud security revenue rose 36% to $185 million and they are now projecting an annual run rate in 2019 of $750 million and rise of more than $1 billion within two years. The company guided for Q1 for earnings of $1.00-41.05 and analysts were expecting 97 cents.

Groupon (GRPN) reported earnings of 10 cents that missed estimates for 13 cents. Revenue of $799.9 million fell -8% but still beat estimates for $783 million. Shares fell 50 cents in afterhours. After this report we could see a sub $3 print soon.

Walmart (WMT) and Google backed same day delivery service Deliv are no longer partners. Deliv uses gig drivers to operate its pickup and delivery service in 1,400 US cities. Drivers complained they had to wait as long as 40 minutes for orders to be ready and as a gig driver time is money. Walmart is not dropping same day delivery. They still partner with seven other delivery services including DoorDash and Postmates. Same day delivery is available from 800 stores and they are adding another 800 in 2019.


Keep your fingers crossed overnight. A one-day wonder rally is nice, but it is not a trend. With the S&P closing right at strong resistance we need to see some strong follow through to catapult us over that resistance level and set up a new leg higher.

The border budget battle is likely to be resolved this week and the market should celebrate the end of those headlines and the threat to economic growth in the US. The news on the China tariff deadline of March 1st is also positive. This has real world impacts on the market unlike the temporary government shutdowns.

It appears Trump and Xi want to get a deal done because each is suffering politically and economically from the current trade battle. This suggests there will be an agreement, how strong we do not know, but it will not be before the March 1st deadline. With Trump now saying he is willing to extend that deadline if real progress is being made, that takes some of the pressure off the market.

We still have the weak Q1 earnings forecast, now at -0.3% but investors do not seem to be paying attention. If it continues lower, they will eventually wake up.

The S&P came to a dead stop only 1 point over the 200-day average at 2,743. There is also minor horizontal resistance at 2,745 and then the analyst consensus for year-end at 2,750. This convergence of resistance levels has stalled the gains over the last week. However, the lack of any selling at the close suggests we could possibly see some follow through on Wednesday. A more over 2,750 will target the 2800-2815 level that halted gains three times in Oct/Nov.

Go Boeing! The plane maker continues to be a driving force for the Dow. If a deal is completed with China, shares could easily run another $40 or more. Boeing is the strongest Dow stock, but they had a lot of help today.

The Dow squeezed out a two-month high close and is ready to surge towards the next resistance at 25,800 if we don't have any negative headlines on Wednesday. With the majority of Dow earnings behind us, we are at risk for post earnings depression next week.

The Nasdaq is back over correction territory and facing near term resistance at 7,425 plus the 200-day average at 7,460. The FANG stocks with the exception of Facebook were on fire. Amazon +47, Google +25, Netflix +14, Facebook -0.75. Fortunately, with those kinds of gains, Facebook had no impact on the index.

If the Nasdaq can just move past 7,500 there is a lot of white space on the chart on the way to 8,000. That is probably overly optimistic at this point, but the possibility exists.

The small caps are moving through their own set of resistance levels and finally surged past the 100-day with authority. The next material resistance is 1,566 and out of correction territory.

I know everything is looking good on the headline front, but this is expiration week in February and the last half of the month is normally weak. If we do continue pushing through these various resistance levels, we could develop some momentum. Those investors who were ready to bail on the first sign of February weakness could find themselves chasing prices higher. I am reluctant to join the chase, but I would continue to hold whatever you currently own. I am not a seller, but I would recommend trailing stops.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Follow Through?

by Jim Brown

Click here to email Jim Brown
Editor's Note

The only thing that would make today's gains better would be strong follow through on Wednesday. We have been struggling with these one-day rallies as earnings began to peak and we need to see some follow through buying to improve investor sentiment. There are still a lot of negatives in the market but nothing that is material. We need to see the market climb this wall of worry now that there are some green shoots beckoning from the top.


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by Jim Brown

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