Option Investor
Newsletter

Daily Newsletter, Thursday, 3/7/2019

Table of Contents

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

Market Wrap

ECB And QE III

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The ECB held its interest rates steady in today's policy action but surprised the market with their statement. In a nutshell, the European central bank joins the pantheon of financial leaders warning 2019 growth will be slower than expected. The bank lowered its GDP target for the year, has pushed back plans to hike rates, and issued a third round of TLTRO, labeled TLTRO-III or QE III. The market, at first, seemed intrigued by the new round of stimulus but choose to focus instead on slowing growth and fear instead.


Mario Draghi warns that near-term growth will be much less than expected as geopolitical issues weigh on growth. The U.S./Sino trade war is only one reason for the caution, the ongoing Brexit issues and weakness in Italy are also high on the list of risks. The ECB now expects 2019 EU GDP growth to be near 1.1%, down a half percent from the previous target, and in line with the OECD's recent 1.0% estimate. The downgrade is a bit of a shock but really nothing more than the ECB catching up with what most others have already done.

Market Statistics

Regarding QE III. The ECB now expects interest rates to remain at their low level until at least the 1st quarter of next year, six months longer than its first indications. The TLTRO-III facility, (targeted longer-term refinancing operations) is intended to help the regions banks with lending and will begin in the fall. The operations will last until March of 21 issuing loans with a two-year time horizon. There are incentives for the banks to use this money for lending in the real economy but no guarantee they will do so.

Economic Calendar

The Economy

The labor data continues to support U.S. economic health despite recent weakness. The initial claims figure fell -3,000 in the last week to hit 223,000, within 25K of the long-term low but flat for the last 12 months. The four-week moving average of claims fell -3,000 too, hitting 226,500, moving lower for the fourth week in a row. On a not-adjusted basis, claims rose 8.4% versus a 9.8% increase expected by analysts, not adjusted claims are -2.2% below this time last year. With the spring hiring season fast approaching I expect to see these figures retreat towards their lows.


The number of continuing claims fell -50,000 to 1.755 million. The decline is nice to see but claims remain elevated and at 8-month highs. The four-week moving average of claims rose however and suggests lingering weakness post-holidays. With the initial claims figures returning to trend and the spring-hiring season at hand this figure should reverse and move lower too, if not we may have a bigger problem with the economy than a government shutdown and temporary slowdown.

The total number of jobless claims jumped 50,000 to hit 2.157 million. This increase is in line with seasonal expectations and long-term trends but brings the total a little higher relative to the previous year than we've seen a while. Total claims are now only -6.0% below last year's figures where they have been trending -10% to -15% lower over the last year. Regardless, the total claims figures are consistent with labor market health so I expect we'll see this figure begin moving lower very soon.


Fourth Quarter Productivity and Unit Labor Costs were much better than expected. Productivity increased by 1.9% versus an expected 1.3% as output increases by 3.1% and hours worked increased a mere 1.2%. The news is great in that it shows rising wages are sustainable, that wage inflation is not yet a(major) problem for the economy. Labor costs rose 2.0% in the fourth quarter but up only 1.0% for all of 2018.


The Challenger, Gray & Christmas report on planned layoffs was a bit of a shocker, at least at first glance. The number of planned layoffs jumped to 76,835 and a 3.5 year high in February. This is 45% above the January figure and 17% above February last year. The mitigating factor is that 50,000 jobs were lost to Army downsizing and another 16,000 are attributed to Payless ShoeSource downsizing which accounts for just about all the cuts. On the hiring front planned hires came in at 15,000 which is about -120,000 from last February but consistent with the longer-term average.


The Dollar Index

The DXY was set up to move higher and then along comes the ECB with a surprise policy change to knock that ball right out of the park. The DXY advanced more than 0.85% in today's session to form a large green candle, break above the $97.50 resistance target, and set a new 18-month high. Now that the ECB has officially and firmly retreated from their (very mildly) hawkish outlook the DXY is set to complete a movement that began many months ago, a move up to and possibly above $100.

The weekly chart says it all, the index is bouncing strongly from the 150-day EMA and supported by indicators confirming today's break out. There is some risk the index will move sideways from here but I wouldn't expect it without a downgrade from the FOMC, or some wickedly surprising data in the EU.



The Gold Index

Gold prices saw some downward pressure in today's session but were able to hold relatively steady despite the big move in the dollar. The spot price edged lower about -0.25% to test for support near $1,280. So far support is holding but I don't think it will last long if the dollar holds today's levels or moves higher. A fall below $1,280 would be bearish for gold and likely take it down to $1,260, $1,240 and possibly as far as $1,220.


The Gold Miners ETF GDX was able to move higher in today's session despite generally weak equities markets, a stronger dollar, and falling gold prices. Today's move shows support is still present at the $20.50 level but resistance is also present just above today's close. Resistance is the short-term moving average, near $22.00, and may be strong. A move above this level may be bullish if supported by gold prices, a move lower would be bearish and likely take the ETF down to $21 or $20.


The Oil Index

Oil prices edged up today on hopes for OPEC's supply cuts and signs Venezuela is hurting under U.S. sanctions. The move is bullish but only mildly so as bearish news also affects prices. The ECB's reduced growth forecast put a damper on demand outlook while surging U.S. production adds to supply concerns. U.S. production topped 12.1 million BPD, a new all-time high, in the last week just FYI. WTI gained about 1.0% in today's action, moving up from support, but remains well within the near-term trading range. The indicators are consistent with a pull-back to support so we may see prices retreat, the indicators are also set up to fire bullish signals so I'd wait for a move below $55 before getting bearish.


The Oil Index shed about -0.80% in a move contrary to the underlying commodity. The index formed a small red candle that moved below the short-term moving average to find support at an uptrend line. The trendline may provide ample support but the indicators remain weak and suggest downward pressure is gaining strength. A move below the trendline may happen without oil prices falling. If WTI persists in trending sideways at current levels outlook for earnings growth in the sector will remain unchanged and it isn't that good. If prices do fall below the trend line a move to 1,250 or 1,230 is likely. A move up from the trendline would be bullish.


In The News, Story Stocks and Earnings

Barnes & Noble took a hit this morning after it reported earnings. The book retailer and source of gifts for all ages says revenue was flat for the quarter missing expectations for a slight increase. The good news is that adjusted EPS came in well above expectations, $1.21 beat by $0.14, but EBITDA was weaker than forecast. The weakness is due to higher marketing costs and promotional spending the company's CEO says has laid the groundwork for sustained growth. Speaking for myself, I go to Barnes & Noble once or twice a year when I'm buying gifts for people, the rest of the year I'm buying books at the used book store, there's no way I could afford my reading habit otherwise. Shares fell more than -12%.


Shares of Kroger soured this morning after the grocer released earnings. The company says revenue and EPS fell short of consensus, EPS further hurt by tightening margins, and provided weak guidance. The miss is due to mix, investments in supply chain, and other strategic spending but that detail was not enough to offset results or outlook. With Amazon moving further and further into the grocery space, and competition heating up in general, the outlook for growth and profits is dim. Shares fell more than -10%.


A darling of last years IPO market, EventBrite reported earnings after the bell. The self-service ticketing hub and event management portal says quarterly revenue grew 21% over the last year, beating estimates, but EPS and guidance are light. EPS of -$0.17 were $0.04 lighter than expected and guidance fell well short of expectations. The company sees first-quarter revenue in the range of $80 to $84 million, $7 million or 7.6% below consensus. Shares fell more than 20% in after-hours trading.


The Indices

The indices moved lower in today's session and look like they will keep falling. With earnings season over, growth fears at a simmer, and no trade news for days there is just nothing to spur buyers to buy. The NASDAQ Composite led today's market with a loss of -1.12% and moved down to touch support at the short-term moving average. Support was present and kept prices from moving below the EMA but the bounce was not strong and the index closed near the low of the day. The indicators are bearish and moving lower suggesting the EMA will be tested again, a break below the EMA would open the door for a much deeper decline.


The Dow Jones Transportation Average posted the second largest decline today at -0.96%. The transports have extended their fall below the pair of moving averages and look like a much deeper decline is at hand. The indicators are both bearish and moving lower, consistent with lower prices, but momentum is weak and stochastic is already approaching oversold levels so we may see prices stall or begin to consolidate in the near future. My target for next support is near 10,000


The S&P 500 shed about -0.80% to create a small red candle. The candle is moving down to touch the short-term moving average where a small bounce formed. The bounce was not strong and left the index near the low of the day. The indicators remain bearish and moving lower with stochastic near the middle of its range so there is room for this index to fall. A drop below the short-term EMA is likely to hit the long-term EMA near 2,715, a fall below that could take the index down to 2,600 or lower.


The Dow Jones Industrial Average posted the smallest loss in today's session at -0.77%. The blue-chip index created a small to a medium-sized red candle that fell below the long-term uptrend line to test support at the short-term EMA. So far support is present but it isn't strong, the bounce that formed was weak and left the index below the midpoint of today's trading range. The indicators are bearish and suggest another test of the EMA is likely, a move lower possible. A move below the 30-day EMA will likely move down to the 150-day EMA, a move below that may fall as far as 24,000 before the next strong pocket of support is found.


The ECB went and did it, they've gone back on their budding hawkish position and reinstated QE. The move isn't a surprise, not really, the EU economy is slowing much faster than expected. While good news in a sense, in today's environment it is a stark reminder that the global economic expansion is on tenuous footing.

Trade related news and hopes took the market up to a peak and now reality is setting back in. Global economic growth is going to be weak this year and even that is in danger. If there isn't a trade deal soon the world economy could crack.

The good news is that, assuming a trade deal emerges, growth is still expected. There is a hurdle in the form of negative earnings growth the market has to jump in the first quarter, after that it should be smooth sailing (relatively speaking).

Tomorrow will be affected by the NFP data. The headline figure will be important but I am more interested in the size of the workforce, unemployment levels, the labor force participation rate, and hourly earnings. If the workforce is stable/growing, participation is rising, unemployment stable/falling, and wages are rising the U.S. economy can't be in that bad of shape.

I remain firmly bullish for the long-term but I am still cautiously bullish for the near-term. PS, a trade-related headline could come at any time and move the market in any direction; I advise extreme caution.

Until then, remember the trend!

Thomas Hughes


New Plays

Same Stuff Different Day

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market has now declined for four consecutive days. The only difference for Thursday is that the big cap indexes caught up with the Russell's decline. The Russell fell -2% on Wednesday and just under 1% today. The Nasdaq fell -1.1% as selling increased. Major support levels are being tested. Selling begets selling until something appears to break the cycle. Given our ten-weeks of gains, there could be more pain ahead.

 

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

Support Failure

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap Russell crashed through minor support at 1,550 and closed at the low for the day. The Russell chart is a perfect representation of the market. We had a nice long 10-week rally that failed at resistance, consolidates for a week then failed again. That second failure caused investors to hit the sell button and not we are in a self-fulfilling decline. The more the market declines the more investors will want to sell until something breaks the cycle.



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 International
The long stock position was stopped at $8.15.



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


BULLISH Play Updates

MDR - McDermott International - Company Profile

Comments:

No specific news. Shares down with the market to stop us out on the stock position at $8.15. The May $10 call is still open.

Original Trade Description: March 2nd.

McDermott International, Inc. provides engineering, procurement, construction and installation, front-end engineering and design, and module fabrication services for upstream field developments. It operates through three segments: the Americas, Europe and Africa; the Middle East; and Asia. The company delivers fixed and floating production facilities, pipeline installations, and subsea systems from concept to commissioning for offshore and subsea oil and gas projects. Its operations include fabrication and offshore installation of fixed and floating structures; and the installation of pipelines and subsea systems, as well as provision of shallow water and deep water construction services. The company's customers include national, integrated, and other oil and gas companies. McDermott International, Inc. was founded in 1923 and is headquartered in Houston, Texas. Company description from FinViz.com.

McDermott posted a whopping $15.33 per share loss for Q4 after writing down $2.2 billion in goodwill. The adjusted loss was $1.55 and analysts were expecting earnings of 17 cents. This was a kitchen sink quarter. They knew it was going to be bad so they bundled everything they could find into the quarter to get it over with in one bad report.

On the flip side they guided for full year earnings of $1.65-$1.75 and analysts were only expecting $1.47. Revenue forecast of $9.5-$10.5 billion was also better than the $9.8 billion estimate.

They ended the year with an order backlog of $10.9 billion and have received $5.5 billion in awards YTD in 2019. They are bidding on $93.1 billion in projects. They have $1.4 billion cash on hand and $2 billion in unused credit.

They recently closed a merger with Chicago Bridge & Iron (CBI) which gave them broader expertise, additional capabilities, and a deeper order book. They expect the $475 million in cost savings synergies to be realized in 2019.

They are currently planning to sell their pipe fabrication business and storage tank business to focus more on their key sectors. They expect proceeds in excess of $1 billion. The pipe business is expected to close in Q2 and the tank business in Q3.

The strong guidance is the key to this position. Shares have rebounded sharply from the earnings disaster and should break over $10 in the next couple of weeks with the potential to move a lot higher. The risk should be minimal because all the bad news is over.

Position 3/4/19:
Closed 3/7: Long MDR shares @ $9.16, exit $8.15, -1.01 loss.
Optional: Long May $10 call @ 90 cents, see portfolio graphic for stop loss.



BEARISH Play Updates

No Updates on Current Positions