Option Investor

Daily Newsletter, Thursday, 2/14/2019

Table of Contents

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

Market Wrap

Retail Sales!

by Thomas Hughes

Click here to email Thomas Hughes


Retail sales data for December, delayed by the government shutdown, took the market by surprise this morning. The real surprise is that the market didn't care how bad the headline was, the initial reaction turned out to be a buying opportunity. Don't get me wrong, the news was a bit of a shock but once the details were understood the market was able to regain its footing and by early afternoon the day's losses were recovered

The data; Retail Sales fell -1.2% in December versus an expectation for gain, this is the biggest one month drop since 2009. On a year over year basis sales were up only 2.3% versus an expected 5-6% predicted by the NRF and Mastercard.

The retail sales data raises many questions about the health of the consumer, the state of the US economy, the impact of the government shutdown, trade relations with China, and the future of corporate earnings. The only good news in the report is a strong gain auto sales which was able to partially offset much deeper declines in other areas.

The data also comes with a few caveats that made it near meaningless to today's market. First, seasonal adjustments are out of whack post-tax reform, based on the raw data sales are up more than 8%. Second, the entire week post-Thanksgiving, the biggest spending week of the year, was entirely in November this year and last year it was partially in December. Adjusting for that the MOM decline is much less. Third, this data is for the period leading up to and including the first week of the Government shutdown, a time in which spending by government employees was probably curtailed. Finally, the December retail sales data is two months old and flawed, time to move on to something else more worrisome like January retail sales, employment data, wage data, and trade.

Market Statistics

The real problem with the Retail Sales data is its impact on GDP. Economist are already slashing their 4th quarter targets and that may carry into this year as well.

Trump says he will sign the spending bill to avoid the government shutdown. He also says he will declare a national emergency and 'other executive actions' in order to get the rest of what he wants for border security. Mitch McConnell says he will support the emergency declaration.

In trade news, President Trump is considering a plan to postpone the March 2nd deadline by 60 days. The postponement is, of course, dependent on a substantive agreement between the two sides before the deadline is reached. Sources are saying the two sides are still deadlocked on forced technology transfers but maybe we'll get a good headline by the end of the day or perhaps over the weekend.

Economic Calendar

The Economy

There was some other economic data released today that helped the market overlook weak retail sales. On the inflation front, the Producer Price Index came in weaker than expected at -0.1%. On a year over year basis PPI was also a bit weak at 2.0% versus 2.1% and in what I will call a Goldilocks zone; not so hot as to cause an interest rate scare, not so cold as to cause recessionary fears.

The jobless claims data is a bit mixed, the nearer-term data reflects the impact from the government shutdown but the long-term data shows YOY tightening in the labor market.

The initial claims figure rose 4,000 over the last week to hit 239,000, about 10K above the expectations. The previous week was revised up by 1,000. The four-week moving average of claims rose 6,750 and hit a one-year high. On a not-adjusted basis claims fell -4.7% versus an expected -6.2% but are up more than 4.%. The data is a red-flag the labor markets may be changing but, with the shutdown behind us, initial claims may resume their downward trend soon.

Continuing claims also rose in the last week but the gain was small, only 4,000. The number of continuing claims is now 239,000 and just below the 10-month high. The four-week moving average of claims moved up adding 9,000 to last week's 1.741 million. The continuing claims have been trending steadily higher over the past four months which is another red flag labor markets are changing but as yet not one indicative of a recession.

The total claims figures do not reflect the changes in labor I see in the initial and continuing claims figures. Granted, the data is lagging the initial claims by two weeks but I think we'd seem something in this data point if there was a change in the macro labor environment. This week, the total claims fell by -59,450 in a seasonally expected decline.

This data is in line with previous years data and indicates a seasonal top in claims. The top is well below my expectation and points to accelerated tightening within the labor market. I now expect to see this figure begin to fall off over the next few weeks with an expected bottom near 1.5 million in early spring. Unless of course, the initial and continuing claims data does indeed indicate a change in labor market trends.

The Dollar Index

The Dollar Index experienced a little volatility in today's session, first up on signs of slowing growth in the global economy and the down on signs of slowing growth in our economy. The net effect was a 0.25% decline that created a small red candle within the near-term consolidation range. The index is still in consolidation and may be topping out at the $97.00 - $97.25 level. The indicators are consistent with a top but not necessarily a peak so prices may continue to trend sideways in the near-term. Over the next week, we are expecting quite a bit of data that will influence this trade, not to mention the trade talks. If prices move higher resistance is near $97.50, if the index fall support is near $96.50.

The Gold Index

Gold prices were able to move higher on today's weakness in the dollar. The metal is still in consolidation above key support, near $1,300, and looks like it could higher but that is questionable. The spot-price has been volatile lately and throwing some mixed signals as data and trade talks develop. The indicators continue to weaken which suggests a deeper move lower may come, the caveat is that the more they weaken while prices trend sideways the bigger the chance a move higher will develop. Support is at $,1300, resistance may be at $1,325-$1,330.

The Gold Miners ETF GDX moved up 1.0% on today's move in gold. The index is still consolidating below a key resistance and looks like it is forming a bullish flag pattern. The pattern is not confirmed so I'd be careful about opening new positions just yet. A move up may find resistance at the $22.50 level, a break above that would be bullish. If the ETF does move up and above resistance a move to $24.50 is possible over the near to short-term.

The Oil Index

Oil prices moved higher for a third day on trade optimism and OPEC's supply cuts. WTI advanced 1.15% to set a new near-term high and looks like it will continue to drift higher in the near to short-term. The move is supported by the indicators so a retest of support at $55 is expected in the least. If the price for WTI is able to move above this resistance we may see a sharp move higher aided by short-covering.

The Oil Index moved up in today's session, supported by today's rise in oil prices. The index is still in consolidation within its near-term trading range but may be gearing up for a move higher. Oil prices are drifting higher in the near and short-term, if they continue to rise I would expect to see the Oil Index rise with them. The indicators are still weak and consistent with range-bound trading but have begun to roll over so a move up within the range is expected at least. If the index does move higher resistance may halt prices at 1,300, a move above that would be bullish.

In The News, Story Stocks and Earnings

Coca Cola reported earnings before the bell, the results and outlook were less than bubbly. The company says adjusted EPS was in line with expectations but GAAP fell far short. Revenue declined -5.5% over the last year despite a 4% increase in organic sales. Organic sales were driven by a 1% increase in global sales and 4% due to pricing and mix. Looking forward Coke says it expects to see organic revenue grow about the same amount in the next year but EPS is going to hold steady. Shares fell -8.0% on the news.

Amazon announced it was not going to build its HQ2 in NY anymore. The reason is political opposition from the left, opposition that thinks the tax incentives given the company far outweigh the economic impact of 20,000 new jobs for local economies. The news was a non-event for shares of Amazon which were able to hold flat in today's session. The real loser in this deal are the business and people in New York who've already begun preparations for the now defunct project.

Shares of Canada Goose popped in the early pre-market session after the release of earnings. The company reported a 50% increase in revenues that far surpassed the analyst's estimates, delivering EPS that was 50% above consensus. The company is also expecting to see revenue and EPS grow by high double digits in the next year and is planning on opening another production facility. Shares moved up more than 2.0% on the news but fell hard during the day to post a loss of -13.0%. Nothing I saw in the report or the conference call transcript jumped out as a specific reason for the fall.

Applied Materials reported after the bell and gave a generally good report. The company beat on the top and bottom lines despite a double-decline in YOY revenue. The problem is forward guidance came in a bit weak for the coming quarter and gave investors a chill. Shares of the stock fell -1.5% in after-hours trading.

The Indices

The indices fell on the retail sales data but the initial reaction was not the right one. After moving down to find support near Tuesday's close the market moved strongly higher to recoup most of the day's losses.

The day's leader is the Dow Jones Transportation Average with an advance of 0.40%. The transports created a medium-sized green candle that set a new high and suggests weak December sales data isn't a concern for the transportation industry. The index is supported by the indicators which are both bullish but there is some cause for concern. Both indicators are diverging from the new high which suggests we are approaching a possible peak in prices. A move up is likely to meet some resistance at 10,750, a move above that level would be bullish.

The day's biggest loser is the Dow Jones Industrial Average which closed with a loss of -0.40%. The blue-chip index did confirm the presence of support at my uptrend line so there is still some bullish bias to today's move. The risk is that the indicators are diverging from the high which may lead it to fall, if not tomorrow then sometime in the near future. A fall below the trend line could take the index down to 25,000, a move higher may find resistance at 25,750.

The S&P 500 closed with a loss of -0.26%. The index created a small doji candle that is part of a budding Spinning Tops formation that may keep the index within a very tight range over the next few trading days. The indicators are consistent with uptrend and a peak with an uptrend so sideways movement is expected if not a pullback to test for support again. If today's low is broken, a move down to 2,725 or 2,700 is possible, if support holds I would expect to see the index move up to 2,775 and 2,800 in the near term.

The NASDAQ Composite posted a small gain, only 0.08%, and created a small red candle. The index is in an uptrend and looks like it could continue higher provided optimism remains high. The indicators are consistent with a peak within the uptrend so there may be some more sideways movement and possibly a test of support. If the index does mover lower from here support is likely near the long-term EMA at the 7,265 level. A move up would be bullish but may find resistance at the 7,500 level, a break above that would be bullish.

Today's action was nice, it shows a bit of resilience in the face of bad data and a willingness within the market to give the trade talks the benefit of the doubt. That may all change soon, though, if the trade talks stall and that is always a possibility. If that happens look out below, here comes stock prices. Tomorrow's action will also be affected by options expiration so the odds of having a volatile session on Friday are high. Until then I remain firmly bullish for the long-term and oh so carefully, cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes

New Plays

Post Earnings Depression

by Jim Brown

Click here to email Jim Brown
Editor's Note

We could be looking at a textbook case of post earnings depression. The Q1 forecast has stabilized at -0.3% growth, which is not terrible given the 24% growth in 2018. However, as the small cap reporting cycle continues it is likely to decline further. The market looks like it has run out of steam and is struggling to just maintain the gains. The negative economics in the US and around the world are putting fear of the future into investors. The last two weeks of February are normally the weakest and it appears there is a setup in progress.


New positions are only added on Wednesday and Saturday except in special circumstances.


No New Bullish Plays


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In Play Updates and Reviews

Russell Positive

by Jim Brown

Click here to email Jim Brown