Option Investor

Daily Newsletter, Thursday, 2/28/2019

Table of Contents

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

Market Wrap

A Deer In Headlights

by Thomas Hughes

Click here to email Thomas Hughes


Like deer in headlights, the market is waiting for something to happen and it may not like what it gets. The indices held their ground in today's trading but don't look very steady despite today's small trading ranges. There are numerous causes of concern, number one on today's list is the Trump/Kim Summit although it is far from being the most important relative to long-term stock market movement. The Summit ended, abruptly, as Trump and Kim fail to reach an accord. In a nutshell; Kim wants 100% relief from international sanction and that is something Trump just won't do. Without concrete concessions and enforcement from North Korea, there's not much reason to.

Trump says, regarding the Summit, that sometimes there are things you have to walk away from and this was one of them. Oddly enough, the move is getting bipartisan approval from the Congress. If only they could agree on other things too. There is no plan for a third summit at this time but I feel certain something else will happen before Trump leaves office.

Market Statistics

Uncertainty continues to plague the US/China Trade Deal. Lighthizer's comments before the Oversight Committee have raised a shadow of a doubt the soon-expected deal will happen or solve any of the core, fundamental, issues with Chinese trade. Economic Adviser to the President Larry Kudlow came out today in support of the trade talks saying last week's talks were fantastic. According to him, progress was made on non-tariff barriers and tariffs including mechanisms for enforcement. He says we still need to wait on Chinese President Xi Jinping to weigh in on the progress but a historic deal is about to happen; we'll see. I'm hopeful but not counting any chickens before they hatch.

Economic Calendar

The Economy

Today's GDP read was much stronger than expected and have raised a new problem for the market to wrestle with. The FOMC. The fourth quarter GDP (1st and 2nd estimates, combined due to the government shutdown) came in at 2.6% and a half percent above consensus. The reading shows the economic slowdown in the 4th quarter was far less than expected and suggests the FOMC may not have to pause their rate hiking very long. If the first quarter data is as strong there is a chance we could see another rate hike or two this year.

Tomorrow's data includes the PCE price index, core inflation is expected to accelerate a tenth to 0.2%. If it comes in hot it will push the FOMC a little closer to hiking rates this year. The CME FedWatch Tool still shows a very small chance for rate hikes this year, the odds of a cut are greater.

Initial claims for unemployment rose 8,000 to hit 225,000. This is on top of a +1,000 revision to last week and in line with expectations. The four-week moving average of claims fell -7,000 but remains well above the low and the twelve-month average. On a not-adjusted basis claims fell -3.8% versus an expected 7.4%, not-adjusted claims are up 2.5% from this same time last year. While not overly concerning, initial claims are running high relative to trend. Over the past twelve months, initial claims seem to have bottomed and begun trending sideways which suggest labor market slack has been taken in.

The number of continuing claims surged 80,000 in the last week with revisions. The figure is not 225,000 which is a new 10-month high. The number of continuing claims has been trending higher since late November and may keep moving up in the near-term. The four-week moving average of continuing claims moved up 6,750 to hit 1.761 million. This data suggest some change in labor market trends, possibly an end to slack in the labor market, but it's too soon to tell. Regardless, the continuing claims are well below last year's levels and consistent with long-term labor market health if not further tightening.

The total number of claims fell -60,162 to 2.11 million. This is consistent with expectations and in line with seasonal trends. The total number of claims is down -7.8% from last year and consistent with long-term labor market trends. So far, if there is a change in labor market trends, it is contained to the nearer-term data. So long as it stays that way I'll consider the near-term data to be just that, near-term, and anticipate it to return to trend as we go into the spring hiring season.

The Chicago Business Barometer (PMI) made its largest monthly gain in many months. The index rebounded from January loss by 8 points to hit 64.7. This is the highest level of business activity since December 2017. Four of the five subcomponents made positive contributions led by new orders. New orders jumped 15.2 points. Production jumped 8.5, backlogs advanced 5.6, and employment rose to its highest level since last summer; a pretty darn good report and vote of confidence for the US economy

The Dollar Index

The Dollar Index had a bit of a wild ride in today's session first up then down and then sideways. The index is trying to stabilize above the bottom of its trading range and got a bit of support from today's data. Now that the market is starting to think the FOMC Pause will get paused there is a reason to think the dollar could firm. Add in tomorrow's data and the chance it will come in hot and the possibility the DXY could begin to move higher again increases. Today's support is at $96, resistance just above at the short-term moving average, a move past either may be significant but only within the greater trading range.

The Gold Index

Gold prices fell again today. The metal came under pressure when the dollar began to rebound from today's lows and is now sitting on the 30-day EMA. Gold may be at support but the indicators remain weak so I expect it to be tested at least. A break of the moving average will likely move down to my uptrend line near $1,300-$1,305. A move below the trend line would be bearish.

The Gold Miners ETF GDX also fell in today's action. The ETF created a small red candle testing for support at the short-term moving average and so far support is present. The indicators are bearish and moving lower so another test of support is likely, a move below the EMA would be bearish. If the ETF moves below the EMA my target is near $21; if support holds a move up may be halted at the $22.50 level, a move above that would be bullish.

The Oil Index

Oil Prices were able to creep higher today despite evidence of further slowing in China and uncertainty around the trade-talks. WTI advanced about a half percent to retest last week's highs and the levels at which it was trading before Trump's Tweet to OPEC on Monday. OPEC doesn't seem to care that he wants lower oil prices, they want higher prices so I don't expect them to comply with his wishes. The indicators suggest upward pressure is present so a move up to test resistance at $57.45is expected. If WTI can move and close above $57.45 it may continue that move up to $60 and $64.

The Oil Index fell today despite upward movement in the underlying commodity. The index shed more than -1.25% to create a medium-sized red candle and confirm resistance near 1,307. The caveat is that today's move has found support at the short-term moving average and a long-term uptrend line so a deep move lower may not be coming. If support at the EMA fails a move to 1,230 is probable.

In The News, Story Stocks and Earnings

AB-InBev moved higher in today's trading after reporting earnings this morning. The company reports strong activity in all three of its top brands Corona, Budweiser, and Stella Artois. Revenue is up for the 4th quarter and full year but what investors found really attractive was the work being done on company debt. Net debt to EBITDA decreased to 4.6x for the 12-months ending 31 December 2018 from 4.8x for the 12-months ending 31 December 2017. They expect net debt to EBITDA to be below 4x by the end of 2020. Shares moved up more than 5.0%.

JC Penny reported before the bell delivering much better than expected quarterly and full year results. Revenue, down for the year beat consensus by a wide margin and delivered EPS more than double consensus. EPS of $0.18 beat by $.11 and was driven by positive comp sales. Comps are up 4% in the quarter and 3% for the year as strategic plans begin to bear fruit. Apparel and jewelry were among the top-selling segments. A new partnership with Shaquille O'Neal Big And Tall branded items is also doing well. Other highlights include a substantial reduction in inventory that helped drive earnings. Shares of the stock moved up more than 22% on the news but are still trading well below the $2.00 mark.

Cannabis Growth Corp, the #2 cultivator of marijuana by volume, announced a partnership with Martha Stewart this morning. The deal involves Sequential Brands, a consumer products company working in lifestyle categories across segments including Martha Stewart and Jessica Simpson, and is limited to an advisory role at this time. Cannabis Growth Corporation intends to create a broad line of CBD and THC infused products in multiple categories and wants to leverage Martha's branding power. The first project is a line of CBD products for pets. Shares of CGC were up 3.5% on the news, it's a good thing.

Gap Stores reported after the bell and investors liked what they heard. The company says revenue fell about 3.3% over the last year and missed estimated by a narrow margin. Despite the shortfall EPS came in above consensus as cost-cutting measures take effect, comp sales were weak for the quarter and flat for the year. The company also announced a major restructuring plan that is expected to result in $90 million in annual pre-tax savings. The plan involves closing 20 specialty Gap stores and spinning off Old Navy in an IPO. Shares were up 15% in after-hours trading.

The Indices

Today's market action was weak. The indices drift lower in an unhurried way to create small red candles. All the major indices closed with losses and all within 0.05% of -0.25%. The NASDAQ Composite led the decline with a loss of -0.29% but only edged out the S&P 500 by a tenth. The tech-heavy index created a small spinning top doji to the side of yesterday's candle and within the four-day range.

The index is in consolidation after hitting a price peak and in danger of reversal. The index has advanced more than 20% from the 2018 low but the indicators are divergent from the high and earnings outlook is weak for the next cycle so a move lower is very possible. If the index moves lower support may be at 7428, a move below that is likely to test the pair of moving averages near 7,300.

The S&P 500 came in a close second in today's action with a loss of -0.28%. The index created a small spinning top candle below potential resistance at one of my uptrend lines. The uptrend line has been significant many times in the past and, at current levels, consistent with other key resistance targets. The indicators are divergent from the recent high and now confirming the peak with bearish crossovers so further consolidation should be expected at least. If the index falls from this level and confirms strong resistance a move to the EMAs near 2,710 is expected.

The Dow Jones Industrial Average comes in third today with a loss of -0.26%. The blue-chip index created a small red candle that moved down to test support at my long-term uptrend line. The candle is weak but bearish and supported by bearish indicators so a move lower looks very likely. Support is currently at the uptrend line, a break of which would be bearish but the depth of the move is questionable. There are several potentially strong support targets between where the index is now and 26,000, about -7.6% below today's close.

The Dow Jones Transportation Average posted the smallest loss in today's session at -0.23%. The transports created a small spinning top doji. The index is pulling back from a peak and indicated lower but maybe finding support near the 10,370 level. This level is just above the +20%-from-Decembers-low mark and a potentially strong target for support. The index may continue to fall in the near-term but, so long as it is above 10,364 I am optimistic a move higher will eventually develop.

The market is at another make or break point. The indices, in all cases, are flirting with the gains at or near +20% from the last low. This is an important level because it could signal the end of the 2018 correction, officially, or produce a wave of selling that will take the indices down to retest those same lows.

For the bear case, the broad-market S&P 500 and small-cap Russell 2000 are both below the +20% market and potential resistance. For the bulls, the transports are above +20%. For me, I can see an argument for both cases and unsure which will win out. I am firmly bullish for the long-term but neutral for the near-term until we get through this little consolidating phase the market is in. After that, we'll either see a march higher to retest all-time highs or a retreat to support.

Until then, remember the trend!

Thomas Hughes

New Plays

Short Squeeze Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

With the S&P futures up 12.50 tonight it appears we are headed for a short squeeze. Of course, that could reverse completely over the next 15 minutes and we could see a gap down open. You really cannot predict the open with futures until you are much closer. There is no apparent reason for the futures spike but with everyone shorting the market this week, it could be a simple short squeeze.

Sellers tried to force the market lower over the last three days with minimal success. Normally this encourages the bulls and a stampede is born. Note that end of month buying in February was practically nonexistent and fund managers may have been waiting for the calendar to turn over before putting money to work. February did not provide a big buying opportunity as they hoped so they are jumping in on March 1st instead.


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


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

No Surprise Here

by Jim Brown

Click here to email Jim Brown

Editors Note:

We have been expecting a weak market since expiration Friday and it appeared as expected. The nine-week rally is in jeopardy without a major short squeeze on Friday. However, after several days of weakness the futures are pointing to a positive day on Friday. There is still a lot of darkness before the dawn but hopefully it will stick.

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

BOX - Box Inc
The long position was stopped at the open.

RDUS - Radius Health
The long position was closed at the open.

XRX - Xerox Corp
The long position was stopped at $31.15.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

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

BULLISH Play Updates

BOX - Box Inc - Company Profile


As expected we were stopped at the open and at the low for the day.

Original Trade Description: Jan 19th.

Box, Inc. provides a cloud content management platform that enables organizations of various sizes to manage and share their enterprise content from anywhere or any device. The company's Software-as-a-Service platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 23 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, and energy industries, as well as government sector primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Box, Inc. was founded in 2005 and is headquartered in Redwood City, California. Company description from FinViz.com.

Earnings February 27th.

Box is a provider of cloud content management services to enterprise customers. Procter & Gamble and GE are two of its largest customers. Over the last several weeks there has been a persistent rumor they will be acquired. Google has been a rumored acquirer but it is more likely Microsoft or even Hewlett Packard could be interested.

Entering a position on acquisition rumors is rarely a good move. More than 90% of the time nothing happens. In this case revenue is growing in excess of 25% for 2018 and they guided for 20%+ for 2019. They also guided for their first quarterly profit in Q4 since they went public in 2015.

Their customer retention rate is close to 100% and they had more than 90,000 customers at the end of Q3. Box has enough scale that it makes sense to be acquired rather than a large company trying to replicate their product and service and spend years stealing market share. Buying Box now would be an instant add on to profits.

Shares broke over three-month resistance on Friday and the next material level is $24.

Update 2/27: The stock closed at a 5-month high but fell to $19 on weak guidance. The company said it was expecting to post an adjusted loss of 5-6 cents for the quarter and 1-3 cents for the year. Analysts were looking for a loss of 1 cent for Q1 and earnings of 3 cents for the year. This will be a major loss at the open on Thursday.

Position 1/22/19:
Closed 2/28: Long BOX Shares @ $19.74, exit $19.22, -.52 loss.
Optional: Long March $21 Call @ $1.00, exit .27, -.73 loss.

RDUS - Radius Health - Company Profile


We closed this position at the open for lack of movement.

Original Trade Description: Feb 2nd.

Radius Health, Inc., a biopharmaceutical company, develops and commercializes endocrine therapeutics in the areas of osteoporosis and oncology. The company markets TYMLOS for the treatment of postmenopausal women with osteoporosis. It is also developing abaloparatide transdermal patch, a short-wear-time patch formulation of abaloparatide that is in Phase III clinical trial to treat postmenopausal women with osteoporosis; RAD1901, a selective estrogen receptor down-regulator/degrader, which is in Phase I clinical trial for the treatment of metastatic breast cancer; and RAD140, a non-steroidal selective androgen receptor modulator that is in Phase I clinical trial to treat breast cancer. The company has collaborations and license agreements with 3M; Ipsen Pharma SAS; Eisai Co. Ltd.; Duke University; and Teijin Limited, as well as research and development agreements with Nordic Bioscience Clinical Development VII A/S. Radius Health, Inc. was founded in 2003 and is headquartered in Waltham, Massachusetts. Company description from FinViz.com.

A week ago, Radius took advantage of the JP Morgan Healthcare Conference to raise guidance for the full year 2018. Sales of their lead drug, Tymlos, surpassed the upper range of $95-$98 million. This is for osteoporosis in postmenopausal women. This is the only anabolic drug in the US market that is increasing its market share. Share rose from 20% at the beginning of 2018 to 27% at the end of the year. In December, market share of new anabolic patients was 40%.

They announced an accelerated late stage clinical pipeline for two drugs with blockbuster potential ($1 billion a year). These are elacestrant (breast cancer) and abaloparatide-patch (osteoporosis in postmenopausal women.)

For the full year 2019 they expect revenue of $155-$175 million and year-end cash of more than $100 million.

Earnings February 28th.

Since the JP Morgan conference three weeks ago, Radius has moved steadily higher. If shares can move over $20 the rally should accelerate.

Position 2/4/19:

Closed 2/28: Long March $20 call @ $.90, exit .60, -.30 loss.

Previously closed 2/7: Long RDUS shares @ $18.70, exit $17.95, -.75 loss.

XRX - Xerox - Company Profile


I wrote yesterday that the EU said they were drawing up tariffs on Caterpillar, Xerox and others in case President Trump put tariffs on European cars. I tightened the stop loss to just under Wednesday's lows, just in case. That stop was hit at the open when shares fell sharply.

Original Trade Description: Feb 16th.

Xerox Corporation designs, develops, and sells document management systems and solutions worldwide. It offers managed document services, including managed print services and multi-channel communication services, as well as a range of digital solutions, such as workflow automation services, content management, and digitization services. The company also provides desktop monochrome and color printers, and multifunction printers; copiers, digital printing presses and light production devices, and solutions; graphic communications and commercial printers; inkjet presses; and FreeFlow portfolio of software solutions for the automation and integration of print jobs processing. In addition, it sells paper products, wide-format systems, and global imaging systems network integration solutions. The company sells its products and services directly to its customers through sales force, as well as through independent agents, dealers, value-added resellers, systems integrators, and the Web. Xerox Corporation was founded in 1906 and is headquartered in Norwalk, Connecticut. Company description from FinViz.com.

Unlike other stocks with post earnings depression the strong guidance has powered XRX higher. Friday's close was a 10-month high.

Earnings April 30th.

Position 2/19:
Closed 2/28: Long XRX shares @ $30.47, exit $31.15, +.68 gain.
Closed 2/28: Long July $32 call @ $1.60, exit $1.65, +.05 gain.

BEARISH Play Updates

No Updates on Current Positions