Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/26/2019

Table of Contents

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

Market Wrap

O.C. Is Dead Wrong

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Jerome Powell began four days of testimony before Congress, he says this new left-wing theory that unlimited borrowing is OK provided the FOMC can maintain price stability is dead-wrong. The way he sees it U.S. debt is on an unsustainable path as it is and should be curbed before irreparable damage is done to the economy. In his words, referring to the Debt Ceiling (which will be reached March 2nd), 'The idea that US would not honor all of its obligations and pay them when due is something that can't even be considered'.


Regarding the U.S. economy, Powell says employment and inflation are both running near FOMC targets, inflation is expected to run at or near 2.0% over the long-term, and the committee is ready to be patient when it comes to policy changes. The wind-down of the Fed balance was also a hot-topic, Powell says the details could change at any meeting provided data supports the decision.

Powell also made note of conflicting signals within and risks to the economy. These are tied primarily to uncertainty around the US/China trade negotiations and Brexit process. US/China trade ties are on the upswing if light on details, the Brexit process hits one snag after another. The latest efforts by May might bear fruit but we won't know until a March 12th vote by Parliament. If that vote fails the next step is for the UK to vote on allowing a hard-Brexit or not, the deadline of which is less than five weeks away.

Market Statistics

In Trump news, former counsel Michael Cohen is slated to appear before the Senate Intelligence Committee. According to reports he will tell the Congress about alleged law-breaking by the President while he was in office. Topics will include ties to Russia, hush payments made prior to the election, and other information relating to Trump's financial statements. Trump, meanwhile, arrived in Vietnam today to begin the second summit with North Korean leader Kim Jong Un.

Economic Calendar

The Economy

Housing Starts were a big whiff this morning but come with a caveat, the data is for December and the more current data (mortgage apps) suggests activity is already rebounding. The number of Housing Starts fell -11.2% from November to December putting the December read at -10.9% YOY. The only good news in this data point is that starts in 2018 were up 2.2% over 2017. Building Permits, a leading indicator of starts and sales, rose 0.3% in December and are up 2.2% for all of 2018. Single family homes, the meat and potatoes of housing markets, saw starts fall -6.7% and permits fall -2.2% in December.


Consumer Confidence rebound in February and much more than expected. The index rose nearly 10 points after three months of decline, coming in at 131.4 versus an estimated 124. The two subindices, present conditions and expectations, both rose. Present conditions increased 3.3 points to 173.5 and expectations improved 14 to 103.4. The improvements are attributed to stabilization in wage and employment outlook following the November/December trade-war induced market correction.

The Dollar Index

The Dollar shed another 0.40% against the basket of world currencies today. The move is in response to Powell's testimony and weakness in housing. The DXY is now moving below the short-term moving average and heading lower within its trading range. The indicators are bearish and suggest a move to the bottom of the range is coming but there is little strength in the move. Momentum is weak and stochastic is already approaching oversold territory so support is expected to kick in near $95.50. The risk lie in this week's round of data which includes 4th quarter GDP and key inflation reads from the US, the EU and UK. A move below $95.50 would be bearish.


The Gold Index

Gold prices were not able to move higher on today's dollar weakness but they did hold steady. The spot price trade within a tight range near $1,330 where it is consolidating after hitting resistance last week. The indicators are bearish but weak and already rolling over so further sideways action is most likely over the next few days. If prices begin to move higher again resistance will be hit just above $1,240, a break above that would be bullish. If prices begin to move lower support is near $1,320, a move below that would likely retest support near $1,300 and the uptrend line.


The Gold Miners ETF shed more than -1.0% despite firmness in gold prices. The ETF fell to test support at the $22.50 level and so far support looks solid. The candle formed has a long lower shadow indicative of support and potential for a price floor. The indicators are still weak and pointing lower so further testing of $22.50 is expected. A move below this level would be bearish and could take the ETF down to $22.00 or lower. If support at $22.50 holds I would expect a retest of $23.20, a move above that may be bullish but I'd wait for price to move above last week's high before committing to that.


The Oil Index

Yesterday oil prices took a dive when President Trump sent a message, via Tweet, to OPEC. He wants OPEC to pump more oil and reduce oil prices, OPEC flat out ignored the message. Today WTI rebound a little more than 0.50% and confirmed support at the $55 level. The indicators have rolled into bearish signals so price may bob along this level in the near-term. If price falls through $55 support may be found at $52. Longer-term, provided OPEC sticks to its gun, a move higher is expected.


The Oil Index continues to wind up within a very narrow near-term range centered on the 1,305 level. The index looks increasingly weak as MACD and stochastic diverge from recent highs and roll into bearish crossovers. The mitigating factor is that price outlook for WTI is biased to the upside with OPEC slowing down production. A move up is likely to find resistance at the long-term moving average, a move above that would be bullish if supported by price gains in WTI. A fall from this level would be bearish and the more likely scenario (based on earnings outlook) except for OPEC tightening efforts.


In The News, Story Stocks and Earnings

Shares of Tesla fell hard in the early pre-market session on word the SEC is going after Elon Musk again. The regulatory agency has asked the courts to hold Musk in contempt for dishonoring details of their deal. Musk, following last years series of missteps, was supposed to hand over the reigns to a new Chairman of the Board and that just isn't happening. Musk has also not stopped sending out market-related data that could impact Tesla's stock price. Musk's reply is that the SECs oversight system is broken but analysts aren't taking his side. The word on the street is that the Tesla/Musk problem is much bigger than the media is letting on. Shares were al


Caterpillar was downgraded by UBS to a sell this morning. The analysts cite weak 2020 revenue, expectation for narrowing margin, and slowing global construction demand as the main reasons. The downgrade is two notches, from buy to sell, and expect a series of earnings revisions over the next twelve months. The stock fell more than -3.0% in early trading and opened with a loss. Shares began the day just above the pair of moving averages where they found support. Buyers took advantage of the lower prices and pushed shares up to form a green candle.

The sell-off was an opportune entry point in my opinion, the industrial sector is expected to lead the market with earnings growth this year so not one I want to short. Caterpillar is also a dividend aristocrat with a double-digit dividend growth ratio and rock-bottom payout ratio which makes it attractive to a broad swath of the market.


Home Depot kicks off a week of retail earnings with a miss. The home improvement/construction warehouse fell short of estimates for revenue and earnings despite posting a stellar quarter. The company says comps are up 3.2%, gross margins improved, inventory is up, transactions are up 7.7%, and they have 3% more stores. Forward guidance is for mid-single-digit revenue and comp sales growth but it was not enough to spark another wave of buying. Shares fell about -3.0% in early trading but opened above key support where buyers were waiting.

Shares moved up from their lows to form a large candle with long-lower shadow confirming support at the pair of moving averages. One reason may be the dividend and buyback, HD raised their dividend 32% to $1.36 quarterly and annouced about $5 billion in planned share buybacks.


Weight Watchers reported after the bell and the results were a bit light. The Oprah-led weight loss program says revenue grew 5.7% over the last year, analysts had been expecting closer to 11%. Adjusted EPS also missed but GAAP EPS beat so take that as you like. Shares of the stockinitially rose on the news, adding more than 2.5% in after hours trading, but then quickly reversed course to give up more than -25% of their value. The quick reversal is due to weak guidance provided during the conference call.


The Indices

The indices held in tight ranges today but the moves still don't look good. The majors are showing signs of topping that could easily turn into a sustained downdraft. Today's lead is the Dow Jones Transportation Average which shed -0.36%. The transports have formed another red candle and prices appear to be deteriorating. The indicators are forming bearish crossovers high in their respective ranges with firm support targets about 2.5% below, near the pair of moving averages. In the near-term, support may be at 10,500, a move below that would be bearish.


The Dow Jones Industrial Average posted the second largest loss with a decline of -0.13%. The blue-chips formed a small doji candle confirming the bearish signal giving by Monday's shooting star. The implication is for lower prices but how low is questionable. The indicators confirm a peak as well but support targets are close below. A move below 26,000 may find support near 25,800, a move below that may find support near 25,550.


The S&P 500 also moved lower in today's session. The broad market index trade exactly on my uptrend line where it formed a small spinning top doji. The doji may signal a bottom in prices but I don't think so, the indicators are rolling into a fairly bearish signal so a test of support is expected. Support may be found at the up trend line, near 2,790, a move below which would be bearish. If prices do move lower my first target for support is near 2,760 and then 2,700.


The NASDAQ Composite brings up the rear in today's march lower. The tech-heavy index fell only -0.06% and was able to form a green candle. The candle, despite its greenness, opened and closed below Monday's low so has a bearish bias and confirms the near-term peak. The indicators are also bearish and forming crossovers that suggest lower prices are on the way. Support may be present at 7,500 but, if broken, a move to 7,300 and the pair of EMAs is expected.


The market has reached a peak. Price action, the indicators, and the outlook for earnings all support it. The question is how significant of a peak is it, and how low will prices go before they bottom? The worst case scenario is the indices will retest their December lows but I don't think that will happen.

Because the indices are all above key moving averages, and because outlook for economic and earnings growth is OK even if the trade deal doesn't alter current tariffs, I think we'll see the indices move down to test support at or near their 150-day EMAs. This test of support will probably happen sometime between now and the end of the first quarter earnings season. I remain firmly bullish for the long-term but am neutral on the near-term until these bearish signals confirm or the market rally is reinvigorated.

Until then, remember the trend!

Thomas Hughes


New Plays

Minefield Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

As earnings fall off the calendar the post earnings depression cycle could be volatile. The Russell, S&P, Nasdaq and Dow have all reached critical resistance levels of 1,600, 2,815, 7,600 and 26,191 respectively. These represent the post crash highs of the first rebound in October. This is the line in the sand for the bears and will likely be strongly defended. All the indexes failed at these levels on Monday. Given the potential for post earnings depression and the normally weaker last half of February, the next couple weeks could be volatile.

 

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


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Thud!

by Jim Brown

Click here to email Jim Brown

Editors Note:

That noise on Monday was the Russell coming to a dead stop at 1,600 and resistance from October. The small caps sold off with the markets on Tuesday or maybe I should say the markets sold off with the small caps. The Russell fell -.76% and ten times more than the S&P. We are at a precarious point where 1,600 on the Russell and 2,815 on the S&P are both strong resistance levels. Moving higher from here could be difficult.



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


EPZM - Epizyme
The long position was stopped at $11.85.



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Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.


BULLISH Play Updates

EPZM - Epizyme - Company Profile

Comments:

The company reported a net loss of 29 cents that was significantly better than the 52 cents a year ago. Shares spiked 1.48 or 12% today. However, we were stopped out at $11.85 on the 20th and did not get to participate in the gains.

Original Trade Description: Feb 6th.

Epizyme, Inc., a clinical stage biopharmaceutical company, discovers and develops novel epigenetic medicines for patients with cancer and other diseases in the United States. Its product candidates include tazemetostat, an inhibitor of the EZH2, which is in Phase II clinical trial for patients with relapsed or refractory non-hodgkin lymphoma (NHL); Phase II clinical trial for relapsed or refractory patients with mesothelioma; Phase I dose-escalation and expansion study for children with INI1-negative solid tumors; Phase II clinical trials for patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL); Phase Ib/II clinical trial in elderly patients with DLBCL; and Phase II clinical trial for relapsed or refractory patients with mesothelioma characterized by BAP1 loss-of-function,; and Phase Ib/II clinical trial for the treatment of patients with relapsed or refractory metastatic non-small cell lung cancer, as well as Phase II clinical trial in adult patients with ovarian cancer. The company is also developing additional programs, such as pinometostat, an intravenously administered small molecule inhibitor of DOT1L for the treatment of acute leukemias; and PRMT5 inhibitor that is in Phase I clinical trial for patients with solid tumors and NHL. Epizyme, Inc. has collaboration agreements with Celgene Corporation; Genentech Inc.; Glaxo Group Limited; Roche Molecular Systems, Inc.; Eisai Co. Ltd.; Lymphoma Study Association; and Boehringer Ingelheim. The company was founded in 2007 and is headquartered in Cambridge, Massachusetts. Company description from FinViz.com.

In early January, Epizyme said it was planning to file for approval of its leading drug candidate, Tazemetostat, later this year. This drug is a late-line treatment for follicular lymphoma with EZH2 mutations. There are approximately 25,000 cases diagnosed annually. The Phase 2 data, showed an objective response rate (ORR) of 71% and complete remission of 11%. The ORR for patients with the wild-type EZH2 mutation saw a 6% remission.

The company said the completed Phase 2 data could serve as a new drug application in Q2 for use in epitheloid sarcoma, a cancer without a drug therapy.

Obviously, it takes some time for FDA approval but once approved this could be a very large cash flow in the hundreds of millions of dollars annually.

Shares popped on the initial announcement in January then suffered a relapse on profit taking. This week EPZM has rebounded out of that dip and made a new 5-month high.

Earnings March 12th.

Position 2/7/19:
Closed 2/20: Long EPZM shares @ $11.63, exit $11.85. +.22 gain
Optional: Long March $12.50 call @ $.55, exit .65, +.10 gain