Option Investor

Daily Newsletter, Monday, 3/4/2019

Table of Contents

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

Market Wrap

Bears Take Control

by Thomas Hughes

Click here to email Thomas Hughes


U.S. equities indices tried to rebound on Monday but the bears wrest control of the market away. The move follows a report in the Wall Street Journal alleging that U.S. and Chinese negotiators were in the final stages of making a trade-deal. The news was well received but comes with little detail and so left investors where they were last week, hopeful but otherwise unsupported by fact and vulnerable to sell-off. Although the indices were able to open positively and at new highs, profit-taking began almost as soon as the opening bell sounded.

The word is that Chinese officials may remove or reduce tariff-barriers for many U.S. products. U.S. officials, in return, may reduce most or all of the tariff and sanction-related penalties imposed over the last year. Negotiators are now working on the final version of the deal in hopes Trump and Xi will be able to sign it later this month. While a step in the right direction it is no more than what the market has been expecting and likely already priced into the indices.

Market Statistics

Economic Calendar

The Economy

The trade situation set the indices up for today's decline but it was the Construction Spending data that sparked today's deep decline. Construction spending fell -0.6% in December despite estimates for a slight increase. The drop was led by declines in residential and private construction, both down more than -1.0% on a month to month basis. The only good news is that construction spending is still up 1.6% YOY and mitigated by more-recent housing data.

Moody's Survey of Business Confidence slumped another -1.6 points in the last week and hit another low. This low dates back to 2009 and is consistent with an economy on the verge of stalling out. The reading shows business is not as optimistic for a meaningful trade deal as the broad equities market and may be telling us something we need to listen to; Yes, a trade deal is at hand but it may be too little too late (and there is still the Brexit to think about). On the flipside; the extremely low level of business sentiment may be just that, an extreme, and ready to snap back once a trade-deal is in the bag.

Regarding the Brexit, we are now less than four weeks from the March 29 deadline with no deal in sight. Comments from the Irish PM point to an extension of the deadline, possibly to June, but the UK Parliament still needs to request it (an extension).

Earnings season continues to wind down for the 2018 Q4 cycle. There are now 96% of reports in the bag and the results are good, just not as good as they have been and not as good as expected. The average S&P 500 company is beating the estimates but by a smaller margin than we've seen in the past. The blended rate of growth for the quarter is now 13.1%, up to a full percent from the end of the fiscal quarter but shy of the 15% or so we were looking for. On a sector basis only 7 of the 11 S&P 500 sectors beat consensus. Looking forward, 71 companies issued negative guidance which is above average.

In terms of the estimates, the forward outlook continues to decline. The first quarter is now looking at negative growth near -3.2%, the second quarter is dangerously close to turning negative itself, and the third and fourth quarter estimates have fallen to 1.9% and 8.5%. The good news is that earnings growth decline is still expected to bottom in the 1st quarter and expand into the end of the year, and 2020 estimates are still creeping higher. If the market (and economy) can survive through the 1st quarter earnings cycle there is a good chance we'll see the market rally in the second half of the year.

The Dollar Index

The Dollar Index got a boost from the trade news that sent it up about 0.30%. The index has moved above the short-term moving average and the mid-point of its trading range. The indicators are consistent with such a move and may lead the index up to the top of the range as sentiment stiffens. A move above the range, above $97.50, is possible considering this week's data. Friday will bring us another round of labor data and, if it's strong like it was last month, could easily lead the dollar to new highs simply because the U.S. economy is doing so much better than the rest of the world.

The average hourly wage figures may also stiffen the dollar because wages have been growing above 3.0% for four months and accelerating. If average hourly wages increase at a hotter than expected rate (entirely possible given recent signs of labor market tightness) it would support the FOMCs general outlook. The FOMC is patient, but most participants are patiently waiting for data that will support the need for more rate hikes later this year.

The Gold Index

Gold prices sank again today as geopolitically driven fear premiums come out of the market. The news that a trade deal is in the works may not be the end of the trade dispute but it does, for now, mean that the U.S/Chinese relations are improving. Now that spot price is below $1,300 and the recent uptrend line a change in the wind is at hand. Gold prices may continue to fall but the depth of decline will be limited by the dollar and possibly this week's data. My next target for support is near $1,280, a move below that could go to $1,260 in the near-term. If prices are able to rebound from here resistance is $1,300 to $1,310.

The Gold Miners ETF fell in the pre-market session but was able to recover all the losses by the end of the day. The ETF may be signaling a rebound in the underlying commodity but I might wait a bit before trading on that signal. Today's move opened just above and tested support at January's high. Support is evident but the indicators are still strongly bearish so a retest of that support is expected at least. If $21.50 is confirmed as the support we may see prices move up to retest resistance at $22, $22.50 and $23.00. If support at $21.50 fails a move down to the long-term EMA is likely; if gold prices fall further a move below the EMA is likely.

The Oil Index

Oil prices were able to move up today and were supported by trade optimism and hopes for OPEC's supply-tightening plans. WTI advanced nearly 2.0% intraday as it continues to consolidate within the near-term trading range. Support is at the $55 level where prices appear to be gathering strength. A move up from here looks very likely, resistance is near $57.50, a move above that would be bullish.

In OPEC news a cartel spokesman says the group, plus partners, will probably wait until June to make the next output decision. The group's monthly output is now at a 4-year low underpinned by the Saudis commitment to cut more than required. The decision is of course predicated upon the data and oil prices, if prices don't move higher I would expect to hear chatter from within the cartel another production cut was on the table.

In U.S. oil news the number of rigs looking for new reserves fell to a 9-month low last week. This is due to a growing number of energy companies cutting back on CAPEX for the year but mitigated by increasing production. The U.S. drilling community has boomed over the past few years and production is still on the rise as those projects come online and reach max-efficiency.

The Oil Index wobble a bit in today's action as it continues to consolidate around the 1,300 level. The index is gearing up for a big move and it could be up provided oil prices continue to drift upward as well. The risk, the caution I should say, is the energy sector is expected to lead the market with negative earnings growth in the first half of the year and not the most attractive from that perspective. The indicators are weak and wishy-washy consistent with a range bound asset and one waiting for something to happen. If that something is a move higher resistance is likely near 1,330; if the something is down, support is near 1,285, but it will take a break of either line before a significant move in prices is possible.

In The News, Story Stocks and Earnings

Shares of client management and retention specialist Salesforce tanked this morning on earnings fears. The slowing global economy was expected to weigh on revenue and earnings and shares fell more than -4.0%. The actual results were much better than expected but the original idea was sound. Forward outlook is weak and spells an end to this stocks wicked growth streak.

The company reports revenue rising 26.3% YOY 4th quarter and EPS, both GAAP and Non-GAAP, beat consensus. Revenue beat consensus too, by 1.1%, while non-GAAP EPS of $0.70 beat by $0.15 and GAAP EPS of $0.46 beat by $0.36. The bad news is that outlook for revenue is in a tight range around consensus and outlook thru 2023 is below expectations, not enough to keep profit takers from taking profits. Shares fell another -2.5% on the news.

BBQ slinger Famous Dave's of America reported after the bell and crushed estimates. The company reports a 7.2% revenue beat driven by strong comp store sales, EPS double consensus, and updates on new initiatives designed to boost results. Comps were up 2.2% in the quarter reported, better than expected, and followed by a 6.3% increase this month which shows momentum is building. EBITDA fell on a year over basis but overlooked because the drop was caused by strategic spending including the testing of a comprehensive new menu.

It looks like a bottom may be in for the VIX which means we're looking at a top for the broader market. The VIX surged in today's session to confirm fear at the 13.50 level. Today's move tested resistance at the short-term moving average and resistance was found although I suspect it will be tested again. The indicators are both showing strong bullish crossovers consistent with rising prices. A move up may be halted at or near 17.50, a move above that would be bullish on fear and bearish for equities.

The Indices

Dark Clouds are brewing in the equities market. The indices fell from early highs to create ominous looking red candles and bearish looking signals. The day's leader is the Dow Jones Industrial Average with a loss of -0.79%. The blue-chip index formed a medium-sized red candle that engulfed the last ten day's of trading and set a new near-term low. The candle is a strong bearish signal and supported by the indicators which are both confirming lower prices. Both MACD and stochastic are forming strong bearish crossovers that suggest a deeper move is at least possible. Today's candle is showing some signs of support with the long lower shadow but I would expect a move to 25,500 or 25,000 before strong support kicks in (if it will).

The Dow Jones Transportation Average posted the second largest decline in today's session and is only a little less-bearish looking. The transports fell -0.59% to create a medium-sized red candle that is testing support at a key and crucial level, 20% above the December low. This support could be the turning point for the broader market assuming the transports are in the lead. A break below this level would likely lead to a prolonged round of selling, profit-taking, and rotation ahead of the 1st quarter earnings cycle. If, however, support is confirmed at this level it would confirm the Vee-Bottom reversal and may result in a retest of the all-time highs.

The S&P 500 posted the third largest decline at -0.38%. The broad market index created a Dark Cloud Cover confirming resistance at the +20%-from-Decembers-low level and suggest an imminent reversal is at hand. The indicators are bearish firing strong crossovers consistent with resistance and reversal. A move lower would confirm the move but may not fall too far, at least not at first. The first strong, really strong, target for support is near 2,700 and the long-term EMA, a move below there would be bullish.

The NASDAQ Composite posted the smallest decline at -0.23% but is no less bearish looking. Today's action created a new high but a red candle with long lower shadow. There is potential for support at the 7,500 level but that is more psychological-round-number support than anything else. My target for strong support is slightly below 7,500 at 7,428 and the +20% level from December's low. The indicators are showing bearish crossovers so I expect to see a retest of 7,500 at least; if that is broken a move to 7,428 is expected and then 7,250 is that is broken.

The indices may not move deeply lower but a move lower is brewing. The trade-deal is looking more and more like a sell-the-news event and today's action may prove it. The deal is getting closer to hand and yet resistance to higher prices is firming. The risk for bullish positions is that support targets are close to hand for all the major indices so, even if a deep move develops, volatility is expected and that will make trading frustrating if not outright difficult. These conditions may persist for a month, or two, maybe longer, it depends on earnings outlook and that depends on the trade deal.

The trade-deals true importance may be in its effect on earnings outlook. If the deal falls apart earnings outlook will deteriorate and that will drive the market lower. If the deal (whatever it may be) gets signed we can rest assured that at least the status quo will be upheld and earnings growth outlook will stabilize, if not improve, and that will drive the market higher. I remain firmly bullish for the long-term but I'm feeling a little bearish for the near-term, cautiously bearish.

Until then, remember the trend!

Thomas Hughes

New Plays

Headlines Turning Negative

by Jim Brown

Click here to email Jim Brown
Editor's Note

Expectations for China are turning negative and the market is suffering. Up one day, down the next on the potential trade deal with China. As details begin to leak out, analysts are concerned President Trump is going to be so desperate for a deal ahead of the 2020 election that he might accept a watered down deal with an agreement to continue talks well into the future. China has said there would be no deal without a complete lifting of tariffs and the US is saying they will keep some tariffs until China performs some of the agreements in the deal on things like intellectual property.

The date now has slipped to "late March" or the "end of the month." The longer the delay the less likely a meaningful deal will be completed. The market is sensing this and cautious investors are starting to take profits at the current strong resistance.


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

Dropping like Flies

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market volatility has eliminated multiple positions over the last week. We lost another one on Monday with EGHT crashing 4% on no news. Resistance held and sellers gave up. The Russell lost nearly 1% with the A/D line nearly 3:1 negative. The China trade agreement could be slipping away and it is turning into a "sell before the news" event.

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

MDR - McDermott
The long position was entered at the open.

EGHT - 8X8 Inc
The long position was stopped at $19.35.

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

EGHT - 8X8 Inc - Company Profile


No specific news. Down hard with a 4% drop to stop us out just after the open.

Original Trade Description: Feb 9th.

8x8, Inc. provides enterprise cloud communications and customer engagement solutions for small and mid-size businesses, mid-market, and distributed enterprises worldwide. It offers unified communications, team collaboration, conferencing, contact center, analytics, and other services to various business customers on a software-as-a-service (SaaS) model. The company provides 8x8 Virtual Office, a self-contained and end-to-end solution that delivers high quality voice and unified communications-as-a-service; 8x8 Virtual Contact Center, a multi-channel cloud-based contact center solution; and 8x8 Virtual Office Meetings, a cloud-based video conferencing and collaboration solution that enables secure and continuous collaboration with borderless high definition (HD) video and audio communications from mobile and desktop devices. It also offers 8x8 Sameroom, an interoperability platform, which enables cross-team messaging and collaboration within a large organization and between organizations; and Script8, a communications flow and routing engine that offers a scripting environment for routing communications data for specific workflows, as well as allows end-users to create simple, personalized, and customizable communications experiences, such as communications control, external data source integration, and intelligent routing. The company integrates its services with third-party applications and platforms, including enterprise resource planning, customer relations management, human capital management, and other proprietary application suites. It markets its services to end users through direct sales organization, Website, and channel partners. As of March 31, 2018, the company serves approximately 53,800 business customers. 8x8, Inc. was founded in 1987 and is headquartered in San Jose, California. Company description from FinViz.com.

8X8 was punished severely for earnings that missed only fractionally. The company reported a loss of 6 cents on revenue of $89.9 million. Analysts were expecting a loss of 6 cents on revenue of $88.6 million. No problems there except that matching on earnings normally produces a decline in the stock.

They lowered guidance for 2019 from $334-$338 million to $334-$335 million. Still not a major decline but the stock was hammered.

Service revenue rose 20% with a 61% increase in customers billing more than $10,000 in monthly recurring charges. Average monthly service revenue per business customer rose to $5,211.

The CEO said, "we are disrupting a $50 billion addressable market that is shifting toward cloud solutions with a preference for a single technology platform."

Shares fell from $19.50 to $16.50 on the earnings. They have recovered to $18.79 and continue to move higher.

Earnings April 30th.

Update 2/13: 8x8 announced the offering of $200 million in convertible senior notes. Over the next 40 days the company will enter into agreements with option counterparties to create "capped calls." This process is an attempt to limit the impact of any future conversion of the notes on the number of shares outstanding.

Position 2/11:
Closed 3/4: Long EGHT shares @ $18.88, exit $19.35, +.47 gain.
Closed 3/4: Long May $20 call @ $1.05, exit .65, -.40 loss.

BEARISH Play Updates

No Updates on Current Positions